SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTERMAC
----------
(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
---------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No ___
PART I - FINANCIAL
Item 1. Financial Statements
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
------------ ------------
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Revenue bonds-at fair value $1,883,104 $1,871,009
Mortgage servicing rights 33,260 33,351
Cash and cash equivalents 79,401 58,257
Cash and cash equivalents-restricted 24,066 26,636
Investments in partnerships 66,317 26,638
Investments in partnerships - FIN 46R 2,173,621 --
Assets consolidated pursuant to FIN 46R 210,494 --
Deferred costs - net of amortization of $14,431
and $13,463 58,656 58,408
Goodwill 207,582 214,744
Other intangible assets - net of amortization
of $8,332 and $4,163 190,033 194,203
Other assets 54,867 100,027
--------- ---------
Total assets $4,981,401 $2,583,273
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 989,568 $ 900,008
Preferred shares of subsidiary (subject to
mandatory repurchase) 273,500 273,500
Notes payable and other liabilities
consolidated pursuant to FIN 46R 1,047,976 --
Notes payable 174,426 153,350
Accounts payable, accrued expenses and
other liabilities 40,887 58,577
Deferred tax liability 48,902 60,370
Distributions payable 31,577 27,612
--------- ---------
Total liabilities 2,606,836 1,473,417
--------- ---------
Minority interest in FIN 46R partnerships 1,297,587 --
--------- ----------
Minority interest in consolidated subsidiary 274,516 292,199
--------- ---------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity - Convertible CRA
Shareholders (7,408,681 and 8,179,761 shares
issued and outstanding in 2004 and 2003,
respectively) 159,070 160,618
Beneficial owners equity - special preferred
voting shares 151 161
Beneficial owners' equity-other common shareholders
(100,000,000 shares authorized; 44,612,335 shares
issued and 44,529,905 outstanding and 42,726,232
shares issued and 42,703,600 outstanding in 2004
and 2003, respectively) 626,238 622,771
Deferred compensation (14,871) (19,385)
Treasury shares of beneficial interest (82,430 and
22,632 shares in 2004 and 2003, respectively) (1,706) (378)
Accumulated other comprehensive income 33,580 53,870
--------- ---------
Total shareholders' equity 802,462 817,657
--------- ---------
Total liabilities and shareholders' equity $4,981,401 $2,583,273
========= =========
See accompanying notes to consolidated financial statements.
-2-
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
============================
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
Revenues:
Revenue bond interest income $ 31,851 $ 26,250
Fee income:
Mortgage banking fees 3,116 3,067
Fund management 7,867 --
Other income 4,550 2,604
------ ----------
Total revenues 47,384 31,921
------- ----------
Expenses:
Interest expense 5,521 3,816
Interest expense - distributions to preferred
shareholders of subsidiary 4,724 --
Recurring fees - securitizations 1,065 963
Salaries and benefits 13,882 3,360
Interest rate derivatives 3,387 --
General and administrative 6,349 3,694
Depreciation and amortization 6,893 1,687
---------- ----------
Total expenses 41,821 13,520
---------- ----------
Income before gain (loss) on repayment of revenue
bonds, gain on sale of loans and equity in
earnings of ARCap 5,563 18,401
Equity in earnings of ARCap 555 555
Gain on sale of loans 1,745 2,139
Gain (loss) on repayment of revenue bonds 260 (412)
---------- -----------
Income before allocation to preferred shareholders
of subsidiary, minority interest and SCUs 8,123 20,683
Income allocated to preferred shareholders of subsidiary -- (4,724)
Income allocated to SCUs (3,705) --
Income allocated to minority interest (105) (28)
----------- -----------
Income before benefit from income taxes 4,313 15,931
Benefit from income taxes 3,838 1,976
---------- ----------
Net income $ 8,151 $ 17,907
========== ==========
Allocation of net income to:
Special distribution to Manager$ -- $ 1,411
========== ==========
Manager $ -- $ 2
========== ==========
Common shareholders $ 6,923 $ 15,089
Convertible CRA Shareholders 1,228 1,405
---------- ----------
Total for shareholders $ 8,151 $ 16,494
========== ==========
Net income per share
Basic $ 0.16 $ 0.37
---------- ----------
Diluted $ 0.16 $ 0.37
---------- ----------
Weighted average shares outstanding:
Basic 51,591,109 45,013,292
========== ==========
Diluted 51,839,141 45,070,595
========== ==========
See accompanying notes to consolidated financial statements.
-3-
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Beneficial Beneficial Beneficial
Owners' Equity- Owners' Equity Owners' Equity
Convertible CRA Other Special Preferred
Shareholders Shareholders Voting Shares
------------ ------------ -------------
Balance at December
31, 2003 $160,618 $622,771 $ 161
Comprehensive income:
Net income 1,228 6,923
Other comprehensive
income (loss):
Net unrealized loss
on interest rate
derivatives
Net unrealized loss
on revenue bonds:
Unrealized holding
loss arising during
the period
Less: Reclassification
adjustment for net
gain included in
net income
Total other
comprehensive loss:
Comprehensive loss
Deferred compensation
Retirement of special
preferred voting shares (10)
Costs of issuance of
Convertible CRA Shares (148)
Issuance of common shares 17,059
Distributions (2,628) (20,515)
------- ------- ------
Balance at March 31, 2004 $159,070 $626,238 $ 151
======= ======= ======
Treasury Accumulated
Shares of Other
Beneficial Deferred Comprehensive Comprehensive
Interest Compensation Income (Loss) Income (Loss) Total
-------- ------------ ------------- ------------- -----
Balance at December
31, 2003 $ (378) $(19,385) $53,870 $817,657
Comprehensive income:
Net income $ 8,151 8,151
---------
Other comprehensive
income (loss):
Net unrealized loss
on interest rate
derivatives (2,292)
Net unrealized loss
on revenue bonds:
Unrealized holding
loss arising during
the period (17,738)
Less: Reclassification
adjustment for net
gain included in
net income (260)
---------
Total other
comprehensive loss: (20,290) (20,290) (20,290)
---------
Comprehensive loss $ (12,139)
=========
Deferred compensation 4,514 4,514
Retirement of special
preferred voting shares (10)
Conversion of
Convertible CRA Shares (148)
Issuance of common shares (1,328) 15,731
Distributions (23,143)
------- ------- ------- -------
Balance at March 31, 2004 $(1,706) $(14,871) $ 33,580 $802,462
====== ======= ======= =======
See accompanying notes to consolidated financial statements.
-4-
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
============================
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,151 $ 17,907
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) loss on repayment of revenue bonds (260) 412
Depreciation and amortization 6,570 2,473
Provision for uncollectible accounts 471 0
Income allocated to preferred shareholders
of subsidiary 4,724 4,724
Income allocated to minority interest - SCUs 3,705 --
Income allocated to minority interest 105 28
Issuance of shares of subsidiary -
compensation expenses -- 867
Deferred tax liability (3,471) (1,204)
Changes in operating assets and liabilities:
Mortgage servicing rights (1,317) (1,812)
Other assets 33,805 7,401
Accounts payable, accrued expenses and other
liabilities (17,467) (20,582)
Deferred compensation 3,777 --
Derivative assets and liabilities 3,387 34
--------- ---------
Net cash provided by operating activities 42,180 10,248
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from revenue bonds and notes $ 27,786 $ 31,212
Revenue bond acquisitions (91,065) (3,050)
Increase in investments in partnerships (39,679) --
Increase in goodwill (835) --
(Increase) decrease in cash and cash
equivalents - restricted 2,570 (187)
--------- ----------
Net cash (used in) provided by investing
activities (101,223) 27,975
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (22,884) (15,546)
Distributions paid to preferred
shareholders of subsidiary (4,724) (4,724)
Proceeds from financing arrangements 127,569 --
Principal repayments of
financing arrangements (38,009) (495)
Increase in notes payable 21,076 2,793
Retirement of special preferred
voting shares (10) --
Options exercised -- 649
Increase in treasury stock (1,328) --
Increase in other deferred costs (1,503) (1,204)
--------- ---------
Net cash provided by (used in)
financing activities 80,187 (18,527)
--------- ---------
Net increase in cash and cash equivalents 21,144 19,696
Cash and cash equivalents at the beginning
of the period 58,257 55,227
--------- ----------
Cash and cash equivalents at the end of
the period $ 79,401 $ 74,923
========= =========
SUPPLEMENTAL INFORMATION:
Interest paid $ 6,926 $ 4,414
========= ==========
Taxes paid $ -- $ 103
========= =========
See accompanying notes to consolidated financial statements.
-5-
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
============================
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
Supplemental disclosure of non cash
activities relating to FIN 46R:
Decrease in revenue bonds 33,821 --
Increase in investments in
partnerships - FIN 46R (2,173,621) --
Increase in assets consolidated
pursuant to FIN 46R (210,494) --
Decrease in other assets - FIN 46R 4,731 --
Increase in notes payable and other
liabilities consolidated
pursuant to FIN 46R 1,047,976 --
Increase in minority interest in
FIN 46R partnerships 1,297,587 --
--------- ---------
$ -- $ --
========= =========
See accompanying notes to consolidated financial statements.
-6-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE 1 - General
CharterMac, which we refer to herein as "we", "us", "our", and "our Company", is
a Delaware statutory trust, which commenced operations in October 1997. We and
our subsidiaries are in the business of (i) portfolio investing, which includes
acquiring and holding (directly and indirectly through our subsidiaries)
federally tax-exempt multifamily housing revenue bonds issued by various state
or local governments, agencies or authorities and other investments designed to
produce federally tax-exempt income; (ii) mortgage banking, which includes
originating and servicing mortgage loans on behalf of third parties such as the
Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and the Federal Housing Authority ("FHA");
(iii) credit enhancement, which includes guaranteeing tax credit equity returns
and mortgage loans; and (iv) fund management, which includes sponsoring
investment programs for a fee.
We and a majority of our subsidiaries are each either treated as partnerships or
disregarded for federal income tax purposes. Therefore, we pass through to our
shareholders, in the form of distributions, income (including federally
tax-exempt income) derived from our investments without paying federal income
tax on that income. We intend to operate so that a substantial portion of our
ordinary income will be excluded from gross income for federal income tax
purposes. Other income, such as capital gains and taxable interest income, as
well as any dividend income from CharterMac Corporation ("CM Corp."), our wholly
owned subsidiary, generally will be subject to tax.
In 1999, we formed CharterMac Equity Issuer Trust, a wholly owned subsidiary
(collectively, with its subsidiaries, "Equity Issuer"), which holds a
substantial portion of our 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 our consolidated financial statements, are legally owned by
Equity Issuer and are not available to any creditors of our Company outside of
Equity Issuer.
In July 2001, we formed CM Corp. as a wholly owned, consolidated taxable
subsidiary to help us more efficiently manage our taxable businesses. CM Corp.
and its subsidiaries conduct most of our taxable business, including many of the
fee-generating activities in which we may engage. CM Corp. isolates a
substantial portion of the taxable income and expenses of our Company. Unlike
CharterMac, CM Corp. is a corporation which is subject to both Federal and State
income tax.
In December 2001, our Company, through CM Corp. acquired 80% of the outstanding
capital stock of PW Funding Inc. and its subsidiaries ("PWF"). 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. Subsequent to the initial purchase of 80% of PWF's
outstanding stock, and pursuant to terms of individual employee stock purchase
agreements, we have purchased additional PWF stock. At March 31, 2004, we own
approximately 87% of the outstanding shares of PWF stock.
On November 17, 2003, we acquired 100% of the ownership interests in and
substantially all of the businesses operated by Related Capital Company ("RCC")
(other than specific excluded interests). RCC had previously acted as our
external manager ("Manager"). The acquisition was structured so that the selling
principals of RCC contributed their ownership interests in RCC to CharterMac
Capital Company, LLC ("CCC"), a newly formed subsidiary of CM Corp, in exchange
for 15,854,505 special common units ("SCUs") in CCC. The SCUs are exchangeable
for cash or, at our option, common shares on a one-for-one basis. All of the
selling principals were also issued one special preferred voting share of our
Company for each SCU they received. The special preferred voting shares have no
economic interest, but entitle the holder to one vote per special preferred
voting share on all matters subject to a vote of the holders of our common
shares. One of the selling principals also received $50 million in cash. The
selling principals of RCC included its four executive managing partners (Stuart
J. Boesky, Alan P. Hirmes, Marc D. Schnitzer and Denise L. Kiley), all of whom
are members of our board of trustees, and an affiliate of The Related Companies,
L.P., a New York limited partnership ("TRCLP") with a majority of its equity
controlled by Stephen M. Ross, who is also the non-executive Chairman of our
board of trustees. As a result of the acquisition, the economic interest in our
Company of (i) TRCLP equals approximately 15.5% and (ii) our management and
employees equals approximately 7.2%. We conduct our fund management business
through RCC.
We are governed by a board of trustees comprised of eight independent managing
trustees and seven managing trustees who are affiliated with RCC.
The consolidated financial statements include the accounts of CharterMac and its
majority owned subsidiary business trusts and corporations which it controls. We
also own approximately 87% of PWF and 100% of RCC through our wholly owned
subsidiary, CM Corp. All intercompany accounts and transactions have been
eliminated in consolidation. Unless otherwise indicated, our "Company", as
hereinafter used in these Notes, refers to CharterMac and its consolidated
subsidiaries.
The accompanying interim financial statements have been prepared without audit.
In the opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial statements of the interim periods. However, given the highly
seasonal nature of our business, the operating results for the interim periods
may not be indicative of the results for the full year.
-7-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Certain information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
condensed or omitted. It is suggested that these financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 2003.
Our consolidated financial statements are prepared on the accrual basis of
accounting in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in the
financial statements include the valuation of our investments in revenue bonds,
mortgage servicing rights ("MSRs") and interest rate swap agreements.
Certain amounts in the 2003 financial statements have been reclassified to
conform to the 2004 presentation.
Significant Accounting Policies
-------------------------------
Investments in revenue bonds
We account for our 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"), due to a provision in most of our revenue bonds under which we
have a right to require redemption and they have the right to call the revenue
bonds prior to their maturity, although we can and may elect to hold them up to
their maturity dates unless otherwise modified. As such, SFAS 115 requires us 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 accumulated 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.
If in our judgment, we determine it is probable that we will not receive all
contractual payments required, when they are due, the revenue 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.
Because revenue bonds have a limited market, we estimate fair value for each
bond as the present value of its expected cash flows using a discount rate for
comparable tax-exempt investments. This process is based upon projections of
future economic events affecting the real estate collateralizing the bonds, such
as property occupancy rates, rental rates, operating cost inflation, market
capitalization rates and an appropriate market rate of interest, all of which
are based on good faith estimates and assumptions we develop. Changes in market
conditions and circumstances may occur which would cause these estimates and
assumptions to change; therefore, actual results may vary from the estimates and
the variance may be material.
For certain revenue bonds, management believes that certain factors have
impacted the near-term fair value. In these instances, the revenue bonds are
valued at either the outstanding face amount of the bond or management's
estimate of the fair value, whichever is lower.
Equity Investments
Equity investments in other assets on the consolidated balance sheets include
the following:
Investment in ARCap - Our preferred equity investment in ARCap Investors,
L.L.C. ("ARCap") is accounted for using the equity method because we have the
ability to exercise significant influence, but not control, over ARCap's
operating and financial policies.
