SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 July 29, 2005, 51,479,883 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 19
Item 3. Quantitative and Qualitative Disclosures about Market Risks 32
Item 4. Controls and Procedures 32
PART II
Item 1. Legal Proceedings 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits 34
SIGNATURES 35
See accompanying notes to condensed consolidated financial statements.
2
ITEM 1. FINANCIAL STATEMENTS
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
June 30, December 31,
2005 2004
----------- -----------
ASSETS
Revenue bonds - at fair value $ 2,050,194 $ 2,100,720
Mortgage servicing rights, net 75,212 32,366
Cash and cash equivalents - including restricted cash of $34,841 and $25,879 107,497 97,166
Other investments 147,488 187,506
Deferred costs - net of amortization of $22,070 and $19,635 53,187 57,260
Goodwill 241,305 206,397
Other intangible assets - net of amortization of $29,186 and $20,847 169,179 177,519
Loan to affiliate -- 4,600
Other assets 98,241 40,549
Investments in partnerships of consolidated non-equity partnerships 2,721,001 2,527,455
Other assets of consolidated non-equity partnerships 548,072 328,559
----------- -----------
Total assets $ 6,211,376 $ 5,760,097
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 1,213,541 $ 1,068,428
Preferred shares of subsidiary (subject to mandatory repurchase) 273,500 273,500
Notes payable 202,890 174,454
Accounts payable, accrued expenses and other liabilities 57,970 35,364
Deferred income 72,180 55,572
Deferred tax liability 15,159 29,898
Distributions payable 38,886 38,859
Notes payable and other liabilities of consolidated non-equity partnerships 1,354,678 1,307,093
----------- -----------
Total liabilities 3,228,804 2,983,168
----------- -----------
Minority interests in consolidated subsidiaries 269,706 271,419
----------- -----------
Preferred shares of subsidiary (not subject to mandatory repurchase) 104,000 104,000
----------- -----------
Partners' interests in consolidated non-equity partnerships 1,715,286 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) 107,227 108,745
Beneficial owners' equity - special preferred voting shares; no par value
(15,086 shares issued and outstanding in 2005 and 15,172 shares issued and
outstanding in 2004) 151 152
Beneficial owners' equity - other common shareholders; no par value
(100,000 shares authorized; 51,630 shares issued and 51,413 outstanding in
2005 and 51,363 shares issued and 51,229 outstanding in 2004) 765,439 773,165
Restricted shares granted (6,508) (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 32,187 28,821
----------- -----------
Total shareholders' equity 893,580 899,991
----------- -----------
Total liabilities and shareholders' equity $ 6,211,376 $ 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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Revenues:
Revenue bond interest income $ 37,283 $ 32,487 $ 73,739 $ 64,338
Fee income:
Mortgage banking 7,411 4,687 11,492 7,803
Fund sponsorship 14,719 10,507 18,030 17,287
Credit enhancement 2,622 2,929 5,061 4,826
Other revenues 9,820 3,606 17,088 6,275
Revenues of consolidated non-equity partnerships 7,152 2,790 12,054 2,790
--------- --------- --------- ---------
Total revenues 79,007 57,006 137,464 103,319
--------- --------- --------- ---------
Expenses:
Interest expense 15,029 7,511 25,841 14,097
Interest expense of consolidated non-equity partnerships 6,133 6,689 13,022 6,689
Interest expense - distributions to preferred shareholders of subsidiary 4,725 4,725 9,449 9,449
Change in fair value of interest rate derivatives -- (3,361) -- 26
Salaries and benefits 16,956 13,050 33,609 26,932
General and administrative 15,620 11,256 25,211 17,605
Depreciation and amortization 9,469 7,796 17,165 14,689
Loss on impairment of assets 1,098 -- 1,098 --
Other expenses of consolidated non-equity partnerships 14,333 8,481 25,627 8,481
--------- --------- --------- ---------
Total expenses 83,363 56,147 151,022 97,968
--------- --------- --------- ---------
(Loss) income before other income (4,356) 859 (13,558) 5,351
Equity and other income 926 565 1,450 1,120
Loss on investments held by consolidated non-equity partnerships (66,623) (48,677) (116,562) (48,677)
Gain on sale of loans 4,317 3,330 6,021 5,075
Gain (loss) on repayment of revenue bonds 912 (38) 903 222
--------- --------- --------- ---------
Loss before allocations and income taxes (64,824) (43,961) (121,746) (36,909)
Income allocated to preferred shareholders of subsidiary (1,556) (830) (3,112) (830)
Income allocated to minority interests in consolidated subsidiaries (7,881) (9,797) (13,946) (12,820)
Loss allocated to partners of consolidated non-equity partnerships 93,370 71,818 164,333 71,818
--------- --------- --------- ---------
Income before income taxes 19,109 17,230 25,529 21,259
Income tax benefit 335 6,973 8,700 9,362
--------- --------- --------- ---------
Net income $ 19,444 $ 24,203 $ 34,229 $ 30,621
========= ========= ========= =========
Allocation of net income to:
Common shareholders $ 17,243 $ 20,721 $ 30,353 $ 26,170
Convertible CRA shareholders 2,201 3,482 3,876 4,451
--------- --------- --------- ---------
Total for shareholders $ 19,444 $ 24,203 $ 34,229 $ 30,621
========= ========= ========= =========
Net income per share:
Basic $ 0.34 $ 0.47 $ 0.59 $ 0.59
========= ========= ========= =========
Diluted $ 0.33 $ 0.46 $ 0.59 $ 0.59
========= ========= ========= =========
Weighted average shares outstanding:
Basic 57,890 52,017 57,856 51,805
========= ========= ========= =========
Diluted 58,274 52,359 58,271 52,193
========= ========= ========= =========
Dividends declared per share $ 0.41 $ 0.38 $ 0.82 $ 0.75
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
-----------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,229 $ 30,621
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on repayment of revenue bonds (903) (222)
Loss on impairment of revenue bond 1,098 --
Depreciation and amortization 17,165 14,689
Income allocated to preferred shareholders of subsidiary 3,113 830
Income allocated to minority interests in consolidated
subsidiaries 13,946 12,820
Non-cash compensation expense 3,836 8,598
Other non-cash expense 1,448 286
Deferred taxes (9,815) (9,446)
Changes in operating assets and liabilities:
Mortgage servicing rights (7,134) (4,571)
Mortgage loans receivable (33,539) (90,879)
Loan to affiliate 4,600 (3,122)
Deferred income 5,216 11,219
Other assets (12,599) 6,554
Accounts payable, accrued expenses and other liabilities 10,040 (9,119)
--------- ---------
Net cash provided by (used in) operating activities $ 30,701 $ (31,742)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from revenue bonds and notes $ 34,357 $ 47,484
Revenue bond acquisitions and fundings (166,781) (164,208)
Acquisitions, net of cash acquired (290) (834)
Loan to Capri Capital (6,000) --
Advances to partnerships (57,377) (87,011)
Collection of advances to partnerships 66,542 72,316
Deferred investment acquisition costs (259) (1,136)
Decrease (increase) in cash and cash equivalents -
restricted (8,285) 1,054
Other investing activities 4,793 (543)
--------- ---------
Net cash used in investing activities $(133,300) $(132,878)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders $ (47,802) $ (40,567)
Distributions to preferred shareholders of subsidiary (3,113) --
Distributions to Special Common Unit holders (17,303) (11,787)
Proceeds from financing arrangements 260,325 127,569
Repayments of financing arrangements (115,213) (67,625)
Increase in notes payable 28,435 100,548
Issuance of common shares 771 105,541
Issuance of preferred shares -- 101,920
Retirement of special preferred voting shares (1) (10)
Treasury stock purchases (1,946) (1,328)
Deferred financing costs (185) (6)
--------- ---------
Net cash provided by financing activities 103,968 314,255
--------- ---------
Net increase in cash and cash equivalents 1,369 149,635
--------- ---------
Cash and cash equivalents at the beginning of the year 71,287 58,257
--------- ---------
Cash and cash equivalents at the end of the period $ 72,656 $ 207,892
--------- ---------
(continued)
5
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
---------------------------
2005 2004
----------- -----------
SUPPLEMENTAL INFORMATION:
Acquisition activity:
Conversion of note receivable $ 70,000
Issuance of subsidiary equity 7,500
Purchase of minority interest (4,200)
Increase in mortgage servicing rights (40,974)
Increase in cash and cash equivalents - restricted (676)
Increase in other investments (7,787)
Increase in goodwill (34,854)
Increase in other assets (6,239)
Increase in accounts payable, accrued expenses and other
liabilities 5,549
Increase in deferred income 11,391
-----------
Net cash paid for acquisitions $ (290)
===========
Supplemental disclosure of non-cash activities relating to adoption of FIN 46R:
Increase in revenue bonds $ 31,101
Increase in investments in partnerships of consolidated
non-equity partnerships (2,301,697)
Increase in other assets of consolidated non-equity partnerships (249,266)
Increase in notes payable and other liabilities of consolidated
non-equity partnerships 1,119,860
Increase in partners' interests of consolidated non-equity
partnerships 1,400,002
-----------
$ --
===========
Restricted share grants $ 1,209 $ 59
=========== ===========
Conversion of SCUs to common shares $ 1,903 $ 17,789
=========== ===========
See accompanying notes to condensed consolidated financial statements.
