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 September 30, 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) 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 October 29, 2004, 57,680,798 shares of the Registrant's shares of
beneficial interest were outstanding.
ITEM 1. FINANCIAL STATEMENTS
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Revenue bonds - at fair value $ 2,024,157 $ 1,871,009
Cash and cash equivalents 57,697 58,257
Cash and cash equivalents - restricted 25,672 26,636
Other investments 162,966 48,460
Mortgage servicing rights 33,031 33,351
Deferred costs - net of amortization of $18,343 and $13,463 59,789 58,408
Goodwill 207,667 214,744
Other intangible assets - net of amortization of $16,674
and $4,163 181,692 194,203
Loan to affiliate 15,361 --
Other assets 47,959 75,946
Investments in partnerships of consolidated VIEs 2,394,398 --
Other assets of consolidated VIEs 302,682 --
----------- -----------
Total assets $ 5,513,071 $ 2,581,014
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Financing arrangements $ 973,663 $ 900,008
Preferred shares of subsidiary (subject to mandatory
repurchase) 273,500 273,500
Notes payable 176,737 153,350
Accounts payable, accrued expenses and other liabilities 82,073 56,318
Deferred tax liability 39,348 60,370
Distributions payable 38,569 27,612
Notes payable and other liabilities of consolidated VIEs 1,225,523 --
----------- -----------
Total liabilities 2,809,413 1,471,158
----------- -----------
Minority interests in subsidiaries 271,640 292,199
----------- -----------
Preferred shares of subsidiary (not subject to mandatory
repurchase) 104,000 --
----------- -----------
Partners' interests in consolidated VIEs 1,419,462 --
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Beneficial owners' equity - Convertible CRA Shareholders;
no par value (6,552 shares issued and outstanding in 2004
and 8,180 issued and outstanding in 2003) 158,481 160,618
Beneficial owners' equity - special preferred voting shares;
no par value 151 161
Beneficial owners' equity - other common shareholders; no
par value (100,000 shares authorized; 51,211 shares issued
and 51,129 outstanding in 2004 and 42,726 shares issued
and 42,704 outstanding in 2003) 729,176 622,771
Restricted shares granted (11,372) (19,385)
Treasury shares of beneficial interest - common, at cost
(82 shares in 2004 and 23 shares in 2003) (1,706) (378)
Accumulated other comprehensive income 33,826 53,870
----------- -----------
Total shareholders' equity 908,556 817,657
----------- -----------
Total liabilities and shareholders' equity $ 5,513,071 $ 2,581,014
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------------------- ----------------------
Revenues:
Revenue bond interest income $ 33,027 $ 30,353 $ 97,365 $ 83,528
Fee income:
Mortgage banking 3,321 3,171 11,124 9,711
Fund sponsorship 11,363 -- 30,300 --
Credit enhancement 2,715 995 7,541 2,986
Other income 5,760 1,329 11,891 4,752
Revenues of consolidated VIEs 4,460 -- 7,250 --
--------- --------- --------- ---------
Total revenues 60,646 35,848 165,471 100,977
--------- --------- --------- ---------
Expenses:
Interest expense 8,301 5,928 22,424 16,613
Interest expense of consolidated VIEs 7,263 -- 13,952 --
Interest expense - distributions to
preferred shareholders of subsidiary 4,724 4,724 14,173 4,724
Salaries and benefits 13,474 3,196 40,406 8,521
General and administrative 12,775 4,477 30,830 12,141
Depreciation and amortization 7,864 2,242 22,553 6,844
Loss on impairment of revenue bonds 610 1,758 610 1,758
Other expenses of consolidated VIEs 10,917 -- 19,398 --
--------- --------- --------- ---------
Total expenses 65,928 22,325 164,346 50,601
--------- --------- --------- ---------
Income (loss) before equity in earnings of
investments, loss on investments held by
consolidated VIEs, gain on sale of loans and
gain (loss) on repayment of revenue bonds (5,282) 13,523 1,125 50,376
Equity in earnings of investments 611 555 1,731 1,665
Loss on investments held by consolidated
VIEs (46,434) -- (95,111) --
Gain on sale of loans 571 444 5,646 2,994
Gain (loss) on repayment of revenue bonds (5) 557 217 2,797
--------- --------- --------- ---------
Income (loss) before allocation of (income)
loss to preferred shareholders of subsidiary,
Special Common Units of subsidiary,
minority interests and partners of
consolidated VIEs (50,539) 15,079 (86,392) 57,832
(Income) allocated to preferred shareholders of
subsidiary (1,556) -- (2,386) (9,449)
(Income) allocated to Special Common Units of
subsidiary (6,484) -- (19,737) --
(Income) loss allocated to minority interests 145 147 (220) 186
Loss allocated to partners of consolidated VIEs 70,174 -- 141,992 --
--------- --------- --------- ---------
Income before income taxes 11,740 15,226 33,257 48,569
Income tax benefit 534 689 11,600 3,453
--------- --------- --------- ---------
Net income $ 12,274 $ 15,915 $ 44,857 $ 52,022
========= ========= ========= =========
Allocation of net income to:
Special distribution to Manager $-- $ 1,583 $-- $ 4,453
========= ========= ========= =========
Manager $-- $ 2 $-- $ 5
========= ========= ========= =========
Common shareholders $ 10,839 $ 12,727 $ 38,686 $ 43,132
Convertible CRA shareholders 1,435 1,603 6,171 4,432
--------- --------- --------- ---------
Total for shareholders $ 12,274 $ 14,330 $ 44,857 $ 47,564
========= ========= ========= =========
Net income per share:
Basic $ 0.21 $ 0.31 $ 0.83 $ 1.05
========= ========= ========= =========
Diluted $ 0.21 $ 0.31 $ 0.83 $ 1.04
========= ========= ========= =========
Weighted average shares outstanding:
Basic 57,708 46,331 53,794 45,485
========= ========= ========= =========
Diluted 58,112 46,366 54,220 45,518
========= ========= ========= =========
Dividends declared per share $ .41 $ .35 $ 1.16 $ 1.00
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
3
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2004 2003
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,857 $ 52,022
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on repayment of revenue bonds (217) (2,797)
Loss on impairment of revenue bonds 610 1,758
Depreciation and amortization 24,655 8,694
Income allocated to preferred shareholders of subsidiary 16,559 14,173
Income allocated to Special Common Units of subsidiary 19,737 --
Income (loss) allocated to minority interests 220 (186)
Non-cash compensation expense 10,779 3,578
Deferred taxes (13,025) (4,223)
Changes in operating assets and liabilities:
Mortgage servicing rights (5,642) (1,897)
Loans to affiliates (15,361) --
Other assets 7,801 35,753
Accounts payable, accrued expenses and other liabilities 23,212 (18,657)
--------- ---------
Net cash provided by operating activities $ 114,185 $ 88,218
========= =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from revenue bonds and notes $ 36,244 $ 94,151
Revenue bond acquisitions and fundings (239,888) (265,796)
Investments in partnerships (30,273) 2,309
Other investments (84,000) --
Increase in goodwill (920) (767)
Decrease (increase) in cash and cash equivalents - restricted 964 (37,219)
--------- ---------
Net cash used in investing activities $(317,873) $(207,322)
========= =========
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders $ (59,996) $ (47,849)
Distributions to preferred shareholders of subsidiary (15,003) (14,173)
Distributions to Special Common Unit holders (19,868) --
Proceeds from financing arrangements 137,761 192,699
Repayments of financing arrangements (64,105) (737)
Increase in notes payable 23,155 15,139
Issuance of common shares 105,541 --
Issuance of preferred shares 104,000 53,783
Retirement of special preferred voting shares (10) --
Proceeds from stock options exercised -- --
Treasury stock purchases (1,328) --
Deferred financing costs (7,019) (10,342)
--------- ---------
Net cash provided by financing activities 203,128 188,520
--------- ---------
Net increase (decrease) in cash and cash equivalents (560) 69,416
--------- ---------
Cash and cash equivalents at the beginning of the year 58,257 13,699
--------- ---------
Cash and cash equivalents at the end of the period $ 57,697 $ 83,115
--------- ---------
See accompanying notes to condensed consolidated financial statements.
