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, 2005 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) 317-5700 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 ----- ----- As of April 29, 2005, 51,323,062 shares of the Registrant's shares of beneficial interest were outstanding. TABLE OF CONTENTS CHARTERMAC FORM 10-Q PAGE PART I Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures about Market Risks 26 Item 4. Controls and Procedures 26 PART II Item 1. Legal Proceedings 28 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits 28 SIGNATURES 29 See accompanying notes to condensed consolidated financial statements. 2 ITEM 1. FINANCIAL STATEMENTS CHARTERMAC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) March 31, December 31, 2005 2004 ----------- ----------- ASSETS Revenue bonds - at fair value $ 2,198,573 $ 2,100,720 Mortgage servicing rights, net 74,553 32,366 Cash and cash equivalents 95,236 71,287 Cash and cash equivalents - restricted 34,723 25,879 Other investments 151,672 187,506 Deferred costs - net of amortization of $20,732 and $19,635 55,006 57,260 Goodwill 225,771 206,397 Other intangible assets - net of amortization of $25,017 and $20,847 173,349 177,519 Loan to affiliate -- 4,600 Other assets 44,880 40,549 Investments in partnerships of consolidated VIEs 2,630,687 2,527,455 Other assets of consolidated VIEs 311,927 328,559 ----------- ----------- Total assets $ 5,996,377 $ 5,760,097 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Financing arrangements $ 1,203,506 $ 1,068,428 Preferred shares of subsidiary (subject to mandatory repurchase) 273,500 273,500 Notes payable 203,146 174,454 Accounts payable, accrued expenses and other liabilities 38,094 35,364 Deferred income 56,937 55,572 Deferred tax liability 27,018 29,898 Distributions payable 38,831 38,859 Notes payable and other liabilities of consolidated VIEs 1,318,903 1,307,093 ----------- ----------- Total liabilities 3,159,935 2,983,168 ----------- ----------- Minority interest in consolidated subsidiary - convertible SCUs 264,449 267,025 ----------- ----------- Minority interest in consolidated subsidiary - CMC -- 4,394 ----------- ----------- Preferred shares of subsidiary (not subject to mandatory repurchase) 104,000 104,000 ----------- ----------- Partners' interests in consolidated VIEs 1,576,088 1,501,519 ----------- ----------- Commitments and contingencies Shareholders' equity: Beneficial owners' equity - Convertible CRA Shareholders; no par value (6,552 shares issued and outstanding in 2005 and 2004) 107,734 108,745 Beneficial owners' equity - special preferred voting shares; no par value (15,172 shares issued and outstanding in 2005 and 2004) 152 152 Beneficial owners' equity - other common shareholders; no par value (100,000 shares authorized; 51,540 shares issued and 51,323 outstanding in 2005 and 51,363 shares issued and 51,229 outstanding in 2004) 767,296 773,165 Restricted shares granted (7,981) (7,922) Treasury shares of beneficial interest - common, at cost (217 shares in 2005 and 134 shares in 2004) (4,916) (2,970) Accumulated other comprehensive income 29,620 28,821 ----------- ----------- Total shareholders' equity 891,905 899,991 ----------- ----------- Total liabilities and shareholders' equity $ 5,996,377 $ 5,760,097 =========== =========== See accompanying notes to condensed consolidated financial statements. 3 CHARTERMAC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Three Months Ended March 31, -------------------- 2005 2004 -------- -------- Revenues: Revenue bond interest income $ 36,456 $ 31,851 Fee income: Mortgage banking 4,081 3,116 Fund sponsorship 3,311 6,780 Credit enhancement 2,439 1,897 Other revenues 7,268 2,669 Revenues of consolidated VIEs 4,902 -- -------- -------- Total revenues 58,457 46,313 -------- -------- Expenses: Interest expense 10,812 6,586 Interest expense of consolidated VIEs 6,889 -- Interest expense - distributions to preferred shareholders of subsidiary 4,724 4,724 Salaries and benefits 16,653 13,882 General and administrative 9,591 6,349 Depreciation and amortization 7,696 6,893 Derivative instrument ineffectiveness -- 3,387 Other expenses of consolidated VIEs 11,294 -- -------- -------- Total expenses 67,659 41,821 -------- -------- (Loss) income before other income (9,202) 4,492 Equity in earnings of investments 524 555 Loss on investments held by consolidated VIEs (49,939) -- Gain on sale of loans 1,704 1,745 Gain (loss) on repayment of revenue bonds (9) 260 -------- -------- (Loss) income before allocations and income taxes (56,922) 7,052 Income allocated to preferred shareholders of subsidiary (1,556) -- Income allocated to Special Common Units of subsidiary (6,065) (2,918) Income allocated to minority interests -- (105) Loss allocated to partners of consolidated VIEs 70,963 -- -------- -------- Income before income taxes 6,420 4,029 Income tax benefit 8,365 2,389 -------- -------- Net income $ 14,785 $ 6,418 ======== ======== Allocation of net income to: Common shareholders $ 13,110 $ 5,449 Convertible CRA shareholders 1,675 969 -------- -------- Total for shareholders $ 14,785 $ 6,418 ======== ======== Net income per share: Basic $ 0.26 $ 0.12 ======== ======== Diluted $ 0.25 $ 0.12 ======== ======== Weighted average shares outstanding: Basic 57,821 51,591 ======== ======== Diluted 58,236 51,839 ======== ======== Dividends declared per share $ 0.41 $ 0.37 ======== ======== See accompanying notes to condensed consolidated financial statements. 4 CHARTERMAC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Three Months Ended March 31, ---------------------- 2005 2004 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,785 $ 6,418 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Loss (gain) on repayment of revenue bonds 9 (260) Depreciation and amortization 7,696 6,893 Income allocated to preferred shareholders of subsidiary 1,556 -- Income allocated to Special Common Units of subsidiary 6,065 2,918 Income allocated to minority interests -- 105 Non-cash compensation expense 1,763 3,784 Other non-cash expense 700 143 Deferred taxes (2,880) (2,022) Changes in operating assets and liabilities: Mortgage servicing rights (3,270) (1,317) Loan to affiliate 4,600 -- Deferred income (10,027) 16 Other assets 7,887 (1,131) Accounts payable, accrued expenses and other liabilities 682 (15,835) --------- --------- Net cash provided by (used in) operating activities $ 29,566 $ (288) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from revenue bonds and notes $ 10,499 $ 27,786 Revenue bond acquisitions and fundings (111,751) (91,065) Other investments (2,026) 20,981 Acquisitions, net of cash acquired 4,654 (835) Loan to Capri Capital (6,000) -- Mortgage loans funded (107,908) (89,063) Mortgage loans sold 87,696 106,102 Advances to partnerships (29,304) (52,492) Collection of advances to partnerships 25,749 12,813 Mortgage loans repaid 2,700 -- Deferred investment acquisition costs 464 749 Decrease (increase) in cash and cash equivalents - restricted (8,167) 2,570 --------- --------- Net cash used in investing activities $(133,394) $ (62,454) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to shareholders $ (23,896) $ (18,846) Distributions to preferred shareholders of subsidiary (1,556) -- Distributions to Special Common Unit holders (8,663) (4,038) Proceeds from financing arrangements 247,792 127,569 Repayments of financing arrangements (112,715) (38,009) Increase in notes payable 28,692 21,076 Issuance of common shares 68 -- Retirement of special preferred voting shares -- (10) Treasury stock purchases (1,946) (1,328) Deferred financing costs 1 (2,528) --------- --------- Net cash provided by financing activities 127,777 83,886 --------- --------- Net increase in cash and cash equivalents 23,949 21,144 --------- --------- Cash and cash equivalents at the beginning of the year 71,287 58,257 --------- --------- Cash and cash equivalents at the end of the period $ 95,236 $ 79,401 --------- --------- (continued) See accompanying notes to condensed consolidated financial statements. 5 CHARTERMAC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Three Months Ended March 31, ------------------------------ 2005 2004 ----------- ----------- SUPPLEMENTAL INFORMATION: Acquisition of CCLP: ------------------- Conversion of note receivable $ 70,000 Increase in mortgage servicing rights (40,974) Increase in cash and cash equivalents - restricted (676) Decrease in other investments (7,787) Increase in goodwill (15,826) Increase in other assets (6,239) Increase in accounts payable, accrued expenses and other liabilities 2,708 Decrease in deferred income 11,391 ----------- Net cash acquired in acquisition of CCLP $ 12,597 =========== Supplemental disclosure of non-cash activities relating to adoption of FIN 46R: Increase in revenue bonds $ 33,821 Increase in other assets 4,731 Increase in investments in partnerships of consolidated VIEs (2,173,621) Decrease in other assets of consolidated VIEs (210,494) Increase in notes payable and other liabilities of consolidated VIEs 1,047,976 Increase in partners' interests of consolidated VIEs 1,297,587 ----------- $ -- =========== See accompanying notes to condensed consolidated financial statements. 6 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of CharterMac, its wholly owned and majority owned subsidiary statutory trusts, companies it controls and entities consolidated pursuant to the adoption of FASB Interpretation No. 46(R) ("FIN 46(R)"). All intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, "the Company", "we" and "us", as used throughout this document, refers to CharterMac and its consolidated subsidiaries. For the entities consolidated pursuant to FIN 46(R), the financial information included is as of and for the three months ended December 31, 2004, the latest practical date available. As we adopted FIN 46(R) as of March 31, 2004, the operating results for the first quarter of 2004 do not include those of consolidated Variable Interest Entities ("VIEs"). 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. 