6
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
CharterMac, it's wholly owned and majority owned subsidiary statutory trusts,
other non-trust subsidiary 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 March 31, 2005, the latest practical
date available. As we adopted FIN 46(R) as of March 31, 2004, the operating
results for the first six months of 2004 only include those of consolidated
Variable Interest Entities ("non-equity partnerships") for the three months
ended June 30, 2004.
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. 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 $1.8 million of acquisition costs. Subsequently, the sellers earned
$15.0 million of additional consideration based on the 2004 financial results of
CCLP's mortgage banking business. The initial purchase price of $70.0 million
was paid via conversion into equity of an existing loan to CCLP and its
affiliates (collectively "Capri") (see Note 4). Of the additional $15.0 million
contingent consideration, we issued subsidiary equity units for half of the
amount (see Note 9), and paid all but approximately $1.7 million (subject to
contractual hold backs) of the balance in cash. Operations of CCLP were merged
into CMC.
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 $32.2 million. Certain allocations are preliminary as of June 30,
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
JUNE 30, 2005
(UNAUDITED)
NOTE 3 - REVENUE BONDS
The following table summarizes our revenue bond portfolio:
June 30, December 31,
(In thousands) 2005 2004
---------------------------------- ----------- ------------
Unamortized cost basis $ 2,224,140 $ 2,098,944
Gross unrealized gains 48,962 50,716
Gross unrealized losses (13,857) (14,653)
----------- -----------
Subtotal/fair value 2,259,245 2,135,007
Less: eliminations (1) (209,051) (34,287)
----------- -----------
Total fair value per balance sheet $ 2,050,194 $ 2,100,720
=========== ===========
(1) These bonds are either recorded as liabilities on the balance sheets of
certain consolidated non-equity partnerships or are recorded as liabilities
of real estate owned 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 June 30, 2005, is summarized in the table below:
Less than 12 Months
(Dollars in thousands) 12 Months or More Total
----------------------- --------- ---------- ---------
Number of bonds 44 43 87
Fair value $ 438,837 $ 267,588 $ 706,425
Gross unrealized loss $ (6,848) $ (7,009) $ (13,857)
The unrealized losses related to these revenue bonds are due primarily 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 $ 13,622 $ 11,800 8.52%
Due between one and five
years 20,389 20,254 6.08
Due after five years 2,206,013 2,227,191 6.73
----------- ----------- ------
Total / Weighted Average 2,240,024 2,259,245 6.74%
======
Less: eliminations (1) (223,181) (209,051)
----------- -----------
Total $ 2,016,843 $ 2,050,194
=========== ===========
(1) These bonds are either recorded as liabilities on the balance sheets of
certain consolidated non-equity partnerships or are recorded as
liabilities of real estate owned and are therefore eliminated in
consolidation.
8
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
The following table summarizes our acquisition activity and additional fundings
to previously acquired revenue bonds for the six months ended June 30, 2005.
Weighted Weighted
Average Average
Face Construction Permanent
(In thousands) Amount Interest Rate Interest Rate
------------------------------- ---------- ------------- -------------
Construction/rehabilitation
properties $ 155,230 5.49% 6.48%
Additional funding of existing
bonds $ 11,551 5.42% 6.61%
During the six months ended June 30, 2005, six revenue bonds were repaid
generating net proceeds of approximately $19.4 million. The bonds had an
aggregate net book value of approximately $18.5 million, resulting in a gain of
approximately $903,000.
At June 30, 2005, $2.1 billion of revenue bonds were securitized or pledged as
collateral for our borrowing facilities. Fourteen of these bonds, with a fair
value of approximately $183.4 million, are eliminated in consolidation as noted
in the tables above.
In May 2005, an affiliate of ours foreclosed upon the properties underlying
three of our revenue bonds which had an aggregate carrying value of $33.9
million as of June 30, 2005. We have obtained valuations as of the foreclosure
date indicating that the fair values of the properties are in excess of our
carrying amounts. As a result, management has concluded that there was no
impairment related to these foreclosures. We are actively marketing the
properties for sale and, as such, the properties are classified as Real Estate
Owned - Held for Sale within Other Assets on the condensed consolidated balance
sheet.
See also Note 10 regarding the status of other revenue bonds in our portfolio
for which we have assumed the general partner interest in the associated
property-level partnership and the impairment charge related to one revenue
bond.
NOTE 4 - OTHER INVESTMENTS
Investments other than revenue bonds consisted of:
June 30, December 31,
(In thousands) 2005 2004
-------------------------------------------------- -------- -----------
Investment in equity interests in LIHTC properties $ 30,730 $ 40,132
Investment in properties under development 3,395 3,157
Investment in ARCap 19,054 19,054
Capri loan 20,000 84,000
Mortgage loans receivable 61,019 27,480
Other investments 13,290 13,683
-------- --------
Total other investments $147,488 $187,506
======== ========
In July 2004, our subsidiary provided an interim loan 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.
9
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
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) -- 35,700 35,700
Reductions (792) -- (792)
--------- --------- ---------
Balance at June 30, 2005 $ 199,361 $ 41,944 $ 241,305
========= ========= =========
The reduction in Fund Management goodwill pertained to the conversion of SCUs
(see Note 8), the deferred tax impact of which served to effectively lower the
purchase price of Related Capital Company LLC ("RCC").
The increase in Mortgage Banking goodwill relates to the acquisition of CCLP and
the purchase of the remainder of CMC (see Note 2).
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
--------------------------------------- ---------- ---------------------- ---------------------- ----------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2005 2004 2005 2004 2005 2004
-------- ----------- -------- ----------- -------- -----------
Amortized identified intangible assets:
Trademarks and trade names 21.0 $ 25,100 $ 25,100 $ 1,935 $ 1,338 $ 23,165 $ 23,762
Partnership service
contracts 9.4 47,300 47,300 8,189 5,661 39,111 41,639
Transactional relationships 16.7 103,000 103,000 13,650 9,436 89,350 93,564
General partner interests 9.0 5,100 5,100 918 634 4,182 4,466
Joint venture developer
relationships 5.0 4,800 4,800 1,555 1,075 3,245 3,725
Other identified intangibles 9.3 4,427 4,427 2,940 2,703 1,487 1,724
------- -------- -------- -------- -------- -------- --------
Subtotal/weighted average life 14.5 189,727 189,727 29,187 20,847 160,540 168,880
=======
Unamortized identified intangible assets:
Mortgage banking licenses 8,639 8,639 -- -- 8,639 8,639
-------- -------- -------- -------- -------- --------
Total identified intangible assets $198,366 $198,366 $ 29,187 $ 20,847 $169,179 $177,519
======== ======== ======== ======== ======== ========
2005 2004
-------- --------
Amortization expense recorded
for the six months ended June 30, $ 8,340 $ 8,340
======== ========
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 were no outstanding borrowings when it expired.
10
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
Our $91.0 million Capri acquisition line was extended and will expire on October
31, 2005.
NOTE 7 - DERIVATIVE INSTRUMENTS
As of June 30, 2005, we had interest rate swaps with an aggregate notional
amount of $561.4 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 entered into our first swap with a notional amount of $50.0 million in 2001.
We entered into several additional swap agreements during 2003 and 2004, which
had inception dates of January 2005 and notional amounts totaling $450.0
million. We also entered into four swaps with aggregate notional amounts of
approximately $61.4 million during 2004 and 2005, which went into effect in the
same periods. 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
which was completely reversed during the second quarter of 2004. There was no
ineffectiveness in the hedging relationship of any of our swaps during the six
months ended June 30, 2005.
We expect all of the swaps will be highly effective in achieving offsetting
changes in cash flow throughout their terms.
At June 30, 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 $8.3 million. Those swaps for which we are in a net
asset position are recorded in other assets in the amount of $1.1 million.
Interest expense includes approximately $1.2 million and $2.9 million for the
three and six months ended June 30, 2005, respectively, and approximately
$364,000 and $1.0 million for the three and six months ended June 30, 2004,
respectively, for amounts paid or payable under the swap agreements.
We estimate that approximately $932,000 of the net unrealized loss included in
accumulated other comprehensive income will be reclassified into interest
expense within the next twelve months.
NOTE 8 - MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
Minority interests in consolidated subsidiaries consisted of the following:
(in thousands) June 30, 2005 December 31, 2004
------------------------------------------------------------- ------------- -----------------
Convertible Special Common Units ("SCUs") of a subsidiary $262,220 $267,025
Convertible Special Membership Units ("SMUs") of a subsidiary 7,486 --
CMC -- 4,394
-------- --------
Total $269,706 $271,419
======== ========
Income allocated to minority interests was as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
--------------------- ---------------------
(in thousands) 2005 2004 2005 2004
------- ------- ------- -------
Convertible SCUs $ 7,826 $ 9,537 $13,891 $12,455
Convertible SMUs 55 -- 55 --
CMC -- 260 -- 365
------- ------- ------- -------
Total $ 7,881 $ 9,797 $13,946 $12,820
======= ======= ======= =======
The convertible SMUs were issued in connection with the CCLP acquisition. The
minority interest in CMC was purchased during the first quarter of 2005 (See
Note 2).