4
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2004 2003
----------------------
SUPPLEMENTAL NON-CASH INFORMATION:
Supplemental disclosure of non cash activities relating to adoption of
FIN 46R:
Decrease in revenue bonds $ 34,281
Decrease in other assets 17,814
Increase in investments in
partnerships of consolidated VIEs (2,394,398)
Increase in other assets of consolidated VIEs (302,682)
Increase in notes payable and other liabilities of consolidated
VIEs 1,225,523
Increase in partners' interests of consolidated VIEs 1,419,462
-----------
$ --
===========
Conversion of Special Common Units to Common Shares $ 17,789
===========
See accompanying notes to condensed consolidated financial statements.
5
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
CharterMac, its wholly owned and majority owned subsidiaries and entities
consolidated pursuant to the adoption of Financial Accounting Standards Board
("FASB") Interpretation No. 46R (see Note 2). All intercompany accounts and
transactions have been eliminated in consolidation. Unless otherwise indicated,
"the Company", as used throughout this document, 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.
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 be read in
conjunction with the consolidated financial statements and notes thereto
included in our Form 10-K for the year ended December 31, 2003.
Our annual report on Form 10-K for the year ended December 31, 2003 contains a
summary of our significant accounting policies. There have been no material
changes to these items since December 31, 2003, 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 financial statements included in this
document. 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.
Certain amounts in the 2003 financial statements have been reclassified to
conform to the 2004 presentation.
NOTE 2 - VARIABLE INTEREST ENTITIES CONSOLIDATED PURSUANT TO FASB INTERPRETATION
46R
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 revised FIN 46, codifying certain FASB Staff positions and extending
the implementation date. 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. Effective March
31, 2004, we adopted FIN 46R.
Through our acquisition of Related Capital Company ("RCC") and in subsequent
fund originations, we became the general partner, or equivalent, in over 70
investment funds in which we have no direct financial investment. Typically,
outside 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 multi-family housing complexes. Limited partners in the investment
partnerships are most often corporations who are able to utilize the tax
benefits, which are comprised of operating losses and Low-Income Housing Tax
Credits ("LIHTCs").
Investment and operating partnerships are variable interest entities ("VIEs") as
defined by FIN 46R. We have concluded that, as the general partner or managing
member for these types of investments, and because the partners or members do
not have the right to remove us as such, we are the primary beneficiary as
defined by FIN 46R because we absorb the majority of the expected income and
loss variability, which is disproportionate to any actual ownership interest. We
have consolidated the assets and liabilities of these entities in our balance
sheet and have recorded their results of operations in our statement of income
beginning April 1, 2004. The balance sheets and statements of operations
consolidated in our condensed financial statements reflect the financial
position and results of operation of the VIEs as of and for the six month period
ended as of June 30, 2004, the latest date available.
6
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 3 - REVENUE BONDS
The following table summarizes our revenue bond portfolio:
September 30, December 31,
(In thousands) 2004 2003
------------ -----------
Unamortized cost basis $ 2,017,541 $ 1,814,180
Gross unrealized gains 59,471 65,394
Gross unrealized losses (18,574) (8,565)
----------- -----------
Subtotal/fair value 2,058,438 1,871,009
Less: eliminations (1) (34,281) --
----------- -----------
Total fair value per balance sheet $ 2,024,157 $ 1,871,009
=========== ===========
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 September 30, 2004, is summarized in the table below:
Less than 12 Months
(Dollars in thousands) 12 Months or More Total
--------- --------- ---------
Number of bonds 39 33 72
Fair value $ 354,057 $ 221,527 $ 575,584
Gross unrealized loss $ (13,759) $ (4,815) $ (18,574)
The unrealized losses related to these revenue bonds are due solely to changes
in interest rates, in that we calculate present values based upon future cash
flows from the bonds and discount these cash flows at the current rate on our
recent bond issuances; as rates rise, the fair value of our portfolio decreases.
We have the intent and ability to hold these bonds to maturity and have
therefore concluded that these declines in value are temporary.
In the third quarter of 2004, in light of the underperformance of one of our
investments which will necessitate the temporary revision of payment terms, we
recognized an impairment loss of approximately $610,000.
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 $ -- $ -- N/A
Due between one and
five years 34,840 32,963 7.02%
Due after five years 1,993,075 2,025,475 6.76%
----------- ----------- ---------
Total / Weighted 2,027,915 2,058,438 6.76%
=========
Less: eliminations (1) (31,082) (34,281)
----------- -----------
Total per balance sheet $ 1,996,833 $ 2,024,157
=========== ===========
(1) These bonds are recorded as liabilities on the balance sheets of entities
consolidated pursuant to FIN 46R (see Note 2) and are therefore eliminated
in consolidation.
7
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
The following table summarizes our acquisition activity and additional fundings
to previously acquired revenue bonds for the nine months ended September 30,
2004.
Weighted Average
Construction Weighted Number of
Aggregate Interest Rate Average Revenue
Face Purchase (excluding points Permanent Bonds
Amount Price paid at closing) Interest Rate Acquired
(In thousands) ---------- ---------- -------------------- ------------ ----------
Construction/rehabilitation $239,948 $239,948 5.40% 6.55% 29
properties
During the nine months ended September 30, 2004, seven revenue bonds were repaid
generating net proceeds of approximately $26.9 million. The bonds had a net book
value of approximately $26.7 million, resulting in a gain of approximately
$217,000.
At September 30, 2004, $1.9 billion of revenue bonds were pledged as collateral
for our borrowing facilities. Two of these bonds, with a book value of
approximately $14.1 million, are included in the bonds pledged as collateral and
are eliminated in consolidation as noted in the tables above.