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 condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2004. Our annual report on Form 10-K for the year ended December 31, 2004, contains a summary of our significant accounting policies. There have been no material changes to these items since December 31, 2004, nor have there been any new accounting pronouncements pending adoption that would have a significant impact on our condensed consolidated financial statements. We are responsible for the unaudited condensed consolidated financial statements included in this document. Our condensed 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. Certain amounts from prior years have been reclassified to conform to the 2005 presentation. NOTE 2 - ACQUISITIONS In the first quarter of 2005, we purchased the 13% of CharterMac Mortgage Capital Corporation ("CMC") that we had not previously owned and made the final payments under the terms of the original purchase agreement. The total of these two items was $7.9 million, $7.5 million of which we paid in cash borrowed through an acquisition facility. This transaction resulted in $3.6 million of additional goodwill. Effective March 1, 2005, we purchased 100% of the ownership interests of Capri Capital Limited Partnership ("CCLP"). The initial purchase price was $70.0 million plus $1.7 million of acquisition costs, subject to additional consideration based on the 2004 financial results of CCLP's mortgage banking business. The total purchase price will not exceed $85.0 million (exclusive of acquisition costs) and any additional consideration will be paid during the second quarter of 2005. The initial purchase price of $70.0 million was paid via conversion of an existing loan to CCLP and its affiliates (collectively "Capri") (see Note 4). Half of any additional consideration will be paid in cash with the remainder in equity units of a CharterMac subsidiary. The acquisition of CCLP was accounted for as a purchase and, accordingly, the results of operations are included in the condensed consolidated financial statements from the acquisition date. We allocated our cost of the acquisition on the basis of the estimated fair values of the assets and liabilities assumed. The excess of the purchase price over the net of the amounts assigned to the assets acquired and liabilities assumed was recognized as goodwill of approximately $15.8 million. Certain allocations are preliminary as of March 31, 2005, including the allocation to goodwill, and will be refined as we gather further information on fair value and determine the fair values of intangible assets acquired. Pro forma financial results for CCLP are not presented as the acquisition was not material to our assets, revenues or net income. 7 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE 3 - REVENUE BONDS The following table summarizes our revenue bond portfolio: March 31, December 31, (In thousands) 2005 2004 ----------------------------------- ----------- ----------- Unamortized cost basis $ 2,200,172 $ 2,098,944 Gross unrealized gains 47,369 50,716 Gross unrealized losses (17,021) (14,653) ----------- ----------- Subtotal/fair value 2,230,520 2,135,007 Less: eliminations (1) (31,947) (34,287) ----------- ----------- Total fair value per balance sheet $ 2,198,573 $ 2,100,720 =========== =========== (1)These bonds are recorded as liabilities on the balance sheets of certain entities consolidated pursuant to FIN 46(R) and are therefore eliminated in consolidation. 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, 2005, is summarized in the table below: Less than 12 Months (Dollars in thousands) 12 Months or More Total ---------------------- --------- --------- ---------- Number of bonds 43 52 95 Fair value $ 393,832 $ 340,237 $ 734,069 Gross unrealized loss $ (5,252) $ (11,769) $ (17,021) The unrealized losses related to these revenue bonds are due solely to changes in interest rates, in that we calculate present values based upon future cash flows from the bonds and discount these cash flows at the current rate on our recent bond issuances; as rates rise, the fair value of our portfolio decreases. We have the intent and ability to hold these bonds to recovery and have therefore concluded that these declines in value are temporary. The following summarizes the maturity dates of our revenue bonds, all of which have fixed interest rates: Weighted Outstanding Average (In thousands) Bond Amount Fair Value Interest Rate -------------------------- ----------- ----------- ------------- Due in less than one year $ 1,481 $ 1,489 5.82% Due between one and five years 34,953 32,960 7.04 Due after five years 2,172,455 2,196,071 6.70 ----------- ----------- ------- Total / Weighted Average 2,208,889 2,230,520 6.71% ======= Less: eliminations (1) (31,082) (31,947) ----------- ----------- Total per balance sheet $ 2,177,807 $ 2,198,573 =========== =========== (1) These bonds are recorded as liabilities on the balance sheets of certain entities consolidated pursuant to FIN 46(R) and are therefore eliminated in consolidation. 8 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) The following table summarizes our acquisition activity and additional fundings to previously acquired revenue bonds for the three months ended March 31, 2005. Weighted Weighted Average Average Face Construction Permanent (In thousands) Amount Interest Rate Interest Rate -------------------------------------- -------- ------------- ------------- Construction/rehabilitation properties $102,000 5.14% 6.50% Additional funding of existing bonds $ 9,751 5.55% 6.63% During the three months ended March 31, 2005, one revenue bond was repaid generating net proceeds of approximately $459,000. The bond had a net book value of approximately $468,000, resulting in a loss of approximately $9,000. At March 31, 2005, $2.1 billion of revenue bonds were securitized or pledged as collateral for our borrowing facilities. Three of these bonds, with a book value of approximately $31.0 million, are included in the bonds securitized or pledged as collateral and are eliminated in consolidation as noted in the tables above. See Note 14 regarding foreclosure of properties underlying three of our revenue bonds and other matters regarding underlying properties. NOTE 4 - OTHER INVESTMENTS Investments other than revenue bonds consisted of: March 31, December 31, (In thousands) 2005 2004 -------------------------------------------------- -------- ---------- Investment in equity interests in LIHTC properties $ 43,693 $ 40,132 Investment in properties under development 3,152 3,157 Investment in ARCap 19,054 19,054 Capri loan 20,000 84,000 Mortgage loans receivable 53,122 27,480 Other investments 12,651 13,683 -------- -------- Total other investments $151,672 $187,506 ======== ======== In July 2004, CM Investor LLC ("CM Investor"), one of our subsidiaries, provided an interim loan in the principal amount of $84.0 million ("Interim Loan") to Capri, which bore interest at a rate of 11.5% per year and matured on January 15, 2005. In the first quarter of 2005, we extended and converted the loan, adding $6.0 million to the loan amount. Upon conversion, we held two participating loans, one of which allowed us to participate in the cash flows of, and in turn was convertible into a 100% ownership interest in, CCLP. The other allows us to participate in the cash flows of, and is convertible into a 49% ownership interest in, Capri Capital Advisors ("CCA"), a pension fund advisory business. In the first quarter of 2005, we converted the CCLP loan and acquired the business as an addition to our Mortgage Banking segment (see Note 2). Management currently expects to convert the CCA loan into an equity ownership prior to the end of the loan term, no later than August 2006. NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS A. GOODWILL The following table provides information regarding goodwill by segment: Fund Mortgage (In thousands) Management Banking Total ----------------------------- ---------- -------- -------- Balance at December 31, 2004 $200,153 $ 6,244 $206,397 Additions (see Note 2) -- 19,374 19,374 -------- -------- -------- Balance at March 31, 2005 $200,153 $ 25,618 $225,771 ======== ======== ======== 9 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) B. OTHER INTANGIBLE ASSETS The components of other identified intangible assets are as follows: Estimated Useful Life Gross Accumulated (In thousands) (in Years) Carrying Amount Amortization Net ---------------------------------------- -------- ---------------------- ----------------------- ------------------------ March 31, December 31, March 31, December 31, March 31, December 31, 2005 2004 2005 2004 2005 2004 -------- ----------- -------- ----------- -------- ----------- Amortized identified intangible assets: Trademarks and trade names 21.0 $ 25,100 $ 25,100 $ 1,637 $ 1,338 $ 23,463 $ 23,762 Partnership service contracts 9.4 47,300 47,300 6,925 5,661 40,375 41,639 Transactional relationships 16.7 103,000 103,000 11,542 9,436 91,458 93,564 General partner interests 9.0 5,100 5,100 776 634 4,324 4,466 Joint venture developer relationships 5.0 4,800 4,800 1,315 1,075 3,485 3,725 Other identified intangibles 9.3 4,427 4,427 2,822 2,703 1,605 1,724 -------- -------- -------- -------- -------- -------- -------- Subtotal/weighted average life 14.5 189,727 189,727 25,017 20,847 164,710 168,880 Unamortized Identified Intangible Assets: Mortgage Banking Licenses 8,639 8,639 -- -- 8,639 8,639 -------- -------- -------- -------- -------- -------- Total Identified Intangible Assets $198,366 $198,366 $ 25,017 $ 20,847 $173,349 $177,519 ======== ======== ======== ======== ======== ======== Amortization Expense Recorded $ 4,170 $ 16,684 ======== ======== The amortization of "other identified intangibles" (approximately $477,000 per year) is included as a reduction to revenue bond interest income as they pertain to the acquisition of such bond investments. NOTE 6 - FINANCING ARRANGEMENTS AND NOTES PAYABLE In March 2005, we terminated our $100.0 million fixed rate securitization and remarketed the borrowings under the Merrill Lynch P-FLOATs/RITESSM program. Our $75.0 million secured revolving tax-exempt bond warehouse line expired on March 31, 2005. There was no outstanding balance at December 31, 2004 and there were no additional borrowings during the three months ended March 31, 2005 on this warehouse line. We plan on