11
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
In the second quarter of 2005, the holders of 86,000 SCUs converted the units to
an equivalent number of common shares.
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 $123,000 and
$262,000 for the three and six months ended June 30, 2005, respectively, and
$917,000 and $1.9 million for the three and six months ended June 30, 2004,
respectively.
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
non-equity partnerships, totaled approximately $822,000 and $1.8 million for the
three and six months ended June 30, 2005, respectively, and approximately
$661,000 for the three and six months ended June 30, 2004.
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 $635,000 and $1.5 million for the
three and six months ended June 30, 2005, respectively, and approximately
$768,000 and $1.3 million for the three and six months ended June 30, 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 3.0%, which is to be used by AMAC to purchase new
investments. The Revolving Facility expires in June 2006. In the opinion of
management, the terms of this facility are consistent with those of transactions
with independent third parties. As of June 30, 2005, there were no outstanding
advances to AMAC under this facility. Interest income earned from this facility
for the six months ended June 30, 2005, was approximately $73,000, all of which
was recorded in the first quarter of 2005; there was no interest income for the
comparable periods in 2004.
NOTE 10 - PRS
PRS Companies ("PRS") and Capitol Realty Group ("CRG") are sponsors of certain
Low-Income Housing Tax Credit ("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.
After PRS approached us to discuss financial difficulties in its construction
company, we conducted a thorough review regarding its financial condition (and
that of its guarantors) and determined that the PRS construction company was
experiencing significant financial difficulties, so that the transfer of control
of the PRS and CRG general partnership interests 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.
In April 2005, affiliates of ours acquired by assignment the general partnership
interests owned by PRS in seven of the "PRS Partnerships" indicated in the table
below. Also in April, affiliates of ours acquired by assignment the general
partnership interests owned by CRG in five of 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, among other
things, to 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 and other consideration. The
agreement also provides that the general partnership interests will be returned
to CRG if they provide us with a letter of credit to secure advances made.
In addition to the PRS Partnerships and CRG Partnerships described above, we own
bonds that finance other partnerships in which PRS was the general partner or in
which CRG is the general partner and PRS was the construction general
contractor. These partnerships are also 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 may 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.
12
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
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.
Our potential exposure falls into three categories as follows:
o CASH REQUIRED TO BRING THE PROPERTIES TO BREAK-EVEN OPERATION - Our current
estimate of the maximum amount of cash that may need to be provided to
bring the properties to break-even operation, 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. Through June 30, 2005,
we had advanced $1.6 million to the partnerships. These advances, and
additional loans, will be assessed periodically 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 the ultimate amount of 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, 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, except as noted below.
o POTENTIAL COST TO PROVIDE SPECIFIED YIELDS - As noted in the table below,
11 of the partnerships in question are part of equity funds for which we
are obligated to provide specified yields. 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 obligations,
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 covered by the
agreements. 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 agreements is
probable at this time.
As a result of our analysis of the affected properties, we determined that the
development of one property in the early stages of construction should not be
continued. We plan to exercise our right to foreclosure as holder of the first
mortgage and will be able to recover much of the funds advanced through the
revenue bond as well as take ownership of the underlying land. Based upon the
funds available to recover and the estimated value of the land, we recognized a
write-down of approximately $1.1 million in the second quarter of 2005. This
property was included in a credit enhanced RCC sponsored fund, and we will be
using a right of substitution to remove it from that fund and replace it with
other properties.
We have consolidated the partnerships for which we have assumed the general
partnership interests (except for two which do not give our affiliates
operational control of the partnerships) effective April 2005.
13
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
The partnerships in question are summarized as follows:
(In thousands)
CharterMac RCC Loan Fari Value of
Holds or Sponsored Included Third Amounts Revenue
WillHold Fund is in RCC Parties Upon Full Bonds
Revenue Equity Guaranteed Holds GP Provided Draw Oustanding at
Number Bond Partner Funds Interest Equity Down June 30, 2005
-------- ---------- ---------- ---------- --------- -------- ---------- -------------
PRS
PARTNERSHIPS
Construction 5 5 4 3 2 1 $ 58,470 $ 37,454
Lease Up 8 7 4 2 4 4 91,400 88,615
Rehab 2 2 1 1 1 1 30,400 29,798
Stabilized 2 2 -- -- -- 2 18,835 18,816
Subtotal PRS
Deals 17 16 9 6 7 8 199,105 174,683
---------------------------------------------------------------------------------------------------------
CRG
PARTNERSHIPS
Construction 2 2 2 -- 2 -- 17,680 --
Lease Up 3 3 3 2 -- -- 8,300 7,792
Rehab 3 3 3 3 3 -- 71,650 68,598
Stabilized -- -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------
Subtotal CRG
Deals 8 8 8 5 5 -- 97,630 76,390
---------------------------------------------------------------------------------------------------------
Total 25 24 17 11 12 8 $ 296,735 $ 251,073
=========================================================================================================
NOTE 11 - COMPREHENSIVE INCOME
Comprehensive income for the six months ended June 30, 2005 and 2004, was as
follows:
Six Months Ended
June 30,
----------------------
(In thousands) 2005 2004
------------------------------------------------------------ -------- --------
Net income $ 34,229 $ 30,621
Net unrealized gain (loss) on interest rate derivatives (963) 3,266
Net unrealized gain on marketable securities 52 --
Net unrealized gain (loss) on revenue bonds:
Unrealized gain (loss) during the period 5,180 (8,635)
Reclassification adjustment for net gain included in net
income (903) (222)
-------- --------
Comprehensive income $ 37,595 $ 25,030
======== ========
NOTE 12 - 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 subsidiaries' SCUs and SMUs is calculated using the
"if-converted method". The SCUs and SMUs are antidilutive, because while the
shares are convertible on a one-to-one basis, the dividends paid are greater
than the dividends paid per common share.
Three Months Ended June 30, 2005 Six Months Ended June 30, 2005
-------------------------------- --------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
---------------------------------------- ------- ------- --------- ------- ------- ---------
Basic EPS $19,444 57,890 $ 0.34 $34,229 57,856 $ 0.59
======= =======
Effect of dilutive securities -- 384 -- 415
------- ------- ------- -------
Diluted EPS $19,444 58,274 $ 0.33 $34,229 58,271 $ 0.59
======= ======= ======= ======= ======= =======
14
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
Three Months Ended June 30, 2004 Six Months Ended June 30, 2004
-------------------------------- --------------------------------
Income Shares Per Share Income Shares Per Share
------- ------- --------- ------- ------- ---------
Basic EPS $24,203 52,017 $ 0.47 $30,621 51,805 $ 0.59
======= =======
Effect of dilutive securities -- 342 -- 388
------- ------- ------- -------
Diluted EPS $24,203 52,359 $ 0.46 $30,621 52,193 $ 0.59
======= ======= ======= ======= ======= =======
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 13 - 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 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 providing credit enhancement for mortgage loans and
providing specified returns to investors in LIHTC equity funds, in
exchange for fees.
3. Mortgage Banking, which includes subsidiaries that originate and service
primarily multifamily mortgage loans on behalf of third parties, primarily:
o 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. Non-equity Partnerships, primarily the LIHTC equity funds we sponsor
through the Fund Management segment's subsidiaries and which we are
required to consolidate in accordance with FIN 46(R), as well as other
partnerships we control but in which we have no equity interest.
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 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.
15
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
The following table provides more information regarding our segments:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
(In thousands) 2005 2004 2005 2004
--------- --------- --------- ---------
REVENUES
Portfolio Investing $ 42,300 $ 33,223 $ 82,498 $ 66,766
Fund Management 33,507 26,202 51,024 37,844
Mortgage Banking (1) 11,562 6,656 17,432 10,536
Non-equity Partnerships (2) 7,152 2,790 12,054 2,790
Elimination of intersegment transactions (15,514) (11,865) (25,544) (14,617)
--------- --------- ----------- -----------
Consolidated $ 79,007 $ 57,006 $ 137,464 $ 103,319
========= ========= =========== ===========
NET INCOME BEFORE ALLOCATIONS TO EQUITY HOLDERS
Portfolio Investing $ 24,204 $ 27,561 $ 50,538 $ 47,943
Fund Management 4,731 2,705 (688) (5,374)
Mortgage Banking (1) 4,804 2,879 3,706 3,439
Non-equity Partnerships (2) -- -- -- --
Elimination of intersegment transactions (468) (563) (1,520) (1,650)
--------- --------- ----------- -----------
Consolidated 33,271 32,582 52,036 44,358
Income allocated to minority interests (7,881) (9,797) (13,946) (12,820)
Income allocated to preferred shareholders (6,281) (5,555) (12,561) (10,279)
Income tax benefit 335 6,973 8,700 9,362
--------- --------- ----------- -----------
Consolidated net income $ 19,444 $ 24,203 $ 34,229 $ 30,621
========= ========= =========== ===========
DEPRECIATION AND AMORTIZATION
Portfolio Investing $ 1,192 $ 939 $ 2,153 $ 1,751
Fund Management 4,614 4,607 9,212 9,239
Mortgage Banking (1) 3,663 2,250 5,800 3,699
Non-equity Partnerships (2) -- -- -- --
Elimination of intersegment transactions -- -- -- --
--------- --------- ----------- -----------
Consolidated $ 9,469 $ 7,796 $ 17,165 $ 14,689
========= ========= =========== ===========
IDENTIFIABLE ASSETS AT END OF PERIOD
Portfolio Investing $ 4,960,264 $ 4,524,793
Fund Management 804,765 809,102
Mortgage Banking (1) 317,841 176,924
Non-equity Partnerships (2) 3,269,073 2,550,963
Elimination of intersegment balances (3,140,567) (2,614,356)
----------- -----------
Consolidated $ 6,211,376 $ 5,447,426
=========== ===========
(1) Includes CCLP beginning March 1, 2005.