NOTE 4 - OTHER INVESTMENTS
Investments other than revenue bonds consisted of:
September 30, December 31,
2004 2003
(In thousands) ------------- -------------
Investment in equity interests in LIHTC properties $ 53,768 $ 24,644
Investment in properties under development 2,476 1,994
Investment in ARCap 19,054 19,054
Capri Capital loan 84,000 --
Other investments 3,668 2,768
-------- --------
Total other investments $162,966 $ 48,460
======== ========
In July 2004, CM Investor LLC ("CM Investor"), one of our subsidiaries, provided
an interim loan in the principal amount of $84.0 million ("Interim Loan") to
Capri Capital Limited Partnership ("CCLP"), which bears interest at a rate of
11.5% per year and matures on January 15, 2005 subject to extension.
We anticipate that the Interim Loan will be repaid in full and that CM Investor
would then make new loans in the aggregate principal amount of $90.0 million,
one of which would give CM Investor the right to acquire 100% of Capri Capital
Finance (CCLP's mortgage banking affiliate) within six months, and the other one
of which would give CM Investor the right to acquire a 49% equity interest in
Capri Capital Advisors ("CCA") (CCLP's pension fund advisory affiliate) on or
after August 1, 2005 (provided that CCA has the right to extend the exercise
date to a date no later than June 30, 2006). The acquisitions are both subject
to certain approvals, including, but not limited to, regulatory and agency
approval for the acquisition of Capri Capital Finance. We have signed a letter
of intent with respect to the subsequent acquisitions; however, definitive
agreements have yet to be signed, and there can be no assurance that the
subsequent acquisitions will occur. If CM Investor ultimately completes both of
these acquisitions pursuant to these arrangements, the total purchase price will
be based on the operating performance of the respective businesses.
We funded the Interim Loan through bridge loans from Fleet National Bank, which
bear interest at rates of LIBOR plus 1.65% and mature in July 2005. The weighted
average interest rate on the loans at September 30, 2004 was 3.42%.
8
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
The components of identifiable intangible assets are as follows:
Other Total
RCC Mortgage Identifiable Identifiable
Intangible Banking Intangible Intangible
(In thousands) Assets Licenses Assets Assets Goodwill
----------- ----------- ------------- ------------- ------------
Balance at December 31, 2003 $ 185,300 $ 8,639 $ 4,427 $ 198,366 $ 214,744
Accumulated amortization (1,936) -- (2,227) (4,163) --
--------- --------- --------- --------- ---------
Net balance at December 31, 2003 183,364 8,639 2,200 194,203 214,744
Additions -- -- -- -- 920
Tax effect of conversion of SCUs to
common shares -- -- -- -- (7,997)
Amortization expense (12,154) -- (357) (12,511) --
--------- --------- --------- --------- ---------
Net balance at September 30, 2004 $ 171,210 $ 8,639 $ 1,843 $ 181,692 $ 207,667
========= ========= ========= ========= =========
Estimated amortization expense per
year for next five years $ 16,206 $ -- $ 474 $ 16,680 $ --
========= ========= ========= ========= =========
The amortization of other identifiable intangible assets is included as a
reduction to revenue bond interest income as they pertain to the acquisition of
such bond investments.
NOTE 6 - RELATED PARTY TRANSACTION
Following are the expenses and the special distributions paid or payable to
related parties, which are included in general and administrative expense. For
periods prior to November 17, 2003, the amounts were paid or payable to RCC. For
periods after our acquisition of RCC, the amounts were paid or payable to The
Related Companies, L.P. ("TRCLP").
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
(In thousands) 2004 2003 2004 2003
------- ------- ------- -------
Special distribution/investment
management fee $ -- $ 1,690 $ -- $ 4,712
Bond servicing fees -- 3,793 -- 8,459
Expense reimbursement -- 269 -- 748
Shared services agreement 1,209 -- 3,145 --
------- ------- ------- -------
$ 1,209 $ 5,752 $ 3,145 $13,919
======= ======= ======= =======
In addition, a subsidiary of TRCLP earned fees for performing property
management services for various properties held in investment funds which we
manage. These fees, which are included in other expenses of consolidated VIEs,
totaled approximately $760,000 and $1.5 million for the three and nine months
ended September 30, 2004.
A subsidiary of ours collects asset management and incentive management 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 $419,000 and $1.2 million for the three and
nine months ended September 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 300 basis points, which is to be used to purchase new
investments. The Revolving Facility has a term of one year with a one year
optional extension. In the opinion of management, the terms of this facility are
consistent with those of transactions with independent third parties. As of
September 30, 2004, we had advanced AMAC approximately $15.4 million.
9
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 7 - DERIVATIVE INSTRUMENTS
We have designated our 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 begin in 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 recorded in accumulated other comprehensive income to
the extent the hedge is effective in achieving offsetting cash flows. This hedge
has been effective to date. The effectiveness of the other swaps is measured
using the hypothetical swap method until they go into effect in 2005. For the
nine months ended September 30, 2004, we recorded approximately $30,000 of
expense related to an interest rate cap.
NOTE 8 - YIELD GUARANTEE TRANSACTION
In July 2004, we completed a transaction to guarantee tax benefits to an
investor in a partnership designed to generate Georgia State LIHTCs. We have
agreed to back-up the guarantee of a primary guarantor of an agreed upon
internal rate of return to the investor in Related Capital Guaranteed Corporate
Partners II, L.P. - Series F, for which we will receive guarantee fees totaling
approximately $3.9 million in three installments, as well as acquisition,
partnership management and asset management fees amounting to approximately $5.8
million. We recorded deferred income of approximately $6.4 million relating to
this guarantee.
NOTE 9 - COMPREHENSIVE INCOME
Comprehensive income for the nine months ended September 30, 2004 and 2003, was
as follows:
(In thousands) 2004 2003
-------- --------
Net income $ 44,857 $ 52,022
Net unrealized gain (loss) on interest rate derivatives (4,113) 2,073
Net unrealized loss on revenue bonds:
Unrealized loss during the period (15,714) (42,294)
Reclassification adjustment for net gain included in net income (217) (2,797)
-------- --------
Comprehensive income $ 24,813 $ 9,004
======== ========
NOTE 10 - EARNINGS PER SHARE
Three Months Ended September 30, 2004 Nine Months Ended September 30, 2004
------------------------------------- ------------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
------------------------------------- ------------------------------------
Basic EPS $ 12,274 57,708 $ 0.21 $44,857 53,794 $ 0.83
========== ==========
Effect of dilutive securities -- 404 -- 426
-------- ------- ------- -------
Diluted EPS $ 12,274 58,112 $ 0.21 $44,857 54,220 $ 0.83
======== ======= ========== ======= ======= ==========
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
------------------------------------- ------------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
------------------------------------- ------------------------------------
Basic EPS $ 14,330 46,331 $ 0.31 $47,564 45,485 $ 1.05
========== ==========
Effect of dilutive securities -- 35 -- 33
-------- ------- ------- -------
Diluted EPS $ 14,330 46,366 $ 0.31 $47,564 45,518 $ 1.04
======== ======= ========== ======= ======= ==========
The number of shares includes common and Convertible CRA Shares as the
Convertible CRA Shares have the same economic benefits as common shares.