replacing this warehouse line with a new facility at some point in the future. NOTE 7 - DERIVATIVE INSTRUMENTS As of March 31, 2005, we have several interest rate swaps with an aggregate notional amount of $524.0 million, which are designated as cash flow hedges on the variable interest payments on our floating rate securitizations. These swaps are recorded at fair market value, with changes in fair market value recorded in accumulated other comprehensive income to the extent the hedges are effective in achieving offsetting cash flows. We initiated one swap in 2001. We entered into two smaller swaps, each with notional amounts of $12.0 million and are associated directly with two revenue bonds. The first swap originated in 2004 and the second originated in January 2005.The remainder had terms that began in January 2005. These new swaps have an aggregate notional amount of $450 million and we entered into the agreements in 2003 and 2004. During the period between the dates we entered into the swaps and the effective dates, we measured their effectiveness using the hypothetical swap method. During the period ended March 31, 2004, we recorded an expense of approximately $3.4 million representing the ineffective portion of the swaps. There was no ineffectiveness in the hedging relationship of any of our swaps during the three months ended March 31, 2005. We expect all of the swaps will be highly effective in achieving offsetting changes in cash flow throughout their terms. At March 31, 2005, those interest rate swaps for which we were in a net liability position were recorded in accounts payable, accrued expenses and other liabilities in the amount of $500,000. Those swaps for which we are in a net 10 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) asset position are recorded in other assets in the amount of $3.0 million. Interest expense for the three months ended March 31, 2005 and 2004, includes approximately $1.6 million and $638,000 for amounts paid or payable under the swap agreements. We estimate that approximately $546,000 of the net unrealized loss included in accumulated other comprehensive income will be reclassified into interest expense within the next twelve months. NOTE 8 - EQUITY During the three months ended March 31, 2005, we repurchased 83,084 common shares for a total cost of approximately $1.9 million in conjunction with the tax withholdings associated with stock based compensation awards to employees. In addition, we granted approximately 62,700 restricted shares to employees at fair value of approximately $1.5 million pursuant to our Incentive Share Plan, which vest over a three-year period, and approximately 3,600 restricted shares to employees at a fair value of approximately $84,000, which vested immediately. NOTE 9 - RELATED PARTY TRANSACTIONS General and administrative expense includes shared services fees paid or payable to The Related Companies, L.P. ("TRCLP"). These fees totaled $138,000 for the three months ended March 31, 2005, and $1.3 million for the three months ended March 31, 2004. In addition, a subsidiary of TRCLP earned fees for performing property management services for various properties held in investment funds which we manage. These fees, which are included in other expenses of consolidated VIEs, totaled approximately $963,000 for the three months ended March 31, 2005. We collect asset management, incentive management and expense reimbursement fees from American Mortgage Acceptance Company ("AMAC"), an affiliated publicly-traded real estate investment trust. These fees, which are included in fund sponsorship income, totaled approximately $648,000 and $515,000 for the three months ended March 31, 2005 and 2004, respectively. In June 2004, we entered into an unsecured revolving credit facility (the "Revolving Facility") with AMAC to provide it up to $20.0 million, bearing interest at LIBOR plus 300 basis points, which is to be used to purchase new investments. The Revolving Facility has a term of one year with a one year optional extension. In the opinion of management, the terms of this facility are consistent with those of transactions with independent third parties. As of March 31, 2005, there were no outstanding advances to AMAC under this facility. Interest income earned from this facility for the three months ended March 31, 2005, was approximately $73,000, while there was no interest income for the comparable period in 2004. NOTE 10 - COMPREHENSIVE INCOME Comprehensive income for the three months ended March 31, 2005 and 2004, was as follows: Three Months Ended March 31, ---------------------- (In thousands) 2005 2004 ------------------------------------------------------------ -------- -------- Net income $ 14,785 $ 6,418 Net unrealized (gain) loss on interest rate derivatives 4,174 (2,292) Net unrealized loss on revenue bonds: Unrealized loss during the period (3,366) (17,738) Reclassification adjustment for net gain included in net income (9) (260) -------- -------- Comprehensive income (loss) $ 15,584 $(13,872) ======== ======== NOTE 11 - EARNINGS PER SHARE 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 and unvested share grants is calculated using the treasury stock method. The dilutive effect of our subsidiary's Special Common Units ("SCUs") is calculated 11 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) 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. Three Months Ended March 31, 2005 Three Months Ended March 31, 2004 --------------------------------- --------------------------------- (In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share ---------------------------------------- ------- ------- --------- ------- -------- --------- Basic EPS $14,785 57,821 $ 0.26 $ 6,418 51,591 $ 0.12 ======== ======= Effect of dilutive securities -- 415 -- 248 ------- ------- ------- -------- Diluted EPS $14,785 58,236 $ 0.25 $ 6,418 51,839 $ 0.12 ======= ======= ======== ======= ======== ======= The number of shares includes common and Convertible Community Reinvestment Act Preferred Shares ("Convertible CRA Shares") as the Convertible CRA Shares have the same economic benefits as common shares. NOTE 12 - BUSINESS SEGMENTS We operate in four business segments: 1. Portfolio Investing, which includes subsidiaries that invest in primarily tax-exempt first mortgage revenue bonds issued by various state or local governments, agencies or authorities and other investments designed to produce federally tax-exempt income. The revenue bonds are used to finance the new construction, substantial rehabilitation, acquisition, or refinancing of affordable multifamily housing throughout the United States. 2. Fund Management, which includes: o Subsidiaries that sponsor real estate equity investment funds that primarily invest in Low-Income Housing Tax Credit ("LIHTC") properties. In exchange for sponsoring and managing these funds, we receive fee income for providing asset management, underwriting, origination and other services; o A subsidiary which provides advisory services to AMAC, an affiliated, publicly traded real estate investment trust; and o Subsidiaries that participate in credit enhancement transactions, including guaranteeing mortgage loans and specified returns to investors in LIHTC equity funds, in exchange for guarantee fees. 3. Mortgage Banking, which includes subsidiaries that originate and service primarily multifamily mortgage loans on behalf of third parties, primarily: o the Federal National Mortgage Association ("Fannie Mae"); o the Federal Home Loan Mortgage Corporation ("Freddie Mac"); o the Federal Housing Authority ("FHA"); and o insurance companies and conduits. In exchange for these origination and servicing activities, we receive origination and servicing fees. 4. VIEs, primarily the LIHTC equity funds we sponsor through the Fund Management segment's subsidiaries, which we are required to consolidate in accordance with FIN 46(R). 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. In prior years, results from credit enhancement services were included in Portfolio Investing. We have reclassified the results to Fund Management to better reflect the management of our businesses. Additionally, in prior periods we had eliminated intercompany transactions from the results of the segment earning profits from such transactions. We have adjusted our presentation to reflect the full operations of each segment to better reflect the true operations of each business. We have reclassified prior years' segment results accordingly. 12 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) The following table provides more information regarding our segments: Three Months Ended March 31, ---------------------------- (In thousands) 2005 2004 ----------- ----------- REVENUES Portfolio Investing $ 40,000 $ 33,543 Fund Management 17,715 11,641 Mortgage Banking (1) 5,870 3,880 VIEs (2) 4,902 -- Elimination of intersegment transactions (10,030) (2,751) ----------- ----------- Consolidated $ 58,457 $ 46,313 =========== =========== NET INCOME BEFORE ALLOCATIONS TO EQUITY HOLDERS Portfolio Investing $ 21,412 $ 15,658 Fund Management (5,221) (8,079) Mortgage Banking (1) (1,098) 560 VIEs (2) -- -- Elimination of intersegment transactions (1,052) (1,087) ----------- ----------- Consolidated 14,041 7,052 Income allocated to SCUs (6,065) (2,918) Income allocated to preferred shareholders (1,556) -- Income allocated to minority interests -- (105) Income tax benefit 8,365 2,389 ----------- ----------- Consolidated Net Income $ 14,785 $ 6,418 =========== =========== DEPRECIATION AND AMORTIZATION Portfolio Investing $ 961 $ 812 Fund Management 4,598 4,632 Mortgage Banking (1) 2,137 1,449 VIEs (2) -- -- Elimination of intersegment transactions -- -- ----------- ----------- Consolidated $ 7,696 $ 6,893 =========== =========== IDENTIFIABLE ASSETS AT END OF PERIOD Portfolio Investing $ 5,129,213 $ 4,410,238 Fund Management 824,085 825,305 Mortgage Banking (1) 277,265 65,318 VIEs (2) 2,942,614 2,384,115 Elimination of intersegment balances (3,176,800) (2,706,806) ----------- ----------- Consolidated $ 5,996,377 $ 4,978,170 =========== =========== (1) Includes CCLP beginning March 1, 2005. (2) Consolidated beginning March 31, 2004, pursuant to FIN 46(R). 