(2) Consolidated beginning March 31,2004.
16
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
NOTE 14 - COMMITMENTS AND CONTINGENCIES
FORWARD TRANSACTIONS
At June 30, 2005, our Mortgage Banking subsidiaries had forward commitments of
approximately $272.2 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 $293.8 million. Approximately $61.0 million of this amount was funded
as of June 30, 2005 and is included in Other Investments as Mortgage Loans
Receivable. The balance of approximately $232.8 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 $174.6 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 $2.8
million at June 30, 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 June 30, 2005, all of our loans sold to
Fannie Mae consisted of Level I loans, meaning, in most cases, 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 June 30, 2005, pursuant to this agreement, was
approximately $940.2 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 June 30,
2005, that reserve was approximately $9.6 million, which we believe represents
our actual potential losses at that time. At the current time, unlike loans
originated for Fannie Mae DUS program, we do not share the risk of loss for
loans we originate for Freddie Mac or FHA. We have, however, been approved to
participate in a new Freddie Mae program, which also involves risk sharing.
Our Mortgage Banking subsidiaries maintained, as of June 30, 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 $14.6 million.
MORTGAGE POOL CREDIT INTERMEDIATION
In December 2001, we completed a credit intermediation 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 June 30, 2005 is
approximately $12.9 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
17
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
of June 30, 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 TRANSACTIONS
We have entered into several agreements with either IXIS Financial Products,
Inc. ("IXIS") or Merrill Lynch (each a "Primary Obligor") to provide 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 fees, generally at the start of each obligation period. There are eight
agreements to provide the specified returns through the construction and
lease-up phases of the properties and there are eight other agreements to
provide the specified returns from the completion of the construction and
lease-up phases through the operating phase of the properties.
Total potential exposure pursuant to these transactions is approximately $581.6
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 obligations, representing the deferral of the fee income
over the obligation periods, was $20.0 million as of June 30, 2005. This amount
is included in deferred income on our condensed consolidated balance sheet.
Refer to Note 10 regarding potential exposure under existing obligations.
Some of the local partnerships have financed their properties with the proceeds
of our revenue bonds. In these cases, the Primary Obligor 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 Obligor 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 transactions, we have posted $64.0 million as collateral with a Primary
Obligor in the form of either cash or revenue bonds.
OTHER
We have entered into 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. We also
provide payment, operating deficit, recapture and replacement reserve guarantees
as business requirements for developers to obtain construction financing.
Our maximum aggregate exposure relating to these transactions is approximately
$153.0 million.
To date, we have had minimal exposure to losses under these transactions and
anticipate no material liquidity requirements in satisfaction of any guarantee
issued.
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 15 - SUBSEQUENT EVENTS
In July 2005, we issued approximately 2.2 million convertible 4.4% CRA Preferred
shares with a liquidation preference of $50.00 per share, receiving net proceeds
of approximately $104.6 million, to be used in investments and general business
purposes. The shares will be convertible into approximately 3.9 million common
shares beginning July 2008.
18
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
-------------------------------
Primarily due to our adoption of FIN 46(R) as of March 31, 2004, we consolidate
more than 110 non-equity partnerships (predominantly investment funds we
sponsor) in our financial statements. The operating results for the three and
six months ended June 30, 2005, include those of these entities, as well as the
elimination of transactions between the entities and our subsidiaries. In 2004,
the operating results for only the three months ended June 30 include comparable
operations as we adopted this accounting standard as of March 31 of that year.
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
---------------------
Three Months Ended June 30, 2005
--------------------------------
The following is a summary of our operations for the three months ended June 30,
2005 and 2004:
% of % of
(In thousands) 2005 Revenues 2004 Revenues % Change
-------------------------- ------- -------- ------- -------- --------
Revenues $79,007 100.0 % $57,006 100.0 % 38.6 %
Income before income taxes $19,109 24.2 % $17,230 30.2 % 10.9 %
Net income $19,444 24.6 % $24,203 42.5 % (19.7)%
Compared to 2004, the second quarter of 2005 benefited from the continued
expansion of all of our businesses and the acquisition of CCLP in the Mortgage
Banking segment. In addition, revenues in 2005 include $6.8 million generated by
non-equity partnerships compared to $2.8 million in 2004. Offsetting the revenue
gains is the elimination of revenues earned by our subsidiaries in transactions
with non-equity partnerships we have consolidated beginning April 1, 2004.
Although the amounts are eliminated in consolidation, the net losses recognized
by those partnerships in connection with these transactions are absorbed
entirely by their equity partners; 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 lower tax benefit led to the decrease
in net income.
19
REVENUES
Our revenues were as follows:
For the Three Months Ended June 30,
----------------------------------
(In thousands) 2005 2004 % Change
------------------------------------- ------- ------- --------
Revenue bond interest income $37,283 $32,487 14.8%
Fee income
Mortgage banking 7,411 4,687 58.1
Fund sponsorship 14,719 10,507 40.1
Credit enhancement 2,622 2,929 (10.5)
------- ------- ------
Total fee income 24,752 18,123 36.6
Other revenues
Capri loan interest 582 -- --
Other interest 2,263 1,344 68.4
Construction service fee 963 268 259.3
Expense reimbursement 1,388 1,111 24.9
Other 4,624 883 423.7
------- ------- ------
Total other revenues 9,820 3,606 172.3
Revenues of consolidated non-equity
partnerships 7,152 2,790 156.3
------- ------- ------
Total revenues $79,007 $57,006 38.6%
======= ======= ======
The Capri loan interest relates to the loans made in July 2004, a large portion
of which has since been converted to equity upon the acquisition of CCLP (see
note 2 to the condensed consolidated financial statements). The increase in
"other" is primarily due to prepayment penalty fees received within the Mortgage
Banking business and administrative fees in the Fund Management segment.
In the second quarter of 2005, the following amounts were eliminated as they
represented transactions between consolidated non-equity partnerships and our
other component businesses:
For the Three Months Ended June 30,
------------------------------------
(In thousands) 2005 2004 % Change
----------------------------------- ------- ------- --------
Revenue bond interest income $ 1,520 $ 247 515.4%
Fund sponsorship fees 11,645 9,563 21.8
Other revenues 268 951 (71.8)
------- ------- ------
Total $13,433 $10,761 24.8%
======= ======= ======
See RESULTS BY SEGMENT below for a detailed description of revenue variances.
EXPENSES
Our expenses were as follows:
For the Three Months Ended June 30,
----------------------------------
(In thousands) 2005 2004 % Change
------------------------------------------------------ -------- -------- --------
Interest expense $ 15,029 $ 7,511 100.1%
Interest expense - preferred shares of subsidiary 4,725 4,725 --
Change in fair value interest rate derivatives -- (3,361) --
Salaries and benefits 16,956 13,050 29.9
General and administrative 15,620 11,256 38.8
Depreciation and amortization 9,469 7,796 21.5
Loss on impairment of asset 1,098 -- --
-------- -------- -------
Subtotal 62,897 40,977 53.5
Interest expense of consolidated non-equity
partnerships 6,133 6,689 (8.3)
Other expenses of consolidated non-equity partnerships 14,333 8,481 69.0
-------- -------- -------
Total expenses $ 83,363 $ 56,147 48.5%
======== ======== =======
20
The increase in interest expense reflects the higher amount of debt to fund
investments in revenue bonds and LIHTC equity investments inherent in the Fund
Management business in 2004 and 2005, and to fund our loan to Capri in July
2004. In addition, our average borrowing rate increased as a result of increases
in Bond Market Association Municipal Swap Index ("BMA") and LIBOR rates in 2004
and 2005, as well as the impact of interest rate swap transactions that went
into effect in 2005. Our average borrowing rate increased to 3.9% in the 2005
quarter as compared to 2.4% in the 2004 period.
The change in fair value of derivatives in 2004 represents the reversal of a
charge recorded in the first quarter of 2004 for swap agreements determined to
be ineffective, as measured using the hypothetical swap method. The swaps were
deemed effective in the second quarter of 2004 and all swaps have been effective
in the current year 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. In addition, we incurred a
higher level of organization expenses related to the higher level of funds
sponsorship activity as compared to the prior year period.
Depreciation and amortization expenses were higher in the 2005 period, primarily
due to higher amortization of mortgage servicing rights following the CCLP
acquisition.
The asset impairment charge relates to management's decision to discontinue
construction of a property in connection with the financial difficulties of the
property developer (see Note 10 to the condensed consolidated financial
statements).
Interest expense of consolidated non-equity partnerships declined from the 2004
level due to the repayment of fund debt upon collection of equity subscriptions.