Cash and Cash Equivalents
Cash and cash equivalents includes cash in banks and investments in short-term
instruments with an original maturity of three months or less. Certain amounts
of cash and cash equivalents are restricted and serve as additional collateral
for borrowings within our existing securitization programs.
Mortgage Banking Activities
PWF is an approved seller/servicer of multifamily mortgage loans for Fannie Mae,
Freddie Mac, FHA and the Government National Mortgage Association ("Ginnie
Mae"). For Fannie Mae, PWF is approved under the Delegated Underwriting and
Servicing ("DUS") program. Under DUS, upon obtaining a commitment from Fannie
Mae with regard to a particular loan, Fannie Mae commits to acquire the mortgage
loan based upon PWF's underwriting and PWF agrees to bear a portion of the risk
of potential losses in the event of a default. Fannie Mae commitments may be
made to acquire the mortgage loan for cash or in exchange for a mortgage-backed
security backed by the mortgage loan. As a Program Plus lender for Freddie Mac,
Freddie Mac agrees to acquire for cash from PWF loans for which PWF has issued
commitments. Ginnie Mae agrees to exchange FHA-insured mortgages originated by
PWF for Ginnie Mae securities.
Mortgage loans originated for Fannie Mae, Freddie Mac or Ginnie Mae are closed
in the name of PWF, which uses corporate cash obtained by borrowing from a
warehouse lender to fund the loans. Approximately a week to a month following
closing of a loan, loan documentation and an assignment are delivered to Fannie
Mae, Freddie Mac, Ginnie Mae, or a document custodian on its behalf and the cash
purchase price or mortgage-backed security is
-8-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
delivered to PWF. PWF uses the cash it receives to repay its warehouse loans and
the mortgage-backed securities are sold pursuant to prior agreements for cash,
which is also used to repay warehouse loans. PWF also underwrites and originates
multifamily and commercial mortgages for insurance companies and banks.
PWF receives origination fees which are included in mortgage banking fees in the
consolidated statements of income. Neither we nor PWF retain any interest in any
of the mortgage loans, except for MSRs and certain liabilities under the
loss-sharing arrangement with Fannie Mae (see Note 9).
Mortgage Servicing Rights
PWF recognizes as assets the rights to service mortgage loans for others,
whether the MSRs are acquired through a separate purchase or through loan
origination, by allocating total costs incurred between the loan and the MSRs
retained based on their relative fair value. MSRs are being carried at their
adjusted cost basis. MSRs are amortized in proportion to, and over the period
of, estimated net servicing income.
We have two areas of loss exposure related to PWF's lending activities. First,
while a loan is recorded on the balance sheet, there is exposure to potential
loss if a loan becomes impaired and defaults. Second, we have exposure to loss
due to the retention of a portion of credit risk within PWF's servicing contract
under the Fannie Mae DUS program.
For loans on our balance sheet, we identify loans that are impaired and evaluate
the allowance for loss on a specific loan basis for losses believed to currently
exist.
We account for exposure to loss under our servicing contract with Fannie Mae as
guarantees under FIN 45 by recording an asset equal to our estimate of the
portion of the servicing cash flows deemed to represent compensation for our
guarantee for loans originated on or after January 1, 2003. On an ongoing basis,
we will account for the asset by offsetting cash received for the guarantee
against the asset and crediting interest income for the change in asset due to
the passage of time. The portion of the liability representing an accrual for
probable losses under SFAS No. 5 "Accounting for Contingencies" ("FAS 5") is
adjusted as loss estimates change; the portion representing our willingness to
stand by as guarantor will be amortized over the expected life of the guarantee.
Revenue Recognition
We derive our revenues from a variety of investments and guarantees, summarized
as follows:
o Revenue Bond Interest Income - Interest income is recognized at the
stated rate as it accrues and when collectibility of future amounts is
reasonably assured. Contingent interest is recognized when received.
Interest income from revenue bonds with modified terms or where the
collectibility of future amounts is uncertain is recognized based upon
expected cash receipts. Certain revenue bonds carry a different interest
rate during the construction period, which will either increase or
decrease for the balance of the term. In these cases, we calculate the
effective yield on the revenue bond and use that rate to recognize
interest over the life of the bond.
o Mortgage Banking Fees - PWF fees earned for arranging financings under
the Fannie Mae DUS product line as well as Freddie Mac, insurance and
banking or other programs are recorded at the point the financing
commitment is accepted by the mortgagor and the interest rate of the
mortgage loan is fixed. PWF also receives fees for servicing the loans
it has originated. This income is recognized on an accrual basis.
o Other Income
Interest Income from Promissory Notes - Interest on mortgage loans
and notes receivable is recognized on the accrual basis as it
becomes due. Deferred loan origination costs and fees are amortized
over the life of the applicable loan as an adjustment to interest
income, using the interest method. Interest which was accrued is
reversed out of income if deemed to be uncollectible.
Interest Income on Temporary Investments - Interest income from
temporary investments, such as cash in banks and short-term
instruments, is recognized on the accrual basis as it becomes due.
Construction Service Fees - We receive fees, in advance, from
borrowers for servicing revenue bonds during the construction
period. These fees are deferred and amortized into other income over
the anticipated call period.
Credit Enhancement Fees - We receive fees for providing credit
enhancements. The credit enhancement fees are received monthly and
recognized in other income when received.
Guarantee Fees - We receive fees for providing guarantees on
guaranteed yields. These fees are deferred and recognized in other
income on a pro-rata basis over the guarantee period.
-9-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
o Fund Management Fees
Origination Fees - Origination fees include both property
acquisition fees and partnership management fees which are received
by RCC from the proceeds raised at formation of the investment
funds. Property acquisition fees (generally 2% to 4% of equity
raised) are for services performed in connection with the
acquisition of interests in property-owning partnerships and are
recognized when the earnings process is complete and collectibility
is reasonably assured, which is defined as the date the investor
equity is raised and the properties have been acquired by the
investment fund. Partnership management fees (generally 1% of equity
raised) are for services to be performed by RCC for (i) maintaining
the books and records of the investment fund, including requisite
investor reporting, and (ii) monitoring the acquired property
interests to ensure that their development, leasing and operations
comply with low income housing or other tax credit requirements. RCC
recognizes these fees when such services are rendered, which, per
the partnership agreements, are contractually over five years
following the initial closing of the investment fund, using the
straight-line method.
Acquisition Fees - Acquisition fees are earned upon acquisition of
investments by publicly-held entities for which RCC acts as the
advisor. These fees are calculated as a percentage of the purchase
price of investments acquired, up to 1%.
Development Fees - Development fees are earned from properties
co-developed by RCC with unaffiliated developers and sold to
investment funds. Recognition of development fees is based on
completion and stabilization of properties, after guarantees of
completion and deficits are no longer deemed to require funding. The
guarantees are issued by an affiliate of RCC, which is also a
subsidiary of CharterMac, to the lender (for the underlying
financing of the properties) on behalf of RCC and as required by the
investment fund.
Asset Management Fees - RCC earns asset management fees from its
investment funds on an annual basis calculated based on a percentage
of each investment fund's invested assets, generally 0.5%. These
fees are paid from the investment fund's available working capital
balances, and are earned by RCC for managing the Underlying Property
assets of the investment fund. These fees are recorded monthly as
earned, but only when the management of RCC determines that
collection is reasonably assured based on the investment funds'
working capital balance.
o Equity in Earnings of ARCap - Our equity in the earnings of ARCap is
accrued at our preferred dividend rate of 12%, unless ARCap does not
have earnings and cash flows adequate to meet this dividend requirement.
In the case where earnings are not sufficient to cover the 12% dividend
rate, any excess dividends received would be a returned capital and
would decrease our investment.
Deferred Costs
Prior to our acquisition of RCC, we paid fees to RCC, as our Manager, for its
activities performed to acquire revenue bonds, including their evaluation and
selection, negotiation of mortgage loan terms, coordination of property
developers and government agencies, and other direct expenditures of acquiring
or investing in revenue bonds. These fees are capitalized and amortized as a
reduction to interest income over the terms of the revenue bonds. Direct costs
relating to unsuccessful acquisitions and all indirect costs relating to the
revenue bonds are charged to operations.
Costs incurred in connection with our various borrowings and securitization
programs, such as legal, accounting, documentation and other direct costs, have
been capitalized and are being amortized using the straight-line method over 10
years, which approximates the average remaining term to maturity of the revenue
bonds in this program.
Costs incurred in connection with the issuance of preferred shares of Equity
Issuer subsidiary, such as legal, accounting, documentation and other direct
costs, have been capitalized and are being amortized using the straight line
method over the period to the mandatory repurchase date of the shares,
approximately 50 years. Costs incurred in connection with the issuance of
Convertible Community Reinvestment Act ("CRA") Shares, such as legal,
accounting, documentation and other direct costs, have been accounted for as an
offset to beneficial owners' equity of such shares.
Financial Risk Management and Derivatives
We have entered into several derivative instruments, including an interest rate
cap, interest rate swaps and forward bond purchase commitments, all of which are
accounted for under the Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended and interpreted. We have designated the interest rate swaps as cash flow
hedges on the variable interest payments on our floating rate securitizations.
All but one of the interest rate swaps do not become effective until 2005. The
one interest rate swap that is currently in place, is recorded at its fair
market value each accounting period, with changes in market value being recorded
in accumulated other comprehensive income to the extent the hedge is effective
in achieving offsetting cash flows. This hedge has been perfectly effective, so
it generated no ineffectiveness that needs to be included in earnings. The
effectiveness of the other swaps is being measured using the hypothetical
derivative method, until they go into effect in 2005. For the three months ended
March 31, 2004, we recorded approximately $3.4 million as an expense
representing the ineffective portion of these swaps. The interest rate cap,
although designed to mitigate our exposure to rising interest rates, was not
designated as a hedging derivative; therefore, any change in fair market value
flows through the consolidated statements of income, where it is included in
interest income. The forward commitments create derivative instruments under
SFAS 133, which have been designated as cash flow hedges of the anticipated
funding of the revenue bonds, and, as such, are recorded at fair value, with
changes in fair value recorded in accumulated other comprehensive income until
the revenue bonds are funded.
-10-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Goodwill and Other Intangible Assets
We have adopted SFAS 141 on July 1, 2001 and SFAS 142, on January 1, 2002. We
have determined that the amounts previously capitalized as goodwill relating to
our initial formation and to the merger of American Tax-Exempt Bond Trust meet
the criteria in SFAS 141 for recognition as intangible assets apart from
goodwill, and accordingly will continue to amortize the remaining $2.2 million
over their remaining useful lives, subject to impairment testing.
We amortize intangible assets on a straight line basis over their estimated
useful lives. The goodwill amounts are tested during the fourth quarter annually
for impairment in accordance with the provisions of FAS 142. We have concluded
that goodwill was not impaired at December 31, 2003 and nothing has occurred
that would indicate goodwill has become impaired since that date.
Income Taxes
Effective July 1, 2001, we conduct most of our taxable business, including our
mortgage servicing activities and fund management activities through CM Corp.
and its subsidiaries. We provide for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax basis of assets and
liabilities.
Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", requires enterprises to report certain financial and descriptive
information about their reportable operating segments, and certain
enterprise-wide disclosures regarding products and services, geographic areas
and major customers.
We have three reportable business segments: portfolio investing, mortgage
banking and fund management. Portfolio investing includes our activities related
to investing in revenue bonds. Mortgage banking includes our activities, carried
out through PWF involving originating mortgages on behalf of third parties. Fund
management involves our activities related to providing management services to
real estate investment programs sponsored by RCC.
New Pronouncements
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145, among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains or
losses from the early extinguishments of debt as extraordinary items will only
be required if they meet the specific criteria of extraordinary items included
in Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations". The revision of SFAS No. 4 became effective January 2003. The
implementation of SFAS No. 145 did not have a material impact on our
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS No. 146 replaces current accounting
literature and requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 became effective January 1,
2003. The implementation of SFAS No. 146 did not have a material impact on our
consolidated financial statements.
In November 2002, the FASB issued FIN 45. FIN 45 elaborates on the disclosures
to be made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. This
Interpretation does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related guarantee. The
initial recognition and initial measurement provisions of this FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. We entered into one credit enhancement transaction and two
yield guarantee transactions prior to December 31, 2002. The fee for the credit
enhancement transaction is received monthly and recognized as income when due.
The fees for the yield guarantee transactions, received in advance, were
deferred and amortized over the guarantee periods. During 2003, we entered into
four more yield guarantee transactions. We believe the fees received for these
guarantees approximates the fair value of the obligations undertaken in issuing
the guarantees and have recorded liabilities included in deferred income equal
to the fair values of the obligations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," an amendment of FASB statement No. 123.
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employer compensation. Because
we account for our share options using the fair value method, implementation of
this statement did not have an impact on our consolidated financial statements.
We have adopted the provisions of SFAS No. 123 for its share options issued to
employees. Accordingly, compensation cost is accrued based on the estimated fair
value of the options issued, and amortized over the vesting period. Because
vesting of the options is contingent upon the recipient continuing to provide
services to us until the vesting date, we estimate the fair value of the
employee options at each period-end up to the vesting date, and adjust expensed
amounts accordingly. The fair value of each option grant is estimated using the
Black-Scholes option-pricing model. In connection with the purchase of RCC, we
issued 778,420 common shares to employees, of which 52,863 vested immediately.
For the three months ended March 31, 2004, another 120,925 restricted
-11-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
common shares vested. The remaining balance of 604,632 restricted common shares
vests over periods ranging from one to four years. We recognized compensation
expense for the vested shares at the market price for the shares on the grant
date and deferred compensation expense for the non-vested shares also at the
market price on the grant date.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). In December 2003, the FASB issued FIN
46R, which revises FIN 46, codifying certain FASB Staff positions and extending
the implementation date. FIN 46, as revised by FIN 46R, clarifies the
application of existing accounting pronouncements to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
Prior to the issuance of FIN 46R, we had not applied FIN 46 to any entities;
accordingly, the provisions of FIN 46R are effective for us beginning March 31,
2004.
FIN 46R is a complex standard that requires significant analysis and judgment.
We have completed our evaluation of FIN 46R and its impact on our consolidated
financial statements. We have concluded that we need to consolidate certain
entities for which we are the general partner. For a more complete discussion,
see Note 9 in these consolidated financial statements.
In recording our acquisition of RCC, we ascribed approximately $5 million of the
purchase price to the estimated future cash flows to be received from general
partner interests in investment partnership in which we maintain a non-equity
controlling interest. However, from time to time the general partner of the
investment funds, may be called upon to fund investment fund operations which we
would advance on behalf of the general partner and would be repaid to us out of
future operating cash flow or sale or refinancing proceeds received by the
investment fund, so our maximum exposure to loss cannot be quantified. We also
have exposure to losses under guarantees of returns on certain funds, as
described in Note 16.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. SFAS 149 is generally effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 on July 1, 2003, as required, had no impact
on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
requires that certain financial instruments that have the characteristics of
debt and equity be classified as debt. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after June 15,
2003. Pursuant to SFAS No. 150, on July 1, 2003 we classified the $273.5 million
previously shown in the "mezzanine" (between liabilities and equity) in the
consolidated balance sheets as "preferred shares of subsidiary subject to
mandatory redemption" into the liability section, and the dividends paid on such
shares (approximately $4.7 million for the period ended March 31, 2004) have
been classified as interest expense; dividends related to prior periods continue
to be classified as income allocated to preferred shareholders of subsidiary.