NOTE 11 - BUSINESS SEGMENTS
We operate in three business segments, which include Portfolio Investing,
Mortgage Banking, and Fund Management.
o The Portfolio Investing segment consists of subsidiaries investing in
primarily tax-exempt first mortgage revenue bonds, the proceeds of which
are used to finance the new construction, substantial rehabilitation,
acquisition, or refinancing of affordable multifamily housing throughout
the United States.
10
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
o The Mortgage Banking segment consists of subsidiaries which originate and
service primarily multifamily mortgage loans on behalf of third parties,
including Fannie Mae, Freddie Mac, the Federal Housing Authority, Insurance
Companies and Conduits. In exchange for the origination and servicing
activities, the Company receives origination and servicing fees.
o The Fund Management segment includes two business lines. The first consists
of our subsidiaries that sponsor real estate equity investment funds that
primarily invest in LIHTC properties. In exchange for sponsoring and
managing these investment funds, the Company receives fee income for
providing asset management, underwriting, origination and other services.
In addition, these subsidiaries also provide management and advisory
services to AMAC and other investors in exchange for fees. The second
business line consists of our subsidiaries that participate in credit
enhancement transactions, including guaranteeing mortgage loans and
specified returns to investors in LIHTC equity funds, in exchange for
guarantee fees. Since the adoption of FIN 46R, effective March 31, 2004,
this segment also includes the results of consolidated VIEs (see Note 2).
In prior periods, results from credit enhancement transactions were included in
Portfolio Investing. We have reclassified the results to Fund Management to
better reflect the management of our businesses and have restated prior year
results accordingly.
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 segments:
(In thousands) Three Months Ended September 30, 2004 Three Months Ended September 30, 2003
-------------------------------------------------- ---------------------------------------------
Portfolio Mortgage Fund Portfolio Mortgage Fund
Investing Banking Management Total Investing Banking Management Total
-------------------------------------------------- ---------------------------------------------
Total revenues $ 36,198 $ 4,978 $ 19,470 $ 60,646 $ 30,760 $ 4,093 $ 995 $ 35,848
================================================== ==============================================
Depreciation and
amortization $ 710 $ 2,408 $ 4,746 $ 7,864 $ 338 $ 1,616 $ 288 $ 2,242
================================================== ==============================================
Net income (loss) $ 13,729 $ (742) $ (713) $ 12,274 $ 16,163 $ (955) $ 707 $ 15,915
================================================== ==============================================
(In thousands) Nine Months Ended September 30, 2004 Nine Months Ended September 30, 2003
-------------------------------------------------- ---------------------------------------------
Portfolio Mortgage Fund Portfolio Mortgage Fund
Investing Banking Management Total Investing Banking Management Total
-------------------------------------------------- ---------------------------------------------
Total revenues $ 101,921 $15,514 $ 48,036 $ 165,471 $ 85,294 $12,697 $2,986 $ 100,977
================================================== ==============================================
Depreciation and
amortization $ 2,042 $ 6,107 $ 14,404 $ 22,553 $ 1,468 $ 4,804 $ 572 $ 6,844
================================================== ==============================================
Net income (loss) $ 50,976 $ 1,689 $ (7,808) $ 44,857 $ 50,777 $(1,169) $2,414 $ 52,022
================================================== ==============================================
Total assets as of
September 30 $2,085,716 $78,221 $3,349,134 $5,513,071 $1,979,123 $77,325 $1,967 $2,058,415
================================================== ==============================================
Assets as of September
30 of consolidated
VIEs included in total
assets (see Note 2) $ (34,281)(1) $ -- $2,697,080 $2,662,799
==================================================
(1) This amount represents revenue bonds recorded as liabilities on the balance
sheets of entities consolidated pursuant to FIN 46R (see Note 2) and are
therefore eliminated in consolidation.
NOTE 12 - SUBSEQUENT EVENTS
Shelf Registration
- ------------------
In October 2004, we filed a shelf registration with the SEC providing for the
issuance of up to $400.0 million in common shares, preferred shares and debt
securities. This shelf registration has not yet been declared effective and we
have no current plans to draw upon it.
11
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 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: adverse changes in the real
estate markets; risk of default associated with the revenue bonds and other
securities held by us or our subsidiaries; interest rate fluctuations; our tax
treatment, the tax treatment of our subsidiaries and the tax treatment of our
investments; general and local economic and business conditions; and changes in
applicable laws and regulations. We caution you not to place undue reliance on
these forward-looking statements, which reflect our view only as of the date
hereof.
Factors Affecting Comparability
- -------------------------------
Our operating results for 2004 were impacted significantly by the November 2003
acquisition of RCC, an affiliated business that, until the date of acquisition,
had acted as an external manager for our Company and our subsidiaries. As a
result of the acquisition, we generate more taxable income and have assumed
numerous expenses that had previously been covered by fees paid to RCC. Further,
the issuance of a new class of subsidiary equity as part of the acquisition
requires us to apportion certain earnings and identify them as due to the
holders of that equity.
Additionally, the adoption of several accounting pronouncements has caused us to
reclassify certain liability and expense categories while not increasing the
actual amounts to be recorded, and has led to a significant increase in the
amount of assets and liabilities we record due to consolidation of numerous
investment partnerships (see Note 2 to the Condensed Consolidated Financial
Statements). This consolidation also results in the recognition of the operating
results of partnerships in which we have no equity interest, the elimination of
transactions between our businesses and those partnerships and the allocation of
their results to their partners.
Results of Operations
- ---------------------
QUARTER ENDED SEPTEMBER 30, 2004 VS. QUARTER ENDED SEPTEMBER 30, 2003
- ---------------------------------------------------------------------
The following is a summary of our operations for the three months ended
September 30, 2004 and 2003:
% of % of
(In thousands) 2004 Revenues 2003 Revenues % Change
--------- ---------- ---------- --------- ----------
Revenues $60,646 $35,848 69.2
Income before income taxes 11,740 19.4 15,226 42.5 (22.9)
Net income 12,274 20.2 15,915 44.4 (22.9)
Compared to 2003, the third quarter of 2004 benefited from a substantial
expansion of our core Portfolio Investing business, the addition of the equity
fund sponsorship portion of our Fund Management segment and the expansion of the
credit enhancement portion of that segment. In addition, revenues in 2004
include $4.5 million generated by VIEs that were not consolidated in 2003.
Offsetting the revenue gains is the elimination of $10.0 million of revenues
earned by our subsidiaries in transactions with VIEs we have consolidated
beginning April 1, 2004. Although the amounts are eliminated in consolidation,
the expenses recognized by the VIEs in connection with these transactions are
absorbed entirely by the partners of the VIEs; as such, the elimination in
consolidation has no impact on our net income.
Despite the revenue gains and the benefit of eliminating fees following the RCC
acquisition, the additional costs assumed following the acquisition (a large
part of which are non-cash amortization costs and income allocated to a new
class of subsidiary equity) led to a decline in net income.
