SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTERMAC
----------
(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
- ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
- ---------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No ___
PART I - FINANCIAL
Item 1. Financial Statements
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
------------ ------------
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Revenue bonds-at fair value $1,883,104 $1,871,009
Mortgage servicing rights 33,260 33,351
Cash and cash equivalents 79,401 58,257
Cash and cash equivalents-restricted 24,066 26,636
Investments in partnerships 66,317 26,638
Investments in partnerships - FIN 46R 2,173,621 --
Assets consolidated pursuant to FIN 46R 210,494 --
Deferred costs - net of amortization of $14,431
and $13,463 58,656 58,408
Goodwill 207,582 214,744
Other intangible assets - net of amortization
of $8,332 and $4,163 190,033 194,203
Other assets 54,867 100,027
--------- ---------
Total assets $4,981,401 $2,583,273
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 989,568 $ 900,008
Preferred shares of subsidiary (subject to
mandatory repurchase) 273,500 273,500
Notes payable and other liabilities
consolidated pursuant to FIN 46R 1,047,976 --
Notes payable 174,426 153,350
Accounts payable, accrued expenses and
other liabilities 40,887 58,577
Deferred tax liability 48,902 60,370
Distributions payable 31,577 27,612
--------- ---------
Total liabilities 2,606,836 1,473,417
--------- ---------
Minority interest in FIN 46R partnerships 1,297,587 --
--------- ----------
Minority interest in consolidated subsidiary 274,516 292,199
--------- ---------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity - Convertible CRA
Shareholders (7,408,681 and 8,179,761 shares
issued and outstanding in 2004 and 2003,
respectively) 159,070 160,618
Beneficial owners equity - special preferred
voting shares 151 161
Beneficial owners' equity-other common shareholders
(100,000,000 shares authorized; 44,612,335 shares
issued and 44,529,905 outstanding and 42,726,232
shares issued and 42,703,600 outstanding in 2004
and 2003, respectively) 626,238 622,771
Deferred compensation (14,871) (19,385)
Treasury shares of beneficial interest (82,430 and
22,632 shares in 2004 and 2003, respectively) (1,706) (378)
Accumulated other comprehensive income 33,580 53,870
--------- ---------
Total shareholders' equity 802,462 817,657
--------- ---------
Total liabilities and shareholders' equity $4,981,401 $2,583,273
========= =========
See accompanying notes to consolidated financial statements.
-2-
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
============================
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
Revenues:
Revenue bond interest income $ 31,851 $ 26,250
Fee income:
Mortgage banking fees 3,116 3,067
Fund management 7,867 --
Other income 4,550 2,604
------ ----------
Total revenues 47,384 31,921
------- ----------
Expenses:
Interest expense 5,521 3,816
Interest expense - distributions to preferred
shareholders of subsidiary 4,724 --
Recurring fees - securitizations 1,065 963
Salaries and benefits 13,882 3,360
Interest rate derivatives 3,387 --
General and administrative 6,349 3,694
Depreciation and amortization 6,893 1,687
---------- ----------
Total expenses 41,821 13,520
---------- ----------
Income before gain (loss) on repayment of revenue
bonds, gain on sale of loans and equity in
earnings of ARCap 5,563 18,401
Equity in earnings of ARCap 555 555
Gain on sale of loans 1,745 2,139
Gain (loss) on repayment of revenue bonds 260 (412)
---------- -----------
Income before allocation to preferred shareholders
of subsidiary, minority interest and SCUs 8,123 20,683
Income allocated to preferred shareholders of subsidiary -- (4,724)
Income allocated to SCUs (3,705) --
Income allocated to minority interest (105) (28)
----------- -----------
Income before benefit from income taxes 4,313 15,931
Benefit from income taxes 3,838 1,976
---------- ----------
Net income $ 8,151 $ 17,907
========== ==========
Allocation of net income to:
Special distribution to Manager$ -- $ 1,411
========== ==========
Manager $ -- $ 2
========== ==========
Common shareholders $ 6,923 $ 15,089
Convertible CRA Shareholders 1,228 1,405
---------- ----------
Total for shareholders $ 8,151 $ 16,494
========== ==========
Net income per share
Basic $ 0.16 $ 0.37
---------- ----------
Diluted $ 0.16 $ 0.37
---------- ----------
Weighted average shares outstanding:
Basic 51,591,109 45,013,292
========== ==========
Diluted 51,839,141 45,070,595
========== ==========
See accompanying notes to consolidated financial statements.
-3-
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Beneficial Beneficial Beneficial
Owners' Equity- Owners' Equity Owners' Equity
Convertible CRA Other Special Preferred
Shareholders Shareholders Voting Shares
------------ ------------ -------------
Balance at December
31, 2003 $160,618 $622,771 $ 161
Comprehensive income:
Net income 1,228 6,923
Other comprehensive
income (loss):
Net unrealized loss
on interest rate
derivatives
Net unrealized loss
on revenue bonds:
Unrealized holding
loss arising during
the period
Less: Reclassification
adjustment for net
gain included in
net income
Total other
comprehensive loss:
Comprehensive loss
Deferred compensation
Retirement of special
preferred voting shares (10)
Costs of issuance of
Convertible CRA Shares (148)
Issuance of common shares 17,059
Distributions (2,628) (20,515)
------- ------- ------
Balance at March 31, 2004 $159,070 $626,238 $ 151
======= ======= ======
Treasury Accumulated
Shares of Other
Beneficial Deferred Comprehensive Comprehensive
Interest Compensation Income (Loss) Income (Loss) Total
-------- ------------ ------------- ------------- -----
Balance at December
31, 2003 $ (378) $(19,385) $53,870 $817,657
Comprehensive income:
Net income $ 8,151 8,151
---------
Other comprehensive
income (loss):
Net unrealized loss
on interest rate
derivatives (2,292)
Net unrealized loss
on revenue bonds:
Unrealized holding
loss arising during
the period (17,738)
Less: Reclassification
adjustment for net
gain included in
net income (260)
---------
Total other
comprehensive loss: (20,290) (20,290) (20,290)
---------
Comprehensive loss $ (12,139)
=========
Deferred compensation 4,514 4,514
Retirement of special
preferred voting shares (10)
Conversion of
Convertible CRA Shares (148)
Issuance of common shares (1,328) 15,731
Distributions (23,143)
------- ------- ------- -------
Balance at March 31, 2004 $(1,706) $(14,871) $ 33,580 $802,462
====== ======= ======= =======
See accompanying notes to consolidated financial statements.
-4-
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
============================
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,151 $ 17,907
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) loss on repayment of revenue bonds (260) 412
Depreciation and amortization 6,570 2,473
Provision for uncollectible accounts 471 0
Income allocated to preferred shareholders
of subsidiary 4,724 4,724
Income allocated to minority interest - SCUs 3,705 --
Income allocated to minority interest 105 28
Issuance of shares of subsidiary -
compensation expenses -- 867
Deferred tax liability (3,471) (1,204)
Changes in operating assets and liabilities:
Mortgage servicing rights (1,317) (1,812)
Other assets 33,805 7,401
Accounts payable, accrued expenses and other
liabilities (17,467) (20,582)
Deferred compensation 3,777 --
Derivative assets and liabilities 3,387 34
--------- ---------
Net cash provided by operating activities 42,180 10,248
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from revenue bonds and notes $ 27,786 $ 31,212
Revenue bond acquisitions (91,065) (3,050)
Increase in investments in partnerships (39,679) --
Increase in goodwill (835) --
(Increase) decrease in cash and cash
equivalents - restricted 2,570 (187)
--------- ----------
Net cash (used in) provided by investing
activities (101,223) 27,975
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (22,884) (15,546)
Distributions paid to preferred
shareholders of subsidiary (4,724) (4,724)
Proceeds from financing arrangements 127,569 --
Principal repayments of
financing arrangements (38,009) (495)
Increase in notes payable 21,076 2,793
Retirement of special preferred
voting shares (10) --
Options exercised -- 649
Increase in treasury stock (1,328) --
Increase in other deferred costs (1,503) (1,204)
--------- ---------
Net cash provided by (used in)
financing activities 80,187 (18,527)
--------- ---------
Net increase in cash and cash equivalents 21,144 19,696
Cash and cash equivalents at the beginning
of the period 58,257 55,227
--------- ----------
Cash and cash equivalents at the end of
the period $ 79,401 $ 74,923
========= =========
SUPPLEMENTAL INFORMATION:
Interest paid $ 6,926 $ 4,414
========= ==========
Taxes paid $ -- $ 103
========= =========
See accompanying notes to consolidated financial statements.