-12-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE 2 - Revenue Bonds
Total interest income from revenue bonds, including participating interest, was
approximately $31,851,000, for the three months ended March 31, 2004, which
represents an average annual yield of 6.85% based on weighted average face
amount of approximately $1,859,957,000.
The amortized cost basis of our revenue bonds portfolio at March 31, 2004 and
December 31, 2003 was approximately $1,877,835,000 and $1,814,180,000,
respectively. The net unrealized gain on revenue bonds in the amount of
$39,091,000 at March 31, 2004 consisted of gross unrealized gains and losses of
$60,632,000 and $21,541,000, respectively. The net unrealized gain on revenue
bonds of $56,829,000 at December 31, 2003 consisted of gross unrealized gains
and losses of $65,394,000 and $8,565,000, respectively.
The fair value and gross unrealized losses of our revenue bonds aggregated by
length of time that individual bonds have been in a continuous unrealized loss
position, at March 31, 2004, is summarized in the table below:
Less than 12 Months
(Dollars in thousands 12 months or more Total
-----------------------------------------------------------------------
Fair value $ 85,429 $389,997 $475,426
Gross unrealized loss $ (3,230) $(18,311) $(21,541)
The following is a table summarizing the maturity dates of our revenue bonds.
Outstanding Weighted Average
(Dollars in thousands) Bond Amount Fair Value Interest Rate
-------------------------------------------------------------------------
Due in less than one year $ 2,872 $ 2,750 9.18%
Due between one and
five years 35,136 32,596 6.94%
Due after five years 1,854,100 1,881,579 6.89%
-------------------------------------------------------------------------
Total/Weighted Average $ 1,892,108 $1,916,925 6.89%
-------------------------------------------------------------------------
Less: FIN 46R
Eliminations (1) $ 33,612 $ 33,821
-------------------------------------------------------------------------
Total/Per Balance Sheet $ 1,858,496 $1,883,104
-------------------------------------------------------------------------
All of our revenue bonds have fixed interest rates.
(1) These bonds were eliminated for FIN 46R purposes because they relate to
properties we are consolidating.
2004 Transactions
-----------------
The following table summarizes our acquisition activity for the three months
ended March 31, 2004.
Weighted
Weighted Average
Aggregate Average Permanent Number of
Purchase Construction Interest Revenue
(Dollars in thousands) Face Amount Price Interest Rate Rate Bonds
-----------------------------------------------------------------------------------------------------
Construction/rehabilitation
properties $91,065 $91,065 5.73% 6.6% 14
During the three months ended March 31, 2004, three revenue bonds were repaid.
We received net proceeds of approximately $23.6 million. The bonds had a net
carrying value of approximately $23.4 million, resulting in a gain of
approximately $260,000.
NOTE 3 - Investment in Partnerships
Investments in partnerships at March 31, 2004 and December 31, 2003 consisted
of:
March 31 December 31
(Dollars in thousands) 2004 2003
-------- -----------
Investment to acquire equity interests $63,713 $24,644
Investment in properties in development 2,604 1,994
-------- -----------
$66,317 $26,638
======== ===========
-13-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
A subsidiary wholly owned by RCC acquires equity interests in property ownership
entities on a short-term basis, and also invests funds with third party
developers to develop properties for inclusion in offerings to investors, which
are arranged by RCC. Such amounts are expected to be repaid to such subsidiary
the proceeds of the equity and debt financing when the investment fund has
closed. The developer has also guaranteed repayment of these investments to RCC.
Substantially all of these investments are pledged as collateral for RCC's
borrowings under the warehouse facility.
RCC also invests funds in affiliated entities, whereby subsidiaries of RCC
co-develop properties to be sold to investment funds. Development investments
include amounts invested to fund pre-development and development costs.
Investment funds organized by RCC acquire the limited partnership interests in
these properties. Repayment of such subsidiaries development investment is
expected to be made from various sources attributable to the properties,
including capital contributions of investments funds, cash flow from operations,
and/or from co-development partners, who in turn have cash flow notes from the
properties. In connection with RCC's co-development agreements, affiliates of
CharterMac issue construction completion, development deficit guarantees and
operating deficit guarantees to the lender and investment funds (for the
underlying financing of the properties) on behalf of RCC.
NOTE 4 - Other Assets
Investment in ARCap
On October 18, 2001, our Company, through CM Corp., purchased 739,741 units of
Series A Convertible Preferred Membership Interests in ARCap Investors, LLC at
the price of $25 per unit, with a preferred return of 12%. The carrying values
of our interests in ARCap at March 31, 2004 and December 31, 2003 were
$19,054,409 in both periods, which is included in other assets in the
consolidated balance sheets.
ARCap Investors, LLC was formed in January 1999 by REM/CAP and Apollo Real
Estate Investors to invest exclusively in subordinated CMBS. Since then, ARCap
has changed its focus and has begun to provide portfolio management services for
third parties.
NOTE 5 - Deferred Costs
The components of deferred costs are as follows:
(Dollars in thousands)
March 31, December 31
2004 2003
---------- -----------
Deferred bond selection costs (1) $ 47,783 $ 46,479
Deferred financing costs 11,715 11,170
Deferred costs relating to the
issuance of preferred
shares of subsidiary 10,445 10,445
Other deferred costs 3,144 3,777
---------- -----------
73,087 71,871
Less: Accumulated amortization (14,431) (13,463)
--------- ----------
$ 58,656 $ 58,408
========= ==========
(1) This primarily represents the 2% bond selection fee paid to the Manager
prior to our acquisition of RCC (see Note 7).
NOTE 6 - Goodwill and Intangible Assets
We adopted SFAS 141 on July 1, 2001 and SFAS 142, on January 1, 2002. We have
determined that the amounts previously capitalized as goodwill relating to our
initial formation and to our merger with American Tax Exempt Bond Trust, meet
the criteria in SFAS 141 for recognition as intangible assets apart from
goodwill, and accordingly will continue to be amortized over their remaining
useful lives, subject to impairment testing.
In conjunction with our purchase of RCC, we acquired additional intangible
assets and goodwill. The value of the intangible assets was verified via third
party valuation. The excess of the total paid over the fair value of the assets
and liabilities was classified as goodwill.
-14-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
The following table provides further information regarding our intangible
assets:
(Dollars in thousands)
Other Total
Identifiable RCC Identifiable
Intangible PWF Intangible Intangible
Assets Licenses Assets Assets Goodwill
------------ -------- ---------- ------------ --------
Balance at
December 31, 2003 $ 4,427 $ 8,639 $185,300 $198,366 $214,744
Accumulated amortization (2,227) -- (1,936) (4,163) --
------------ -------- ---------- ------------ --------
Net balance at
December 31, 2003 2,200 8,639 183,364 194,203 214,744
Additions -- -- -- -- 835
Conversion of SCUs
to common shares -- -- -- -- (7,997)
Amortization expense (118) -- (4,052) (4,170) --
------------ -------- ---------- ------------ --------
Net balance at
March 31, 2004 $ 2,082 $ 8,639 $179,312 $190,033 $207,582
------------ -------- ---------- ------------ --------
Amortization expense
for the three months
ended March 31, 2004 $ 118 $ -- $ 4,052 $ 4,170 $ --
------------ -------- ---------- ------------ --------
Estimated amortization
expense per year for
next five years $ 472 $ -- $ 16,208 $ 16,680 $ --
------------ -------- ---------- ------------ --------
The amortization of other identifiable intangible assets is included as a
reduction to revenue bond interest income.
The amounts indicated as goodwill in the accompanying consolidated financial
statements as of March 31, 2004 are related to the acquisitions, on December 31,
2001 of PWF and on November 17, 2003 of RCC. These amounts represent goodwill
under SFAS 142, and therefore, are not being amortized. In accordance with SFAS
142, we performed the required annual impairment tests in the fourth quarter of
2003 and determined that no impairment existed at December 31, 2003. Nothing has
occurred since that date that would indicate there has been any subsequent
impairment.
NOTE 7 - Related Party Transactions
Due to our acquisition of RCC, our related parties have changed substantially
from the period prior to the acquisition to the period after the acquisition.
Prior to the RCC Acquisition
Prior to our acquisition of RCC, we and our subsidiaries had engaged a
subsidiary of RCC to provide us with management services.
Pursuant to the terms of our prior Management Agreement, the Manager was
entitled to receive the fees and other compensation set forth below:
Fees/Compensation* Amount
----------------- ------
Bond Selection Fee 2.00% of the face amount of each asset invested
in or acquired by CharterMac or its subsidiaries.
Special 0.375% per annum of the total
Distributions/Investment invested assets of CharterMac or its
Management Fee subsidiaries.
Loan Servicing Fee 0.25% per annum based on the
outstanding face amount of revenue bonds and
other investments owned by CharterMac or its
subsidiaries.
Operating Expense For direct expenses incurred by the
Reimbursement Manager in an amount not to exceed
$901,035 per annum (subject to increase based on
increases in CharterMac's and its subsidiaries'
assets and to annual increases based upon
increases in the Consumer Price Index).
Incentive Share Options The Manager may receive options to
acquire additional Common shares
pursuant to the Share Option Plan
only if CharterMac's distributions in
any year exceed $0.9517 per common
share and the Compensation Committee
of the Board of Trustees determines
to grant such options.
Liquidation Fee 1.50% of the gross sales price of the assets
sold by CharterMac in connection with a
liquidation of CharterMac assets supervised by
RCC.
* RCC is also permitted to earn miscellaneous compensation which may include,
without limitation, construction fees, escrow interest, property management
fees, leasing commissions and insurance brokerage fees. The payment of any
such compensation is generally limited to the competitive rate for the
services being performed. A bond placement fee of 1.0% to 1.5% of the face
amount of each asset invested in or acquired by CharterMac or its
subsidiaries is payable to the Manager by the borrower, and not by CharterMac
or its subsidiaries.
-15-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Affiliates of RCC may provide certain financial guarantees to facilitate
leveraging by CharterMac, for which they could be paid market rate fees. In
addition, affiliates of RCC may provide certain financial guarantees to the
owner (or partners of the owners) of the Underlying Properties securing
CharterMac's revenue bonds, for which they could be paid market rate fees.
Subsequent to the RCC Acquisition
On November 17, 2003, CCC entered into an agreement with TRCLP for the purpose
of TRCLP to provide various services to CCC and any of its affiliates including
RCC. The services provided include computer support, office management, payroll,
human resources and other office services as defined in the agreement. The
majority of the services are charged to CCC at 100% of the direct costs incurred
by TRCLP.
General
The costs, expenses and the special distributions paid or payable to RCC, prior
to our acquisition of RCC, its affiliates and TRCLP for the three months ended
March 31, 2004 and 2003 were as follows:
Paid or Payable to TRCLP,
RCC and Affliliates
----------------------------
Three Months Ended
March 31,
----------------------------
(Dollars in thousands) 2004 2003
---------- -----------
Special distribution/Invetment management fee -- $ 1,483
Bond servicing fees -- 1,015
Expense reimbursement -- 233
Shared service agreement 1,252 --
---------- -----------
$ 1,252 $ 2,731
========== ===========
Substantially all of RCC's revenues are received from investment funds they have
originated and manage. Affiliates of RCC maintain a continuing equity interest
in the investment funds' general partner and/or managing member/advisor. RCC has
no direct investments in these general partner and/or managing member/advisor
entities, and RCC does not guarantee the obligations of the general partner
and/or managing member/advisor entities. RCC has agreements with these entities
under which RCC provides ongoing services for the investment funds on behalf of
the general partners and/or managing members/advisors, and receives all fee
income to which these entities are entitled. RCC does not participate in the
investment funds' operating income or losses or on gains or losses from property
sales.
As of March 31, 2004, the obligors of certain revenue bonds are local
partnerships for which the general partners of the controlling investment
partnerships are non-equity managing partners controlled by RCC.
As of December 31, 2002, the owner of the Underlying Property and obligor of the
Highpointe revenue bond was an affiliate of RCC who has not made an equity
investment. This entity has assumed the day-to-day responsibilities and
obligations of the Underlying Property. Buyers are being sought who would make
equity investments in the Underlying Property and assume the nonrecourse
obligations for the revenue bond or otherwise buy the property and payoff all or
most of the revenue bond obligation.
In December 2001, we completed a credit enhancement transaction with Merrill
Lynch Capital Services, Inc. ("MLCS") pursuant to which CM Corp. initially will
receive a fee in return for assuming MLCS's first loss position on a pool of
tax-exempt weekly variable rate multifamily mortgage loans originated by
CreditRe Mortgage Capital, LLC, an affiliate of Credit Suisse First Boston and
the Related Companies, L.P. Our maximum exposure under the terms of the
transaction was approximately $19 million at March 31, 2004 and December 31,
2003.
We have entered into several agreements with an unrelated third party (the
"Primary Guarantor") to guarantee agreed-upon internal rates of return for pools
of multifamily properties owned by real estate investment funds for which we
have received guarantee fees for the three months ended March 31, 2004 totaling
approximately $566,000. No guarantee fees were received during the same period
of 2003.
Related Management Company, which is wholly owned by TRCLP earned fees for
performing property management services for various properties held in
investment funds, which are managed by RCC. The fees totaled $720,000 and
$608,000 for the three months ended March 31, 2004 and 2003, respectively.
-16-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE 8- Earnings Per Share, Profit and Loss Allocations and Distributions
Prior to our acquisition of RCC, pursuant to our Trust Agreement and the
Management Agreement with the Manager, RCC was entitled, in its capacity as our
general partner, to a special distribution equal to .375% per annum of our total
invested assets (which equals the face amount of the revenue bonds and other
investments), payable quarterly. After payment of the special distribution,
distributions were made to the shareholders in accordance with their percentage
interests. Income was allocated first to RCC in an amount equal to the special
distribution. The net remaining profits or losses, after a special allocation of
..1% to RCC, were then allocated to shareholders in accordance with their
percentage interests.
Subsequent to the RCC acquisition, CCC's income is allocated first to the
holders of the SCUs in an amount equivalent to the SCU holders ownership
percentage, assuming all SCUs converted to common shares, divided by .72, to
take into account the fact that dividends paid on the SCUs are taxable.
Net income per share is computed in accordance with SFAS No. 128, Earnings Per
Share. Basic income per share is calculated by dividing income allocated to
Common and Convertible CRA Shareholders ("Shareholders") by the weighted average
number of Common and Convertible CRA Shares outstanding during the period. The
Convertible CRA Shareholders are included in the calculation of shares
outstanding as they share the same economic benefits as Common shareholders,
including receipt of the same dividends per share as common shareholders.
Diluted income per share is calculated using the weighted average number of
shares outstanding during the period plus the additional dilutive effect of
common share equivalents. The dilutive effect of outstanding share options is
calculated using the treasury stock method. The dilutive effect of the SCUs is
calculated using the "if-converted method". The SCUs will always be
antidilutive, because while the shares are convertible on a one-to-one basis,
the dividends paid will always be greater than the dividends paid per common
share.