Other expenses of the non-equity partnerships increased due to the increase in
the population of consolidated entities due to additional Fund Management
activity. The expenses of the non-equity partnerships are absorbed entirely by
their equity partners.
OTHER ITEMS
For the Three Months Ended June 30,
------------------------------------
(In thousands) 2005 2004 % Change
----------------------------------------- -------- -------- ----------
Gain (loss) on repayment of revenue bonds $ 912 $ (38) (2,500.0)%
Gain on sale of loans $ 4,317 $ 3,330 29.6 %
Equity and other income $ 926 $ 565 63.9 %
Income allocated to preferred
shareholders of subsidiary $ (1,556) $ (830) 87.5 %
Income allocated to SCUs $ (7,826) $ (9,537) (17.9)%
Income allocated to SMUs (55) -- --
Income allocated to CMC -- (260) --
-------- -------- --------
Total income allocated to minority $ (7,881) $ (9,797) (19.6)%
interests
Loss allocated to partners of
consolidated non-equity partnerships $ 93,370 $ 71,818 30.0 %
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 and other income includes dividends from our investment in ARCap
Investors, LLC, in both years, property operations of real estate owned in 2005,
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 June 30, 2005, including the portion classified as
interest expense, increased as compared to the three months ended June 30, 2004,
due to the additional preferred offering consummated in May 2004.
21
The income allocation to SCUs and SMUs of subsidiaries represents the
proportionate share of after-tax income attributable to holders of subsidiary
equity as if they were all converted to common shares. There was no income
allocated to SMUs in 2004, as the units were first issued in May 2005.
The loss allocation to partners of non-equity partnerships represents the full
operating losses of consolidated non-equity partnerships, none of which we have
absorbed.
RESULTS BY SEGMENT
PORTFOLIO INVESTING
The table below shows selected information regarding our Portfolio Investing
activities:
For the Three Months Ended June 30,
----------------------------------
(In thousands) 2005 2004
------------------------------------------------- ----------- -----------
Revenue bond acquisitions and fundings $ 55,030 $ 73,143
Weighted average permanent interest rate of bonds
acquired 6.43% 6.46%
Revenue bonds repaid $ 18,922 $ 2,842
Average portfolio balance $ 2,266,725 $ 1,916,458
Weighted average yield of portfolio 6.58% 6.78%
Revenue bond interest income (1) $ 39,191 $ 32,734
Other revenues (1) 3,109 489
----------- -----------
$ 42,300 $ 33,223
=========== ===========
Interest expense and securitizations fees (1) $ 15,029 $ 7,511
Gain (loss) on repayments of revenue bonds $ 912 $ (38)
(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 volume of investment and the decline in the
interest rate of bonds acquired reflects the challenging market conditions
experienced since 2004, such as increased competition and some potential
investments not meeting 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 2.64% and 1.13% for the three
months ended June 30, 2005 and 2004, respectively. Our weighted average cost of
debt associated with these investments was approximately 3.38% and 1.97% 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.
Other revenues in this segment are predominantly interest income on investments
other than revenue bonds and intercompany royalty fees eliminated in
consolidation. The increase for the three months ended June 30, 2005, as
compared to the three months ended June 30, 2004, is due largely to Capri loan
interest (see Note 4 to the condensed consolidated financial statements).
FUND MANAGEMENT
The table below shows selected information regarding our Fund Management
activities:
For the Three Months Ended June 30,
------------------------------------------
(In thousands) 2005 2004 % Change
-------------------------------------- ------------ ------------ ------------
Equity raised $ 421,172 $ 370,223 13.8 %
Equity invested by investment funds $ 307,057 $ 296,214 3.7 %
Fund sponsorship fees (1) $ 27,016 $ 20,691 30.6 %
Credit enhancement fees 2,622 2,929 (10.5)
Other revenues (1) 3,869 2,582 49.8
------------ ------------ -----------
Total $ 33,507 $ 26,202 27.9 %
============ ============ ===========
(1) Prior to intercompany eliminations.
22
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 and the first half of 2005.
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 increased approximately 16.8% to $3.7 million compared
to $3.2 million in the 2004 quarter primarily due to the increase in equity
raised and an increase in the fee rate realized. Fees earned for partnership
management services are amortized over a five-year period. These fees increased
approximately 240% to $972,000 compared to $283,000 for the same period in 2004.
This increase is primarily the result of ongoing revenues for fund sponsorships
completed after the second 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 $13.4 million in 2005, representing an approximate
3.8% increase compared to the prior year results. The increase is due to the
increase in equity invested in 2005 as compared to 2004.
Also during 2005, RCC acted as advisor for $109.6 million of investment
originations by CharterMac entities and others, compared to $98.1 million of
such originations for the three months ended June 30, 2004. We recognize
acquisition fees in this segment for such services, which amounted to $815,000,
exceeding the fees recognized for the three months ended June 30, 2004 by
approximately 36%. The increase exceeded the change in investment originations
due to the increase in the rate of fees realized in 2005 as compared to 2004.
Partnership and asset management fees increased to $6.9 million for the three
months ended June 30, 2005, representing an increase of approximately 84% 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 decrease in credit enhancement fees relates to the timing and relative size
of the credit enhancement transactions. Fees for the three months ended June 30,
2004 included recognition of fees for several large transactions for which the
credit enhancement period ended prior to the current year quarter. A transaction
of similar size, however, was executed during the second quarter of 2005,
resulting in a partial period of revenue. Both periods, however, include fees
for smaller transactions, the fees for which are recognized over periods of up
to 20 years.
MORTGAGE BANKING
The table below shows selected information regarding our Mortgage Banking
activities:
For the Three Months Ended June 30,
-------------------------------------------
(In thousands) 2005 2004 % Change
---------------------------------- ------------ ------------ ------------
Originations $ 658,532 $ 418,061 57.5 %
Mortgage portfolio at June 30 $ 9,355,039 $ 4,274,720 118.8 %
Mortgage servicing fees $ 5,378 $ 2,404 123.7 %
Mortgage origination fees 2,033 2,283 (11.0)
Other revenues 4,151 1,969 110.8
------------ ------------ ------------
$ 11,562 $ 6,656 73.7 %
============ ============ ============
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 was approximately the same as the second quarter of 2004.
The higher volume of originations in 2005 resulted from a significant increase
in Fannie Mae originations, due to the CCLP acquisition (whereby CCLP has
traditionally conducted a large portion of its business through Fannie Mae
originations) and a pricing change that allowed us to garner greater market
share. Conduit originations also increased sharply as we continue to pursue
business that does not warrant agency execution. These increases were partially
offset by a sharp decline in Freddie Mac business, as the 2004 period reflects a
large single-borrower pool transaction, with no comparable transaction in the
current year period. The current year also includes a significantly higher level
of assumption lending for which we receive assumption fees rather than
origination fees.
23
Originations for the three months ended June 30 are broken down as follows:
(In thousands) 2005 % of total 2004 % of total
-------------- -------- ---------- -------- ----------
Fannie Mae $423,222 64.3 % $121,264 29.0 %
Freddie Mac 24,640 3.7 229,131 54.8
FHA 6,372 1.0 27,749 6.6
Conduit - Bank 126,572 19.2 32,934 7.9
Assumptions 77,727 11.8 6,983 1.7
-------- ------- -------- -------
Total $658,533 100.0 % $418,061 100.0 %
======== ======= ======== =======
Other revenues in this segment pertain to interest earned on mortgages prior to
their sale date, prepayment penalty fees for early repayments and fees earned
for loan assumptions. The increase in the 2005 period is primarily a result of
the CCLP acquisition.
NON-EQUITY PARTNERSHIPS
The results of non-equity partnerships reflected in our financial statements are
for entities we are considered to control according to the definitions of FIN
46(R), and other partnerships we control, but in which we have no equity
interest. Our Fund Management segment earns fees from many of the entities,
however, and our Portfolio Investing business earns interest on revenue bonds
for which non-equity partnerships are the obligors. The Non-equity partnerships
are primarily tax-credit equity investment funds we sponsor and manage, while
the others are property level partnerships for which we have assumed the role of
general partner.
The increased revenue amounts in 2005 are due to the origination of six funds
and the assumption of the general partner interests in 18 property level
partnerships in the past year, all of which are included in the population of
non-equity partnerships consolidated.
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,
the consolidation of these non-equity partnerships has no impact on our net
income.
Six Months Ended June 30, 2005
------------------------------
The following is a summary of our operations for the six months ended June 30,
2005 and 2004:
% of % of
(In thousands) 2005 Revenues 2004 Revenues % Change
-------------------------- ---------- ---------- -------- ---------- ----------
Revenues $137,464 100.0 % $103,319 100.0 % 33.0 %
Income before income taxes $ 25,529 18.6 % $ 21,259 20.6 % 20.1 %
Net income $ 34,229 24.9 % $ 30,621 29.6 % 11.8 %
Compared to 2004, the first half of 2005 benefited from the continued expansion
of our component businesses and the acquisition of CCLP in the Mortgage Banking
segment. In addition, revenues in 2005 include $12.1 million generated by
non-equity partnerships as compared to $2.8 million in 2004, which included only
three months of results for those partnerships. Offsetting the revenue gains is
the elimination of revenues earned by our subsidiaries in transactions with the
non-equity partnerships. Although the amounts are eliminated in consolidation,
the net losses recognized by the non-equity partnerships in connection with
these transactions are absorbed entirely by their partners; 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 lower tax benefit led to a smaller
increase in net income.