-5-
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
============================
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
Supplemental disclosure of non cash
activities relating to FIN 46R:
Decrease in revenue bonds 33,821 --
Increase in investments in
partnerships - FIN 46R (2,173,621) --
Increase in assets consolidated
pursuant to FIN 46R (210,494) --
Decrease in other assets - FIN 46R 4,731 --
Increase in notes payable and other
liabilities consolidated
pursuant to FIN 46R 1,047,976 --
Increase in minority interest in
FIN 46R partnerships 1,297,587 --
--------- ---------
$ -- $ --
========= =========
See accompanying notes to consolidated financial statements.
-6-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE 1 - General
CharterMac, which we refer to herein as "we", "us", "our", and "our Company", is
a Delaware statutory trust, which commenced operations in October 1997. We and
our subsidiaries are in the business of (i) portfolio investing, which includes
acquiring and holding (directly and indirectly through our subsidiaries)
federally tax-exempt multifamily housing revenue bonds issued by various state
or local governments, agencies or authorities and other investments designed to
produce federally tax-exempt income; (ii) mortgage banking, which includes
originating and servicing mortgage loans on behalf of third parties such as the
Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and the Federal Housing Authority ("FHA");
(iii) credit enhancement, which includes guaranteeing tax credit equity returns
and mortgage loans; and (iv) fund management, which includes sponsoring
investment programs for a fee.
We and a majority of our subsidiaries are each either treated as partnerships or
disregarded for federal income tax purposes. Therefore, we pass through to our
shareholders, in the form of distributions, income (including federally
tax-exempt income) derived from our investments without paying federal income
tax on that income. We intend to operate so that a substantial portion of our
ordinary income will be excluded from gross income for federal income tax
purposes. Other income, such as capital gains and taxable interest income, as
well as any dividend income from CharterMac Corporation ("CM Corp."), our wholly
owned subsidiary, generally will be subject to tax.
In 1999, we formed CharterMac Equity Issuer Trust, a wholly owned subsidiary
(collectively, with its subsidiaries, "Equity Issuer"), which holds a
substantial portion of our revenue bonds. From time to time, Equity Issuer may
issue Series A and Series B Cumulative Preferred Shares (cumulatively,
"Preferred Shares") to institutional investors. The Preferred Shares have a
senior claim to the tax-exempt income derived from the investments owned by
Equity Issuer. Any income in Equity Issuer after the payment of the cumulative
distributions on its Preferred Shares, and after the fulfillment of certain
covenants, may then be allocated to CharterMac. The assets of Equity Issuer,
while included in our consolidated financial statements, are legally owned by
Equity Issuer and are not available to any creditors of our Company outside of
Equity Issuer.
In July 2001, we formed CM Corp. as a wholly owned, consolidated taxable
subsidiary to help us more efficiently manage our taxable businesses. CM Corp.
and its subsidiaries conduct most of our taxable business, including many of the
fee-generating activities in which we may engage. CM Corp. isolates a
substantial portion of the taxable income and expenses of our Company. Unlike
CharterMac, CM Corp. is a corporation which is subject to both Federal and State
income tax.
In December 2001, our Company, through CM Corp. acquired 80% of the outstanding
capital stock of PW Funding Inc. and its subsidiaries ("PWF"). Under the
acquisition agreement, the stockholders of PWF were granted the right to put
their remaining 20% stock interest to CM Corp. after an initial period of 24 to
36 months. The agreement also grants CM Corp. the right to call the remaining
20% stock interest of PWF from PWF's stockholders after the same initial period
of 24 to 36 months. Subsequent to the initial purchase of 80% of PWF's
outstanding stock, and pursuant to terms of individual employee stock purchase
agreements, we have purchased additional PWF stock. At March 31, 2004, we own
approximately 87% of the outstanding shares of PWF stock.
On November 17, 2003, we acquired 100% of the ownership interests in and
substantially all of the businesses operated by Related Capital Company ("RCC")
(other than specific excluded interests). RCC had previously acted as our
external manager ("Manager"). The acquisition was structured so that the selling
principals of RCC contributed their ownership interests in RCC to CharterMac
Capital Company, LLC ("CCC"), a newly formed subsidiary of CM Corp, in exchange
for 15,854,505 special common units ("SCUs") in CCC. The SCUs are exchangeable
for cash or, at our option, common shares on a one-for-one basis. All of the
selling principals were also issued one special preferred voting share of our
Company for each SCU they received. The special preferred voting shares have no
economic interest, but entitle the holder to one vote per special preferred
voting share on all matters subject to a vote of the holders of our common
shares. One of the selling principals also received $50 million in cash. The
selling principals of RCC included its four executive managing partners (Stuart
J. Boesky, Alan P. Hirmes, Marc D. Schnitzer and Denise L. Kiley), all of whom
are members of our board of trustees, and an affiliate of The Related Companies,
L.P., a New York limited partnership ("TRCLP") with a majority of its equity
controlled by Stephen M. Ross, who is also the non-executive Chairman of our
board of trustees. As a result of the acquisition, the economic interest in our
Company of (i) TRCLP equals approximately 15.5% and (ii) our management and
employees equals approximately 7.2%. We conduct our fund management business
through RCC.
We are governed by a board of trustees comprised of eight independent managing
trustees and seven managing trustees who are affiliated with RCC.
The consolidated financial statements include the accounts of CharterMac and its
majority owned subsidiary business trusts and corporations which it controls. We
also own approximately 87% of PWF and 100% of RCC through our wholly owned
subsidiary, CM Corp. All intercompany accounts and transactions have been
eliminated in consolidation. Unless otherwise indicated, our "Company", as
hereinafter used in these Notes, refers to CharterMac and its consolidated
subsidiaries.
The accompanying interim financial statements have been prepared without audit.
In the opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial statements of the interim periods. However, given the highly
seasonal nature of our business, the operating results for the interim periods
may not be indicative of the results for the full year.
-7-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Certain information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
condensed or omitted. It is suggested that these financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 2003.
Our consolidated financial statements are prepared on the accrual basis of
accounting in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in the
financial statements include the valuation of our investments in revenue bonds,
mortgage servicing rights ("MSRs") and interest rate swap agreements.
Certain amounts in the 2003 financial statements have been reclassified to
conform to the 2004 presentation.
Significant Accounting Policies
- -------------------------------
Investments in revenue bonds
We account for our investments in revenue bonds as available-for-sale debt
securities under the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"), due to a provision in most of our revenue bonds under which we
have a right to require redemption and they have the right to call the revenue
bonds prior to their maturity, although we can and may elect to hold them up to
their maturity dates unless otherwise modified. As such, SFAS 115 requires us to
classify these investments as "available-for-sale." Accordingly, investments in
revenue bonds are carried at their estimated fair values, with unrealized gains
and losses reported in accumulated other comprehensive income. Unrealized gains
or losses do not affect the cash flow generated from property operations,
distributions to shareholders, the characterization of the tax-exempt income
stream or the financial obligations under the revenue bonds.
If in our judgment, we determine it is probable that we will not receive all
contractual payments required, when they are due, the revenue bond is deemed
impaired and is written down to its then estimated fair value, with the amount
of the write-down accounted for as a realized loss.
Because revenue bonds have a limited market, we estimate fair value for each
bond as the present value of its expected cash flows using a discount rate for
comparable tax-exempt investments. This process is based upon projections of
future economic events affecting the real estate collateralizing the bonds, such
as property occupancy rates, rental rates, operating cost inflation, market
capitalization rates and an appropriate market rate of interest, all of which
are based on good faith estimates and assumptions we develop. Changes in market
conditions and circumstances may occur which would cause these estimates and
assumptions to change; therefore, actual results may vary from the estimates and
the variance may be material.
For certain revenue bonds, management believes that certain factors have
impacted the near-term fair value. In these instances, the revenue bonds are
valued at either the outstanding face amount of the bond or management's
estimate of the fair value, whichever is lower.
Equity Investments
Equity investments in other assets on the consolidated balance sheets include
the following:
Investment in ARCap - Our preferred equity investment in ARCap Investors,
L.L.C. ("ARCap") is accounted for using the equity method because we have the
ability to exercise significant influence, but not control, over ARCap's
operating and financial policies.
Cash and Cash Equivalents
Cash and cash equivalents includes cash in banks and investments in short-term
instruments with an original maturity of three months or less. Certain amounts
of cash and cash equivalents are restricted and serve as additional collateral
for borrowings within our existing securitization programs.
Mortgage Banking Activities
PWF is an approved seller/servicer of multifamily mortgage loans for Fannie Mae,
Freddie Mac, FHA and the Government National Mortgage Association ("Ginnie
Mae"). For Fannie Mae, PWF is approved under the Delegated Underwriting and
Servicing ("DUS") program. Under DUS, upon obtaining a commitment from Fannie
Mae with regard to a particular loan, Fannie Mae commits to acquire the mortgage
loan based upon PWF's underwriting and PWF agrees to bear a portion of the risk
of potential losses in the event of a default. Fannie Mae commitments may be
made to acquire the mortgage loan for cash or in exchange for a mortgage-backed
security backed by the mortgage loan. As a Program Plus lender for Freddie Mac,
Freddie Mac agrees to acquire for cash from PWF loans for which PWF has issued
commitments. Ginnie Mae agrees to exchange FHA-insured mortgages originated by
PWF for Ginnie Mae securities.