(Dollars in thousands)
Three Months Ended March 31, 2004
-----------------------------------
Income Shares Per Share
Numerator Denominator Amount
----------- ----------- ----------
Net income allocable to share-
holders (Basic EPS) $ 8,151 51,591,109 $ 0.16
=======
Effect of dilutive securities
106,581 share options -- 248,032
-------- ----------
Diluted net income allocable to
shareholders (Diluted EPS) $ 8,151 51,839,141 $ 0.16
======== ========== =======
(Dollars in thousands)
Three Months Ended March 31, 2003
-----------------------------------
Income Shares Per Share
Numerator Denominator Amount
----------- ----------- ----------
Net income allocable to share-
holders (Basic EPS) $ 16,494 45,013,292 $ 0.37
=======
Effect of dilutive securities
168,136 stock options -- 57,303
---------- ---------
Diluted net income allocable to
shareholders (Diluted EPS) $ 16,494 45,070,595 $ 0.37
========= ========== =======
* Includes Common and Convertible CRA Shares.
During the quarter ended September 30, 2002, we issued 40,000 options at a
strike price of $17.56. These options vest equally, in thirds, in September
2003, 2004 and 2005 and expire in 10 years. These options were dilutive for the
three months ended March 31, 2004 and were taken into account in the calculation
of diluted shares. At March 31, 2004, these options had a fair value of $103,600
based on the Black-Scholes pricing model, using the following assumptions:
dividend yield of 5.97%, estimated volatility of 20%, swap rate of 4.016% and
expected lives of 8.5 years. We recorded compensation cost of $20,458 and $1,693
for the three months ended March 31, 2004 and 2003, relating to these options,
respectively.
As part of the RCC acquisition, we issued 1,000,000 options to Stephen M. Ross,
at a strike price of $17.78, which vest over five years and expire in 10 years.
At March 31, 2004, these options had a fair value of approximately $2,630,000.
-17-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Also, in conjunction with the RCC acquisition, we issued 778,420 restricted
common shares to various individuals who are either employees of RCC or TRCLP. A
small portion of these shares, 52,863, vested immediately. For the three months
ended March 31, 2004, another 120,925 restricted common shares vested. The
remaining balance of 604,632 restricted common shares vests over periods ranging
from one to four years.
We have recorded deferred compensation of approximately $14.9 million and $19.4
million at March 31, 2004 and December 31, 2003, respectively, included in the
equity section of our consolidated balance sheets. The deferred compensation is
being amortized as compensation expense on a straight line basis over the
respective vesting periods (approximately $4.5 million for the three months
ended March 31, 2004). Distributions paid related to these non-vested shares are
being recorded directly to equity (approximately $3.5 million for the three
months ended March 31, 2004).
The following table shows the number of options outstanding, granted, exercised
and exercisable and the exercise price of those options.
March 31, December 31,
2004 2003
---------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------------------------------------------------------------------
Options outstanding at beginning of year 1,119,914 $ 17.33 263,509 $ 12.47
Options granted during the period -- -- 1,000,000 $ 17.78
Options exercised during the period -- -- 143,595 $ 11.5625
--------- ---------
Options outstanding at end of period 1,119,914 $ 17.33 1,119,914
--------- ---------
Options exercisable at end of period $93,247 $ 11.5625 93,247 $ 12.42
Weighted-average fair value of options granted during the year $ 3,460,000
The following table summarizes information about stock options outstanding at March 31, 2004.
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 3/31/04 Contractual Life Exercise Prices at 3/31/04 Exercise Price
-------------------------------------------------------------------------------------------------------------------------------
$11.5625 79,914 7.2 $11.5625 79,914 $11.5625
$ 17.78 1,000,000 9.6 $17.7800 -- $17.7800
$ 17.56 40,000 8.5 $17.5600 13,333 $17.5600
Other
-----
Through November 17, 2003, two of our independent trustees were 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 March 31, 2004 and December 31, 2003, 2,198 and 1,728 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, 2003 and 2002. 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 RCC. After the acquisition of RCC, the five new
independent trustees received $18,750 as compensation for their services
rendered during the year ended December 31, 2003. In 2004, all eight of the
independent trustees will receive annual compensation of $30,000 payable in cash
(maximum of $15,000 per year) and/or common shares valued at their fair market
value on the date of issuance.
Effective May 3, 2000, we implemented a dividend reinvestment and Common share
purchase plan (the "Plan"). Under the Plan, common shareholders may elect to
have their distributions from our Company automatically reinvested in additional
common shares at a purchase price equal to the average of the high and low
market price from the previous day's trading. If a common shareholder
participates in the Plan, such shareholder may also purchase additional common
shares through quarterly voluntary cash payments with a minimum contribution of
$500. There are no commissions for common
-18-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
shares purchased under the Plan. Participation in the Plan is voluntary and a
common shareholder may join or withdraw at any time. The opportunity for
participation in the Plan began with the distributions paid in August 2000.
The board of trustees has authorized the implementation of a common share
repurchase plan, enabling us to repurchase, from time to time, up to 1,500,000
of its common shares. The repurchases will be made in the open market and the
timing is dependant on the availability of common shares and other market
conditions. As of March 31, 2004 and December 31, 2003, we have acquired 82,430
and 22,632 of its common shares for an aggregate purchase price of approximately
$1,706,000 and $378,000, respectively (including commissions and service
charges). Repurchased common shares are accounted for as treasury shares of
beneficial interest.
NOTE 9 - Commitments and Contingencies
PW Funding Inc.
PWF is required to meet minimum net worth and capital requirements and to comply
with other requirements set by Fannie Mae, Freddie Mac, Ginnie Mae and FHA.
PWF maintains, as of March 31, 2004, treasury notes of approximately $5.3
million and a money market account of approximately $0.9 million, which is
included in cash and cash equivalents-restricted in the consolidated balance
sheet, to satisfy the Fannie Mae collateral requirements of $6.2 million.
PWF has liability under the terms of its master loss sharing agreement with
Fannie Mae for a portion of any loss that may result from borrower defaults on
the mortgage loans it originates and sells to Fannie Mae.
We maintain an allowance for loan losses for loans originated under the Fannie
Mae DUS product line at a level that, in management's judgment, is adequate to
provide for estimated losses. At March 31, 2004, that reserve was approximately
$6.9 million, which we believe represents its maximum liability at this time.
Unlike loans originated for Fannie Mae, PWF does not share the risk of loss for
loans it originates for Freddie Mac or FHA.
In connection with the PWF warehouse line, both CharterMac and CM Corp. have
entered into guarantees for the benefit of Fleet National Bank ("Fleet"),
guaranteeing the total advances drawn under the line, up to the maximum of $100
million, together with interest, fees, costs, and charges related to the PWF
warehouse line.
At March 31, 2004, PWF had commitments of approximately $46.7 million to six
borrowers.
Credit Enhancement Transaction
CM Corp. completed a credit enhancement transaction with Merrill Lynch Capital
Services, Inc. ("MLCS"), pursuant to which, CM Corp. assumes MLCS's first loss
position on a pool of tax-exempt weekly variable rate multifamily mortgage
loans. TRCLP has provided CM Corp. with an indemnity covering 50% of any losses
that are incurred by CM Corp. as part of this transaction. Our maximum exposure
under the terms of the transaction was approximately $19.0 million at March 31,
2004.
As of March 31, 2004, the credit enhanced pool of properties are performing
according to their contractual obligations and we do not anticipate any losses
to be incurred on its guaranty. Should our ongoing analysis of risk of loss
change in the future, a provision for probable loss might be required; such
provision could be material.
Yield Guarantee Transaction
We have entered into several agreements with Merrill Lynch (the "Primary
Guarantor") to guarantee an agreed upon rates of return for pools of seven
multifamily properties each owned by RCGCP II, an investment fund sponsored by
RCC prior to our acquisition of RCC.
These transactions were each structured as two separate guarantees, one
primarily guaranteeing the return through the lease-up phase of the properties
and the other guaranteeing the return through the operating phase of the
properties. The fee for the first guarantee is paid at closing. The fee for the
second guarantee is typically paid in two installments. These fees will be
recognized in income on a straight line basis over the period of the respective
guarantees.
Some of the properties included in these pools have been financed with the
proceeds of revenue bonds acquired by an affiliate of CharterMac. In connection
with these transactions, the Primary Guarantor required that those revenue bonds
be deposited into a trust pursuant to which the revenue bonds were divided into
senior and subordinated interests with 50% of each revenue bond being
subordinated. We have financed the senior trust interest as part of the Merrill
Lynch P-FloatsSM/RitesSM program. The subordinate trust interests are being used
as collateral in other of our financing programs.
In connection with these transactions, we posted collateral to the Primary
Guarantor in the form of either cash or revenue bonds of approximately $601
million.
-19-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Other
We have entered into transactions related to certain properties, pursuant to
which we provide credit support to the construction lender for project
completion and Fannie Mae conversion and will be obligated to acquire
subordinated bonds to the extent the construction period bonds do not fully
convert.
Up until the point of completion, we will guaranty to the construction lender
reimbursement of any draw on its construction letter of credit up to 40% of the
stated amount of the letter of credit. Following completion, up until the
project loan converts to permanent loan status, we will guarantee the full
amount of the letter of credit. Our maximum exposure, related to these three
transactions, is approximately $27 million.
The developer has also issued several guarantees to the construction lender,
each of which would be called upon before our guarantees, and each of which
would be assigned to us should its guarantees be called.
We have entered into other transactions to purchase revenue bonds pursuant to
agreements which require us, at the earlier of stabilization or conversion to
permanent financings to acquire Series A and Series B revenue bonds at
predetermined prices and interest rates. We are obligated to purchase the
revenue bonds only if construction is completed. We are obligated to buy the
Series B revenue bonds only if, at the date the Series A bonds are stabilized,
the property's cash flow is sufficient to provide debt service coverage of 1.15x
for both the Series A and B bonds. An unrelated third party lender will advance
funds to the developer, as needed during the construction period, at a floating
rate. These forward commitments create derivative instruments under SFAS No.
133, which have been designated as a cash flow hedge of the anticipated funding
of the revenue bonds, and are recorded at fair value, with changes in fair value
recorded in accumulated other comprehensive income until the revenue bonds are
funded. The total potential amount we could possibly be required to fund is
$83.4 million.
We are 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 our financial position, results of
operations or cash flows.
NOTE 10 - Financial Risk Management and Derivatives
Our revenue bonds generally bear fixed rates of interest, but the interest rates
we pay under our securitization programs are variable rates re-set weekly or
every 35 days, so we are exposed to interest rate risk. Various financial
vehicles exist which allow our management to hedge against the impact of
interest rate fluctuations on our cash flows and earnings.
We currently manage a portion of our interest rate risk through the use of The
Bond Market Association ("TBMA") indexed interest rate swaps. Under each
interest rate swap agreement, for a specified period of time we are required to
pay a fixed rate of interest on a specified notional amount to the transaction
counterparty and we receive a floating rate of interest equivalent to the TBMA
index, which is the most widely used tax-exempt floating rate index. As of March
31, 2004, we have entered into one such swap with MLCS as counterparty with a
notional amount of $50 million fixed at an annual rate of 3.98%, which expires
in January 2006. We have also entered into several interest rate swaps with
Fleet National Bank and RBC Capital Markets as the counterparty all of which go
into effect in January 2005. The notional amount on these swaps totaled $450
million. The weighted average fixed interest rate is 3.07% and they mature from
January 2007 to January 2010.
The average TBMA rates for the three months ended March 31, 2004 and 2003, were
0.95% and 1.07%, respectively. Net swap payments received by us, if any, will be
taxable income to our Company and, accordingly, to shareholders. A possible risk
of such swap agreements is the possible inability of the Counterparty to meet
the terms of the contracts with us; however, there is no current indication of
such an inability.
At March 31, 2004, the fair market value of our interest rate swaps of
approximately $6.5 million were recorded in our consolidated balance sheets.
Interest paid or payable under the terms of the swaps, of approximately
$638,000, is included in interest expense. For the three months ended March 31,
2004, we recorded approximately $3.4 million as an expense representing the
ineffective portion of these swaps.
During January 2002, we entered into an interest rate cap agreement with Fleet,
with a cap of 8% on a notional amount of $30 million. Although this transaction
is designed to mitigate our exposure to rising interest rates, we have not
designated this interest rate cap as a hedging derivative. As of March 31, 2004,
this interest rate cap was recorded as an asset with a fair market value of
$18,101 included in other assets in the consolidated balance sheets. Because we
have not designated this derivative as a hedge, the change in fair market value
flows through the consolidated statements of income, where it is included in
interest rate derivatives, in the amount of $(15,902) for the three months ended
March 31, 2004.
NOTE 11 - Dividends and Restricted Assets
CharterMac may not receive any distributions from its subsidiary, Equity Issuer,
until Equity Issuer has either paid all accrued but unpaid distributions related
to its preferred shares, or in the case of the next following distribution
payment date, set aside funds sufficient for payment. The distributions related
to the preferred shares are payable only from Equity Issuer's quarterly net
income, defined as the tax-exempt income (net of expenses) for the particular
calendar quarter. Equity Issuer is required, under the terms of its preferred
share issuance, to meet certain leverage ratios calculated as its total
obligations divided by the gross fair value of investments. This could limit the
ability of Equity Issuer to distribute cash or revenue bonds to our Company or
to make loans or advances to our Company.
-20-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Equity Issuer and its subsidiaries hold Revenue Bonds, which at March 31, 2004,
had an aggregate carrying amount of approximately $1.8 billion that serve as
collateral for securitized borrowings or are securitized. The total securitized
borrowings at March 31, 2004 were approximately $406 million. Equity Issuer's
net assets at March 31, 2004 were approximately $508 million.
NOTE 12 - Business Segments
We have three reportable business segments which include portfolio investing,
mortgage banking, and fund management.
The portfolio investing segment consists primarily of subsidiaries holding
investments in revenue bonds producing primarily tax-exempt interest income and
includes our credit enhancement activities.
The mortgage banking segment consists of subsidiaries which originate mortgages
on behalf of third parties and receive mortgage origination and mortgage
servicing fees generated by those activities.
The fund management segment consists of subsidiaries that generate fee income
from the asset management, underwriting, originating and other services provided
to the real estate equity investment programs RCC sponsors, and the management
and related services provided to us and a publicly-traded real estate investment
trust.
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.
The following table provides more information regarding our Company's segments:
Three Months Ended March 31, 2004 Three Months Ended March 31, 2003 (1)
----------------------------------------------------- ------------------------------------------
Portfolio Mortgage Fund Portfolio Mortgage
(Dollars in thousands) Investing Banking Management Total Investing Banking Total
----------------------------------------------------- ----------------------------------------
Total revenues $ 34,012 $ 3,880 $ 9,492 $ 47,384 $ 28,602 $ 3,319 $ 31,921
===================================================== =======================================
Net income (loss) $ 21,103 $ 700 $ (13,652) $ 8,151 $ 18,487 (580) $ 17,907
==================================================== =======================================
Assets consolidated
pursuant to FIN 46R $ -- $ -- $ 2,384,115 $ 2,384,115 $ -- $ -- $ --
===================================================== =========================================
Total assets $ 2,117,043 $ 64,644 $ 2,799,714 $ 4,981,401 $1,720,371 $ 110,894 $1,831,265
===================================================== =========================================
(1) The Fund Management segment began with our acquisition of RCC on November 17, 2003.
NOTE 13 - Notes Payable
In connection with the acquisition of PWF, we entered into a loan commitment
(the "PWF Acquisition Loan"). The PWF Acquisition Loan has a term of five years
with an interest rate of LIBOR plus 2.25%. The loan is interest only for the
first twelve months. Beginning in 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.