24
REVENUES
Our revenues were as follows:
For the Six Months Ended June 30,
------------------------------------
(In thousands) 2005 2004 % Change
------------------------------------ -------- -------- --------
Revenue bond interest income $ 73,739 $ 64,338 14.6%
Fee income
Mortgage banking 11,492 7,803 47.3
Fund sponsorship 18,030 17,287 4.3
Credit enhancement 5,061 4,826 4.9
-------- -------- ------
Total fee income 34,583 29,916 15.6
Other revenues
Capri loan interest 2,363 -- --
Other interest 5,206 1,928 170.0
Construction service fee 1,832 408 349.0
Expense reimbursement 2,730 2,365 15.4
Other 4,957 1,574 214.9
-------- -------- ------
Total other revenues 17,088 6,275 172.3
Revenues of consolidated non-equity
partnerships 12,054 2,790 332.0
-------- -------- ------
Total revenues $137,464 $103,319 33.0%
======== ======== ======
The Capri loan interest relates to the loans made in July 2004, a large portion
of which has since been converted to equity upon the acquisition of CCLP (see
note 2 to the condensed consolidated financial statements). The increase in
"other" is primarily due to prepayment penalty fees received within the Mortgage
Banking business and administrative fees in the Fund Management segment.
In the first half of each year, the following amounts were eliminated as they
represented transactions between consolidated non-equity partnerships and our
other component businesses:
For the Six Months Ended June 30,
--------------------------------------
(In thousands) 2005 2004 % Change
------------------------------- ------- -------- --------
Revenue bond interest income $ 1,779 $ 247 620.2%
Fund sponsorship fees 18,617 9,563 94.7
Other revenues 780 951 (18.0)
------- ------- ------
Total $21,176 $10,761 96.8%
======= ======= ======
See RESULTS BY SEGMENT below for a detailed description of revenue variances.
EXPENSES
Our expenses were as follows:
For the Six Months Ended June 30,
----------------------------------
(In thousands) 2005 2004 % Change
------------------------------------------------- -------- -------- --------
Interest expense $ 25,841 $ 14,097 83.3%
Interest expense - preferred shares of subsidiary 9,449 9,449 --
Change in fair value of interest rate derivatives -- 26 --
Salaries and benefits 33,609 26,932 24.8
General and administrative 25,211 17,605 43.2
Depreciation and amortization 17,165 14,689 16.9
Loss on impairment of asset 1,098 -- --
-------- -------- ------
Subtotal 112,373 82,798 35.7
Interest expense of consolidated non-equity
partnerships 13,022 6,689 94.7
Other expenses of consolidated non-equity
partnerships 25,627 8,481 202.2
-------- -------- ------
Total expenses $151,022 $ 97,968 54.2%
======== ======== ======
25
The increase in interest expense reflects the higher amount of debt to fund
investments in revenue bonds, and LIHTC equity investments inherent in the Fund
Management business in 2004 and 2005, and to fund our loan to Capri in July
2004. In addition, our average borrowing rate increased as a result of increases
in 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 3.5% in the first half of 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. In addition, we incurred a
higher level of organization expenses related to the higher level of funds
sponsorship activity as compared to the prior year period.
Depreciation and amortization expenses were higher in the 2005 period, primarily
due to higher amortization of mortgage servicing rights following the CCLP
acquisition.
The asset impairment charge relates to management's decision to discontinue
construction of a property in connection with the financial difficulties of the
property developer (see Note 10 to the condensed consolidated financial
statements).
We did not record the expenses of the non-equity partnerships prior to April 1,
2004. The increase in the expenses generated by these entities is a result of
the non-comparable consolidation periods as well as the increase in the number
of non-equity partnerships consolidated. These expenses do not represent any
cash or non-cash charges to be absorbed by us as they are absorbed entirely by
their partners.
OTHER ITEMS
For the Six Months Ended June 30,
-------------------------------------
(In thousands) 2005 2004 % Change
----------------------------------- --------- --------- --------
Gain on repayment of revenue bonds $ 903 $ 222 306.8 %
Gain on sale of loans $ 6,021 $ 5,075 18.6 %
Equity and other income $ 1,450 $ 1,120 29.5 %
Income allocated to preferred
shareholders of subsidiary $ (3,112) $ (830) 274.9 %
Income allocated to SCUs $ (13,891) $ (12,455) 11.5%
Income allocated to SMUs (55) -- --
Income allocated to CMC -- (365) --
--------- --------- -------
Total income allocated to minority $ (13,946) $ (12,820) 8.8%
interests
Loss allocated to partners of
consolidated non-equity partnerships $ 164,333 $ 71,818 128.8%
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 and other income includes dividends from our investment in ARCap
Investors, LLC, in both years, property operations of real estate owned in 2005,
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 six months ended June 30, 2005, including the portion classified as
interest expense, increased as compared to the six months ended June 30, 2004,
due to the additional preferred offering consummated in May 2004.
The income allocation to Special Common Units and Special Member Units of
subsidiaries represents the proportionate share of after-tax income attributable
to holders of subsidiary equity as if they were all converted to common shares.
There was no income allocated to SMUs in 2004 as the units were first issued in
May 2005.
The loss allocation to partners of non-equity partnerships represents the full
operating losses of consolidated non-equity partnerships, none of which we have
absorbed.
26
Results by Segment
PORTFOLIO INVESTING
The table below shows selected information regarding our Portfolio Investing
activities:
For the Six Months Ended June 30,
--------------------------------
(In thousands) 2005 2004
-------------------------------------------- ---------- ----------
Revenue bond acquisitions and fundings $ 166,781 $ 164,208
Weighted average permanent interest rate of
bonds acquired 6.49% 6.54%
Revenue bonds repaid $ 19,381 $ 26,477
Average portfolio balance $2,229,206 $1,879,458
Weighted average yield of portfolio 6.62% 6.85%
Revenue bond interest income (1) $ 75,907 $ 64,585
Other revenues (1) 6,591 2,181
---------- ----------
$ 82,498 $ 66,766
========== ==========
Interest expense and securitizations fees (1) $ 25,841 $ 14,097
Gain on repayments of revenue bonds $ 903 $ 222
(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 volume of investment and the decline in the
interest rate of bonds acquired reflects the challenging market conditions
experienced since 2004, such as increased competition and some potential
investments not meeting 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 2.25% and 1.04% for the six
months ended June 30, 2005 and 2004, respectively. Our weighted average cost of
debt associated with these investments was approximately 3.01% and 1.99% 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.
Other revenues in this segment are predominantly interest income on investments
other than revenue bonds and intercompany royalty fees eliminated in
consolidation. The increase for the six months ended June 30, 2005, as compared
to the six months ended June 30, 2004, is due largely to Capri loan interest
(see Note 4 to the condensed consolidated financial statements).
FUND MANAGEMENT
The table below shows selected information regarding our Fund Management
activities:
For the Six Months Ended June 30,
-----------------------------------
(In thousands) 2005 2004 % Change
-------------------------------------- -------- -------- --------
Equity raised $436,384 $398,833 9.4%
Equity invested by investment funds $430,999 $373,841 15.3%
Fund sponsorship fees (1) $ 38,554 $ 28,673 34.5%
Credit enhancement fees 5,061 4,826 4.9
Other revenues (1) 7,409 4,344 70.6
-------- -------- ------
Total $ 51,024 $ 37,843 34.8%
======== ======== ======
(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 and the first half of 2005.
27
We earn 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
increased approximately 11.5% to $3.8 million compared to $3.4 million in the
2004 period primarily due to the increase in equity raised and an increase in
the fee rate realized. Fees earned for partnership management services are
amortized over a five-year period. These fees increased approximately 300% to
$1.8 million compared to $450,000 for the same period in 2004. This increase is
primarily the result of ongoing revenues for fund sponsorships completed in 2004
and 2005.
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 $18.6 million in 2005, representing an approximate
13.6% increase compared to the prior year results. The increase in fees is
consistent with the increase of equity invested from 2005 to 2004.
Also during 2005, RCC acted as advisor for $226.5 million of investment
originations by CharterMac entities and others, compared to $220.8 million of
such originations for the six months ended June 30, 2004. We recognize
acquisition fees in this segment for such services, which increased
approximately 11% to $1.9 million as compared to $1.8 million in the 2004
period. The increase exceeded the change in investment originations due to the
increase in the rate of fees realized in 2005 as compared to 2004.
Partnership and asset management fees increased to $11.2 million for the six
months ended June 30, 2005, representing an increase of approximately 68% over
the 2004 period, 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 six months ended June 30, 2005, as
compared to the 2004 period is due to additional credit enhancement transactions
completed over the course of 2004 and 2005, the fees for which are recognized
over periods of up to 20 years.