13 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE 13 - COMMITMENTS AND CONTINGENCIES FORWARD TRANSACTIONS At March 31, 2005, our Mortgage Banking subsidiaries had forward commitments of approximately $283.0 million for mortgages to be funded in 2005 and later. As each lending commitment has an associated sale commitment, the fair values of each offset and, as a result, we record no asset or liability for the commitments. In addition, those subsidiaries had commitments to sell mortgages totaling $63.7 million. Approximately $53.1 million of this amount was funded as of March 31, 2005 and are included in Other Investments as Mortgage Loans Receivable. The balance of approximately $10.6 million is to be funded later in 2005. We have entered into transactions to purchase revenue bonds. The agreements require us, at the earlier of stabilization or conversion to permanent financing, 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. During the construction period, a third party lender will advance funds to the developer, as needed, 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 be required to fund is $184.3 million. Additionally, we have certain other bonds that we fund on an as needed basis. The remaining balance to be funded on these drawdown bonds is approximately $15.8 million at March 31, 2005. MORTGAGE BANKING LOSS SHARING AGREEMENT Under a master loss sharing agreement with Fannie Mae, we assume responsibility for a portion of any loss that may result from borrower defaults, based on Fannie Mae loss sharing formulas. At March 31, 2005, all of our loans sold to Fannie Mae consisted of Level I loans, meaning that we are 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; Fannie Mae bears any remaining loss. Pursuant to this agreement, we are 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, we may request interim loss sharing adjustments which allow us to fund 25% of such advances until final settlement under the agreement. Our maximum exposure at March 31, 2005, pursuant to this agreement, was approximately $940.4 million although this amount is not indicative of our actual potential losses. 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, 2005, that reserve was approximately $9.5 million, which we believe represents our actual potential losses at that time. Unlike loans originated for Fannie Mae, we do not share the risk of loss for loans we originate for Freddie Mac or FHA. Our Mortgage Banking subsidiaries maintained, as of March 31, 2005, treasury notes of approximately $14.2 million and a money market account of approximately $1.2 million, which is included in cash and cash equivalents-restricted in the condensed consolidated balance sheet, to satisfy the Fannie Mae collateral requirements of $14.7 million. MORTGAGE POOL CREDIT ENHANCEMENT In December 2001, we completed a credit enhancement transaction with Merrill Lynch Capital Services, Inc. ("MLCS"). Pursuant to the terms of the transaction, we assumed MLCS's first loss position on a pool of tax-exempt weekly variable rate multifamily mortgage loans. TRCLP has provided us with an indemnity covering 50% of any losses that we incur as part of this transaction. As the loans mature or prepay, the first loss exposure and the fees we receive are reduced. The latest maturity date on any loan in the portfolio occurs in 2009. The remainder of the real estate exposure after the first loss position has been assumed by Fannie Mae and Freddie Mac. In connection with the transaction, we have posted collateral, initially in an amount equal to 50% of the first loss amount, which may be reduced to 40% if certain post closing conditions are met. Our maximum exposure under the terms of the transaction as of March 31, 2005 is approximately $19.0 million. We 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. We analyzed the portfolio on a "stressed" basis by increasing capitalization rates and assuming an increase in the low floater bond rate. As 14 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) of March 31, 2005, the credit enhanced properties are performing according to their contractual obligations and we do not anticipate any losses to be incurred on this guaranty. Should our analysis of risk of loss change in the future, a provision for probable loss might be required pursuant to SFAS No. 5, ACCOUNTING FOR CONTINGENCIES. YIELD GUARANTEES We have entered into several agreements with either IXIS Financial Products, Inc. ("IXIS") or Merrill Lynch (each a "Primary Guarantor") to guarantee agreed-upon rates of return for pools of multifamily properties each owned by a local partnership which in turn, is majority-owned by a fund sponsored by our subsidiary, Related Capital Company LLC ("RCC"). In return, we have or will receive guarantee fees, generally at the start of each guarantee period. There are seven agreements guaranteeing returns through the construction and lease-up phases of the properties and there are seven other agreements guaranteeing returns from the completion of the construction and lease-up phases through the operating phase of the properties. Total potential exposure pursuant to these guarantees is approximately $460.0 million, assuming there is no return whatsoever by the funds. We have analyzed the expected operations of the underlying properties and believe there is no risk of loss at this time as we have never yet been called upon to make payments under the guarantees. Should our analysis of risk of loss change in the future, a provision for possible losses might be required pursuant to SFAS No. 5. The fair value of these guarantees, representing the deferral of the fee income over the guarantee periods, was $14.9 million as of March 31, 2005. This amount is included in deferred income on our condensed consolidated balance sheet. Refer to Note 14 regarding additional transactions entered into after March 31, 2005, and potential exposure under existing guarantees. 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 and a portion of certain of the subordinate trust interests using credit enhancement from the Primary Guarantor as part of the Merrill Lynch P-FLOATs/RITESSM program. We use the remaining subordinate trust interests as collateral in the Merrill Lynch P-FLOATs/RITESSM program. In connection with these yield guarantee transactions, we have posted $64.5 million as collateral with a Primary Guarantor in the form of either cash or revenue bonds. OTHER GUARANTEES We have entered several transactions pursuant to the terms of which we will provide credit support to construction lenders for project completion and Fannie Mae conversion. In some instances, we have also agreed to acquire subordinated bonds to the extent the construction period bonds do not fully convert. Up until the point of completion, we will guarantee 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. We closely monitor these properties, and believe there is currently no need to provide for any potential loss. 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 three transactions, is 40% of the stated amount of the letter of credit of approximately $37.8 million. We also provide payment, operating deficit, recapture and replacement reserve guarantees as business requirements for developers to obtain construction financing. Our maximum exposure relating to these guarantees is approximately $115.3 million. To date, we have had minimal exposure to losses under these guarantees and anticipate no material liquidity requirements in satisfaction of any guarantee issued. 15 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) OTHER CONTINGENCIES 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 14 - SUBSEQUENT EVENTS YIELD GUARANTEE TRANSACTION --------------------------- In April 2005, we completed a transaction to guarantee tax benefits to an investor in a partnership designed to generate Federal LIHTCs. CM Corp. has agreed to back-up the guarantee of a Primary Guarantor of an agreed upon internal rate of return to the investor in Related Capital Credit Enhanced Partners, L.P. - Series B, for which we will receive guarantee fees totaling approximately $7.6 million in three installments, as well as acquisition, partnership management and asset management fees amounting to approximately $10.4 million. Our total exposure pursuant to this guarantee is $121.6 million, assuming there is no return whatsoever by the fund, although we currently expect no loss. PROPERTY FORECLOSURE -------------------- In May 2005, an affiliate of ours foreclosed upon the properties underlying three of our revenue bonds which had an aggregate carrying value of $33.7 million as of March 31, 2005. We have obtained valuations as of the foreclosure date indicating fair values of the properties in excess of our carrying amounts. As a result, management has concluded that there was no impairment related to the revenue bonds as of March 31, 2005. We are actively marketing the properties for sale and, as such, the properties will be carried as Real Estate Owned - Held for Sale from the foreclosure date forward. PRS --- PRS Companies ("PRS") and Capitol Realty Group ("CRG") are sponsors of certain LIHTC partnerships for which we hold revenue bonds and/or to which investment funds we sponsor have contributed equity. Information with respect to these partnerships is set forth in the table below. A construction company affiliate of PRS also served as general contractor for those partnerships. PRS recently approached us to discuss financial difficulties in its construction company. Upon a thorough review regarding its financial condition, we determined that the PRS construction company was experiencing significant financial difficulties, so that the transfer of control of the PRS and CRG partnerships to entities affiliated with us and the orderly termination of unfulfilled construction contracts was in our best interest. We could then install new general contractors to complete construction and capable property managers to complete leasing. We determined that, if we did not obtain control of the partnerships, a bankruptcy filing by or against PRS would be adverse to our interests as it would likely result in the reduction or cessation of bond payments, could possibly