At March 31, 2004 and December 31, 2003, there was approximately $24.5 million
and $25.2 million outstanding on this loan, respectively, included in notes
payable in the accompanying consolidated financial statements.
PWF has a $100 million secured, revolving mortgage warehouse facility, subject
to annual renewal. CM Corp. is a guarantor of this PWF warehouse facility. The
interest rate for each warehouse advance is the Fed Funds rate at the end of
each year plus 1.25%, which at March 31, 2004 was 2.24%. At March 31, 2004 and
December 31, 2003, the amount outstanding was approximately $4.8 million and
$21.9 million, respectively.
In order to further increase financial flexibility, on March 31, 2003, Equity
Issuer entered into a $75 million secured revolving tax-exempt bond warehouse
line of credit with Fleet National Bank and Wachovia Bank N.A. This facility has
a built in accordion feature allowing up to a $25 million increase for a total
size of $100 million and a term of two years, plus a one year extension at our
option. This facility bears interest at 31, 60, 90, or 180-day reserve adjusted
LIBOR plus 1.5%, or prime plus 0.25%, at our option. During the third quarter of
2003, Citibank became the third lender under this facility. The outstanding
balance of this facility at March 31, 2004 was approximately $21.7 million.
On November 17, 2003, CM Corp. entered into $50 million and $10 million
acquisition bridge loan facilities with Wachovia Bank in order to fund the cash
portion, fees and expenses of our acquisition of RCC. These bridge loan
facilities have a nine-month term with two 90-day extension options. We have
pledged our common ownership interest in the Equity Issuer as security under
these facilities. The facilities are pre-payable at any time and bear interest
at LIBOR plus 1.5% and 2.4%, respectively. As of March 31, 2004 and December 31,
2003, CM Corp. had borrowed
-21-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
the full $60 million available under these facilities.
On November 17, 2003, RCC entered into a warehouse facility in the amount of $85
million, with Fleet National Bank, Merrill Lynch C.D.C and Citicorp, USA. This
facility has a maturity date of October 29, 2004 and bears interest, at RCC's
option, at either LIBOR plus 2% or the prime rate plus .125%. At March 31, 2004,
there was an outstanding balance of $63.3 million at a weighted average net rate
of 3.90%. This facility is collateralized by a lien on certain limited
partnership interests (See Note 4). Payments of interest only are due on a
monthly basis. RCC has the option to extend the warehouse facility upon its
maturity in 2004.
Minimum payments due
under
non-cancellable leases
---------------------------------------
(Dollars in thousands) Payments Due
---------------------- ------------
2004 $130,204
2005 24,456
2006 2,726
2007 2,726
2008 and thereafter 14,314
-----------
$174,426
===========
NOTE 14 - Financing Arrangements
We raise capital to acquire additional revenue bonds through two securitization
programs.
P-FLOATSSM/RITESSM Program
During 2004, we transferred 20 revenue bonds with an aggregate face amount of
approximately $118.8 million to the P-FLOATSSM/RITESSM program and received
proceeds of approximately $127.6 million. Additionally, we repurchased three
revenue bonds with an aggregate face value of approximately $28.4 million. As of
March 31, 2004 our total borrowings outstanding were approximately $406 million.
Our cost of funds relating to our secured borrowings under the Merrill Lynch
P-FLOATSSM/RITESSM program (calculated as interest expense as a percentage of
the weighted average amount of the secured borrowings) was approximately 1.9%
and 2.0%, annualized, for the three months ended March 31, 2004 and 2003,
respectively.
MBIA Securitization Programs
As of March 31, 2004, the maximum amount of capital we could raise under the
security agreement with MBIA was $650 million, including $425 million in Floater
Certificates under the Owner Trust and $225 million in Auction Certificates
under the Auction Trust. In addition, the surety commitment by MBIA was recently
extended for eight years, through October 1, 2011. As of March 31, 2004, total
outstanding was $383.5 million under the Floater Certificate structure and $100
million under the Auction Certificate structure.
Our Company's floating rate cost of funds relating to our MBIA securitizations
(calculated as interest expense plus recurring fees as a percentage of the
weighted average amount of the outstanding Senior Certificate) was approximately
2.05% and 2.08% for the three months ended March 31, 2004 and 2003,
respectively.
The following table shows the components of the financing arrangements.
Amount Financed (Dollars in thousands)
Financing Arrangement March 31, 2004 December 31, 2003
--------------------- -------------- -----------------
P-FLOATSSM/RITESSM $406,068 $316,508
MBIA: Low Floater 383,500 383,500
MBIA: Auction Rate 100,000 100,000
Fixed-Rate Securitization 100,000 100,000
------- -------
Total $989,568 $900,008
======= =======
-22-
NOTE 15 - Shareholders' Equity
In February 2004, our Company, at the shareholders' request, converted 771,080
of outstanding Convertible CRA Shares to Common Shares. The conversion was based
on a one-to-one conversion ratio.
NOTE 16 - FASB Interpretation No. 46
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). In December 2003, the FASB issued FIN
46R, which revises FIN 46, codifying certain FASB Staff positions and extending
the implementation date. FIN 46, as revised by FIN 46R, clarifies the
application of existing accounting pronouncements to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
Prior to the issuance of FIN 46R, we had not applied FIN 46 to any entities;
accordingly, the provisions of FIN 46R are effective for us beginning March 31,
2004.
Through our acquisition of RCC, we entered the Low Income Hosing Tax Credit
("LIHTC") syndication business, becoming the general partner or equivalent in
over 70 investment funds. Typically, the investors acquire all limited
partnership interest in an upper-tier, or investment partnership or 100% of the
membership interest if structured as a limited liability company. The investment
partnership, in turn, invests as a limited partner in one or more lower-tier, or
operating partnerships, that own and operate the housing projects. Limited
partners in the investment partnerships are most often corporations who are able
to utilize the tax benefits and, in most cases, are not anticipating any
economic benefit from the investment other than the expected tax benefits. In
some cases, in conjunction with the final disposition of the portfolio, there
may be some additional return to the limited partners.
There are certain entities in which the limited partners have the right to
remove us as the general partner or managing member without cause. These
entities are not VIEs under the provisions of FIN 46R therefore will not be
consolidated.
Entities and operating partnerships in which the limited partners or limited
members do not have the right to remove us as the general partner or managing
member are variable interest entities as defined by FIN 46R. We have concluded
that as the general partner or managing member for these type of investments, we
are the primary beneficiary as defined by FIN 46R because we absorb the majority
of the expected income and losses disproportionate to our actual ownership
interest.
We have included the consolidated amounts in Investments in partnerships - FIN
46R, assets consolidated pursuant to FIN 46R, notes payable and other
liabilities consolidated pursuant to FIN 46R, and minority interest in FIN 46R
partnerships in the consolidated balance sheets at our cost basis as of December
31, 2003 (such date approximates the date we became involved in these entities),
which approximates their fair values.
NOTE 17 - Subsequent Events
New Acquisitions
----------------
Subsequent to March 31, 2004, CharterMac has acquired one revenue bond with an
aggregate face amount of approximately $8.0 million, secured by 321 multifamily
units. We have also advanced additional funds to revenue bonds which were
previously acquired totaling approximately $4.5 million.
LIHTC Guarantee
---------------
On April 19, 2004, we completed our fourth transaction to guarantee tax benefits
to an investor in a partnership designed to earn LIHTCs. We entered into two
agreements with the Primary Guarantor to guarantee an agreed-upon rate of return
to the investor in Related Capital Guaranteed Corporate Partners II, L.P. -
Series D for which our Company will receive guarantee fees totaling
approximately $6.5 million in three installments as well as acquisition,
partnership management and asset management fees amounting to $7.4 million.
Conversion of Convertible CRA Shares to Common Shares
-----------------------------------------------------
On April 26, 2004, an investor converted 216,540 of outstanding Convertible CRA
Shares to Common Shares. The conversion was based on a one-to-one conversion
ratio for the Convertible CRA Shares.
-23-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
-------
We are CharterMac, a Delaware statutory trust, which commenced operations in
October 1997. We and our subsidiaries are in the business of (i) portfolio
investing, which includes acquiring and holding (directly and indirectly through
our subsidiaries) federally tax-exempt multifamily housing revenue bonds issued
by various state or local governments, agencies or authorities and other
investments designed to produce federally tax-exempt income; (ii) mortgage
banking, which includes originating and servicing mortgage loans on behalf of
third parties such as the Federal National Mortgage Association ("Fannie Mae"),
the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Government
National Mortgage Association ("Ginnie Mae") and the Federal Housing Authority
("FHA"); (iii) credit enhancement, which includes guaranteeing tax credit equity
returns and mortgage loans; and (iv) fund management, which includes sponsoring
investment programs for a fee.
We and a majority of our subsidiaries, are each either treated as partnerships
or disregarded for federal income tax purposes. Therefore, we pass through to
our shareholders, in the form of distributions, income (including federally
tax-exempt income) derived from our investments without paying federal income
tax on that income.
We conduct most of our portfolio investing through CharterMac Equity Issuer
Trust (collectively, with its subsidiaries, "Equity Issuer"). Portfolio
investing includes the acquisition and ownership (directly and indirectly
through our subsidiaries) of federally tax-exempt multifamily housing revenue
bonds issued by various state or local governments, agencies or authorities and
other investments designed to produce federally tax-exempt income. The proceeds
of the revenue bonds are used to make mortgage loans for the construction,
rehabilitation, acquisition or refinancing of affordable multifamily housing
properties throughout the United States.
Our Company, through its wholly owned subsidiary CharterMac Corporation ("CM
Corp."), owns approximately 87% of the outstanding capital stock (85% of the
economics) of PW Funding, Inc. ("PWF"), a national mortgage banking firm
specializing in multifamily housing. CM Corp. expects to acquire the remaining
outstanding capital stock of PWF over the next 6 to 18 months. As a result of
the acquisition of PWF, our Company has diversified the range of our investment
products and is able to offer developers fixed and floating rate tax-exempt and
taxable financing through Fannie Mae, Freddie Mac and FHA for affordable and
market rate multifamily properties. Combining this with our Company's core
business of investing in revenue bonds and its affiliation with RCC, we are able
to provide developers with financing for all aspects of their property's capital
structure.
We also own Related Capital Company ("RCC"). RCC is in the business of
syndicated Low Income Housing Tax Credits ("LIHTC") via investment partnerships
and providing origination, acquisition, asset management and partnership
management services to partnerships we sponsor, which are the LIHTC syndication
vehicles.
Results of Operations
---------------------
The following is a summary of our operations for the three months ended March
31, 2004 and 2003. Net income for the three months ended March 31, 2004 and 2003
was approximately $8.2 million and $18.0 million, respectively.
Revenues
For the Three Months Ended March 31,
(Dollars in thousands) 2004 2003 % Change
-----------------------------------------------------------------------------
Revenue bond interest income $31,851 $26,250 21.3%
Fee income
Mortgage banking fees 3,116 3,067 1.6%
Fund management fees 7,867 N/A N/A
Other income 4,550 2,604 74.7%
----------------------------------------
Total revenues $47,384 $31,921 48.4%
========================================
Total revenues for the three months ended March 31, 2004, increased by
approximately 48.4% or $15.5 million over 2003, primarily due to increases in
revenue bond interest income of approximately 21.3% or $5.6 million and $7.9
million in fund management fees.
The increase in revenue bond interest income is primarily due to new bonds
acquired during later quarters of 2003 and during 2004. The increase in fund
management fees represents the fee income earned by RCC.
-24-
Expenses
For the Three Months Ended March 31,
(Dollars in thousands) 2004 2003 % Change
----------------------------------------------------------------------
Interest expense $ 5,521 $ 3,816 44.7%
Interest expense - distribution
to preferred shareholders of
subsidiary 4,724 N/A N/A
Recurring fees - securitizations 1,065 963 10.6%
Salaries and benefits 13,882 3,360 313.2%
Interest rate derivatives 3,387 N/A N/A
General and administrative 6,349 3,694 71.9%
Depreciation and amortization 6,893 1,687 308.6%
-------------------------------------
Total expenses $ 41,821 $ 13,520 209.3%
=====================================
Total expenses increased approximately 209.3% or $28.3 million for the three
months ended March 31, 2004 versus 2003, primarily due to increases of 313.2%,
or $10.5 million in salaries and benefits, 71.9%, or $2.7 million in general and
administrative expenses, 308.6%, or $5.2 million in depreciation and
amortization, and $4.7 million in interest expense represented by distributions
to our preferred shareholders.
The increase in interest expense - distributions to preferred shareholders of
subsidiary represents a reclassification pursuant to FAS 150 of distribution
paid to the holders of our mandatorily redeemable preferred shares.
The above increases are predominantly due to our acquisition of RCC and the
associated recognition of approximately $19.4 million in expenses. These
increases include salary and benefits of $11.6 million, depreciation and
amortization of $4.4 million, and general and administrative of $3.4 million.
Other Items
For the Three Months Ended March 31,
(Dollars in thousands) 2004 2003 % Change
----------------------------------------------------------------------
Equity in earnings of ARCap $ 555 $ 555 0.0%
Gain on sale of loans 1,745 2,139 (18.4)%
Gain(loss)on repayment of revenue
revenue bonds 260 412) 163.1%
Income allocated to preferred
shareholders of subsidiary N/A 4,724 N/A
Income allocated to special
common units 3,705 N/A N/A
Income allocated to minority
interest 105 28 275.0%
Benefit for income taxes 3,838 1,976 94.2%
Gains on sales of loans decreased approximately 18.4% or $394,000 for the three
months ended March 31, 2004 versus 2003, due to the decrease in PWF's loan
origination activity in 2004 versus 2003.
The income allocated to SCUs represents the distributions payable to the holders
of the SCUs for the three months ended March 31, 2004.
Since FIN 46R was effective for us beginning March 31, 2004, there was no impact
to our results of operations.
Liquidity and Capital Resources
-------------------------------
Short-term liquidity provided by operations comes primarily from interest income
from revenue bonds and promissory notes in excess of the related financing
costs, mortgage origination and servicing fees, and fund management fees. For
the three months ended March 31, 2004, we had net cash from operations of
approximately $42.2 million. Additionally, we have entered into three revolving
warehouse facilities, one, in the amount of $100 million, used by PWF, another,
in the amount of $75 million, used by us to fund mortgage loans and investments
in revenue bonds on a short term basis and the third, in the amount of $85
million, used by RCC to acquire equity interests in property ownership entities
prior to the inclusion of these equity interests into investments funds. The PWF
facility is renewable annually, our facility matures March 31, 2005, with a one
year extension at our option, and the RCC facility matures on October 29, 2004.
During the three months ended March 31, 2004, cash and cash equivalents of our
Company and its consolidated subsidiaries increased approximately $21.1 million.
The increase was primarily due to cash provided by operating activities of
approximately $42.2 million, proceeds from the repayment of revenue bonds of
approximately $27.8 million, proceeds from financing arrangements of
approximately $127.6 million, an increase in notes payable of approximately
$21.1 million, an increase in goodwill of approximately $0.8 million and a
decrease in restricted cash of approximately $2.6 million, partially offset by
distribution payments of approximately $27.6 million, purchases of revenue bonds
of approximately $91.1 million and
-25-
principal payments on financing arrangements of approximately $38.0 million and
increase in investments in partnerships of approximately $39.7 million.