12
REVENUES
Our revenues were as follows:
For the Three Months Ended September 30,
(In thousands) 2004 2003 % Change
------- ------- --------
Revenue bond interest income $33,027 $30,353 8.8
Fee income
Mortgage banking 3,321 3,171 4.7
Fund sponsorship 11,363 -- N/A
Credit enhancement 2,715 995 172.9
Other income 5,760 1,329 333.4
Revenues of consolidated VIEs 4,460 -- N/A
------- ------- -----
Total revenues $60,646 $35,848 69.2
======= ======= =====
The increase in revenue bond interest income is primarily due to the increased
investment base resulting from new bonds funded during later quarters of 2003
and during 2004. We funded $90.0 million of bonds at an average interest rate of
6.53% in the 2004 period as compared to fundings of $119.8 million at an average
interest rate of 6.62% in the same period in 2003. The weighted average level of
the bond portfolio in the quarter was $2.2 billion, an increase of 39.7% over
the same period in 2003. The average annual yield for the bond portfolio was
6.14% compared to 7.88% in the 2003 period. Offsetting these increases is the
elimination in consolidation of approximately $447,000 of revenue on bonds where
the debtor is a VIE that is now consolidated in our condensed financial
statements.
The increase in mortgage banking fees resulted from a 7.5% increase in mortgage
servicing fees partially offset by a slight decrease in origination fees due to
changes in the components of total originations. Loan originations amounted to
$113.2 million in the 2004 quarter as compared to $107.9 million in the same
period last year and the total serviced loan portfolio reached $4.2 billion
compared to $3.9 billion at September 30, 2003. Originations in the third
quarter are broken down as follows:
(In thousands) 2004 % of total 2003 % of total
--------- ---------- --------- ----------
Fannie Mae $ 36,456 32.2 $ 49,816 46.2
Freddie Mac 44,375 39.2 21,669 20.0
FHA (35) -- -- --
Assumptions 8,297 7.3 13,828 12.8
Conduit - Bank 24,150 21.3 22,624 21.0
--------- ---------- --------- ----------
Total $ 113,243 100.0 $ 107,937 100.0
========= ========== ========= ==========
The increase in fund sponsorship fees represents the fee income earned by RCC
which was not acquired until the fourth quarter of 2003. The reported amounts,
however, exclude $8.6 million of fees earned by RCC in transactions with
consolidated VIEs. On a pro forma basis, comparing the 2004 period (including
the revenues eliminated in consolidation) to the same pre-acquisition period in
2003, revenue in the Fund Management business increased 13% over the prior year
due to steady growth in the level of assets under management and an increase in
origination fees as a result of an increase in equity raised for fund
sponsorships. The increases were partially offset by a decrease in acquisition
fees, paid by third-party borrowers of the underlying revenue bonds, and from
other loan origination, due to a decrease in revenue bond acquisitions. Equity
raised for fund sponsorships in the quarter totaled $355.6 million compared to
$310.3 million in the third quarter of 2003. Revenue bond transactions we
arranged for our Company and others, for which we receive fee income, totaled
$133.7 million in the third quarter of 2004 compared to approximately $137.1
million of revenue bonds acquired in the third quarter of 2003.
The increase in credit enhancement fees relates to growth in the credit
enhancement business. In the third quarter of 2004, we completed one transaction
to guarantee tax benefits to investors, and continued to earn fees from two
transactions completed earlier in 2004 and three transactions completed in 2003.
13
Other income comprises:
For the Three Months Ended September 30,
(In thousands) 2004 2003 % Change
------ ------ --------
Capri loan interest $1,993 $ -- N/A
Other interest 1,365 686 99.0
Service fee 704 -- N/A
Other 1,698 643 164.1
------ ------ -------
Total other income $5,760 $1,329 333.4
====== ====== =======
The Capri loan interest relates to the Interim Loan we provided to CCLP in July
2004 (see Note 4). Service fee income represents income for services RCC
provides to affiliates, which became a part of our operations with the
acquisition of RCC in November 2003. The increase in other income is primarily
due to exit fees received within the Mortgage Banking business.
EXPENSES
Our expenses were as follows:
For the Three Months Ended September 30,
(In thousands) 2004 2003 % Change
------- ------- ---------
Interest expense $ 8,301 $ 5,928 40.0
Interest expense - preferred
shares of subsidiary 4,724 4,724 --
Salaries and benefits 13,474 3,196 321.6
General and administrative 12,775 4,477 185.3
Depreciation and amortization 7,864 2,242 250.8
Loss on impairment of revenue
bonds 610 1,758 (65.3)
Expenses of consolidated VIEs 18,180 -- N/A
------- ------- -------
Total expenses $65,928 $22,325 195.3
======= ======= =======
The increase in interest expense reflects the higher borrowing levels stemming
from our acquisition of RCC, additional investments in revenue bonds, our loan
to fund the interim loan to Capri Capital and LIHTC equity interests inherent in
the Fund Management business, which was not yet part of our Company in the third
quarter of 2003. In addition, our average borrowing rate increased to 3.0% as
compared to 2.4% in the 2003 period.
The increases in salaries and benefits, general and administrative and
depreciation and amortization all relate to the RCC acquisition in the fourth
quarter of 2003 and the resulting recognition of expenses due to the
internalization of management, as well as amortization of intangible assets
acquired. General and administrative expenses in the 2004 quarter also included
$5.6 million of costs relating to fund originations.
We did not record the expenses of consolidated VIEs prior to April 1, 2004. The
expenses are not controlled by us, nor do they represent any cash or non-cash
charges to be absorbed by us. The expenses of the VIEs are absorbed entirely by
the partners of the VIEs.
OTHER ITEMS
The income allocation to SCUs represents the proportionate share of income
attributable to holders of the new class of equity issued at the time of the RCC
acquisition in the fourth quarter of 2003. 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. The loss
allocation to partners of VIEs represents the full operating losses of
consolidated VIEs for the current period, none of which we have absorbed.
14
NINE MONTHS ENDED SEPTEMBER 30, 2004 VS. NINE MONTHS ENDED SEPTEMBER 30, 2003
- -----------------------------------------------------------------------------
The following is a summary of our operations for the nine months ended September
30, 2004 and 2003:
% of % of
(In thousands) 2004 Revenues 2003 Revenues % Change
---------------------------------------------------
Revenues $165,471 $100,977 63.9
Income before income taxes 33,257 20.1 48,569 48.1 (31.5)
Net income 44,857 27.1 52,022 51.5 (13.8)
The nine months of 2004 benefited from a substantial expansion of our core
Portfolio Investing business, the addition of the equity fund sponsorship
portion of our Fund Management segment and the expansion of the credit
enhancement portion of that segment. In addition, our mortgage banking segment
posted substantial growth in the first half of the year, and 2004 includes $7.3
million of revenues generated by VIEs that were not consolidated in 2003.