endanger our various tax credit equity investments and would result in delays in construction completion which could not be quantified. On April 28, 2005, affiliates of ours acquired by assignment the general partnership interests owned by PRS in the "PRS Partnerships" indicated in the table below. On April 28, affiliates of ours also acquired by assignment the general partnership interests owned by CRG in the "CRG Partnerships" indicated in the table below. We sought control of the CRG Partnerships because PRS was the construction general contractor for those partnerships and PRS' financial difficulties caused construction finance shortfalls that have created liquidity problems for those partnerships. We have agreed in principle to, among other things, provide a $5.0 million revolving line of credit to be used to stabilize the CRG Partnerships which will be collateralized by contractual rights of CRG and its affiliates to receive fees or other consideration. In addition to the PRS Partnerships and CRG Partnerships described above, we own bonds that finance eight other partnerships in which PRS was the general partner and one other partnership in which CRG is the general partner and PRS was the construction general contractor. These partnerships are summarized in the table below. On those deals in which our funds are not the equity sponsor, we will look to the respective equity investor to take control, complete construction and stabilize the partnerships. Absent a satisfactory resolution, we will exercise our available remedies to protect our investments. In those situations, there is substantial equity in the form of LIHTCs in addition to the real estate, both of which are our collateral. There can be no assurance that a bankruptcy by or against PRS or its affiliates may not give rise to additional claims concerning these partnerships. 16 CHARTERMAC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) Our potential exposure falls into three categories as follows: o Cash required to stabilize the properties - Our current estimate of the maximum amount of cash that may need to be provided to stabilize the properties, taking into account delays in construction, is approximately $10.0 million. This estimate is based upon our initial analyses and information provided by the developer, and may increase due to unforeseen construction delays and other factors, while the amount may be reduced by additional contributions by investors (which may generate additional tax credits), reserves at the property level, syndication of state tax credits or other factors. Our portion of any cash requirements may range from nothing to the full amount. Should we need to make additional loans to the partnerships, they would need to be assessed for collectibility and the impact on the potential impairment of existing revenue bonds. Given existing loan-to-value ratios and the variability of the likelihood of funding, we can not yet determine whether we will be required to fund any such loans. At present, we do not anticipate that any such loans would require a charge to expense. o Potential impact on revenue bonds - Our current estimate, based on available information provided by the developer, is that expected cash flows from the underlying properties are sufficient to provide debt service. As a result, we do not believe that there is other-than-temporary impairment of any of the affected bonds. o Potential cost to provide guaranteed yields - As noted in the table below, 11 of the parternships in question are part of equity funds for which we provide yield guarantees. As construction delays are likely to reduce the expected yields of the properties themselves, performance of the funds is likely to be impacted as well. The guarantees, however, provide for expected yields on pools of properties, some of which are performing above expected levels and the funds themselves often provide for adjustors that may mitigate the negative impact that would arise from the construction delays over the guarantee period. Our current estimate given these factors, and assuming that the property level partnerships meet their obligations under existing partnership agreements, is that no exposure under these guarantees is probable at this time. As part of the resolution of this situation, affiliates of ours have taken over general partner interests in the partnerships for which an RCC sponsored fund is an equity partner, all but two of which give our affiliates operational control of the partnerships. We will be consolidating those partnerships effective April 2005. The partnerships in question are summarized as follows: (In thousands) CharterMac RCC Loan Holds or Sponsored Third Amounts Fair Value of Will Hold Fund is Included in Parties Upon Full Revenue Bonds Revenue Equity Guaranteed Provided Draw Oustanding at Number Bond Partner Funds Equity Down March 31, 2005 -------- ---------- --------- ----------- -------- ---------- -------------- PRS Partnerships Construction 6 6 4 3 2 $ 69,570 $ 55,879 Rehab 1 1 1 1 -- 91,400 88,232 Lease Up 8 7 4 2 4 19,300 16,986 Stabilized 2 2 -- -- 2 18,835 18,816 ------------------------------------------------------------------------------------------------------ Subtotal PRS Deals 17 16 9 6 8 199,105 179,913 CRG Partnerships Construction 2 2 2 -- -- 17,680 -- Rehab 3 3 3 3 -- 8,300 8,018 Lease Up 3 3 3 2 -- 71,650 69,951 Stabilized -- -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------ Subtotal CRG Deals 8 8 8 5 -- 97,630 77,969 ------------------------------------------------------------------------------------------------------ Total 25 24 17 11 8 $ 296,735 $ 257,882 ====================================================================================================== 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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. These forward-looking statements are not historical facts, but rather our beliefs and expectations and are based on our current expectations, estimates, projections, beliefs and assumptions about our Company and industry. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Some of these risks include, among other things: o adverse changes in the real estate markets including, among other things, competition with other companies; o interest rate fluctuations; o general economic and business conditions, which will, among other things, affect the availability and credit worthiness of prospective tenants, lease rents and the terms and availability of financing for properties financed by revenue bonds owned by us; o risk of real estate development and acquisition; o environment/safety requirements; o changes in applicable laws and regulations; o our tax treatment, the tax treatment of our subsidiaries and the tax treatment of our investments; and o risk of default associated with the revenue bonds and other securities held by us or our subsidiaries. These risks are more fully described in our Form 10-K for the year ended December 31, 2004. We caution you not to place undue reliance on these forward-looking statements, which reflect our view only as of the date of this report. Factors Affecting Comparability ------------------------------- Due to our adoption of FIN 46(R) as of March 31, 2004, we now consolidate more than 90 VIEs (predominantly investment funds we sponsor) in our financial statements. The operating results for the three months ended March 31, 2005, include those of these entities, as well as the elimination of transactions between the entities and our subsidiaries. The operating results for the three months ended March 31, 2004, do not include comparable operations as we adopted this accounting standard as of the end of that period. In addition, we acquired CCLP in March 2005. Operating results prior to the acquisition date include interest income on a loan made in July 2004. Following the acquisition, operating results of CCLP are included in our Mortgage Banking segment. Results of Operations --------------------- The following is a summary of our operations for the three months ended March 31, 2005 and 2004: % of % of (In thousands) 2005 Revenues 2004 Revenues % Change --------------------------- ------- -------- ------- -------- -------- Revenues $58,457 100.0% $46,313 100.0% 26.2% Income before income taxes $ 6,420 11.0% $ 4,029 8.7% 59.3% Net income $14,785 25.3% $ 6,418 13.9% 130.4% Compared to 2004, the first quarter of 2005 benefited from the continued expansion of our Portfolio Investing segment, expansion of the Fund Management segment and the acquisition of CCLP in the Mortgage Banking segment. In addition, revenues in 2005 include $4.9 million generated by VIEs that were not consolidated in 2004. Offsetting the revenue gains is the elimination of $7.6 million of revenues earned by our subsidiaries in transactions with VIEs we have consolidated beginning April 1, 2004. Although the amounts are eliminated in consolidation, the expenses recognized by the VIEs in connection with these transactions are absorbed entirely by the partners of the VIEs; as such, the elimination in consolidation has no impact on our net income. The revenue gains and the relatively smaller increase in expenses led to an increase in income before taxes, while a significantly higher tax benefit also contributed to the increase in net income. 