Mortgage loans originated for Fannie Mae, Freddie Mac or Ginnie Mae are closed
in the name of PWF, which uses corporate cash obtained by borrowing from a
warehouse lender to fund the loans. Approximately a week to a month following
closing of a loan, loan documentation and an assignment are delivered to Fannie
Mae, Freddie Mac, Ginnie Mae, or a document custodian on its behalf and the cash
purchase price or mortgage-backed security is
-8-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
delivered to PWF. PWF uses the cash it receives to repay its warehouse loans and
the mortgage-backed securities are sold pursuant to prior agreements for cash,
which is also used to repay warehouse loans. PWF also underwrites and originates
multifamily and commercial mortgages for insurance companies and banks.
PWF receives origination fees which are included in mortgage banking fees in the
consolidated statements of income. Neither we nor PWF retain any interest in any
of the mortgage loans, except for MSRs and certain liabilities under the
loss-sharing arrangement with Fannie Mae (see Note 9).
Mortgage Servicing Rights
PWF recognizes as assets the rights to service mortgage loans for others,
whether the MSRs are acquired through a separate purchase or through loan
origination, by allocating total costs incurred between the loan and the MSRs
retained based on their relative fair value. MSRs are being carried at their
adjusted cost basis. MSRs are amortized in proportion to, and over the period
of, estimated net servicing income.
We have two areas of loss exposure related to PWF's lending activities. First,
while a loan is recorded on the balance sheet, there is exposure to potential
loss if a loan becomes impaired and defaults. Second, we have exposure to loss
due to the retention of a portion of credit risk within PWF's servicing contract
under the Fannie Mae DUS program.
For loans on our balance sheet, we identify loans that are impaired and evaluate
the allowance for loss on a specific loan basis for losses believed to currently
exist.
We account for exposure to loss under our servicing contract with Fannie Mae as
guarantees under FIN 45 by recording an asset equal to our estimate of the
portion of the servicing cash flows deemed to represent compensation for our
guarantee for loans originated on or after January 1, 2003. On an ongoing basis,
we will account for the asset by offsetting cash received for the guarantee
against the asset and crediting interest income for the change in asset due to
the passage of time. The portion of the liability representing an accrual for
probable losses under SFAS No. 5 "Accounting for Contingencies" ("FAS 5") is
adjusted as loss estimates change; the portion representing our willingness to
stand by as guarantor will be amortized over the expected life of the guarantee.
Revenue Recognition
We derive our revenues from a variety of investments and guarantees, summarized
as follows:
o Revenue Bond Interest Income - Interest income is recognized at the
stated rate as it accrues and when collectibility of future amounts is
reasonably assured. Contingent interest is recognized when received.
Interest income from revenue bonds with modified terms or where the
collectibility of future amounts is uncertain is recognized based upon
expected cash receipts. Certain revenue bonds carry a different interest
rate during the construction period, which will either increase or
decrease for the balance of the term. In these cases, we calculate the
effective yield on the revenue bond and use that rate to recognize
interest over the life of the bond.
o Mortgage Banking Fees - PWF fees earned for arranging financings under
the Fannie Mae DUS product line as well as Freddie Mac, insurance and
banking or other programs are recorded at the point the financing
commitment is accepted by the mortgagor and the interest rate of the
mortgage loan is fixed. PWF also receives fees for servicing the loans
it has originated. This income is recognized on an accrual basis.
o Other Income
Interest Income from Promissory Notes - Interest on mortgage loans
and notes receivable is recognized on the accrual basis as it
becomes due. Deferred loan origination costs and fees are amortized
over the life of the applicable loan as an adjustment to interest
income, using the interest method. Interest which was accrued is
reversed out of income if deemed to be uncollectible.
Interest Income on Temporary Investments - Interest income from
temporary investments, such as cash in banks and short-term
instruments, is recognized on the accrual basis as it becomes due.
Construction Service Fees - We receive fees, in advance, from
borrowers for servicing revenue bonds during the construction
period. These fees are deferred and amortized into other income over
the anticipated call period.
Credit Enhancement Fees - We receive fees for providing credit
enhancements. The credit enhancement fees are received monthly and
recognized in other income when received.
Guarantee Fees - We receive fees for providing guarantees on
guaranteed yields. These fees are deferred and recognized in other
income on a pro-rata basis over the guarantee period.
-9-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
o Fund Management Fees
Origination Fees - Origination fees include both property
acquisition fees and partnership management fees which are received
by RCC from the proceeds raised at formation of the investment
funds. Property acquisition fees (generally 2% to 4% of equity
raised) are for services performed in connection with the
acquisition of interests in property-owning partnerships and are
recognized when the earnings process is complete and collectibility
is reasonably assured, which is defined as the date the investor
equity is raised and the properties have been acquired by the
investment fund. Partnership management fees (generally 1% of equity
raised) are for services to be performed by RCC for (i) maintaining
the books and records of the investment fund, including requisite
investor reporting, and (ii) monitoring the acquired property
interests to ensure that their development, leasing and operations
comply with low income housing or other tax credit requirements. RCC
recognizes these fees when such services are rendered, which, per
the partnership agreements, are contractually over five years
following the initial closing of the investment fund, using the
straight-line method.
Acquisition Fees - Acquisition fees are earned upon acquisition of
investments by publicly-held entities for which RCC acts as the
advisor. These fees are calculated as a percentage of the purchase
price of investments acquired, up to 1%.
Development Fees - Development fees are earned from properties
co-developed by RCC with unaffiliated developers and sold to
investment funds. Recognition of development fees is based on
completion and stabilization of properties, after guarantees of
completion and deficits are no longer deemed to require funding. The
guarantees are issued by an affiliate of RCC, which is also a
subsidiary of CharterMac, to the lender (for the underlying
financing of the properties) on behalf of RCC and as required by the
investment fund.
Asset Management Fees - RCC earns asset management fees from its
investment funds on an annual basis calculated based on a percentage
of each investment fund's invested assets, generally 0.5%. These
fees are paid from the investment fund's available working capital
balances, and are earned by RCC for managing the Underlying Property
assets of the investment fund. These fees are recorded monthly as
earned, but only when the management of RCC determines that
collection is reasonably assured based on the investment funds'
working capital balance.
o Equity in Earnings of ARCap - Our equity in the earnings of ARCap is
accrued at our preferred dividend rate of 12%, unless ARCap does not
have earnings and cash flows adequate to meet this dividend requirement.
In the case where earnings are not sufficient to cover the 12% dividend
rate, any excess dividends received would be a returned capital and
would decrease our investment.
Deferred Costs
Prior to our acquisition of RCC, we paid fees to RCC, as our Manager, for its
activities performed to acquire revenue bonds, including their evaluation and
selection, negotiation of mortgage loan terms, coordination of property
developers and government agencies, and other direct expenditures of acquiring
or investing in revenue bonds. These fees are capitalized and amortized as a
reduction to interest income over the terms of the revenue bonds. Direct costs
relating to unsuccessful acquisitions and all indirect costs relating to the
revenue bonds are charged to operations.
Costs incurred in connection with our various borrowings and securitization
programs, such as legal, accounting, documentation and other direct costs, have
been capitalized and are being amortized using the straight-line method over 10
years, which approximates the average remaining term to maturity of the revenue
bonds in this program.
Costs incurred in connection with the issuance of preferred shares of Equity
Issuer subsidiary, such as legal, accounting, documentation and other direct
costs, have been capitalized and are being amortized using the straight line
method over the period to the mandatory repurchase date of the shares,
approximately 50 years. Costs incurred in connection with the issuance of
Convertible Community Reinvestment Act ("CRA") Shares, such as legal,
accounting, documentation and other direct costs, have been accounted for as an
offset to beneficial owners' equity of such shares.
Financial Risk Management and Derivatives
We have entered into several derivative instruments, including an interest rate
cap, interest rate swaps and forward bond purchase commitments, all of which are
accounted for under the Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended and interpreted. We have designated the interest rate swaps as cash flow
hedges on the variable interest payments on our floating rate securitizations.
All but one of the interest rate swaps do not become effective until 2005. The
one interest rate swap that is currently in place, is recorded at its fair
market value each accounting period, with changes in market value being recorded
in accumulated other comprehensive income to the extent the hedge is effective
in achieving offsetting cash flows. This hedge has been perfectly effective, so
it generated no ineffectiveness that needs to be included in earnings. The
effectiveness of the other swaps is being measured using the hypothetical
derivative method, until they go into effect in 2005. For the three months ended
March 31, 2004, we recorded approximately $3.4 million as an expense
representing the ineffective portion of these swaps. The interest rate cap,
although designed to mitigate our exposure to rising interest rates, was not
designated as a hedging derivative; therefore, any change in fair market value
flows through the consolidated statements of income, where it is included in
interest income. The forward commitments create derivative instruments under
SFAS 133, which have been designated as cash flow hedges of the anticipated
funding of the revenue bonds, and, as such, are recorded at fair value, with
changes in fair value recorded in accumulated other comprehensive income until
the revenue bonds are funded.