Offsetting these gains is the elimination of $20.8 million of revenues earned by
our subsidiaries in transactions with VIEs we have consolidated beginning April
1, 2004. Although the amounts are eliminated in consolidation, the expenses
recognized by the VIEs in connection with these transactions are absorbed
entirely by the partners of the VIEs; as such, the elimination in consolidation
has no impact on our net income.
Despite the revenue gains and the benefit of eliminating fees following the RCC
acquisition, the additional costs assumed following the acquisition (a large
part of which are non-cash amortization costs and income allocated to a new
class of subsidiary equity) led to a decline in net income.
REVENUES
Our revenues were as follows:
For the Nine Months Ended September 30,
(In thousands) 2004 2003 % Change
------------- ------------ ------------
Revenue bond interest income $ 97,365 $ 83,528 16.6
Fee income
Mortgage banking 11,124 9,711 14.6
Fund sponsorship 30,300 -- N/A
Credit enhancement 7,541 2,986 152.5
Other income 11,891 4,752 150.2
Revenues of consolidated VIEs 7,250 -- N/A
------------- ------------ ------------
Total revenues $165,471 $100,977 63.9
============= ============ ============
The increase in revenue bond interest income is primarily due to the increased
investment base resulting from new bonds funded during later quarters of 2003
and during 2004. We funded $239.9 million of bonds at an average interest rate
of 6.55% in the 2004 period as compared to fundings of $265.8 million at an
average interest rate of 6.37% in the same period in 2003. The weighted average
level of bond investments for the nine months of 2004 was $2.1 billion, an
increase of 33.8% over the same period in 2003. The average annual yield for the
bond portfolio was 6.22% compared to 7.14% in the 2003 period. Offsetting these
increases is the elimination in consolidation of approximately $694,000 of
revenue on bonds where the debtor is a VIE that is now consolidated in our
condensed financial statements.
15
The increase in mortgage banking fees resulted from a 28.9% increase in
origination fees with solid increases in Freddie Mac and FHA originations,
mostly in the first six months of 2004. Opportunistic pricing on a significant
transaction in the second quarter of 2004 and a change in the components of
total originations resulted in a less significant change in the mortgage banking
fees as compared to the growth in loan originations. Loan originations amounted
to $664.3 million in 2004 as compared to $407.8 million in the same period last
year. Originations for the first nine months are broken down as follows:
(In thousands) 2004 % of total 2003 % of total
------------------------------------------------------------
Fannie Mae $235,731 35.5 $201,194 49.3
Freddie Mac 282,006 42.4 59,254 14.6
FHA 27,714 4.2 -- --
Assumptions 40,253 6.1 41,728 10.2
Conduit - Bank 78,588 11.8 101,161 24.8
Other -- -- 4,500 1.1
------------------------------------------------------------
Total $664,292 100.0 $407,837 100.0
============================================================
In addition, servicing fees increased 7.9% over the first nine months of 2003
due to the 7.7% growth in the servicing portfolio.
The increase in fund sponsorship fees represents the fee income earned by RCC,
which was not acquired until the fourth quarter of 2003. The reported amounts,
however, exclude $18.2 million of fees earned by RCC in transactions with
consolidated VIEs. On a pro forma basis, comparing the 2004 period (including
the revenues eliminated in consolidation) to the same pre-acquisition period in
2003, revenue in the Fund Management business increased 16% over the prior year
due to steady growth in the level of assets under management and an increase in
origination and acquisition fees as a result of an increase in equity raised for
fund sponsorships. The increases were partially offset by a decrease in
acquisition fees paid by third party borrowers of the underlying revenue bonds
and from other loan originations. This is due to a decrease of approximately 15%
in the average percentage acquisition fee charged, despite an increase in
acquired revenue bonds and loan originations. Equity raised for fund
sponsorships for the first nine months of 2004 totaled $754.5 million compared
to $563.5 million for the first nine months of 2003. Debt and debt securities
acquired, mostly revenue bonds transactions we arranged for our Company and
others, totaled $354.5 million for the first nine months of 2004 compared to
$304.7 million for the first nine months of 2003. Of the debt acquired for the
first nine months of 2004, $32.9 million has not been funded as of September 30,
2004.
The increase in credit enhancement income relates to growth in the credit
enhancement business. For the nine months of 2004, we completed three
transactions to guarantee tax benefits to investors, and continued to earn fees
from three transactions completed in 2003.
Other income comprises:
For the Nine Months Ended September 30,
(In thousands) 2004 2003 % Change
------------- ------------ ------------
Capri loan interest $ 1,993 $ -- N/A
Other interest 3,375 2,342 44.1
Service fee 4,516 -- N/A
Other 2,007 2,410 (16.7)
------------- ------------ ------------
Total other income $11,891 $ 4,752 150.2
============= ============ ============
The Capri loan interest relates to the Interim Loan we provided to CCLP in July
2004 (see Note 4). Service fee income represents income for services RCC
provides to affiliates, which became a part of our operations with the
acquisition of RCC in November 2003.
16
EXPENSES
Our expenses were as follows:
For the Nine Months Ended September 30,
(In thousands) 2004 2003 % Change
------------- ------------ ------------
Interest expense $ 22,424 $16,613 35.0
Interest expense - preferred
shares of subsidiary 14,173 4,724 200.0
Salaries and benefits 40,406 8,521 374.2
General and administrative 30,830 12,141 153.9
Depreciation and amortization 22,553 6,844 229.5
Loss of impairment of revenue
bonds 610 1,758 (65.3)
Expenses of consolidated VIEs 33,350 -- N/A
------------- ------------ ------------
Total expenses $164,346 $50,601 224.8
============= ============ ============
The increase in interest expense reflects the higher borrowing levels stemming
from our acquisition of RCC, additional investments in revenue bonds, our loan
to fund the interim loan to Capri Capital and LIHTC equity interests inherent in
the Fund Management business, which was not yet part of our Company as of
September 30, 2003. In addition, our average borrowing rate increased to 2.6% as
compared to 2.4% in the 2003 period.
The amount reported as interest expense on preferred shares of subsidiary
represent dividends on our preferred shares subject to mandatory redemption,
which had been reported as an allocation of income outside of operating earnings
in the first half of 2003.
The increases in salaries and benefits, general and administrative and
depreciation and amortization all relate to the RCC acquisition in the fourth
quarter of 2003 and the resulting recognition of expenses due to the
internalization of management, as well as amortization of intangible assets
acquired. General and administrative expenses for the nine months of 2004 also
include $10.8 million of costs relating to fund originations.
We did not record the expenses of consolidated VIEs prior to April 1, 2004. The
expenses are not controlled by us, nor do they represent any cash or non-cash
charges to be absorbed by us. The expenses of the VIEs are absorbed entirely by
the partners of the VIEs.
OTHER ITEMS
Gains on sales of loans increased approximately 88.6% for the nine months ended
September 30, 2004 versus the same period in 2003, due to the higher level of
mortgage originations in 2004. The income allocation to SCUs represents the
proportionate share of income attributable to holders of the new class of equity
issued at the time of the RCC acquisition in the fourth quarter of 2003.