18 REVENUES Our revenues were as follows: For the Three Months Ended March 31, ------------------------------------- (In thousands) 2005 2004 % Change ------------------------------ -------- -------- --------- Revenue bond interest income $36,456 $31,851 14.5% Fee income Mortgage banking 4,081 3,116 31.0 Fund sponsorship 3,311 6,780 (51.2) Credit enhancement 2,439 1,897 28.6 ------- ------- ------- Total fee income 9,831 11,793 (16.6) Other revenues Capri loan interest 1,781 -- -- Other interest 1,957 584 235.1 Construction service fee 870 139 525.9 Expense reimbursement 1,342 1,254 7.0 Other 1,318 692 90.5 ------- ------- ------- Total other revenues 7,268 2,669 172.3 Revenues of consolidated VIEs 4,902 -- -- ------- ------- ------- Total revenues $58,457 $46,313 26.2% ======= ======= ======= The overall growth in our revenues is due to the continued expansion of all of our businesses, including the acquisition of CCLP in the first quarter of 2005. Results in 2005 also include revenues of VIEs that were not consolidated in the first quarter of 2004, offset by the elimination in consolidation of revenues associated with VIEs that are now consolidated in our condensed financial statements. In the first quarter of 2005, approximately $259,000 of revenue bond interest income, $7.0 million of fund sponsorship fees and $347,000 of other revenues was eliminated. See also RESULTS BY SEGMENT below. The Capri loan interest relates to the loans made in July 2004, a large portion of which has since been converted upon the acquisition of CCLP (see note 2 to the condensed consolidated financial statements). The increase in "other" is primarily due to exit fees received within the Mortgage Banking business and construction service fees and administrative fees in the Fund Management segment. EXPENSES Our expenses were as follows: For the Three Months Ended March 31, ----------------------------------- (In thousands) 2005 2004 % Change -------------------------------------- -------- -------- -------- Interest expense $10,812 $ 6,586 64.2% Interest expense - preferred shares of subsidiary 4,724 4,724 -- Salaries and benefits 16,653 13,882 20.0 General and administrative 9,591 6,349 51.1 Depreciation and amortization 7,696 6,893 11.6 Change in FV of ineffective derivatives -- 3,387 -- ------- ------- ------ Subtotal 49,476 41,821 18.3 Interest expense of consolidated VIEs 6,889 -- -- Other expenses of consolidated VIEs 11,294 -- -- ------- ------- ------ Total expenses $67,659 $41,821 61.8% ======= ======= ====== The increase in interest expense reflects the higher amount of debt to fund investments in revenue bonds, our loan to Capri and LIHTC equity investments inherent in the Fund Management business in 2004. In addition, our average 19 borrowing rate increased as a result of increases in Bond Market Association ("BMA") and LIBOR rates in 2004 and 2005, as well as the impact of new interest rate swap transactions that went into effect in the first quarter of 2005. Our average borrowing rate increased to 2.8% in the 2005 quarter as compared to 2.3% in the 2004 period. The increases in salaries and benefits expense relates to the growth of our component businesses as well as the acquisition of CCLP in the first quarter of 2005, which doubled the size of our Mortgage Banking business. The increase in general and administrative expenses is also due to the expansion of our businesses and the acquisition of CCLP, particularly with regard to increased occupancy needs and professional fees. Depreciation and amortization expenses were higher in the 2005 period, primarily due to higher amortization of mortgage servicing rights following the CCLP acquisition. We did not record the expenses of consolidated VIEs prior to April 1, 2004. The expenses are not controlled by us, nor do they represent any cash or non-cash charges to be absorbed by us. The expenses of the VIEs are absorbed entirely by the partners of the VIEs. OTHER ITEMS For the Three Months Ended March 31, ----------------------------------- (In thousands) 2005 2004 % Change -------------------------------------- -------- -------- -------- Derivative instrument ineffectiveness $ -- $ (3,387) --% (Loss) gain on repayment of revenue bonds $ (9) $ 260 (103.5)% Gain on sale of loans $ 1,704 $ 1,745 (2.3)% Equity in earnings of investments $ 524 $ 555 (5.6)% Income allocated to preferred shareholders of subsidiary $ (1,556) $ -- --% Income allocated to Special Common Units of subsidiary $ (6,065) $ (2,918) 107.8% Income allocated to minority interests $ -- $ (105) --% Loss allocated to partners of consolidated VIEs $ 70,963 $ -- --% The change in fair value of derivatives represents the portion of the change in the fair value of swap agreements determined to be ineffective, as measured using the hypothetical swap method. The amount reversed in the second quarter of 2004 and all swaps have been effective in the current year period. Gains and losses related to revenue bonds and loans fluctuate in relation to relative activity levels in the Portfolio Investing and Mortgage Banking businesses. See RESULTS BY SEGMENT below. Equity in earnings of investments includes dividends from our investment in ARCap Investors, LLC, offset in 2005 by losses from tax advantaged investment vehicles similar to those we sponsor. The income allocated to preferred shareholders relates to shares we issued in 2004 that differ from previously issued shares in that they are not subject to mandatory redemption; as such, the distributions are classified as expense outside of operating earnings. Total income allocated to preferred shareholders for the three months ended March 31, 2005, including the portion classified as interest expense, increased as compared to the three months ended March 31, 2004, due to the additional preferred offering consummated in May 2004. The income allocation to Special Common Units of a subsidiary represents the proportionate share of income attributable to holders' subsidiary equity as if they were all converted to common shares. There was no income allocated to minority interests in the 2005 period as we repurchased all remaining shares of CMC in the period. The loss allocation to partners of VIEs represents the full operating losses of consolidated VIEs for the current period, none of which we have absorbed. Income Taxes ------------ A large majority of our pre-tax income is derived from our Portfolio Investing businesses, which are structured as partnership entities; as such, income from those investments is not subject to taxes. Conversely, our businesses that generate taxable income are corporations operating with financial losses due to their absorption of most company costs and expenses as well as tax-deductible 20 distributions on their subsidiary equity. We provide for income taxes for these corporate subsidiaries in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109") which 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 bases of assets and liabilities. The tax benefit disclosed relates to the book losses of those businesses. As the proportion of our pre-tax income contributed by the businesses generating taxable income and losses changes, the resulting tax benefit or provision may appear incongruous with our consolidated income before income taxes. The effective tax rate on a consolidated basis for the three months ended March 31, 2005 and 2004 was (130.3)% and (59.3)%, respectively. The effective rate for our corporate subsidiaries that were subject to taxes was 55.2% and 52.8% for the three months ended March 31, 2005 and 2004, respectively. Results by Segment ------------------ PORTFOLIO INVESTING The table below shows selected information regarding our Portfolio Investing activities: For the Three Months Ended March 31, ----------------------------------- (In thousands) 2005 2004 ------------------------------------------------- ---------- ---------- Revenue bond acquisitions and fundings $ 111,751 $ 91,065 Weighted average permanent interest rate of bonds acquired 6.51 % 6.60% Revenue bonds repaid $ 459 $ 23,635 Average portfolio balance $2,191,793 $1,860,481 Weighted average yield of portfolio 6.65 % 6.85% Revenue bond interest income (1) $ 36,716 $ 31,851 Other revenues (1) 3,284 1,692 ---------- ---------- $ 40,000 $ 33,543 ========== ========== Interest expense and securitizations fees (1) $ 10,290 $ 10,791 Gain on repayments of revenue bonds $ 9 $ 260 (1) Prior to intercompany eliminations. The increase in revenue bond interest income is primarily due to the increased investment base resulting from new bonds funded during later quarters of 2004 and during 2005, although the rate of investment reflects the challenging market conditions experienced since 2004 whereby some potential investments did not meet our underwriting standards. While the decline in interest rates has gradually lowered the average yield of our portfolio, from a profit perspective, the low interest rate environment has been favorable for us. Although increasing lately, the BMA rate, the short-term tax-exempt index, continues to be low, averaging 1.86% and 0.95% for the three months ended March 31, 2005 and 2004, respectively. Our weighted average cost of debt associated with these investments was approximately 2.39% and 1.90% for the same respective periods, taking into effect our current hedging. We continue to recognize healthy spreads between our cost of borrowing and the interest rates on our revenue bonds. The interest rates on our tax-exempt first mortgage bonds for the three months ended March 31, 2005, had a weighted average permanent coupon rate of 6.9% and our entire tax-exempt first mortgage bond portfolio had a weighted average coupon rate of 6.7% for the three months ended March 31, 2005. Other revenues in this segment is predominantly interest income on investments other than revenue bonds and intercompany royalty fees eliminated in consolidation. The increase for the three months ended March 31, 2005, as compared to the three months ended March 31, 2004, is due largely to Capri loan interest (see Note 4 to the condensed consolidated financial statements). 