-10-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Goodwill and Other Intangible Assets
We have adopted SFAS 141 on July 1, 2001 and SFAS 142, on January 1, 2002. We
have determined that the amounts previously capitalized as goodwill relating to
our initial formation and to the merger of American Tax-Exempt Bond Trust meet
the criteria in SFAS 141 for recognition as intangible assets apart from
goodwill, and accordingly will continue to amortize the remaining $2.2 million
over their remaining useful lives, subject to impairment testing.
We amortize intangible assets on a straight line basis over their estimated
useful lives. The goodwill amounts are tested during the fourth quarter annually
for impairment in accordance with the provisions of FAS 142. We have concluded
that goodwill was not impaired at December 31, 2003 and nothing has occurred
that would indicate goodwill has become impaired since that date.
Income Taxes
Effective July 1, 2001, we conduct most of our taxable business, including our
mortgage servicing activities and fund management activities through CM Corp.
and its subsidiaries. We provide for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax basis of assets and
liabilities.
Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", requires enterprises to report certain financial and descriptive
information about their reportable operating segments, and certain
enterprise-wide disclosures regarding products and services, geographic areas
and major customers.
We have three reportable business segments: portfolio investing, mortgage
banking and fund management. Portfolio investing includes our activities related
to investing in revenue bonds. Mortgage banking includes our activities, carried
out through PWF involving originating mortgages on behalf of third parties. Fund
management involves our activities related to providing management services to
real estate investment programs sponsored by RCC.
New Pronouncements
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145, among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains or
losses from the early extinguishments of debt as extraordinary items will only
be required if they meet the specific criteria of extraordinary items included
in Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations". The revision of SFAS No. 4 became effective January 2003. The
implementation of SFAS No. 145 did not have a material impact on our
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS No. 146 replaces current accounting
literature and requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 became effective January 1,
2003. The implementation of SFAS No. 146 did not have a material impact on our
consolidated financial statements.
In November 2002, the FASB issued FIN 45. FIN 45 elaborates on the disclosures
to be made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. This
Interpretation does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related guarantee. The
initial recognition and initial measurement provisions of this FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. We entered into one credit enhancement transaction and two
yield guarantee transactions prior to December 31, 2002. The fee for the credit
enhancement transaction is received monthly and recognized as income when due.
The fees for the yield guarantee transactions, received in advance, were
deferred and amortized over the guarantee periods. During 2003, we entered into
four more yield guarantee transactions. We believe the fees received for these
guarantees approximates the fair value of the obligations undertaken in issuing
the guarantees and have recorded liabilities included in deferred income equal
to the fair values of the obligations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," an amendment of FASB statement No. 123.
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employer compensation. Because
we account for our share options using the fair value method, implementation of
this statement did not have an impact on our consolidated financial statements.
We have adopted the provisions of SFAS No. 123 for its share options issued to
employees. Accordingly, compensation cost is accrued based on the estimated fair
value of the options issued, and amortized over the vesting period. Because
vesting of the options is contingent upon the recipient continuing to provide
services to us until the vesting date, we estimate the fair value of the
employee options at each period-end up to the vesting date, and adjust expensed
amounts accordingly. The fair value of each option grant is estimated using the
Black-Scholes option-pricing model. In connection with the purchase of RCC, we
issued 778,420 common shares to employees, of which 52,863 vested immediately.
For the three months ended March 31, 2004, another 120,925 restricted
-11-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
common shares vested. The remaining balance of 604,632 restricted common shares
vests over periods ranging from one to four years. We recognized compensation
expense for the vested shares at the market price for the shares on the grant
date and deferred compensation expense for the non-vested shares also at the
market price on the grant date.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). In December 2003, the FASB issued FIN
46R, which revises FIN 46, codifying certain FASB Staff positions and extending
the implementation date. FIN 46, as revised by FIN 46R, clarifies the
application of existing accounting pronouncements to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
Prior to the issuance of FIN 46R, we had not applied FIN 46 to any entities;
accordingly, the provisions of FIN 46R are effective for us beginning March 31,
2004.
FIN 46R is a complex standard that requires significant analysis and judgment.
We have completed our evaluation of FIN 46R and its impact on our consolidated
financial statements. We have concluded that we need to consolidate certain
entities for which we are the general partner. For a more complete discussion,
see Note 9 in these consolidated financial statements.
In recording our acquisition of RCC, we ascribed approximately $5 million of the
purchase price to the estimated future cash flows to be received from general
partner interests in investment partnership in which we maintain a non-equity
controlling interest. However, from time to time the general partner of the
investment funds, may be called upon to fund investment fund operations which we
would advance on behalf of the general partner and would be repaid to us out of
future operating cash flow or sale or refinancing proceeds received by the
investment fund, so our maximum exposure to loss cannot be quantified. We also
have exposure to losses under guarantees of returns on certain funds, as
described in Note 16.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. SFAS 149 is generally effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 on July 1, 2003, as required, had no impact
on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
requires that certain financial instruments that have the characteristics of
debt and equity be classified as debt. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after June 15,
2003. Pursuant to SFAS No. 150, on July 1, 2003 we classified the $273.5 million
previously shown in the "mezzanine" (between liabilities and equity) in the
consolidated balance sheets as "preferred shares of subsidiary subject to
mandatory redemption" into the liability section, and the dividends paid on such
shares (approximately $4.7 million for the period ended March 31, 2004) have
been classified as interest expense; dividends related to prior periods continue
to be classified as income allocated to preferred shareholders of subsidiary.
-12-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE 2 - Revenue Bonds
Total interest income from revenue bonds, including participating interest, was
approximately $31,851,000, for the three months ended March 31, 2004, which
represents an average annual yield of 6.85% based on weighted average face
amount of approximately $1,859,957,000.
The amortized cost basis of our revenue bonds portfolio at March 31, 2004 and
December 31, 2003 was approximately $1,877,835,000 and $1,814,180,000,
respectively. The net unrealized gain on revenue bonds in the amount of
$39,091,000 at March 31, 2004 consisted of gross unrealized gains and losses of
$60,632,000 and $21,541,000, respectively. The net unrealized gain on revenue
bonds of $56,829,000 at December 31, 2003 consisted of gross unrealized gains
and losses of $65,394,000 and $8,565,000, respectively.
The fair value and gross unrealized losses of our revenue bonds aggregated by
length of time that individual bonds have been in a continuous unrealized loss
position, at March 31, 2004, is summarized in the table below:
Less than 12 Months
(Dollars in thousands 12 months or more Total
-----------------------------------------------------------------------
Fair value $ 85,429 $389,997 $475,426
Gross unrealized loss $ (3,230) $(18,311) $(21,541)
The following is a table summarizing the maturity dates of our revenue bonds.
Outstanding Weighted Average
(Dollars in thousands) Bond Amount Fair Value Interest Rate
-------------------------------------------------------------------------
Due in less than one year $ 2,872 $ 2,750 9.18%
Due between one and
five years 35,136 32,596 6.94%
Due after five years 1,854,100 1,881,579 6.89%
-------------------------------------------------------------------------
Total/Weighted Average $ 1,892,108 $1,916,925 6.89%
-------------------------------------------------------------------------
Less: FIN 46R
Eliminations (1) $ 33,612 $ 33,821
-------------------------------------------------------------------------
Total/Per Balance Sheet $ 1,858,496 $1,883,104
-------------------------------------------------------------------------
All of our revenue bonds have fixed interest rates.
(1) These bonds were eliminated for FIN 46R purposes because they relate to
properties we are consolidating.
2004 Transactions
- -----------------
The following table summarizes our acquisition activity for the three months
ended March 31, 2004.
Weighted
Weighted Average
Aggregate Average Permanent Number of
Purchase Construction Interest Revenue
(Dollars in thousands) Face Amount Price Interest Rate Rate Bonds
-----------------------------------------------------------------------------------------------------
Construction/rehabilitation
properties $91,065 $91,065 5.73% 6.6% 14
During the three months ended March 31, 2004, three revenue bonds were repaid.
We received net proceeds of approximately $23.6 million. The bonds had a net
carrying value of approximately $23.4 million, resulting in a gain of
approximately $260,000.