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. The loss allocation to partners of VIEs
represents the full operating losses of consolidated VIEs for the current
period, none of which we have absorbed.
Income Taxes
- ------------
We have corporate subsidiaries that are subject to income taxes. We provide for
income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 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. Our effective tax rate will vary from period to period as the
composition of our earnings changes and due to the normal transactional nature
of much of our taxable business.
Liquidity and Capital Resources
- -------------------------------
We meet our long term liquidity needs using primarily two sources of capital,
debt and various types of equity offerings. We believe that our financing
capacity and cash flow from current operations are adequate to meet our current
and projected liquidity requirements. We fund our business (including
investments and acquisitions) primarily with cash provided by operations,
securitization of investments and equity offerings by some of our subsidiaries.
Additionally, we have entered into bridge loans and revolving warehouse
facilities:
17
o $100.0 million, used for mortgage banking needs, which is renewable
annually.
o $75.0 million, used to fund mortgage loans and investments in revenue
bonds on a short term basis, which matures March 31, 2005, with a
built in accordion feature allowing up to a $25.0 million increase and
a term of two years, and a one year extension at our option.
o $85.0 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 29, 2005, with a one year
extension at our option.
o $85.0 million, used to provide the interim loan to CCLP, which bears
interest at a rate of LIBOR plus 1.65% and matures in July 2005.
o $40.0 million, established in connection with the PW Funding
acquisition, which expires December 31, 2006 and bears interest at a
rate of LIBOR plus 2.25%.
As of September 30, 2004, we had approximately $208.3 million available to
borrow under these debt facilities without exceeding limits imposed by debt
covenants and our trust agreement.
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.
The net change in cash and cash equivalents during the first nine months of 2004
was lower than the increase in the comparable 2003 period, primarily due to
increased investing outflows. Operating cash flows were higher in the 2004
period by a margin of $26.0 million, benefited by a higher level of earnings
exclusive of non-cash expenses and the timing of payments in operating liability
accounts. The increase in investing outflows resulted from our Interim Loan to
Capri Capital and heightened activity in advance of fund sponsorships. The
higher level of financing inflows in the 2004 period related to equity
issuances, which were used to repay debt and finance the increased investing
activity.
During November 2004, distributions of approximately $23.7 million ($.41 per
share) will be paid to holders of common and Convertible CRA Shares, which were
declared in September 2004.
Management currently expects to pay approximately $6.4 million in the fourth
quarter of 2004 in connection with put and call options, thereby acquiring the
13% of PW Funding that we do not currently own.
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.
In October 2004, we filed a shelf registration with the SEC providing for the
issuance of up to $400.0 million in common shares, preferred shares and debt
securities. This shelf registration has not yet been declared effective and we
have no current plans to draw upon it.
Commitments, Contingencies and Off Balance Sheet Arrangements
- -------------------------------------------------------------
The following table reflects our maximum exposure and carrying amount as of
September 30, 2004 for guarantees we and our subsidiaries have entered into:
Maximum Carrying
(In thousands) Exposure Amount
- -------------------------------- ------------ ------------
Payment guarantees $ 4,533 $ --
Completion guarantees 24,538 --
Operating deficit guarantees 949 --
Recapture guarantees 53,426 --
Replacement reserve 1,454 --
CMC credit enhancement 19,000 --
LIHTC guarantees 398,562 14,730
------------ ------------
$502,462 $14,730
============ ============
18
CONTRACTUAL OBLIGATIONS
The following table provides our commitments as of September 30, 2004 to make
future payments under our debt agreements and other contractual obligations.
Payments due by Period
--------------------------------------------------------------
Less than More than
(In thousands) Total 1 year 1-3 years 3-5 years 5 years
---------- ---------- ---------- ---------- ----------
Notes payable $ 176,737 $ 154,926 $ 5,452 $ 16,359 $--
Notes payable of consolidated VIEs (1) 474,914 88,152 271,744 22,486 92,532
Operating lease obligations 5,028 840 2,710 1,333 145
Unfunded loan commitments 176,421 119,376 57,045 -- --
Floating rate securitization 873,663 873,663 -- -- --
Fixed rate securitization 100,000 100,000 -- -- --
---------- ---------- ---------- ---------- ----------
Total $1,806,763 $1,336,957 $ 336,951 $ 40,178 $ 92,677
========== ========== ========== ========== ==========
(1) Of the notes payable of consolidated VIEs, $401.9 million is guaranteed by
the limited partners of the investment funds. Per partnership agreements the
limited partners are also obligated to pay the principal and interest on the
notes. The remaining balance of $73.0 million is collateralized with the
underlying properties of the consolidated operating partnerships.
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 variablerate 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 Bond Market Association ("BMA")
municipal swap index and are re-set weekly or every 35 days. In addition, we
have floating rate debt related to our acquisition financing and our warehouse
facilities. Other long-term sources of capital, such as our Cumulative Preferred
Shares, carry a fixed dividend rate and, as such, are not impacted by changes in
market interest rates.
With the exception of $50.0 million of debt hedged via an interest rate swap
agreement and the $100.0 million fixed rate securitization, 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 $10.0 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.
19
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 September 30, 2004 value of approximately $2.1 billion to approximately $1.9
billion. A 1% decline in interest rates would increase the value of the
September 30, 2004 portfolio to approximately $2.2 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), as of the end of the period covered by this report. Based on
such evaluation, such officers have concluded that, as of the end of such
period, our disclosure controls and procedures are effective.
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
significant changes in our internal control over financial reporting during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
20
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. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.6 Third Amended and Restated Bylaws, dated September 15, 2004
(filed herewith).
31.1 Chief Executive Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer and Chief Financial Officer certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following 8-K reports were filed or furnished, as noted in
the applicable Form 8-K, for the quarter ended September 30,
2004.
Current report on Form 8-K relating to a press release we issued
announcing that our subsidiary, CM Investor LLC, had provided a
$72.0 million interim loan to Capri Capital Limited Partnership
and committed to make an additional $12.0 million advance, dated
July 19, 2004.
Current report on Form 8-K relating to a press release we issued
reporting our second quarter financial results, dated August 5,
2004.
21
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: November 4, 2004 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee and Chief Executive Officer
Date: November 4, 2004 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee, Chief Financial Officer and
Chief Operating Officer
Exhibit 10.6
CHARTERMAC
THIRD AMENDED AND RESTATED BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Trust shall be located
at such place as the Board of Trustees may designate in its sole discretion.
Section 2. ADDITIONAL OFFICES. The Trust may have additional offices at such
places as the Board of Trustees may from time to time determine in its sole
discretion or the business of the Trust may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE. All meetings of Shareholders shall be held at the principal
office of the Trust or at such other place within the United States as shall be
stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the Shareholders for the
election of Managing Trustees whose terms have expired and the transaction of
any business within the powers of the Trust shall be held on a date and at the
time set by the Board of Trustees during the month of June in each year.