During May 2004, distributions of approximately $16,476,000 ($.37 per share)
will be paid to holders of Common and Convertible CRA Shares, which were
declared in March 2004.
Our long term liquidity needs are met using primarily two sources of capital:
collateralized debt securitization and various types of equity offerings. We
believe that our financing capacity and cash flow from current operations are
adequate to meet our current and projected liquidity requirements. 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.
Critical Accounting Policies
----------------------------
Our Company's critical accounting policies are described in our Form 10-K for
the year ended December 31, 2003 and in Note 1 of the footnotes of the
accompanying financial statements.
Acquisitions
-------------
During the period January 1, 2004 through March 31, 2004, we acquired thirteen
tax-exempt revenue bonds and one taxable revenue bonds with an aggregate face
amount of approximately $91.1 million.
Forward-Looking Statements
--------------------------
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements include statements regarding the intent, belief
or current expectations of our Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of our Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the availability and creditworthiness of prospective tenants,
lease rents and the terms and availability of financing for properties financed
by revenue bonds owned by us; adverse changes in the real estate markets
including, among other things, competition with other companies; risks of real
estate development and acquisition; governmental actions and initiatives; and
environment/safety requirements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.
Inflation
---------
Inflation did not have a material effect on our results for the periods
presented.
Related Parties
---------------
Our Company's day-to-day affairs are handled under the terms of the Management
Agreements with the Manager.
We have invested in, and may in the future invest in, revenue bonds secured by
properties in which either direct or indirect affiliates of RCC own equity
interests in the borrower. Our Company's trust agreement contains a limitation,
equal to 15% of total market value, on the aggregate amount of revenue bonds we
may hold where the borrowers under such revenue bonds are either direct or
indirect affiliates of RCC and RCC generally has a controlling economic
interest.
In some cases, RCC or its affiliates may own a partnership or joint venture
interest merely to facilitate an equity financing on behalf of one of RCC's
investment funds. These instances are not considered in the above 15%
limitation. This type of transaction with an affiliated borrower would be
structured as a limited partnership as follows: the general partner would be an
unaffiliated third party with a 1% general partnership interest and the 99%
limited partner would itself be a limited partnership in which an affiliate of
RCC would own a 1% general partnership interest and one or more Fortune 500
companies would own a 99% limited partnership interest.
Affiliates of the Manager may provide certain financial guarantees to facilitate
leveraging by us, for which they could be paid market rate fees. In addition,
affiliates of the Manager may provide certain financial guarantees to the owner
(or partners of the owners) of the underlying properties securing our revenue
bonds, for which they could be paid market rate fees.
Certain of the revenue bonds held by our Company are supported by various
guarantees including, but not limited to, construction and operating guarantees
from affiliates of the Manager.
On September 24, 2003, we completed a second yield guarantee transaction,
agreeing to back up a primary guarantor's obligation to guarantee an agreed-upon
rate of return to the investor in Related Capital Guaranteed Corporate Partners
II, L.P. - Series B ("RCGCP - Series B"). RCGCP - Series B is a fund sponsored
by RCC.
In connection with the refinancing of River Run, we entered into an agreement
which allows the revenue bond to be put to our Company should the owner of the
underlying property default on the bond. We, in turn, entered into agreements
which allow us to put the bond to the general partners of the owner who are
affiliates of the Manager. Our Company's put right is secured by collateral
assignments of the general partners' partnership interests in the limited
partnership which owns the underlying property.
-26-
We have entered into a credit enhancement transaction with Merrill Lynch Capital
Services. TRCLP has provided us with an indemnity covering 50% of any losses
incurred by us pursuant to such transaction.
Commitments and Contingencies
-----------------------------
Mortgage Banking Activities
Through PWF, we originate and service multifamily mortgage loans for Fannie Mae,
Freddie Mac and FHA. PWF's mortgage lending business is subject to various
governmental and quasi-governmental regulations. PWF is licensed or approved to
service and/or originate and sell loans under Fannie Mae, Freddie Mac, Ginnie
Mae and FHA programs. FHA and Ginnie Mae are agencies of the Federal government
and Fannie Mae and Freddie Mac are federally-chartered investor-owned
corporations. These agencies require PWF and its subsidiaries to meet minimum
net worth and capital requirements and to comply with other requirements.
Mortgage loans made under these programs are also required to meet the
requirements of these programs. In addition, under Fannie Mae's DUS program, PWF
has the authority to originate loans without a prior review by Fannie Mae and is
required to share in the losses on loans originated under this program.
The DUS program is Fannie Mae's principal loan program. Under the Fannie Mae DUS
Product Line, PWF originates, underwrites and services mortgage loans on
multifamily residential properties and sells the project loans directly to
Fannie Mae. PWF assumes responsibility for a portion of any loss that may result
from borrower defaults, based on the Fannie Mae loss sharing formulas, Levels I,
II or III. At March 31, 2004, all of PWF's loans consisted of Level I loans. For
such loans, PWF is responsible for the first 5% of the unpaid principal balance
and a portion of any additional losses to a maximum of 20% of the original
principal balance. Level II and Level III loans carry a higher loss sharing
percentage. Fannie Mae bears any remaining loss.
Under the terms of the Master Loss Sharing Agreement between Fannie Mae and PWF,
PWF is responsible for funding 100% of mortgagor delinquency (principal and
interest) and servicing (taxes, insurance and foreclosure costs) advances until
the amounts advanced exceed 5% of the unpaid principal balance at the date of
default. Thereafter, for Level I loans, we may request interim loss sharing
adjustments which allow us to fund 25% of such advances until final settlement
under the Master Loss Sharing Agreement. No interim loss sharing adjustments are
available for Level II and Level III loans.
We maintain an accrued liability for probable losses under FAS 5 for loans
originated under the Fannie Mae DUS product line at a level that, in
management's judgment, is adequate to provide for estimated losses. At March 31,
2004, that liability was approximately $6.9 million, which we believe represents
its probable liability at this time. Unlike loans originated for Fannie Mae, PWF
does not share the risk of loss for loans PWF originates for Freddie Mac or FHA.
In connection with the PWF warehouse line, both our Company and CM Corp. have
entered into guarantees for the benefit of Fleet National Bank ("Fleet"),
guaranteeing the total advances drawn under the line, up to the maximum of $100
million, together with interest, fees, costs, and charges related to the PWF
warehouse line.
PWF maintains, as of March 31, 2004, treasury notes of approximately $5.3
million and a money market account of approximately $0.9 million, which is
included in cash and cash equivalents-restricted in the consolidated balance
sheet, to satisfy the Fannie Mae collateral requirements of $6.2 million.
Due to the nature of PWF's mortgage banking activities, PWF is subject to
supervision by certain regulatory agencies. Among other things, these agencies
require PWF to meet certain minimum net worth requirements, as defined. PWF met
these requirements for all agencies, as applicable, as of March 31, 2004.
At March 31, 2004, PWF had commitments of approximately $46.7 million to six
borrowers.
Off Balance Sheet Arrangements
------------------------------
Credit Enhancement Transaction
In December 2001, CM Corp. completed a credit enhancement transaction with
Merrill Lynch Capital Services, Inc. ("MLCS"). Pursuant to the terms of the
transaction, CM Corp. assumed MLCS's first loss position on a pool of tax-exempt
weekly variable rate multifamily mortgage loans. TRCLP, has provided CM Corp.
with an indemnity covering 50% of any losses that are incurred by CM Corp. as
part of this transaction. As the loans mature or prepay, the first loss exposure
and the fees paid to CM Corp. will both be reduced. The latest maturity date on
any loan in the portfolio occurs in 2009. The remainder of the real estate
exposure after the million first loss position has been assumed by Fannie Mae
and Freddie Mac. In connection with the transaction, we have guaranteed the
obligations of CM Corp., and have met its obligation to post collateral, in an
amount equal to 40% of the first loss amount. Our maximum exposure under the
terms of this transaction is approximately $19.0 million.
CM Corp. performed due diligence on each property in the pool, including an
examination of loan-to-value and debt service coverage both on a current and
"stressed" basis. CM Corp. analyzed the portfolio on a "stressed" basis by
increasing capitalization rates and assuming an increase in the low floater bond
rate. As of March 31, 2004, the credit enhanced pool of properties are
performing according to their contractual obligations and we do not anticipate
any losses to be incurred on its guaranty. Should the Company's analysis of risk
of loss change in the future, a provision for probable loss might be required;
such provision could be material.
-27-
Yield Guarantee Transactions
CM Corp. has entered into six agreements with Merrill Lynch (the "Primary
Guarantor") to guarantee agreed-upon rates of return for three pools of
multifamily properties each owned by a local partnership which in turn, is
majority-owned by affiliates of RCC for which CM Corp. has or will receive
guarantee fees.
Each transaction was structured as two separate guarantees, one primarily
guaranteeing the returns through the lease-up phase of the properties and the
other guaranteeing the returns through the operating phase of the properties. CM
Corp. receives a fee for each guarantee up front at the start of each guarantee
period. These fees will be recognized in income on a straight line basis over
the period of the respective guarantees. Total potential exposure pursuant to
these guarantees is approximately $228.0 million. We have analyzed the expected
operations of the Underlying Properties and believe there is no risk of loss at
this time. Should our analysis of risk of loss change in the future, a provision
for possible losses might be required; such provision could be material. We
account for these guarantees under FIN 45. We have determined that the fees
received represent the fair value of the respective liabilities and accordingly
have recorded such fees as a liability included in deferred income on our
consolidated balance sheets.
Some of the local partnerships have financed their properties with the proceeds
of our revenue bonds. In these cases, the Primary Guarantor has required that
those revenue bonds be deposited into a trust pursuant to which the revenue
bonds were divided into senior and subordinated interests with approximately 50%
of each revenue bond being subordinated. We have financed the senior trust
interest as part of the Merrill Lynch P-FloatsSM/RitesSM program. The
subordinate trust interests are being used as collateral in other of our
Company's financing programs.
In connection with these transactions, we have posted $159.0 million as
collateral with the Primary Guarantor in the form of either cash or revenue
bonds.
Revenue Bond Forward Transactions
We have entered into six transactions to purchase revenue bonds pursuant to
agreements which require us, at the earlier of stabilization or conversion to
permanent financing to acquire Series A and Series B revenue bonds at a
predetermined price and interest rates. We are obligated to purchase the revenue
bonds only if construction is completed. We are obligated to buy the Series B
revenue bonds only if, at the date the Series A bonds are stabilized, the
property's cash flow is sufficient to provide debt service coverage of 1.15x for
both the Series A and B bonds. An unrelated third party lender will advance
funds to the developer, as needed during the construction period, at a floating
rate. These forward commitments create derivative instruments under SFAS No.
133, which have been designated as a cash flow hedge of the anticipated funding
of the revenue bonds, and are recorded at fair value, with changes in fair value
recorded in other accumulated comprehensive income until the revenue bonds are
funded. The total potential amount we could possibly be required to fund is
$83.4 million.
Other Guarantees
We have entered into three transactions related to three properties: Coventry
Place, Canyon Springs and Arbor Ridge. Pursuant to the terms of these
transactions, we will provide credit support to the construction lender for
project completion and Fannie Mae permanent loan conversion and acquire
subordinated bonds to the extent the construction period bonds do not fully
convert. Up until the point of completion, we will reimburse the construction
lender for any draw on its construction letter of credit up to 40% of the stated
amount of the letter of credit. Following completion, up until the project loan
converts to permanent loan status, we will, should the need arise, reimburse the
full amount of the letter of credit. We closely monitor these two properties,
and believes there is no need currently, to provide for any potential loss.
Should our analysis of risk of loss change in the future, a provision for loss
might be required; such provision could be material. The developer has also
issued several guarantees to the construction lender, each of which would be
called upon before our guarantees, and each of which would be assigned to us
should its guarantees be called. Once the construction loans convert to
permanent loans, we are obligated to acquire subordinated loans for the amount
by which each construction loan exceeds the corresponding permanent loan, if
any. The subordinated bonds will bear interest at 10%. Under Fannie Mae
guidelines, the size of the subordinated bonds will be limited to a 1.0x debt
service coverage based on 75% of the cash flow after the senior debt.
Our maximum exposure, related to these two transactions, is 40% of the stated
amount of the letter of credit of approximately $27 million.
The following table reflects our maximum exposure and carrying amount for
guarantees we and our subsidiaries have entered into:
Carrying
(Dollars in thousands) Exposure Amount
----------------------------------------------------------------------
Payment guarantees $ 17,933 $ --
Completion guarantees 53,236 --
Operating deficit guarantees 614 --
CMC credit enhancement 19,000 --
LIHTC guarantees 228,000 5,850
----------- ------------
$ 318,783 $ 5,850
=========== ============
-28-
Contractual Obligations
The following table provides our commitments as of March 31, 2004 to make future
payments under our debt agreements and other contractual obligations.
Payments due by Period
-------------------------------------------------------------------------------------
Less than 1 More than
(Dollars in thousands) Total year 1-3 years 3-5 years 5 years
------------------------------------------------------------------------------------------------------------------------
Notes payable $174,426 $130,204 $27,182 $17,040 $ --
Operating lease obligations 1,376 545 831 -- --
Unfunded loan commitments 178,930 49,750 129,180 -- --
Fixed rate securitization 100,000 -- 100,000 -- --
Employee contracts 6,000 2,000 4,000 -- --
-------------------------------------------------------------------------------------
Total $460,732 $182,499 $261,193 $17,040 $ --
=====================================================================================
Income Taxes
------------
We are organized as a Delaware statutory trust and, for tax purposes, are
classified as a partnership. Almost all of our recurring income is tax-exempt.
From time to time we may sell or securitize various assets which may result in
capital gains and losses. This tax structure allows us to have the pass-through
income characteristics of a partnership for both taxable and tax-exempt income.
We do not pay tax at the partnership level. Instead, the distributive share of
our income, deductions and credits is reported to each shareholder for inclusion
on their respective income tax return. The tax-exempt income derived from most
of our revenue bonds remains tax-exempt as it is passed through to shareholders.
Any cash dividends received by us from subsidiaries, organized as corporations,
will be recorded as dividend income for tax purposes. For such subsidiaries,
created in 2001, there were no dividends distributed for tax purposes.
We provide for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). FAS 109 requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the financial statement
carrying amounts and the tax basis of assets and liabilities.
We derive a substantial portion of our income from ownership of first mortgage
"Private Activity Bonds." The interest from these bonds is generally tax-exempt
from regular Federal income tax. However, the Tax Reform Act of 1986 classifies
the interest earned on Private Activity Bonds issued after August 7, 1986 as a
tax preference item for alternative minimum tax purposes ("AMT"). The percentage
of our tax-exempt interest income subject to AMT for the years ended December
31, 2002, 2001 and 2000 was approximately 85%, 79% and 88% respectively. AMT is
a mechanism within the Internal Revenue Code to ensure that all taxpayers pay at
least a minimum amount of taxes. All taxpayers are subject to the AMT
calculation requirements although the vast majority of taxpayers will not
actually pay AMT. As a result of AMT, the percentage of our income that is
exempt from federal income tax may be different for each shareholder depending
on that shareholder's individual tax situation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We invest in certain financial instruments, primarily revenue bonds and other
bond related investments that are subject to various forms of market risk,
including real estate risk, interest rate risk, credit and liquidity risk and
prepayment risk. We seek to prudently and actively manage such risks to earn
sufficient compensation to justify the undertaking of such risks and to maintain
capital levels which are commensurate with the risks we undertake.