NOTE 3 - Investment in Partnerships
Investments in partnerships at March 31, 2004 and December 31, 2003 consisted
of:
March 31 December 31
(Dollars in thousands) 2004 2003
-------- -----------
Investment to acquire equity interests $63,713 $24,644
Investment in properties in development 2,604 1,994
-------- -----------
$66,317 $26,638
======== ===========
-13-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
A subsidiary wholly owned by RCC acquires equity interests in property ownership
entities on a short-term basis, and also invests funds with third party
developers to develop properties for inclusion in offerings to investors, which
are arranged by RCC. Such amounts are expected to be repaid to such subsidiary
the proceeds of the equity and debt financing when the investment fund has
closed. The developer has also guaranteed repayment of these investments to RCC.
Substantially all of these investments are pledged as collateral for RCC's
borrowings under the warehouse facility.
RCC also invests funds in affiliated entities, whereby subsidiaries of RCC
co-develop properties to be sold to investment funds. Development investments
include amounts invested to fund pre-development and development costs.
Investment funds organized by RCC acquire the limited partnership interests in
these properties. Repayment of such subsidiaries development investment is
expected to be made from various sources attributable to the properties,
including capital contributions of investments funds, cash flow from operations,
and/or from co-development partners, who in turn have cash flow notes from the
properties. In connection with RCC's co-development agreements, affiliates of
CharterMac issue construction completion, development deficit guarantees and
operating deficit guarantees to the lender and investment funds (for the
underlying financing of the properties) on behalf of RCC.
NOTE 4 - Other Assets
Investment in ARCap
On October 18, 2001, our Company, through CM Corp., purchased 739,741 units of
Series A Convertible Preferred Membership Interests in ARCap Investors, LLC at
the price of $25 per unit, with a preferred return of 12%. The carrying values
of our interests in ARCap at March 31, 2004 and December 31, 2003 were
$19,054,409 in both periods, which is included in other assets in the
consolidated balance sheets.
ARCap Investors, LLC was formed in January 1999 by REM/CAP and Apollo Real
Estate Investors to invest exclusively in subordinated CMBS. Since then, ARCap
has changed its focus and has begun to provide portfolio management services for
third parties.
NOTE 5 - Deferred Costs
The components of deferred costs are as follows:
(Dollars in thousands)
March 31, December 31
2004 2003
---------- -----------
Deferred bond selection costs (1) $ 47,783 $ 46,479
Deferred financing costs 11,715 11,170
Deferred costs relating to the
issuance of preferred
shares of subsidiary 10,445 10,445
Other deferred costs 3,144 3,777
---------- -----------
73,087 71,871
Less: Accumulated amortization (14,431) (13,463)
--------- ----------
$ 58,656 $ 58,408
========= ==========
(1) This primarily represents the 2% bond selection fee paid to the Manager
prior to our acquisition of RCC (see Note 7).
NOTE 6 - Goodwill and Intangible Assets
We adopted SFAS 141 on July 1, 2001 and SFAS 142, on January 1, 2002. We have
determined that the amounts previously capitalized as goodwill relating to our
initial formation and to our merger with American Tax Exempt Bond Trust, meet
the criteria in SFAS 141 for recognition as intangible assets apart from
goodwill, and accordingly will continue to be amortized over their remaining
useful lives, subject to impairment testing.
In conjunction with our purchase of RCC, we acquired additional intangible
assets and goodwill. The value of the intangible assets was verified via third
party valuation. The excess of the total paid over the fair value of the assets
and liabilities was classified as goodwill.
-14-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
The following table provides further information regarding our intangible
assets:
(Dollars in thousands)
Other Total
Identifiable RCC Identifiable
Intangible PWF Intangible Intangible
Assets Licenses Assets Assets Goodwill
------------ -------- ---------- ------------ --------
Balance at
December 31, 2003 $ 4,427 $ 8,639 $185,300 $198,366 $214,744
Accumulated amortization (2,227) -- (1,936) (4,163) --
------------ -------- ---------- ------------ --------
Net balance at
December 31, 2003 2,200 8,639 183,364 194,203 214,744
Additions -- -- -- -- 835
Conversion of SCUs
to common shares -- -- -- -- (7,997)
Amortization expense (118) -- (4,052) (4,170) --
------------ -------- ---------- ------------ --------
Net balance at
March 31, 2004 $ 2,082 $ 8,639 $179,312 $190,033 $207,582
------------ -------- ---------- ------------ --------
Amortization expense
for the three months
ended March 31, 2004 $ 118 $ -- $ 4,052 $ 4,170 $ --
------------ -------- ---------- ------------ --------
Estimated amortization
expense per year for
next five years $ 472 $ -- $ 16,208 $ 16,680 $ --
------------ -------- ---------- ------------ --------
The amortization of other identifiable intangible assets is included as a
reduction to revenue bond interest income.
The amounts indicated as goodwill in the accompanying consolidated financial
statements as of March 31, 2004 are related to the acquisitions, on December 31,
2001 of PWF and on November 17, 2003 of RCC. These amounts represent goodwill
under SFAS 142, and therefore, are not being amortized. In accordance with SFAS
142, we performed the required annual impairment tests in the fourth quarter of
2003 and determined that no impairment existed at December 31, 2003. Nothing has
occurred since that date that would indicate there has been any subsequent
impairment.
NOTE 7 - Related Party Transactions
Due to our acquisition of RCC, our related parties have changed substantially
from the period prior to the acquisition to the period after the acquisition.
Prior to the RCC Acquisition
Prior to our acquisition of RCC, we and our subsidiaries had engaged a
subsidiary of RCC to provide us with management services.
Pursuant to the terms of our prior Management Agreement, the Manager was
entitled to receive the fees and other compensation set forth below:
Fees/Compensation* Amount
- ----------------- ------
Bond Selection Fee 2.00% of the face amount of each asset invested
in or acquired by CharterMac or its subsidiaries.
Special 0.375% per annum of the total
Distributions/Investment invested assets of CharterMac or its
Management Fee subsidiaries.
Loan Servicing Fee 0.25% per annum based on the
outstanding face amount of revenue bonds and
other investments owned by CharterMac or its
subsidiaries.
Operating Expense For direct expenses incurred by the
Reimbursement Manager in an amount not to exceed
$901,035 per annum (subject to increase based on
increases in CharterMac's and its subsidiaries'
assets and to annual increases based upon
increases in the Consumer Price Index).
Incentive Share Options The Manager may receive options to
acquire additional Common shares
pursuant to the Share Option Plan
only if CharterMac's distributions in
any year exceed $0.9517 per common
share and the Compensation Committee
of the Board of Trustees determines
to grant such options.
Liquidation Fee 1.50% of the gross sales price of the assets
sold by CharterMac in connection with a
liquidation of CharterMac assets supervised by
RCC.
* RCC is also permitted to earn miscellaneous compensation which may include,
without limitation, construction fees, escrow interest, property management
fees, leasing commissions and insurance brokerage fees. The payment of any
such compensation is generally limited to the competitive rate for the
services being performed. A bond placement fee of 1.0% to 1.5% of the face
amount of each asset invested in or acquired by CharterMac or its
subsidiaries is payable to the Manager by the borrower, and not by CharterMac
or its subsidiaries.
-15-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Affiliates of RCC may provide certain financial guarantees to facilitate
leveraging by CharterMac, for which they could be paid market rate fees. In
addition, affiliates of RCC may provide certain financial guarantees to the
owner (or partners of the owners) of the Underlying Properties securing
CharterMac's revenue bonds, for which they could be paid market rate fees.
Subsequent to the RCC Acquisition
On November 17, 2003, CCC entered into an agreement with TRCLP for the purpose
of TRCLP to provide various services to CCC and any of its affiliates including
RCC. The services provided include computer support, office management, payroll,
human resources and other office services as defined in the agreement. The
majority of the services are charged to CCC at 100% of the direct costs incurred
by TRCLP.
General
The costs, expenses and the special distributions paid or payable to RCC, prior
to our acquisition of RCC, its affiliates and TRCLP for the three months ended
March 31, 2004 and 2003 were as follows:
Paid or Payable to TRCLP,
RCC and Affliliates
----------------------------
Three Months Ended
March 31,
----------------------------
(Dollars in thousands) 2004 2003
---------- -----------
Special distribution/Invetment management fee -- $ 1,483
Bond servicing fees -- 1,015
Expense reimbursement -- 233
Shared service agreement 1,252 --
---------- -----------
$ 1,252 $ 2,731
========== ===========
Substantially all of RCC's revenues are received from investment funds they have
originated and manage. Affiliates of RCC maintain a continuing equity interest
in the investment funds' general partner and/or managing member/advisor. RCC has
no direct investments in these general partner and/or managing member/advisor
entities, and RCC does not guarantee the obligations of the general partner
and/or managing member/advisor entities. RCC has agreements with these entities
under which RCC provides ongoing services for the investment funds on behalf of
the general partners and/or managing members/advisors, and receives all fee
income to which these entities are entitled. RCC does not participate in the
investment funds' operating income or losses or on gains or losses from property
sales.
As of March 31, 2004, the obligors of certain revenue bonds are local
partnerships for which the general partners of the controlling investment
partnerships are non-equity managing partners controlled by RCC.