MORTGAGE BANKING
The table below shows selected information regarding our Mortgage Banking
activities:
For the Six Months Ended June 30,
---------------------------------------
(In thousands) 2005 2004 % Change
------------------------------ ---------- ---------- --------
Originations $ 781,993 $ 551,049 41.9 %
Mortgage portfolio at June 30 $9,355,039 $4,274,720 118.8 %
Mortgage servicing fees $ 8,702 $ 4,719 84.4 %
Mortgage origination fees 2,790 3,084 (9.5)
Other revenues 5,940 2,733 117.3
---------- ---------- --------
$ 17,432 $ 10,536 65.5 %
========== ========== ========
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 was approximately the same as the first half of 2004.
The higher volume of originations in 2005 resulted from a significant increase
in Fannie Mae originations, due to the CCLP acquisition (whereby CCLP has
traditionally conducted a large portion of its business through Fannie Mae
originations) and a pricing change that allowed us to garner greater market
share. Conduit originations also increased sharply as we continue to pursue
business that does not warrant agency execution. These increases were partially
offset by a sharp decline in Freddie Mac business, as the 2004 period reflects a
large single-borrower pool transaction, with no comparable transaction in the
current year period. The current year also includes a significantly higher level
of assumption lending for which we receive assumption fees rather than
origination fees.
Originations for the six months ended June 30 are broken down as follows:
(In thousands) 2005 % of total 2004 % of total
-------------- -------- ---------- -------- ----------
Fannie Mae $465,490 59.6% $199,275 36.2%
Freddie Mac 33,905 4.3 237,631 43.1
FHA 6,372 0.8 27,749 5.0
Conduit - Bank 139,385 17.8 54,437 9.9
Assumptions 136,841 17.5 31,957 5.8
-------- ------ -------- ------
Total $781,993 100.0% $551,049 100.0%
======== ======= ======== ======
28
Other revenues in this segment pertain to interest earned on mortgages prior to
their sale date, prepayment penalty fees for early repayments and fees earned
for loan assumptions. The increase in the 2005 period is primarily a result of
the CCLP acquisition.
NON-EQUITY PARTNERSHIPS
The results of non-equity partnerships reflected in our financial statements are
for entities we are considered to control according to the definitions of FIN
46(R), and other partnerships we control, but in which we have no equity
interest. Our Fund Management segment earns fees from many of the entities,
however, and our Portfolio Investing business earns interest on revenue bonds
for which non-equity partnerships are the obligors. The Non-equity partnerships
are primarily tax-credit equity investment funds we sponsor and manage, while
the others are property level partnerships for which we have assumed the role of
general partner.
The results we reported in 2005 reflect six months of operations for the
non-equity partnerships we consolidate while the six months ended June 30, 2004,
includes only three months of results as we consolidated these entities as of
March 31, 2004. The increased amounts in 2005 are also due to the origination of
six funds and the assumption of the general partner interests in 18 property
level partnerships in the past year, all of which are included in the population
of non-equity partnerships consolidated.
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,
the consolidation of these non-equity partnerships has no impact on our net
income.
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 income taxes. The Fund Management and
Mortgage Banking businesses are conducted in corporations and are subject to
income taxes.
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 the taxable businesses
and the tax deductible distributions on their subsidiary equity. 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 six months ended June 30,
2005 and 2004 was (34.1)% and (44.0)%, respectively. The effective rate for our
corporate subsidiaries that were subject to taxes was 54.6% and 71.9% for the
six months ended June 30, 2005 and 2004, respectively.
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.
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 on October 31, 2005;
o $40.0 million, established in connection with the CMC acquisition,
which expires December 31, 2006;
29
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 or credit enhanced by either Merrill Lynch or IXIS.
As of June 30, 2005, we had approximately $262.8 million available to borrow
under these debt and securitization facilities without exceeding limits imposed
by debt covenants and our trust agreement.
Equity
------
We have the ability to issue $100.0 million of equity securities pursuant to a
registration statement we have filed with the Securities and Exchange
Commission. We currently have no plans to issue any such securities. Subsequent
to the end of the second quarter of 2005, however, we issued $108.0 million of
4.40% Cumulative Perpetual Convertible Community Reinvestment Act Preferred
Shares that are not subject to SEC registration.
Liquidity Requirements after June 30, 2005
------------------------------------------
During August 2005, distributions of approximately $23.8 million ($0.41 per
share) will be paid to holders of common and Convertible CRA Shares.
Additionally $8.7 million will be paid to SCU and SMU holders. All of these
distributions were declared in June 2005.
Other
-----
We have received a tender offer to purchase all of our shares of ARCap
Investors, LLC at $32.83. We are currently evaluating whether or not to accept
this offer. If we choose to accept, we would receive approximately $24.3 million
in proceeds.
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 lower than the
increase in 2004 despite increased operating inflows due to a lower level of
financing activity in 2005 as compared to 2004.
Operating cash flows were higher in the 2005 period by a margin of $62.4
million. This increase resulted from a higher level of earnings exclusive of
non-cash expenses. Additionally, the timing of receipts and payments in
operating asset and liability accounts contributed to this increase,
particularly with regard to the fundings and sales of mortgage loans.
Investing outflows were approximately the same in 2005 as compared to 2004
despite that acquisition of CCLP as the majority of the cost of the acquisition
was funded as a loan in the third quarter of 2004. A higher level of revenue
bond acquisition and funding activity, coupled with lower repayment activity,
was partially offset by a net decrease in our funds invested in partnerships in
the current year period.
Financing inflows in the 2005 period were lower than in 2004 by $210.3 million.
The primary reason for the higher inflows in 2004 was the issuance of common and
preferred shares in the first half of the year, with no comparable offerings in
the current year (although we completed an equity after the end of the second
quarter of 2005). The higher level of securitization activity was due in part to
the remarketing of borrowings under the fixed rate securitization that
terminated in the current year period.
Commitments, Contingencies and Off Balance Sheet Arrangements
-------------------------------------------------------------
Note 15 to the condensed consolidated financial statements contains a summary of
the Company's guarantees and off-balance sheet arrangements.
30
The following table reflects our maximum exposure and carrying amount as of June
30, 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) 12,887 --
LIHTC guarantees (2) 581,561 20,045
Mortgage banking loss sharing agreement (3) 940,245 9,553
-------------- -------------
$ 1,687,724 $ 29,598
============== =============
(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 credit enhancement deals 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 transactions and anticipate
no material liquidity requirements in satisfaction of any credit enhancement
provided. The carrying values disclosed above relate to the fees we earn for the
transactions, which we recognize as the fair value of the credit enhancement.
(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 June 30, 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 year 5 years
---------------------------------------- ----------- ----------- ---------- --------- -----------
Notes payable (1) $ 202,890 $ 185,170 $ 5,452 $ 12,268 $ --
Notes payable of consolidated non-equity
partnerships (2) 520,695 100,834 181,517 34,467 203,877
Operating lease obligations, net of
subleases 73,533 6,199 13,531 12,984 40,819
Unfunded loan commitments 177,370 152,540 24,830 -- --
Financing arrangements (1) 1,213,541 1,213,541 -- -- --
Preferred shares of subsidiary (subject
to mandatory repurchase) 273,500 -- -- -- 273,500
----------- ----------- ---------- --------- -----------
Total $ 2,461,529 $ 1,658,284 $ 225,330 $ 59,719 $ 518,196
=========== =========== ========== ========= ===========
(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 non-equity partnerships, $402.3
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 $118.4
million is collateralized with the underlying properties of the
consolidated operating partnerships. All of this debt is non-recourse to
us.
31
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 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 $561.4 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 $8.6
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 June 30, 2005, value of approximately $2.2 billion to approximately $2.1
billion. A 1% decline in interest rates would increase the value of the June 30,
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
32
Officer and 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 June 30, 2005, the Chief Executive Officer and Chief
Financial Officer have concluded 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 six months of
2005, we have:
(i) hired a director of taxation, a newly created position;
(ii) 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;
(iii)strengthened our due diligence procedures in reviewing
acquisition candidates to ensure that any required
recharacterizations are identified on a timely basis; and
(iv) strengthened our analytical procedures with regard to the
preparation and review of all consolidation eliminations.
33
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
There were no shares purchased or sold during the three months ended
June 30, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of shareholders on June 30, 2005. Alan P.
Hirmes, Janice Cook Roberts, Marc D. Schnitzer and Thomas W. White
were elected as trustees for three-year terms expiring in 2008.
Continuing to serve their current terms are the following trustees:
Stuart J. Boesky, Stephen M. Ross, Peter T. Allen, Jeff T. Blau,
Robert A. Meister, Jerome Y. Halperin, Andrew L. Farkas, Nathan
Gantcher and Robert L. Loverd. The four individuals elected, and the
number of votes cast for and abstaining, with respect to each of them,
were as follows (no votes were cast "against"):
For Abstain
---------- ----------
Alan P. Hirmes
Common Shares 46,161,727 1,966,981
Restricted Common Shares 259,174 --
Special Preferred Voting Shares 13,561,875 1,486,182*
Janice Cook Roberts
Common Shares 47,620,657 507,961
Restricted Common Shares 259,174 --
Special Preferred Voting Shares 13,561,875 1,486,182*
Marc D. Schnitzer
Common Shares 47,720,529 408,090
Restricted Common Shares 259,174 --
Special Preferred Voting Shares 13,561,875 1,486,182*
Thomas W. White
Common Shares 46,086,364 2,042,255
Restricted Common Shares 259,174 --
Special Preferred Voting Shares 13,561,875 1,486,182*
* Pursuant to the stipulation and compromise settlement entered into
as a result of a lawsuit commenced prior to our acquisition of RCC,
certain individuals can vote no more than 90% of their special
preferred voting shares until November 13, 2005.