Real Estate Risk
We derive income by investing in revenue bonds secured by multifamily affordable
residential properties. Investing in such revenue bonds collateralized by such
properties subjects us to various types and degrees of risk that could adversely
affect the value of our assets and our ability to generate revenue. The factors
that may reduce our revenues, net income and cash available for distributions to
shareholders include the following: the property securing a revenue bond may not
generate income sufficient to meet its operating expenses and debt service on
its related revenue bond; economic conditions, either local, regional or
national, may limit the amount of rent that can be charged for rental units at
the properties, and may result in a reduction in timely rent payments or a
reduction in occupancy levels; occupancy and rent levels may be affected by
construction of additional housing units and national, regional and local
politics, including current or future rent stabilization and rent control laws
and agreements; federal LIHTC and city, state and federal housing subsidy or
similar programs which apply to many of the properties, could impose rent
limitations and adversely affect the ability to increase rents to maintain the
properties in proper condition during periods of rapid inflation or declining
market value of such properties; and, if a revenue bond defaults, the value of
the property securing such revenue bond (plus, for properties that have availed
themselves of the federal LIHTC, the value of such credit) may be less than the
face amount of such revenue bond.
All of these conditions and events may increase the possibility that a property
owner may be unable to meet its obligations to us under its mortgage revenue
bond. This could affect our net income and cash available for distribution to
shareholders. We manage these risks through diligent and comprehensive
underwriting, asset management and ongoing monitoring of loan performance.
We may be adversely affected by periods of economic or real estate downturns
that result in declining property performance or property values. Any material
decline in property values used as collateral for our revenue bonds increases
the possibility of a loss in the event of default. Additionally, some of our
income may come from additional interest received from the participation of a
portion of the cash flow, sale or refinancing proceeds on underlying
-29-
properties. The collection of such additional interest may decrease in periods
of economic slowdown due to lower cash flows or values available from the
properties. In a few instances, the revenue bonds are subordinated to the claims
of other senior interest and uncertainties may exist as to a borrower's ability
to meet principal and interest payments. Because of these economic factors, debt
service on the revenue bonds, and therefore net income and cash available for
distribution to shareholders is dependent on the performance of the underlying
properties.
Interest Rate Risk
The nature of our investments and the instruments used to raise capital for
their acquisition expose us to income and expense volatility due to fluctuations
in market interest rates. Market interest rates are highly sensitive to many
factors, including governmental policies, domestic and international economic
and political considerations and other factors beyond our control.
The revenue bonds generally bear interest at fixed rates, or pay interest
according to the cash flows of the underlying properties, which do not fluctuate
with changes in market interest rates. In contrast, payments required under our
floating rat securitization programs vary based on market interest rates based
on TBMA index and are re-set weekly or every 35 days.
In addition, we have floating rate debt related to our acquisition financing of
PWF and RCC and our warehouse facilities. PWF has loans receivable and short
term borrowings related to its mortgage origination operations which are not
expected to subject PWF to significant interest rate risk. PWF typically
provides mortgages to borrowers (mortgages receivable) by borrowing from third
parties (short-term borrowings). Since PWF's mortgages receivable are typically
subject to a take-out commitment by Fannie Mae, Freddie Mac or FHA, the related
borrowings to finance such mortgages are typically short-term. The interest
income or expense that represents the difference between the interest charged to
borrowers and the interest paid to PWF's lender during the warehousing period
will be earned by PWF.
Other long-term sources of capital, such as Equity Issuer's various series of
Cumulative Preferred Shares, carry a fixed dividend rate and as such, are not
impacted by changes in market interest rates.
A rising interest rate environment could reduce the demand for multifamily
tax-exempt and taxable financing, which could limit our ability to invest in
revenue bonds or to structure transactions. Conversely, falling interest rates
may prompt historical renters to become homebuyers, in turn potentially reducing
the demand for multifamily housing.
An effective interest rate management strategy can be complex and no strategy
can insulate us from all potential risks associated with interest rate changes.
Various financial vehicles exist which would allow us to mitigate the impact of
interest rate fluctuations on our cash flows and earnings. Beginning in 2001,
based upon management's analysis of the interest rate environment and the costs
and risks of such strategies, we entered into interest rate swaps in order to
hedge a portion of the risk of rising interest rates and the impact of such a
rise on our MBIA and P-FloatsSM/RitesSM programs.
We have entered into several derivative instruments, including an interest rate
cap, interest rate swaps and forward bond origination commitments, all of which
are accounted for under the Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended and interpreted. We have designated the interest rate swaps as cash flow
hedges on the variable interest payments on our floating rate securitizations.
All but one of the interest rate swaps do not become effective until 2005. The
one interest rate swap that is currently in place, is recorded at its fair
market value each accounting period, with changes in market value being recorded
in accumulated other comprehensive income to the extent the hedge is effective
in achieving offsetting cash flows. This hedge has been perfectly effective, so
has generated no ineffectiveness that needs to be included in earnings. The
effectiveness of the other swaps is being measured using the hypothetical swap
method, until they go into effect in 2005. For the three months ended March 31,
2004, we recorded approximately $3.4 million as an expense representing the
ineffective portion of these swaps. The interest rate cap, although designed to
mitigate our exposure to rising interest rates, was not designated as a hedging
derivative; therefore, any change in fair market value flows through the
consolidated statements of income, where it is included in interest income. The
forward commitments create derivative instruments under SFAS 133, which have
been designated as cash flow hedges of the anticipated funding of the revenue
bonds, and, as such, are recorded at fair value, with changes in fair value
recorded in accumulated other comprehensive income until the revenue bonds are
funded.
Interest rate swap agreements are subject to risk of early termination by us or
the counterparty, possibly at times unfavorable to us and, depending on market
conditions at the time, may result in the recognition of a significant gain or
loss from changes in the market value of the hedging instrument. There can be no
assurance that we will be able to acquire hedging instruments at favorable
prices, or at all, when the existing arrangements expire or are terminated which
would then fully expose us to interest rate risk to the extent of the balance of
debt subject to such hedges. In addition, there is no assurance that the
counterparty to these hedges will have the capacity to pay or perform under the
stated terms of the interest rate swap agreement; however, we seek to enter into
such agreements with reputable and investment grade rated counterparties.
We adopted statement of Financial Accounting Standards No. 133, as amended and
interpreted ("FAS 133"), on January 1, 2001. Accordingly, we have documented and
established our policy for risk management and the related objectives and
strategies for the use of derivative instruments to potentially mitigate such
risks. Currently, our strategy is intended to reduce interest rate risk through
the use of interest rate swaps. At inception, we designated these interest rate
swaps as cash flow hedges on the variable interest payments on its floating rate
financing. Accordingly, the interest rate swaps are recorded at their fair
market values each accounting period, with changes in market values being
recorded in accumulated other comprehensive income to the extent that the hedge
is effective in achieving offsetting cash flows. We assess, both at the
inception of the hedge and on an ongoing basis, whether the swap agreements are
highly effective in offsetting changes in the cash flows of the hedged
financing. Any ineffectiveness in the hedging relationship is recorded in
earnings. Our hedges have been perfectly effective through December 31, 2003.
For the three months ended March 31, 2004, we have recorded approximately $3.4
million in general and administrative expenses on the consolidated income
statement due to ineffectiveness, calculated pursuant to FAS 133, of our
existing interest rate swaps. Net amounts payable or receivable under the swap
agreements are recorded as adjustments to interest expense.
-30-
At March 31, 2004, the fair market value of our interest rate swaps of
approximately $6.5 million were recorded in our consolidated balance sheets.
Interest paid or payable under the terms of the swaps of approximately $638,000
and $884,000, is included in interest expense for the three months ended March
31, 2004 and 2003, respectively.
At March 31, 2004, the interest rate cap was recorded as an asset with a fair
market value of $18,101 included in other assets on the consolidated balance
sheets. Because we have not designated this derivative as a hedge, the change in
fair market value flows through the consolidated statements of income, where it
is included in interest rate derivatives.
With respect to the portion of our floating rate financing programs which are
not hedged, a change in TBMA rate would result in increased or decreased
payments under these financing programs, without a corresponding change in cash
flows from the investments in revenue bonds. For example, based on the un-hedged
$839.6 million ($889.6 million outstanding under these financing programs at
March 31, 2004, less the $50 million notional amount subsequently hedged and
assuming a perfect hedge correlation), we estimate that an increase of 1.0% in
TBMA rate would decrease our annual net income by approximately $8.4 million.
Conversely, a decrease in market interest rates would generally benefit us in
the same amount described above, as a result of decreased allocations to the
minority interest and interest expense without corresponding decreases in
interest received on revenue bonds.
Changes in interest rates would also affect the PWF acquisition loan with Fleet,
the PWF warehouse lines, the RCC acquisition facility, Fleet line credit and the
RCC warehouse facility line. A 1% change in the underlying interest rates would
affect our annual net income by approximately $1.7 million (based on the
outstanding balances at March 31, 2004 of approximately $24.5 million for the
PWF acquisition loan, $4.8 million for the PWF warehouse line, $60 million for
the RCC acquisition facility, $21.7 million for the Fleet line credit and $63.3
million for the RCC warehouse facility line).
Changes in market interest rates would also impact the estimated fair value of
our portfolio of revenue bonds. We estimate the fair value for each revenue bond
as the present value of its expected cash flows, using a discount rate for
comparable tax-exempt investments. Therefore, as market interest rates for
tax-exempt investments increase, the estimated fair value of our revenue bonds
will generally decline, and a decline in interest rates would be expected to
result in an increase in their estimated fair values. For example, we estimate,
using the same methodology used to estimate the portfolio fair market value
under FAS 115, that a 1% increase in market rates for tax-exempt investments
would decrease the estimated fair value of our portfolio of revenue bonds from
its March 31, 2004 value of approximately $1.9 billion to approximately $1.8
billion. A 1% decline in interest rates would increase the value of the March
31, 2004 portfolio to approximately $2.1 billion. Changes in the estimated fair
value of the revenue bonds do not impact our reported net income, earnings per
share, distributions or cash flows, but are reported as components of other
accumulated comprehensive income and affect reported shareholders' equity.
The assumptions related to the foregoing discussion of market risk involve
judgments involving future economic market conditions, future corporate
decisions and other interrelating factors, many of which are beyond our control
and all of which are difficult or impossible to predict with accuracy. Although
we believe that the assumptions underlying the forward-looking information are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking information included herein will prove
to be accurate. Due to the significant uncertainties inherent in forward-looking
information, the inclusion of such information should not be regarded as our
representation that our objectives and plans would be achieved.
Liquidity Risk
Our investments generally lack a regular trading market, particularly during
turbulent market conditions or if any of our tax-exempt revenue bonds become
taxable or are in default. There is no limitation as to the percentage of
investments that may be illiquid and we do not expect to invest a substantial
portion of its assets in liquid investments. There is a risk involved in
investing in illiquid investments, particularly in the event that we need
additional cash. In a situation requiring additional cash, we could be forced to
liquidate some of its investments on unfavorable terms that could substantially
impact our consolidated balance sheet and reduce the amount of distributions
available and payments made in respect of our shares.
Risk Associated with Securitization
Through securitizations, we seek to enhance our overall return on our
investments and to generate proceeds that, along with equity offering proceeds,
facilitate the acquisition of additional investments. In our debt
securitizations, an investment bank and/or credit enhancer generally provides
liquidity to the underlying trust and credit enhancement to the bonds, which
enables the senior interests to be sold to certain accredited third party
investors seeking investments rated "AA" or better. The liquidity facilities are
generally for one-year terms and are renewable annually. To the extent that the
credit enhancer is downgraded below "AA", either an alternative credit
enhancement provider would be substituted to reinstate the desired investment
rating or the senior interests would be marketed to other accredited investors.
In either case, it is anticipated that the return on the residual interests
would decrease, which would negatively impact our income. If we are unable to
renew the liquidity or credit enhancement facilities, we would be forced to find
alternative liquidity or credit enhancement facilities, repurchase the
underlying bonds or liquidate the underlying bonds and its investment in the
residual interests. If we are forced to liquidate our investment, we would
recognize gains or losses on the liquidation, which may be significant depending
on market conditions. As of March 31, 2004, $483.5 million of senior interest is
credit enhanced by an eight-year term facility through MBIA. Of this $483.5
million, $383.5 million is subject to annual "rollover" renewal for liquidity.
Also as of March 31, 2004, Merrill Lynch provided liquidity for $406 million of
senior interests in the P Floats program. We do not maintain an ongoing
commitment with Merrill Lynch and the senior interest is subject to a weekly
re-set schedule. We continue to review alternatives that would reduce and
diversify risks associated with securitization.
-31-
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), as of the end of the period covered by this report. Based
on such evaluation, such officers have concluded that, as of the end of such
period, our disclosure controls and procedures are effective .
(b) Internal Control over Financial Reporting. There have not been any
significant changes in our internal control over financial reporting during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
-32-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are 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 our financial
position, results of operations or cash flows.
On October 24, 2003, the New York Supreme Court for Nassau County
issued a final judgment approving the stipulation of compromise and
settlement of the class and derivative action entitled Dulitz v.
Hirmes, which had challenged certain aspects of our acquisition of RCC.
Pursuant to that settlement, certain terms of the acquisition will be
modified, as fully detailed in our proxy statement that was previously
mailed to shareholders and filed with the SEC on September 5, 2003,
together with the Notice of Pendency of Class and Derivative Action.
Although the defendants in the action denied all wrongdoing and believe
they had meritorious defenses, the settlement eliminates the cloud of
litigation over the acquisition in connection with Dulitz and provides
us and our shareholders with certain benefits described in the proxy
statement and Notice. The Court also approved an award pursuant to the
settlement of $400,000 for attorney's fees and expenses payable by us
to the plaintiff's attorneys.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table sets forth information with respect to purchases
made by the Company of its common stock during the three months ended
March 31, 2004.
Total
number
of shares Maximum
purchased number of
Total Average as part of that may yet be
number of price paid publicity purchased under
Period shares purchased per share programs the programs
-------------------------------------------------------------------------------
March 15, 2004 59,798 $22.20 0 1,500,000
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5 Other Information - Stuart A. Rothstein resigned his position
as Chief Financial Officer ("CFO") of our Company effective March 31,
2004, in order to pursue other endeavors. Alan P. Hirmes, a Managing
Trustee of our Company, replaced Mr. Rothstein as the new CFO.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
10.1 Acquisition Loan Agreement, dated as of December 24, 2001, among
Charter Mac Corporation, as Borrower, Fleet National Bank, as
Agent, and the Lenders.
10.2 Mortgage Warehousing Credit and Security Agreement, dated as of
December 24, 2001, among PW Funding Inc., Cambridge Healthcare
Funding Inc. and Larson Financial Resources, Inc., as Borrowers,
Fleet National Bank, as Agent, and the Lenders.
10.3 Amended and Restated Reimbursement Agreement, dated as of March
31, 2003, among Charter Mac Equity Issuer Trust, Fleet National
Bank, as Agent, Fleet National Bank, as Issuing Bank, and the
Participants.
10.4 Tax-Exempt Bond Line of Credit and Security Agreement, dated as of
March 26, 2003, among Charter Mac Equity Issuer Trust, Fleet
National Bank, Wachovia Bank, National Association, Fleet
Securities Inc. and Wachovia Securities, Inc., and the Lenders.