As of December 31, 2002, the owner of the Underlying Property and obligor of the
Highpointe revenue bond was an affiliate of RCC who has not made an equity
investment. This entity has assumed the day-to-day responsibilities and
obligations of the Underlying Property. Buyers are being sought who would make
equity investments in the Underlying Property and assume the nonrecourse
obligations for the revenue bond or otherwise buy the property and payoff all or
most of the revenue bond obligation.
In December 2001, we completed a credit enhancement transaction with Merrill
Lynch Capital Services, Inc. ("MLCS") pursuant to which CM Corp. initially will
receive a fee in return for assuming MLCS's first loss position on a pool of
tax-exempt weekly variable rate multifamily mortgage loans originated by
CreditRe Mortgage Capital, LLC, an affiliate of Credit Suisse First Boston and
the Related Companies, L.P. Our maximum exposure under the terms of the
transaction was approximately $19 million at March 31, 2004 and December 31,
2003.
We have entered into several agreements with an unrelated third party (the
"Primary Guarantor") to guarantee agreed-upon internal rates of return for pools
of multifamily properties owned by real estate investment funds for which we
have received guarantee fees for the three months ended March 31, 2004 totaling
approximately $566,000. No guarantee fees were received during the same period
of 2003.
Related Management Company, which is wholly owned by TRCLP earned fees for
performing property management services for various properties held in
investment funds, which are managed by RCC. The fees totaled $720,000 and
$608,000 for the three months ended March 31, 2004 and 2003, respectively.
-16-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE 8- Earnings Per Share, Profit and Loss Allocations and Distributions
Prior to our acquisition of RCC, pursuant to our Trust Agreement and the
Management Agreement with the Manager, RCC was entitled, in its capacity as our
general partner, to a special distribution equal to .375% per annum of our total
invested assets (which equals the face amount of the revenue bonds and other
investments), payable quarterly. After payment of the special distribution,
distributions were made to the shareholders in accordance with their percentage
interests. Income was allocated first to RCC in an amount equal to the special
distribution. The net remaining profits or losses, after a special allocation of
..1% to RCC, were then allocated to shareholders in accordance with their
percentage interests.
Subsequent to the RCC acquisition, CCC's income is allocated first to the
holders of the SCUs in an amount equivalent to the SCU holders ownership
percentage, assuming all SCUs converted to common shares, divided by .72, to
take into account the fact that dividends paid on the SCUs are taxable.
Net income per share is computed in accordance with SFAS No. 128, Earnings Per
Share. Basic income per share is calculated by dividing income allocated to
Common and Convertible CRA Shareholders ("Shareholders") by the weighted average
number of Common and Convertible CRA Shares outstanding during the period. The
Convertible CRA Shareholders are included in the calculation of shares
outstanding as they share the same economic benefits as Common shareholders,
including receipt of the same dividends per share as common shareholders.
Diluted income per share is calculated using the weighted average number of
shares outstanding during the period plus the additional dilutive effect of
common share equivalents. The dilutive effect of outstanding share options is
calculated using the treasury stock method. The dilutive effect of the SCUs is
calculated using the "if-converted method". The SCUs will always be
antidilutive, because while the shares are convertible on a one-to-one basis,
the dividends paid will always be greater than the dividends paid per common
share.
(Dollars in thousands)
Three Months Ended March 31, 2004
-----------------------------------
Income Shares Per Share
Numerator Denominator Amount
----------- ----------- ----------
Net income allocable to share-
holders (Basic EPS) $ 8,151 51,591,109 $ 0.16
=======
Effect of dilutive securities
106,581 share options -- 248,032
-------- ----------
Diluted net income allocable to
shareholders (Diluted EPS) $ 8,151 51,839,141 $ 0.16
======== ========== =======
(Dollars in thousands)
Three Months Ended March 31, 2003
-----------------------------------
Income Shares Per Share
Numerator Denominator Amount
----------- ----------- ----------
Net income allocable to share-
holders (Basic EPS) $ 16,494 45,013,292 $ 0.37
=======
Effect of dilutive securities
168,136 stock options -- 57,303
---------- ---------
Diluted net income allocable to
shareholders (Diluted EPS) $ 16,494 45,070,595 $ 0.37
========= ========== =======
* Includes Common and Convertible CRA Shares.
During the quarter ended September 30, 2002, we issued 40,000 options at a
strike price of $17.56. These options vest equally, in thirds, in September
2003, 2004 and 2005 and expire in 10 years. These options were dilutive for the
three months ended March 31, 2004 and were taken into account in the calculation
of diluted shares. At March 31, 2004, these options had a fair value of $103,600
based on the Black-Scholes pricing model, using the following assumptions:
dividend yield of 5.97%, estimated volatility of 20%, swap rate of 4.016% and
expected lives of 8.5 years. We recorded compensation cost of $20,458 and $1,693
for the three months ended March 31, 2004 and 2003, relating to these options,
respectively.
As part of the RCC acquisition, we issued 1,000,000 options to Stephen M. Ross,
at a strike price of $17.78, which vest over five years and expire in 10 years.
At March 31, 2004, these options had a fair value of approximately $2,630,000.
-17-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Also, in conjunction with the RCC acquisition, we issued 778,420 restricted
common shares to various individuals who are either employees of RCC or TRCLP. A
small portion of these shares, 52,863, vested immediately. For the three months
ended March 31, 2004, another 120,925 restricted common shares vested. The
remaining balance of 604,632 restricted common shares vests over periods ranging
from one to four years.
We have recorded deferred compensation of approximately $14.9 million and $19.4
million at March 31, 2004 and December 31, 2003, respectively, included in the
equity section of our consolidated balance sheets. The deferred compensation is
being amortized as compensation expense on a straight line basis over the
respective vesting periods (approximately $4.5 million for the three months
ended March 31, 2004). Distributions paid related to these non-vested shares are
being recorded directly to equity (approximately $3.5 million for the three
months ended March 31, 2004).
The following table shows the number of options outstanding, granted, exercised
and exercisable and the exercise price of those options.
March 31, December 31,
2004 2003
---------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------------------------------------------------------------------
Options outstanding at beginning of year 1,119,914 $ 17.33 263,509 $ 12.47
Options granted during the period -- -- 1,000,000 $ 17.78
Options exercised during the period -- -- 143,595 $ 11.5625
--------- ---------
Options outstanding at end of period 1,119,914 $ 17.33 1,119,914
--------- ---------
Options exercisable at end of period $93,247 $ 11.5625 93,247 $ 12.42
Weighted-average fair value of options granted during the year $ 3,460,000
The following table summarizes information about stock options outstanding at March 31, 2004.
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 3/31/04 Contractual Life Exercise Prices at 3/31/04 Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
$11.5625 79,914 7.2 $11.5625 79,914 $11.5625
$ 17.78 1,000,000 9.6 $17.7800 -- $17.7800
$ 17.56 40,000 8.5 $17.5600 13,333 $17.5600
Other
- -----
Through November 17, 2003, two of our independent trustees were entitled to
receive annual compensation for serving as trustees in the aggregate amount of
$17,500 payable in cash (maximum of $7,500 per year) and/or common shares valued
at their fair market value on the date of issuance. The third independent
trustee is entitled to receive annual compensation in the aggregate amount of
$30,000 payable in cash (maximum of $20,000 per year) and/or common shares. As
of March 31, 2004 and December 31, 2003, 2,198 and 1,728 common shares,
respectively, having an aggregate value on the date of issuance of $30,000 each
year, were issued to the independent trustees as compensation for services
rendered during the years ended December 31, 2003 and 2002. The independent
trustees also received an aggregate of 5,535 shares, worth $97,500 at the time
of issuance, as payment for their work on the special committee analyzing the
proposed acquisition of RCC. After the acquisition of RCC, the five new
independent trustees received $18,750 as compensation for their services
rendered during the year ended December 31, 2003. In 2004, all eight of the
independent trustees will receive annual compensation of $30,000 payable in cash
(maximum of $15,000 per year) and/or common shares valued at their fair market
value on the date of issuance.
Effective May 3, 2000, we implemented a dividend reinvestment and Common share
purchase plan (the "Plan"). Under the Plan, common shareholders may elect to
have their distributions from our Company automatically reinvested in additional
common shares at a purchase price equal to the average of the high and low
market price from the previous day's trading. If a common shareholder
participates in the Plan, such shareholder may also purchase additional common
shares through quarterly voluntary cash payments with a minimum contribution of
$500. There are no commissions for common
-18-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
shares purchased under the Plan. Participation in the Plan is voluntary and a
common shareholder may join or withdraw at any time. The opportunity for
participation in the Plan began with the distributions paid in August 2000.