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.*
99.1 Amended Audit Committee Charter *
* Filed herewith
34
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: August 9, 2005 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee and Chief Executive Officer
Date: August 9, 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 June 30, 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
principles;
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 the
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: August 9, 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 June 30, 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
principles;
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 the
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: August 9, 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 JUNE 30, 2005
In connection with the Quarterly Report on Form 10-Q of CharterMac for the
quarterly period ending June 30, 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
August 9, 2005 August 9, 2005
Exhibit 99.1
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF TRUSTEES
I. PURPOSE
The Audit Committee is established by and amongst the Board of Trustees for the
primary purpose of assisting the board in:
o overseeing the integrity of the Company's financial statements,
o overseeing the Company's compliance with legal and regulatory
requirements,
o overseeing the independent auditor's qualifications and independence,
o overseeing the performance of the company's independent auditor, and
o overseeing the Company's system of disclosure controls and system of
internal controls regarding finance, accounting, legal compliance, and
ethics that management and the Board have established.
Consistent with this function, the Audit Committee should encourage continuous
improvement of, and should foster adherence to, the Company's policies,
procedures and practices at all levels. The Audit Committee should also provide
an open avenue of communication among the independent auditors, financial and
senior management, and the Board of Trustees.
The Audit Committee has the authority to obtain advice and assistance from
outside legal, accounting, or other advisors as deemed appropriate to perform
its duties and responsibilities.
The Company shall provide appropriate funding, as determined by the Audit
Committee, for compensation to the independent auditor and to any advisers that
the audit committee chooses to engage.
The Audit Committee will primarily fulfill its responsibilities by carrying out
the activities enumerated in Section III of this Charter. The Audit Committee
will report regularly to the Board of Trustees regarding the execution of its
duties and responsibilities.
II. COMPOSITION AND MEETINGS
The Audit Committee shall be comprised of three or more trustees as determined
by the Board, each of whom shall be independent trustees (as defined by all
applicable rules and regulations), and free from any relationship (including
disallowed compensatory arrangements) that, in the opinion of the Board, would
interfere with the exercise of his or her independent judgment as a member of
the Committee. Each trustee shall be free of any relationship that, in the
opinion of the Board, would interfere with his or her individual exercise of
independent judgment, and shall meet the director independence requirements for
serving on the Committee as set forth in the corporate governance standards of
the American Stock Exchange. All members of the Committee shall have a working
familiarity with basic finance and accounting practices. The board shall
determine whether at least one member of the Committee qualifies as an "audit
committee financial expert" in compliance with the criteria established by the
SEC and other relevant regulations. The Company will disclose, in periodic
filings as required by the SEC, (i) the name of the "audit committee financial
expert" and whether or not he or she is independent, or (ii) the reason for the
absence of a current "audit committee financial expert". Committee members may
enhance their familiarity with finance and accounting by participating in
educational programs conducted by the Company or an outside consultant. The
Board has determined that simultaneous service on more than one Audit Committee
would not impair the ability of any trustee to effectively serve on the
Company's audit committee.
The members of the Committee shall be elected by the Board at the annual
organizational meeting of the Board or until their successors shall be duly
elected and qualified. Unless a Chair is elected by the full Board, the members
of the Committee may designate a Chair by majority vote of the full Committee
membership.
The Committee shall meet at least four times annually, or more frequently as
circumstances dictate. Each regularly scheduled meeting shall conclude with an
executive session of the Committee absent members of management and on such
terms and conditions as the Committee may elect. As part of its job to foster
open communication, the Committee should meet periodically with management and
the independent auditors in separate executive sessions to discuss any matters
that the Committee or each of these groups believe should be discussed
privately. In addition, the Committee should meet quarterly with the independent
auditors and management to discuss the annual audited financial statements and
quarterly financial statements, including the Company's disclosure under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
III. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
Documents/Reports/Accounting Information Review
1. Review this Charter periodically, at least annually, and recommend to the
Board of Trustees any necessary amendments as conditions dictate.
2. Review and discuss with management the Company's annual financial statements,
quarterly financial statements, and all internal controls reports (or summaries
thereof). Review other relevant reports or financial information submitted by
the Company to any governmental body, or the public, including management
certifications as required by the Sarbanes-Oxley Act of 2002 (Sections 302, 404
and 906) and relevant reports rendered by the independent auditors (or summaries
thereof).
3. Recommend to the Board whether the financial statements should be included in
the Annual Report on Form 10-K. Review with financial management and the
independent auditors the 10-Q prior to its filing (or prior to the release of
earnings).
4. Review earnings press releases with management, including review of
"pro-forma" or "adjusted" non-GAAP information.
5. Discuss with management financial information and earnings guidance provided
to analysts and rating agencies. Such discussions may be on general terms (i.e.,
discussion of the types of information to be disclosed and the type of
presentation to be made).
INDEPENDENT AUDITORS
6. Appoint (subject to shareholder ratification, if applicable), compensate, and
oversee the work performed by the independent auditor for the purpose of
preparing or issuing an audit report or related work. Review the performance of
the independent auditors and remove the independent auditors if circumstances
warrant. The independent auditors shall report directly to the audit committee
and the audit committee shall oversee the resolution of disagreements between
management and the independent auditors in the event that they arise. The
committee will review the experience and qualifications of senior members of the
independent audit team annually and ensure that all partner rotation
requirements, as promulgated by applicable rules and regulations, are executed.
The committee will also consider whether the auditor's performance of
permissible nonaudit services is compatible with the auditor's independence.
7. Review with the independent auditor any problems or difficulties and
management's response; review the independent auditor's attestation and report
on management's internal control report; and hold timely discussions with the
independent auditors regarding the following:
o all critical accounting policies and practices;
o all alternative treatments of financial information within generally
accepted accounting principles that have been discussed with
management, ramifications of the use of such alternative disclosures
and treatments, and the treatment preferred by the independent
auditor;
o other material written communications between the independent auditor
and management including, but not limited to, the management letter
and schedule of unadjusted differences; and
o an analysis of the auditor's judgment as to the quality of the
Company's accounting principles, setting forth significant reporting
issues and judgments made in connection with the preparation of the
financial statements.
8. At least annually, obtain and review a report by the independent auditor
describing:
o the firm's internal quality control procedures;
o any material issues raised by the most recent internal quality-control
review, peer review, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five
years, respecting one or more independent audits carried out by the
firm, and any steps taken to deal with any such issues; and
o (to assess the auditor's independence) all relationships between the
independent auditor and the Company.
9. Review and preapprove both audit and nonaudit services to be provided by the
independent auditor (other than with respect to DE MINIMIS exceptions permitted
by the Sarbanes-Oxley Act of 2002). This duty may be delegated to one or more
designated members of the audit committee with any such preapproval reported to
the audit committee at its next regularly scheduled meeting. Approval of
nonaudit services shall be disclosed to investors in periodic reports required
by Section 13(a) of the Securities Exchange Act of 1934.
10. Set clear hiring policies, compliant with governing laws or regulations, for
employees or former employees of the independent auditor.
FINANCIAL REPORTING PROCESSES AND ACCOUNTING POLICIES
11. In consultation with the independent auditors, review the integrity of the
organization's financial reporting processes (both internal and external), and
the internal control structure (including disclosure controls).
12. Review with management major issues regarding accounting principles and
financial statement presentations, including any significant changes in the
Company's selection or application of accounting principles, and major issues as
to the adequacy of the Company's internal controls and any special audit steps
adopted in light of material control deficiencies.
13. Review analyses prepared by management (and the independent auditor as noted
in item 7 above) setting forth significant financial reporting issues and
judgments made in connection with the preparation of the financial statements,
including analyses of the effects of alternative GAAP methods on the financial
statements.
14. Review with management the effect of regulatory and accounting initiatives,
as well as off-balance sheet structures, on the financial statements of the
Company.
15. Establish and maintain procedures for the receipt, retention, and treatment
of complaints regarding accounting, internal accounting, or auditing matters.
16. Establish and maintain procedures for the confidential, anonymous submission
by Company employees regarding questionable accounting or auditing matters.
Legal Compliance and Risk Management
17. Review, with the organization's counsel, any legal matter that could have a
significant impact on the organization's financial statements.
18. Discuss policies with respect to risk assessment and risk management. Such
discussions should include the Company's major financial and accounting risk
exposures and the steps management has undertaken to control them.
Other Responsibilities
19. Review with the independent auditors and management the extent to which
changes or improvements in financial or accounting practices, as approved by the
Audit Committee, have been implemented. (This review should be conducted at an
appropriate time subsequent to implementation of changes or improvements, as
decided by the Committee.)
20. Prepare the report that the SEC requires be included in the Company's annual
proxy statement.
21. Annually, perform a self-assessment relative to the Audit Committee's
purpose, duties and responsibilities outlined herein.
22. Perform any other activities consistent with this Charter, the Company's
by-laws and governing law, as the Committee or the Board deems necessary or
appropriate.
1. 23. Oversee compliance with the Company's Code of Conduct and oversee
and review such code and recommend changes as necessary.