10.5 Severance Agreement of Stuart A. Rothstein, dated December 15,
2003, between the Company and the Executive (filed herewith).
31.1 Chief Executive Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer and Chief Financial Officer certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following 8-K reports were filed or furnished, as noted in the
applicable Form 8-K, for the quarter ended March 31, 2004.
Current report on Form 8-K relating to a press release issued by
our Company reporting our fourth quarter and year-end financial
results, dated March 9, 2004.
-33-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: May 10, 2004 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee, President and
Chief Executive Officer
Date: May 10, 2004 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee, Chief Financial Officer
and Chief Accounting Officer
Exhibit 10.5
December 15, 2003
Mr. Stuart J. Boesky
Chief Executive Officer
CharterMac and American Mortgage Acceptance Company
Mr. Marc D. Schnitzer
Chief Executive Officer
Related Capital Company
625 Madison Avenue
New York, NY 10022
Dear Stuart and Marc:
After carefully considering and reflecting upon our recent discussions, I
have decided to tender my resignation from the positions of Chief Financial
Officer of both CharterMac and American Mortgage Acceptance Company ("AMAC")as
well as from my positions with any affiliated entities, including, without
limitation, my position as Executive Vice President of Related Capital Company
(collectively, the "Officer Positions").
In consideration of your desire to ensure a smooth and orderly transfer of
my responsibilities, I have agreed to remain in the Officer Positions and
perform the functions required by such positions in accordance with past
practice (collectively, the "Officer Functions") for a transition period which
will end no later than March 31, 2004 or such earlier date as you shall choose
(the "Transition Period"). Without limiting the foregoing, I agree that, I will
sign the certifications required to be signed by the chief financial officer of
CharterMac and AMAC in connection with their Form 10-Ks for the calendar year
ended December 31, 2003 (provided, of course, that the reports otherwise permit
me to make such certifications). I also agree to abide by the covenants set
forth on Exhibit A; to the extent you have obligations under such covenants, you
also agree to abide by such covenants.
In exchange for agreeing to the provisions of Exhibit A and remaining in
the Officer Positions and performing the Officer Functions during the Transition
Period, my current salary shall remain at the rate of $200,000 per annum. In
addition, upon the expiration of the Transition Period, Related Capital Company
shall pay me a bonus in the amount of $200,000 upon my execution and delivery to
you of the Release attached as Exhibit B to this letter.
If you are in agreement with these terms please indicate by signing next
to your names below.
Thank you,
Stuart A. Rothstein
Agreed and accepted:
CharterMac
American Mortgage Acceptance Company
By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky, Chief Executive Officer
Related Capital Company
By: /s/ Marc D. Schnitzer
---------------------
Marc D. Schnitzer, Chief Executive Officer
Cc: Mark Schonberger - Paul Hastings Janofsky & Walker
Exhibit A
Covenants
---------
Related Capital Company LLC, a Delaware limited liability company (the
"Company"), and Stuart Rothstein (the "Executive") agree as follows (all
capitalized terms not otherwise defined in this Exhibit A have the meanings
ascribed to them in the Severance Agreement to which this Exhibit A is a part:
(a) Confidential Information. For the Transition Period and thereafter:
(i) the Executive will not divulge, transmit or otherwise disclose (except as
legally compelled by court order, and then only to the extent required, after
prompt notice to the Company of any such order), directly or indirectly, other
than in the regular and proper course of business of the Company, any
confidential knowledge or information with respect to the operations, finances,
organization or employees of the Company or its affiliates or with respect to
confidential or secret processes, services, techniques, customers or plans with
respect to the Company or its affiliates (collectively, "Confidential
Information"); and (ii) the Executive will not use, directly or indirectly, any
Confidential Information for the benefit of anyone other than the Company or its
affiliates; provided, however, that Confidential Information shall not be deemed
to include any information that (A) is or hereafter becomes generally available
to the public other than through disclosure by the Executive, (B) is rightfully
received by the Executive following the Transition Period from a third party or
(C) is brought by the Executive to his employment relationship with the Company.
All files, records, correspondence, memoranda, notes or other documents
(including, without limitation, those in computer-readable form) or property
relating or belonging to the Company or its affiliates, whether prepared by the
Executive or otherwise coming into his possession in the course of the
performance of his services under this Agreement, shall be the exclusive
property of Company and shall be delivered to Company and not retained by the
Executive (including, without limitation, any copies thereof) upon termination
of the Executive's employment with the Company for any reason whatsoever.
(b) Inventions and Patents. The Executive agrees that all processes,
technologies and inventions, including new contributions, improvements, ideas
and discoveries, together with all products and proceeds of the Executive's
services hereunder, including, but not limited to, all materials, ideas,
concepts, formats, suggestions, developments, arrangements, packages, programs
and other intellectual properties that the Executive may acquire, obtain,
develop or create in connection with and during his employment, whether
patentable or not, conceived, developed, invented or made by him during his
employment by the Company (collectively, "Inventions") shall belong exclusively
to the Company, provided that such Inventions grew out of the Executive's work
with the Company or any of its affiliates, are related to the business
(commercial or experimental) of the Company or any of its affiliates or are
conceived or made on the Company's time or with the use of the Company's
facilities or materials. The Executive shall promptly disclose such Inventions
to the Company and shall, subject to reimbursement by the Company for all
reasonable expenses incurred by the Executive in connection therewith: (i)
assign to the Company, without additional compensation, all patent and other
rights to such Inventions for the United States and foreign countries; (ii) sign
all papers necessary to carry out the foregoing; and (iii) give testimony in
support of the Executive's inventorship. The provisions of this Section (b)
shall cease to have application to any Inventions that become known to the
public other than through disclosure by the Executive and that are not subject
to a copyright, patent or trademark in favor of the Company that (A) was
received before the termination of the Executive's employment or (B) was applied
for before the termination of the Executive's employment in the ordinary course
of business (and not in anticipation of the Executive's termination of
employment) and ultimately is received by the Company.
(c) Disparagement. The Company and the Executive agree that, during the
Transition Period and thereafter (including following the Executive's
termination of employment for any reason) neither the Company or its affiliates
or their respective employees, officers, trustees or directors, on the one hand,
or the Executive, on the other, will make statements or representations, or
otherwise communicate, directly or indirectly, in writing, orally, or otherwise,
or take any action which may, directly or indirectly, disparage the other or
their respective officers, trustees, directors, employees, advisors, businesses
or reputations. Notwithstanding the foregoing, nothing in this Agreement shall
preclude the Executive or a representative of the Company or its affiliates from
making truthful statements or disclosures that are required by applicable law,
regulation or legal process.
(d) No Raid. During the period of twelve (12) months following the
termination of the Executive's employment hereunder, the Executive shall not,
directly or indirectly, hire or solicit for hire, for the account of the
Executive or any other person or entity, any person who is or was an employee of
the Company or any affiliate of the Company (other than any secretary to the
Executive) so long as such person is an employee of the Company or any of its
Affiliates and for a period of 180 days after such person has ceased to be an
employee of the Company or any of its Affiliates.
(e) Remedies. The Executive acknowledges that a material breach of his
covenants contained in this Exhibit A will cause irreparable damage to the
Company and its affiliates, the exact amount of which will be difficult to
ascertain, and that the remedies at law for any such material breach will be
inadequate. Accordingly, the Executive agrees that if he breaches any of the
covenants contained in this Exhibit A in any material respect, in addition to
any other remedy which may be available at law or in equity, the Company shall
be entitled to specific performance and injunctive relief.
Exhibit B
Form of Release
---------------
GENERAL RELEASE
---------------
It hereby is agreed, by and among Related Capital Company LLC, a Delaware
limited liability company (the "Company"), and Stuart Rothstein (the
"Executive"), as follows:
1. The Executive submits, and the Company accepts, his permanent resignation
from employment effective March 31, 2004. The Executive hereby waives any
and all rights or claims to reinstatement or reemployment by the Company.
The Company reaffirms it obligation, following the date of this Release to
make the payments required pursuant to that certain letter agreement dated
as of December 15, 2003 between the Company and the Executive (the
"Severance Agreement" and together with that certain letter agreement
dated as of July 9, 2002 between the Company and the Executive,
collectively, the "Letter Agreements"). The parties acknowledge that the
Letter Agreements are the only agreements entered into between the
Executive and the Company and its affiliates with respect to the subject
matter of the Executive's employment or severance.
2. In consideration of the foregoing and for other good and valuable
consideration, the receipt of which is hereby acknowledged by the
Executive, the Executive, for himself, his heirs, executors,
administrators, successors and assigns, hereby releases and forever
discharges the Company, including any and all of the Company's
subsidiaries, parents, affiliates or related business entities, its or
their past, present and future owners, partners, directors, officers,
agents, representatives, and employees or any of its or their
subsidiaries, parents, affiliates or related business entities, and its or
their respective heirs, executors, administrators, successors and assigns,
of, from and/or for all manner of actions, proceedings, causes of action,
suits, debts, sums of money, accounts, contracts, controversies,
agreements, promises, damages, judgments, claims, and demands whatsoever,
known or unknown, whether arising in law or equity, out of any federal,
state or city constitution, statute, ordinance, bylaw or regulation, or
under the Letter Agreements, arising out of or relating to the Executive's
employment by the Company, including but not limited to the termination of
such employment, all claims of discrimination on the basis of age,
alienage, citizenship, creed, disability, gender, handicap, marital
status, national origin, race, religion, sex or sexual orientation, and,
without limitation, any claims arising under Title VII of the Civil Rights
Act of 1964, the Age Discrimination in Employment Act, the Equal Pay Act,
the Rehabilitation Act, the Americans With Disabilities Act, the New York
State Human Rights Law, the New York City Human Rights Law, and any other
federal, state or local statute, ordinance, rule, regulation or order
(collectively, "Claims or Damages"), which the Executive ever had, now
has, or which he, or his heirs, executors, administrators, successors or
assigns can or may have for, or by reason of, any matter, cause, event,
act, omission, transaction or occurrence up to and including the date of
the execution of this Release, arising out of or relating to Executive's
employment by the Company, including but not limited to the termination of
such employment. For the avoidance of doubt, this Release shall not extend
to (i) claims arising out of the Company's failure to perform its
obligations under the Severance Agreement, including, without limitation,
the Company's obligations under Exhibit A to the Severance Agreement or
(ii) claims to enforce this Release.
3. The Company, for itself, its successors, assigns and legal
representatives, hereby releases and forever discharges the Executive, and
the Executive's heirs, executors, administrators, legal representatives
and assigns, from and against any and all Claims or Damages which the
Company ever had, now has for, or by reason of, any matter, cause, event,
act, omission, transaction or occurrence up to and including the date of
the execution of this Release, arising out of or relating to Executive's
employment by the Company; provided, however, that the Company is not
releasing any claims ("Retained Claims") arising out of (i) any breach by
the Executive of his obligations under Exhibit A to the Severance
Agreement , (ii) intentionally improper acts by the Executive or (iii) any
fraudulent, unauthorized or illegal acts by the Executive, with the
understanding that the Company is not currently aware of any such acts;
and provided further that any Retained Claims that are not brought in a
legal proceeding against the Executive within eighteen (18) months
following the date of this Release shall be deemed released and forever
discharged from and after the date which is eighteen months following the
date of this Release.
4. (a) Except with respect to amounts owed pursuant to the Severance
Agreement and to the extent not prohibited by law, the Executive covenants
not to in any way cause to be commenced or prosecuted, or to commence,
maintain or prosecute any action, charge, complaint or proceeding of any
kind, on his own behalf or as a member of any alleged class of persons, in
any court or before any administrative or investigative body or agency
(whether public, quasi-public or private), against the Company, or any of
its subsidiaries, parents, affiliates, related business entities, or their
respective successors or assigns, or any individual now or previously
employed by the Company, or by any of its subsidiaries, parents,
affiliates, or related business entities and their successors and assigns,
with respect to any act, omission, transaction or occurrence up to and
including the date of this Release relating to the Executive's employment
with the Company or the termination of his employment.
(b) The Executive further represents that he has not commenced,
maintained, prosecuted or participated in any action, charge, complaint or
proceeding of any kind (on his own behalf and/or on behalf of any other
person and/or on behalf of or as a member of any alleged class of persons)
that is presently pending in any court, or before any administrative or
investigative body or agency (whether public, quasi-public, or private),
against or involving the Company, or any of the Company's subsidiaries,
parents, affiliates, or related business entities, or their successors or
assigns or any individual now or previously employed by the Company, or by
any of its subsidiaries, parents, affiliates, or related business entities
or their successors and assigns relating to the Executive's employment
with the Company or the termination of his employment.
(c) The Company covenants not to in any way cause to be commenced or
prosecuted, or to commence, maintain or prosecute any action, charge,
complaint or proceeding of any kind in any court or before any
administrative or investigative body or agency (whether public,
quasi-public or private), against the Executive with respect to any act,
omission, transaction or occurrence up to an including the date of this
Release relating to the Company's employment of the Executive or the
termination of his employment; provided, however, that the Company is not
waiving and shall not waive such right with respect to (i) any breach by
the Executive of his obligations under Exhibit A to the Severance
Agreement or (ii) any act or failure to act by the Executive that
constitutes bad faith, gross negligence, willful misconduct or any
unlawful act. [As of the date of this Release, the Company is not aware of
any act or failure to act by the Executive that would give rise to any
action, charge, complaint or proceeding of any kind in any court or before
any administrative or investigative body or agency (whether public,
quasi-public or private), against the Executive.](1)
(d)The Company represents that it has not commenced, maintained,
prosecuted or participated in any action, charge, complaint or proceeding
of any kind that is presently pending in any court, or before any
administrative or investigative body or agency (whether public,
quasi-public, or private), against or involving the Executive or relating
to the Executive's employment with the Company or the termination of his
employment.
5. The Executive acknowledges that he has been fully and fairly represented
throughout his employment by the Company including the negotiation of this
Release, the terms of which have been explained to him.
6. The Executive acknowledges that he has considered fully the terms of this
Release before signing; that he has read this Release in its entirety and
understands its terms; that he agrees to all terms and conditions
contained herein; that he is signing this Release knowingly and
voluntarily; and, that he intends to abide by its terms in all respects.
7. This Release shall be construed and enforced in accordance with the laws
of the State of New York without regard to the conflict of principles
thereof. Any action to enforce this Release shall be brought in the New
York State Supreme Court, County of New York. The parties hereby consent
to such jurisdiction.
8. This Release may be executed in more than one counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the
same instrument.
EXECUTIVE
----------------------------------- -----------------------------------
Date
Signed before me this
_____ day of ______________, [Year]
Notary Public
RELATED CAPITAL COMPANY LLC
By: CharterMac Corporation, as member
------------------------- By:
Date ------------------------------
Name:
Title:
Signed before me this
_____ day of ____________, [Year]
Notary Public
Consented To/Agreed:
CharterMac
By:
--------------------------------
Name:
Title:
[This Release is to be modified if at time of execution the Executive is subject
to the protections of the Older Workers Benefit Protection Act or similar
legislation.]
-----------------------------------
(1) This bracketed sentence will be included in the Release if at the time of
the execution of the Release, the Company is able to make such statement. If at
that time the Company is not able to make such statement, the Release must be
executed without such sentence.