The board of trustees has authorized the implementation of a common share
repurchase plan, enabling us to repurchase, from time to time, up to 1,500,000
of its common shares. The repurchases will be made in the open market and the
timing is dependant on the availability of common shares and other market
conditions. As of March 31, 2004 and December 31, 2003, we have acquired 82,430
and 22,632 of its common shares for an aggregate purchase price of approximately
$1,706,000 and $378,000, respectively (including commissions and service
charges). Repurchased common shares are accounted for as treasury shares of
beneficial interest.
NOTE 9 - Commitments and Contingencies
PW Funding Inc.
PWF is required to meet minimum net worth and capital requirements and to comply
with other requirements set by Fannie Mae, Freddie Mac, Ginnie Mae and FHA.
PWF maintains, as of March 31, 2004, treasury notes of approximately $5.3
million and a money market account of approximately $0.9 million, which is
included in cash and cash equivalents-restricted in the consolidated balance
sheet, to satisfy the Fannie Mae collateral requirements of $6.2 million.
PWF has liability under the terms of its master loss sharing agreement with
Fannie Mae for a portion of any loss that may result from borrower defaults on
the mortgage loans it originates and sells to Fannie Mae.
We maintain an allowance for loan losses for loans originated under the Fannie
Mae DUS product line at a level that, in management's judgment, is adequate to
provide for estimated losses. At March 31, 2004, that reserve was approximately
$6.9 million, which we believe represents its maximum liability at this time.
Unlike loans originated for Fannie Mae, PWF does not share the risk of loss for
loans it originates for Freddie Mac or FHA.
In connection with the PWF warehouse line, both CharterMac and CM Corp. have
entered into guarantees for the benefit of Fleet National Bank ("Fleet"),
guaranteeing the total advances drawn under the line, up to the maximum of $100
million, together with interest, fees, costs, and charges related to the PWF
warehouse line.
At March 31, 2004, PWF had commitments of approximately $46.7 million to six
borrowers.
Credit Enhancement Transaction
CM Corp. completed a credit enhancement transaction with Merrill Lynch Capital
Services, Inc. ("MLCS"), pursuant to which, CM Corp. assumes MLCS's first loss
position on a pool of tax-exempt weekly variable rate multifamily mortgage
loans. TRCLP has provided CM Corp. with an indemnity covering 50% of any losses
that are incurred by CM Corp. as part of this transaction. Our maximum exposure
under the terms of the transaction was approximately $19.0 million at March 31,
2004.
As of March 31, 2004, the credit enhanced pool of properties are performing
according to their contractual obligations and we do not anticipate any losses
to be incurred on its guaranty. Should our ongoing analysis of risk of loss
change in the future, a provision for probable loss might be required; such
provision could be material.
Yield Guarantee Transaction
We have entered into several agreements with Merrill Lynch (the "Primary
Guarantor") to guarantee an agreed upon rates of return for pools of seven
multifamily properties each owned by RCGCP II, an investment fund sponsored by
RCC prior to our acquisition of RCC.
These transactions were each structured as two separate guarantees, one
primarily guaranteeing the return through the lease-up phase of the properties
and the other guaranteeing the return through the operating phase of the
properties. The fee for the first guarantee is paid at closing. The fee for the
second guarantee is typically paid in two installments. These fees will be
recognized in income on a straight line basis over the period of the respective
guarantees.
Some of the properties included in these pools have been financed with the
proceeds of revenue bonds acquired by an affiliate of CharterMac. In connection
with these transactions, the Primary Guarantor required that those revenue bonds
be deposited into a trust pursuant to which the revenue bonds were divided into
senior and subordinated interests with 50% of each revenue bond being
subordinated. We have financed the senior trust interest as part of the Merrill
Lynch P-FloatsSM/RitesSM program. The subordinate trust interests are being used
as collateral in other of our financing programs.
In connection with these transactions, we posted collateral to the Primary
Guarantor in the form of either cash or revenue bonds of approximately $601
million.
-19-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Other
We have entered into transactions related to certain properties, pursuant to
which we provide credit support to the construction lender for project
completion and Fannie Mae conversion and will be obligated to acquire
subordinated bonds to the extent the construction period bonds do not fully
convert.
Up until the point of completion, we will guaranty to the construction lender
reimbursement of any draw on its construction letter of credit up to 40% of the
stated amount of the letter of credit. Following completion, up until the
project loan converts to permanent loan status, we will guarantee the full
amount of the letter of credit. Our maximum exposure, related to these three
transactions, is approximately $27 million.
The developer has also issued several guarantees to the construction lender,
each of which would be called upon before our guarantees, and each of which
would be assigned to us should its guarantees be called.
We have entered into other transactions to purchase revenue bonds pursuant to
agreements which require us, at the earlier of stabilization or conversion to
permanent financings to acquire Series A and Series B revenue bonds at
predetermined prices and interest rates. We are obligated to purchase the
revenue bonds only if construction is completed. We are obligated to buy the
Series B revenue bonds only if, at the date the Series A bonds are stabilized,
the property's cash flow is sufficient to provide debt service coverage of 1.15x
for both the Series A and B bonds. An unrelated third party lender will advance
funds to the developer, as needed during the construction period, at a floating
rate. These forward commitments create derivative instruments under SFAS No.
133, which have been designated as a cash flow hedge of the anticipated funding
of the revenue bonds, and are recorded at fair value, with changes in fair value
recorded in accumulated other comprehensive income until the revenue bonds are
funded. The total potential amount we could possibly be required to fund is
$83.4 million.
We are subject to routine litigation and administrative proceedings arising in
the ordinary course of business. Management does not believe that such matters
will have a material adverse impact on our financial position, results of
operations or cash flows.
NOTE 10 - Financial Risk Management and Derivatives
Our revenue bonds generally bear fixed rates of interest, but the interest rates
we pay under our securitization programs are variable rates re-set weekly or
every 35 days, so we are exposed to interest rate risk. Various financial
vehicles exist which allow our management to hedge against the impact of
interest rate fluctuations on our cash flows and earnings.
We currently manage a portion of our interest rate risk through the use of The
Bond Market Association ("TBMA") indexed interest rate swaps. Under each
interest rate swap agreement, for a specified period of time we are required to
pay a fixed rate of interest on a specified notional amount to the transaction
counterparty and we receive a floating rate of interest equivalent to the TBMA
index, which is the most widely used tax-exempt floating rate index. As of March
31, 2004, we have entered into one such swap with MLCS as counterparty with a
notional amount of $50 million fixed at an annual rate of 3.98%, which expires
in January 2006. We have also entered into several interest rate swaps with
Fleet National Bank and RBC Capital Markets as the counterparty all of which go
into effect in January 2005. The notional amount on these swaps totaled $450
million. The weighted average fixed interest rate is 3.07% and they mature from
January 2007 to January 2010.
The average TBMA rates for the three months ended March 31, 2004 and 2003, were
0.95% and 1.07%, respectively. Net swap payments received by us, if any, will be
taxable income to our Company and, accordingly, to shareholders. A possible risk
of such swap agreements is the possible inability of the Counterparty to meet
the terms of the contracts with us; however, there is no current indication of
such an inability.
At March 31, 2004, the fair market value of our interest rate swaps of
approximately $6.5 million were recorded in our consolidated balance sheets.
Interest paid or payable under the terms of the swaps, of approximately
$638,000, is included in interest expense. For the three months ended March 31,
2004, we recorded approximately $3.4 million as an expense representing the
ineffective portion of these swaps.
During January 2002, we entered into an interest rate cap agreement with Fleet,
with a cap of 8% on a notional amount of $30 million. Although this transaction
is designed to mitigate our exposure to rising interest rates, we have not
designated this interest rate cap as a hedging derivative. As of March 31, 2004,
this interest rate cap was recorded as an asset with a fair market value of
$18,101 included in other assets in the consolidated balance sheets. Because we
have not designated this derivative as a hedge, the change in fair market value
flows through the consolidated statements of income, where it is included in
interest rate derivatives, in the amount of $(15,902) for the three months ended
March 31, 2004.
NOTE 11 - Dividends and Restricted Assets
CharterMac may not receive any distributions from its subsidiary, Equity Issuer,
until Equity Issuer has either paid all accrued but unpaid distributions related
to its preferred shares, or in the case of the next following distribution
payment date, set aside funds sufficient for payment. The distributions related
to the preferred shares are payable only from Equity Issuer's quarterly net
income, defined as the tax-exempt income (net of expenses) for the particular
calendar quarter. Equity Issuer is required, under the terms of its preferred
share issuance, to meet certain leverage ratios calculated as its total
obligations divided by the gross fair value of investments. This could limit the
ability of Equity Issuer to distribute cash or revenue bonds to our Company or
to make loans or advances to our Company.
-20-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Equity Issuer and its subsidiaries hold Revenue Bonds, which at March 31, 2004,
had an aggregate carrying amount of approximately $1.8 billion that serve as
collateral for securitized borrowings or are securitized. The total securitized
borrowings at March 31, 2004 were approximately $406 million. Equity Issuer's
net assets at March 31, 2004 were approximately $508 million.