21 FUND MANAGEMENT The table below shows selected information regarding our Fund Management activities: For the Three Months Ended March 31, ----------------------------------- (In thousands) 2005 2004 % Change ----------------------------------- -------- -------- -------- Equity raised $ 15,212 $ 28,610 (46.8)% Equity invested by investment funds $123,942 $ 77,627 59.7% Fund sponsorship fees (1) $ 11,538 $ 7,982 44.6% Credit enhancement fees 2,439 1,897 28.6 Other revenues (1) 3,738 1,762 100.9 -------- -------- ------ Total $ 17,715 $ 11,641 50.5 % ======== ======== ====== (1) Prior to intercompany eliminations. Our Fund Management activities generate origination and acquisition fees associated with sponsoring tax-credit equity investment funds and for assisting the funds in acquiring assets, which we recognize when the equity is invested by the investment fund. We also receive asset management fees for the services we perform for the funds once they are operating, which we recognize over the service periods. As many of our revenues are recognized over time following the sponsorship of a new fund, many of the 2005 increases relate to the funds closed throughout 2004. We earn Organization and Offering ("O&O") service and partnership management fees based upon the level of equity we raise for tax-credit equity funds. Fees earned for O&O services decreased approximately 47% to $152,000 compared to $286,000 in the 2004 quarter due to the decrease in equity raised. Fees earned for partnership management services are amortized over a five-year period. These fees increased approximately 400% to $838,000 compared to $167,000 compared to the same period in 2004. This increase is primarily the result of ongoing revenues for fund sponsorships completed after the first quarter of 2004. We earn property acquisition fees and acquisition allowance fees based upon the level of fund equity invested. Fees earned for property acquisition and equity origination services associated with tax credit equity fund sponsorship increased to approximately $5.0 million in 2005, representing an approximate 45% increase compared to the prior year results. While these fees are earned based on investment activity, the increase fell short of the percentage increase in investments due to the rate of fees realized as a result of the lower proportion of proprietary (single-investor) funds in the total mix of fund equity invested in 2005 as compared to 2004. Also during 2005, RCC acted as advisor for $116.9 million of investment originations by CharterMac entities and others, compared to $122.7 million of such originations for the three months ended March 31, 2004. We recognize acquisition fees in this segment for such services, which approximated the fees recognized for the three months ended March 31, 2004. Partnership and asset management fees increased to $4.3 million for the three months ended March 31, 2005, representing an increase of approximately 48% over the 2004 quarter, attributable to the higher level of assets under management and the improvement of the cash position of certain investment funds allowing us to collect management fees in 2005 which we did not previously recognize until collectibility was determined. The increase in credit enhancement fees relates to acceleration of the credit enhancement business. The increase for the three months ended March 31, 2005, as compared to the 2004 period is due to additional credit enhancement transactions completed over the course of 2004, the fees for which are recognized over periods of up to 20 years. 22 MORTGAGE BANKING The table below shows selected information regarding our Mortgage Banking activities: For the Three Months Ended March 31, ---------------------------------------- (In thousands) 2005 2004 % Change ------------------------------ ---------- ---------- --------- Originations $ 123,461 $ 132,988 (7.2)% Mortgage portfolio at March 31 $9,339,038 $4,099,998 127.8% Mortgage servicing fees $ 3,323 $ 2,315 43.6% Mortgage origination fees 757 801 (5.5) Other revenues 1,790 764 134.3 ---------- ---------- ----- $ 5,870 $ 3,880 51.3% ========== ========== ===== The increase in the servicing portfolio and servicing fees is a result of the CCLP acquisition. Excluding the impact of the acquisition, servicing fee income in 2005 increased approximately 1.0% over the first quarter of 2004. The lower volume of originations in 2005 resulted from a significant decline in Fannie Mae and conduit originations due to heightened competition. This decline was partially offset by a higher level of assumption lending for which we receive assumption fees rather than origination fees. Originations for the three-months ended March 31 are broken down as follows: (In thousands) 2005 % of total 2004 % of total ---------------- -------- ---------- -------- ---------- Fannie Mae $ 42,268 34.2% $ 78,011 58.6% Freddie Mac 9,265 7.5 8,500 6.4 Conduit - Bank 12,814 47.9 21,504 16.2 Assumptions 59,114 10.4 24,973 18.8 -------- ----- -------- ----- Total $123,461 100.0% $132,988 100.0% ======== ===== ======== ===== Other revenues in this segment pertains to interest earned on mortgages prior to their sale date, exit fees for early repayments and fees earned for loan assumptions. The increase in the 2005 period is primarily a result of the CCLP acquisition. VIES The results of VIEs reflected in our financial statements are those of entities we are considered to control according to the definitions of FIN 46(R), but in which we have no equity interest. Our Fund Management segment earns fees from the entities, however, and our Portfolio Investing business earns interest on several revenue bonds for which VIEs are the obligors. The VIEs are primarily tax-credit equity investment funds we sponsor and manage. The results we reported in 2005 reflect three months of operations for the VIEs we consolidate while the quarter ended March 31, 2004, does not include any comparable operating results as we consolidated these entities as of the end of that period. As third party investors hold all the equity partnership interests in these entities, we allocate all results of operations to those partners. As a result, these VIEs have no impact on our net income. Inflation --------- Inflation did not have a material effect on our results for the periods presented. Liquidity and Capital Resources ------------------------------- We fund our ongoing business (including investments) primarily with cash provided by operations, securitization of investments and revolving or warehouse credit facilities. Our primary sources of capital to meet long-term liquidity needs (including acquisitions) are debt and various types of equity offerings, including equity of our subsidiaries. We believe that our financing capacity and cash flow from current operations are adequate to meet our current and projected liquidity requirements. Nonetheless, as business needs warrant, we may issue other types of debt or equity in the future. 23 DEBT AND SECURITIZATIONS ------------------------ 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. We typically generate funds for investment purposes from corresponding financing activities. We have the following debt and securitization facilities to provide short-term and long-term liquidity: o $100.0 million, used for mortgage banking needs, which is renewable annually; o $90.0 million, used to acquire equity interests in property ownership entities prior to the inclusion of these equity interests into investments funds, which matures on October 28, 2005, with a one year extension at our option; o $91.0 million, used to provide the interim loan to Capri, which matures in July 2005; o $40.0 million, established in connection with the CMC acquisition, which expires December 31, 2006; o $650.0 million in MBIA credit enhancement through 2011, under which we can complete up to $425.0 million of floating rate securitizations and $225.0 million of auction rate securitization; and o Securitization through the Merrill Lynch P-FLOATs/RITESSM program of a specified percentage of the fair value of revenue bonds not otherwise securitized, credit enhanced by either Merrill Lynch or IXIS. As of March 31, 2005, we had approximately $262.6 million available to borrow under these debt and securitization facilities without exceeding limits imposed by debt covenants and our trust agreement. Liquidity Requirements after March 31, 2005 ------------------------------------------- During May 2005, distributions of approximately $23.7 million ($0.41 per share) will be paid to holders of common and Convertible CRA Shares and $8.6 million paid to SCU holders, all of which were declared in March 2005. Also during May 2005, we expect to pay the remainder of the purchase price for CCLP, 50% of which will be paid in cash. The maximum amount to be paid in cash is $7.5 million. 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. Summary of Cash Flows --------------------- The net increase in cash and cash equivalents during 2005 was higher than the increase in 2004, primarily due to increased operating and financing inflows, which offset the higher level of financing activity in 2005 as compared to 2004. Operating cash flows were higher in the 2005 period by a margin of $29.9 million. This increase resulted from a higher level of earnings exclusive of non-cash expenses and the repayment of advances we had made to AMAC. Additionally, the timing of receipts and payments in operating asset and liability accounts contributed to this increase. Investing outflows increased by $69.9 million in 2005 as compared to 2004. A higher level of revenue bond acquisition and funding activity, coupled with lower repayment activity, and a net outflow from mortgage originations was partially offset by a net decrease in our funds invested in partnerships in the current year period. The funds paid to acquire the portion of CMC that we had not owned previously was offset by a net cash inflow at the time of the CCLP acquisition, as the majority of the CCLP purchase price was paid in the form of a loan in the third quarter of 2004. Financing inflows in the 2005 period were higher than in 2004 by $42.5 million. The primary reason for the higher inflows in 2005 was the level of securitization borrowings, a portion of which was the remarketing of borrowings under the fixed rate securitization that terminated in the current year quarter. Commitments, Contingencies and Off Balance Sheet Arrangements ------------------------------------------------------------- Note 13 to the condensed consolidated financial statements contains a summary of the Company's guarantees and off-balance sheet arrangements. Subsequent Events ----------------- See Note 14 to the condensed consolidated financial statements regarding actions taken in May 2005 in response to the financial difficulties experienced by sponsors of certain properties underlying revenue bonds and investment funds we sponsor as well as the foreclosure upon certain other underlying properties. 