NOTE 12 - Business Segments
We have three reportable business segments which include portfolio investing,
mortgage banking, and fund management.
The portfolio investing segment consists primarily of subsidiaries holding
investments in revenue bonds producing primarily tax-exempt interest income and
includes our credit enhancement activities.
The mortgage banking segment consists of subsidiaries which originate mortgages
on behalf of third parties and receive mortgage origination and mortgage
servicing fees generated by those activities.
The fund management segment consists of subsidiaries that generate fee income
from the asset management, underwriting, originating and other services provided
to the real estate equity investment programs RCC sponsors, and the management
and related services provided to us and a publicly-traded real estate investment
trust.
Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
These reportable segments are strategic business units that primarily generate
revenue streams that are distinctly different and are generally managed
separately.
The following table provides more information regarding our Company's segments:
Three Months Ended March 31, 2004 Three Months Ended March 31, 2003 (1)
----------------------------------------------------- ------------------------------------------
Portfolio Mortgage Fund Portfolio Mortgage
(Dollars in thousands) Investing Banking Management Total Investing Banking Total
----------------------------------------------------- ----------------------------------------
Total revenues $ 34,012 $ 3,880 $ 9,492 $ 47,384 $ 28,602 $ 3,319 $ 31,921
===================================================== =======================================
Net income (loss) $ 21,103 $ 700 $ (13,652) $ 8,151 $ 18,487 (580) $ 17,907
==================================================== =======================================
Assets consolidated
pursuant to FIN 46R $ -- $ -- $ 2,384,115 $ 2,384,115 $ -- $ -- $ --
===================================================== =========================================
Total assets $ 2,117,043 $ 64,644 $ 2,799,714 $ 4,981,401 $1,720,371 $ 110,894 $1,831,265
===================================================== =========================================
(1) The Fund Management segment began with our acquisition of RCC on November 17, 2003.
NOTE 13 - Notes Payable
In connection with the acquisition of PWF, we entered into a loan commitment
(the "PWF Acquisition Loan"). The PWF Acquisition Loan has a term of five years
with an interest rate of LIBOR plus 2.25%. The loan is interest only for the
first twelve months. Beginning in January 2003 and through the remaining loan
term, quarterly straight-line principal amortization on the initial advance is
paid based on a ten-year amortization period.
At March 31, 2004 and December 31, 2003, there was approximately $24.5 million
and $25.2 million outstanding on this loan, respectively, included in notes
payable in the accompanying consolidated financial statements.
PWF has a $100 million secured, revolving mortgage warehouse facility, subject
to annual renewal. CM Corp. is a guarantor of this PWF warehouse facility. The
interest rate for each warehouse advance is the Fed Funds rate at the end of
each year plus 1.25%, which at March 31, 2004 was 2.24%. At March 31, 2004 and
December 31, 2003, the amount outstanding was approximately $4.8 million and
$21.9 million, respectively.
In order to further increase financial flexibility, on March 31, 2003, Equity
Issuer entered into a $75 million secured revolving tax-exempt bond warehouse
line of credit with Fleet National Bank and Wachovia Bank N.A. This facility has
a built in accordion feature allowing up to a $25 million increase for a total
size of $100 million and a term of two years, plus a one year extension at our
option. This facility bears interest at 31, 60, 90, or 180-day reserve adjusted
LIBOR plus 1.5%, or prime plus 0.25%, at our option. During the third quarter of
2003, Citibank became the third lender under this facility. The outstanding
balance of this facility at March 31, 2004 was approximately $21.7 million.
On November 17, 2003, CM Corp. entered into $50 million and $10 million
acquisition bridge loan facilities with Wachovia Bank in order to fund the cash
portion, fees and expenses of our acquisition of RCC. These bridge loan
facilities have a nine-month term with two 90-day extension options. We have
pledged our common ownership interest in the Equity Issuer as security under
these facilities. The facilities are pre-payable at any time and bear interest
at LIBOR plus 1.5% and 2.4%, respectively. As of March 31, 2004 and December 31,
2003, CM Corp. had borrowed
-21-
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
the full $60 million available under these facilities.
On November 17, 2003, RCC entered into a warehouse facility in the amount of $85
million, with Fleet National Bank, Merrill Lynch C.D.C and Citicorp, USA. This
facility has a maturity date of October 29, 2004 and bears interest, at RCC's
option, at either LIBOR plus 2% or the prime rate plus .125%. At March 31, 2004,
there was an outstanding balance of $63.3 million at a weighted average net rate
of 3.90%. This facility is collateralized by a lien on certain limited
partnership interests (See Note 4). Payments of interest only are due on a
monthly basis. RCC has the option to extend the warehouse facility upon its
maturity in 2004.
Minimum payments due
under
non-cancellable leases
---------------------------------------
(Dollars in thousands) Payments Due
---------------------- ------------
2004 $130,204
2005 24,456
2006 2,726
2007 2,726
2008 and thereafter 14,314
-----------
$174,426
===========
NOTE 14 - Financing Arrangements
We raise capital to acquire additional revenue bonds through two securitization
programs.
P-FLOATSSM/RITESSM Program
During 2004, we transferred 20 revenue bonds with an aggregate face amount of
approximately $118.8 million to the P-FLOATSSM/RITESSM program and received
proceeds of approximately $127.6 million. Additionally, we repurchased three
revenue bonds with an aggregate face value of approximately $28.4 million. As of
March 31, 2004 our total borrowings outstanding were approximately $406 million.
Our cost of funds relating to our secured borrowings under the Merrill Lynch
P-FLOATSSM/RITESSM program (calculated as interest expense as a percentage of
the weighted average amount of the secured borrowings) was approximately 1.9%
and 2.0%, annualized, for the three months ended March 31, 2004 and 2003,
respectively.
MBIA Securitization Programs
As of March 31, 2004, the maximum amount of capital we could raise under the
security agreement with MBIA was $650 million, including $425 million in Floater
Certificates under the Owner Trust and $225 million in Auction Certificates
under the Auction Trust. In addition, the surety commitment by MBIA was recently
extended for eight years, through October 1, 2011. As of March 31, 2004, total
outstanding was $383.5 million under the Floater Certificate structure and $100
million under the Auction Certificate structure.
Our Company's floating rate cost of funds relating to our MBIA securitizations
(calculated as interest expense plus recurring fees as a percentage of the
weighted average amount of the outstanding Senior Certificate) was approximately
2.05% and 2.08% for the three months ended March 31, 2004 and 2003,
respectively.
The following table shows the components of the financing arrangements.
Amount Financed (Dollars in thousands)
Financing Arrangement March 31, 2004 December 31, 2003
--------------------- -------------- -----------------
P-FLOATSSM/RITESSM $406,068 $316,508
MBIA: Low Floater 383,500 383,500
MBIA: Auction Rate 100,000 100,000
Fixed-Rate Securitization 100,000 100,000
------- -------
Total $989,568 $900,008
======= =======
-22-
NOTE 15 - Shareholders' Equity
In February 2004, our Company, at the shareholders' request, converted 771,080
of outstanding Convertible CRA Shares to Common Shares. The conversion was based
on a one-to-one conversion ratio.
NOTE 16 - FASB Interpretation No. 46
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). In December 2003, the FASB issued FIN
46R, which revises FIN 46, codifying certain FASB Staff positions and extending
the implementation date. FIN 46, as revised by FIN 46R, clarifies the
application of existing accounting pronouncements to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
Prior to the issuance of FIN 46R, we had not applied FIN 46 to any entities;
accordingly, the provisions of FIN 46R are effective for us beginning March 31,
2004.
Through our acquisition of RCC, we entered the Low Income Hosing Tax Credit
("LIHTC") syndication business, becoming the general partner or equivalent in
over 70 investment funds. Typically, the investors acquire all limited
partnership interest in an upper-tier, or investment partnership or 100% of the
membership interest if structured as a limited liability company. The investment
partnership, in turn, invests as a limited partner in one or more lower-tier, or
operating partnerships, that own and operate the housing projects. Limited
partners in the investment partnerships are most often corporations who are able
to utilize the tax benefits and, in most cases, are not anticipating any
economic benefit from the investment other than the expected tax benefits. In
some cases, in conjunction with the final disposition of the portfolio, there
may be some additional return to the limited partners.
There are certain entities in which the limited partners have the right to
remove us as the general partner or managing member without cause. These
entities are not VIEs under the provisions of FIN 46R therefore will not be
consolidated.
Entities and operating partnerships in which the limited partners or limited
members do not have the right to remove us as the general partner or managing
member are variable interest entities as defined by FIN 46R. We have concluded
that as the general partner or managing member for these type of investments, we
are the primary beneficiary as defined by FIN 46R because we absorb the majority
of the expected income and losses disproportionate to our actual ownership
interest.
We have included the consolidated amounts in Investments