24 The following table reflects our maximum exposure and carrying amount as of March 31, 2005, for guarantees we and our subsidiaries have entered into: Maximum Carrying (In thousands) Exposure Amount ------------------------------------------- ---------- ---------- Payment guarantees (1) $ 45,471 $ -- Completion guarantees (1) 37,773 -- Operating deficit guarantees (1) 1,629 -- Recapture guarantees (1) 66,366 -- Replacement reserve (1) 1,792 -- Mortgage pool credit enhancement (2) 19,000 -- LIHTC guarantees (2) 459,971 14,885 Mortgage banking loss sharing agreement (3) 940,356 9,455 ---------- ---------- $1,572,358 $ 24,340 ========== ========== (1) These guarantees generally relate to business requirements for developers to obtain construction financing. As part of our role as co-developer of certain properties, we issue these guarantees in order to secure properties as assets for the funds we manage. To date, we have had minimal exposure to losses under these guarantees and anticipate no material liquidity requirements in satisfaction of any guarantee issued. (2) We see these guarantees as opportunities to expand our Fund Management business by offering broad capital solutions to customers. To date, we have had minimal exposure to losses under these guarantees and anticipate no material liquidity requirements in satisfaction of any guarantee issued. The carrying values disclosed above relate to the fees we earn for the guarantees, which we recognize as the fair value of the guarantee. (3) The loss sharing agreement with Fannie Mae is a normal part of the DUS lender program and affords a higher level of fees than we earn for other comparable funding sources. The carrying value disclosed above is our estimate of potential exposure under the guarantees, although any funding requirements for such exposure is based on the contractual requirements of the underlying loans we sell to Fannie Mae, which vary as to amount and duration, up to a maximum of 30 years. The maximum exposure amount is not indicative of our expected losses under the guarantees. CONTRACTUAL OBLIGATIONS The following table provides our commitments as of March 31, 2005, to make future payments under our debt agreements and other contractual obligations: Payments due by period ---------------------------------------------------------------------- Less than More than (In thousands) Total 1 year 1-3 years 3-5 years 5 years ---------------------------------------- ----------- ----------- ---------- ---------- ------------ Notes payable (1) $ 203,146 $ 184,744 $ 5,452 $ 12,950 $ -- Notes payable of consolidated VIEs (2) 480,258 140,578 175,470 23,846 140,364 Operating lease obligations 70,305 4,431 11,642 12,136 42,096 Unfunded loan commitments 200,070 133,515 66,555 -- -- Financing arrangements (1) 1,203,506 1,203,506 -- -- -- Preferred shares of subsidiary (subject to mandatory repurchase) 273,500 -- -- -- 273,500 ----------- ----------- ---------- ---------- ------------ Total $ 2,430,785 $ 1,666,774 $ 259,119 $ 48,932 $ 455,960 =========== =========== ========== ========== ============ (1) The amounts reflect the current expiration, reset or renewal date of each facility or security certificate. Management has the ability and intent to renew, refinance or remarket the borrowings beyond their current due dates. (2) Of the notes payable of consolidated VIEs, $407.1 million is guaranteed by certain equity partners of the investment funds. Per partnership agreements, the equity partners are also obligated to pay the principal and interest on the notes. The remaining balance of $73.2 million is collateralized with the underlying properties of the consolidated operating partnerships. All of this debt is non-recourse to us. 25 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 interest rate 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. The assumptions related to the following 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. 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. Our exposure to interest rates is twofold: o the potential increase in interest expense on our variable rate debt; and o the impact of interest rate on the value of our assets. IMPACT ON EARNINGS Our investments in 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 rate securitization programs vary based on market interest rates based on the BMA municipal swap index and are re-set weekly or every 35 days. In addition, we have floating rate debt related to our acquisition financing and our warehouse facilities. Other long-term sources of capital, such as the preferred shares of our Equity Issuer subsidiary, carry a fixed dividend rate and, as such, are not impacted by changes in market interest rates. Excluding $524.0 million of debt hedged via interest rate swap agreements, the full amount of our liabilities labeled as Financing Arrangements and Notes Payable are variable rate debts. We estimate that an increase of 1.0% in interest rates would decrease our annual net income by approximately $8.8 million. We manage this risk through the use of interest rate swaps, interest rate caps and forward bond origination commitments, as described in the notes to our financial statements. In addition, we manage our exposure by striving for diversification in our businesses to include those not susceptible to interest rate changes and by managing our leverage. IMPACT ON VALUATION OF ASSETS 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 SFAS 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, 2005, value of approximately $2.2 billion to approximately $2.1 billion. A 1% decline in interest rates would increase the value of the March 31, 2005, portfolio to approximately $2.3 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, and may affect our borrowing capability to the extent that collateral requirements are sometimes based on our asset values. ITEM 4. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and 26 Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities and Exchange Act Rule 13a-15. Based upon this evaluation as of March 31, 2005, the Chief Executive Officer and Chief Financial Officer conclude that the Company's disclosure controls and procedures are not effective due to the unremediated material weaknesses in the Company's internal control over financial reporting identified during the Company's evaluation pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 as of the year ended December 31, 2004. To remediate these control weaknesses, the Company performed additional analysis and performed other procedures (detailed in item 4b below) in order to prepare the unaudited quarterly consolidated financial statements in accordance with generally accepted accounting principles in the United States of America. Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. (b) INTERNAL CONTROL OVER FINANCIAL REPORTING. To remediate the material weaknesses in internal controls identified during the Company's evaluation pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 as of the year ended December 31, 2004, during the first quarter of 2005, we have: (i) taken steps to remediate the errors in our tax accounting through increased use of third-party tax service providers for the more complex areas of our tax accounting and increased formality and rigor of controls and procedures over accounting for income taxes; (ii) strengthened our due diligence procedures in reviewing acquisition candidates to ensure that any required recharacterizations are identified on a timely basis; and (iii)strengthened our analytical procedures with regard to the preparation and review of all consolidation eliminations. 27 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. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Purchases of Equity Securities (a) (b) (c) (d) Total number of shares Total purchased as part Maximum number number of Average of publicly of shares that may yet shares price paid announced plans or be purchased under the Period purchased per share programs plans or programs --------------------- ----------- ------------ -------------------- ------------------------ January 1 - 31, 2005 25,645 $23.75 -- February 1 - 28, 2005 -- -- -- March 1 - 31, 2005 57,439 23.05 -- -------- ------- ------- Total 83,084 $23.40 -- 1,291,273 ======== ======= ======= ========== ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None ITEM 5. OTHER INFORMATION - None ITEM 6. EXHIBITS 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 Section 906 of the Sarbanes-Oxley Act of 2002.* * Filed herewith 28 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. CHARTERMAC (Registrant) Date: May 10, 2005 By: /s/ Stuart J. Boesky -------------------- Stuart J. Boesky Managing Trustee and Chief Executive Officer Date: May 10, 2005 By: /s/ Alan P. Hirmes ------------------ Alan P. Hirmes Managing Trustee, Chief Financial Officer and Chief Operating Officer Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Stuart J. Boesky, hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q for the period ending March 31, 2005 of CharterMac; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors or persons performing the equivalent functions: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2005 By: /s/Stuart J. Boesky ------------------- Stuart J. Boesky Chief Executive Officer Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Alan P. Hirmes, hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q for the period ending March 31, 2005 of CharterMac; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors or persons performing the equivalent functions: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2005 By: /s/ Alan P. Hirmes ------------------ Alan P. Hirmes Chief Financial Officer Exhibit 32.1 CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (UNITED STATES CODE, TITLE 18, CHAPTER 63, SECTION 1350) ACCOMPANYING QUARTERLY REPORT ON FORM 10-Q OF CHARTERMAC FOR THE QUARTER ENDED MARCH 31, 2005 In connection with the Quarterly Report on Form 10-Q of CharterMac for the quarterly period ending March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Stuart J. Boesky, as Chief Executive Officer of our Company, and Alan P. Hirmes, as Chief Financial Officer of our Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of our Company. By: /s/ Stuart J. Boesky By: /s/ Alan P. Hirmes -------------------- ------------------ Stuart J. Boesky Alan P. Hirmes Chief Executive Officer Chief Financial Officer May 10, 2005 May 10, 2005