Section 3. SPECIAL MEETINGS. Special meetings of the Shareholders (or of
Shareholders holding Shares of any class or series having a separate class or
series vote on any matter pursuant to the Trust Agreement or applicable law) may
be called by the Board of Trustees pursuant to a resolution adopted by a
majority of the whole Board of Trustees, including a majority of the Independent
Trustees. Special meetings of Shareholders shall also be called by the Board of
Trustees upon the written request of the holders of Shares entitled to cast not
less than 10% of all the votes entitled to be cast at such meeting. Such request
shall briefly state the purpose of such meeting and the matters proposed to be
acted on at such meeting.
Section 4. NOTICE. Not less than 10 nor more than 90 days before each meeting of
Shareholders, the Board of Trustees shall give to each Shareholder entitled to
vote at such meeting and to each Shareholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time and
place of the meeting and, in the case of a special meeting or as otherwise may
be required by any statute, stating briefly the purpose for which the meeting is
called, either by mail or by presenting it to such Shareholder personally or by
leaving it at the Shareholder's residence or usual place of business. If mailed,
such notice shall be deemed to be given when deposited in the United States mail
addressed to the Shareholder at the Shareholder's post office address as it
appears on the records of the Trust, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Trust may be transacted at an
annual meeting of Shareholders without being specifically designated in the
notice, except such business as is required by any statute to be stated in such
notice. No business shall be transacted at a special meeting of Shareholders
except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of Shareholders, the chairman of the
Board of Trustees, if there is one, shall conduct the meeting or, in the case of
vacancy in office or absence of the chairman of the Board of Trustees, the
following officers of the Trust: the president and the vice presidents in their
order of rank and seniority, and a Person appointed by the chairman shall act as
secretary.
Section 7. QUORUM. At any meeting of Shareholders, the presence in person or by
proxy of Shareholders entitled to cast a majority of all the votes entitled to
be cast at such meeting shall constitute a quorum; provided, however, this
section shall not affect any requirement under any statute, the Trust Agreement
or these Bylaws regarding the vote necessary for the adoption of any measure.
If, however, such quorum shall not be present at any meeting of the
Shareholders, the Shareholders entitled to vote at such meeting, present in
person or by proxy, shall have the power to adjourn the meeting from time to
time to a date not more than 120 days after the original record date without
notice other than announcement at the meeting. At such adjourned meeting at
which a quorum shall be present, any business may be transacted which might have
been transacted at the meeting as originally notified. If the adjournment is for
more than 120 days, or if after the adjournment a new record date is fixed for
the adjourned meeting, notice of the adjourned meeting shall be given to each
Shareholder of record entitled to vote at the meeting.
The Shareholders present at a meeting which has been duly called and convened
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Shareholders to leave less than a quorum.
Section 8. VOTING. A plurality of all the votes entitled to be cast, and
actually cast, at a meeting of Shareholders duly called and at which a quorum is
present shall be sufficient to elect a Managing Trustee. Each Share may be voted
for as many individuals as there are Managing Trustees to be elected and for
whose election the Share is entitled to be voted. A majority of the votes cast
at a meeting of Shareholders duly called and at which a quorum is present shall
be sufficient to approve any other matter which may properly come before the
meeting, unless a different vote is required by statute, the Trust Agreement or
these Bylaws. Unless otherwise provided in the Trust Agreement, each outstanding
Share, regardless of class, shall be entitled to one vote on each matter
submitted to a vote at any meeting of Shareholders.
Section 9. PROXIES. A Shareholder may cast the votes entitled to be cast by the
Shares owned of record by such Shareholder either in person or by proxy executed
in writing or transmitted by telephone (whether orally or otherwise), telegram,
cablegram or means of electronic transmission by the Shareholder or by the
Shareholder's duly authorized attorney in fact. Such proxy shall be filed with
the Board of Trustees before or at the time of the meeting. No proxy shall be
valid after 11 months from the date of its execution, unless otherwise provided
in the proxy. A proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A Shareholder may revoke any proxy that is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or by delivering a proxy in accordance
with applicable law bearing a later date to the Board of Trustees.
Section 10, VOTING OF SHARES BY CERTAIN HOLDERS. Shares of the Trust registered
in the name of a corporation, partnership, trust or other Entity, if entitled to
be voted, may be voted by the president or a vice president, a general partner
or trustee thereof, as the case may be, or a proxy appointed by any of the
foregoing individuals, unless some other Person who has been appointed to vote
such stock pursuant to a bylaw or a resolution of the governing body of such
corporation, partnership, trust or other Entity or agreement governing the
organization of such other Entity presents a certified copy of such bylaw,
resolution or agreement, in which case such Person may vote such stock. Any
director or other fiduciary may vote stock registered in his name as such
fiduciary, either in person or by proxy.
Shares of the Trust directly or indirectly owned by it shall not be voted at any
meeting and shall not be counted in determining the total number of outstanding
Shares entitled to be voted at any given time, unless they are held by it in a
fiduciary capacity, in which case they may be voted and shall be counted in
determining the total number of outstanding Shares at any given time.
The Board of Trustees may adopt by resolution a procedure by which a Shareholder
may certify in writing to the Trust that any Shares registered in the name of
the Shareholder are held for the account of a specified Person other than the
Shareholder. The resolution shall set forth the class of Shareholders who may
make the certification, the purpose for which the certification may be made, the
form of certification and the information to be contained in it; if the
certification is with respect to a record date or closing of the Share transfer
books, the time after the record date or closing of the Share transfer books
within which the certification must be received by the Trust; and any other
provisions with respect to the procedure which the Board of Trustees considers
necessary or desirable. On receipt of such certification, the Person specified
in the certification shall be regarded as, for the purposes set forth in the
certification, the Shareholder of record of the specified Shares in place of the
Shareholder who makes the certification.
Section 11. INSPECTORS. At any meeting of Shareholders, the chairman of the
meeting may appoint one or more Persons as inspectors for such meeting. Such
inspectors shall ascertain and report the number of Shares represented at the
meeting based upon their determination of the validity and effect of proxies,
count all votes, report the results and perform such other acts as are proper to
conduct the election and voting with impartiality and fairness to all the
Shareholders.
Each report of an inspector shall be in writing and signed by such inspector or
by a majority of them if there is more than one inspector acting at such
meeting. If there is more than one inspector, the report of a majority shall be
the report of the inspectors. The report of the inspector or inspectors on the
number of Shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
Section 12 NOMINATIONS AND SHAREHOLDER BUSINESS.
(a) ANNUAL MEETINGS OF SHAREHOLDERS.
(1) Subject to paragraph (c) of this Section 12, nominations of
Persons for election as a Managing Trustee to the Board
of Trustees and the proposal of business to be considered by the
Shareholders may be made at an annual meeting of Shareholders (i)
pursuant to the Trust's notice of meeting, (ii) by or at the
direction of a majority of the Board of Trustees or (iii) by any
Shareholder of the Trust who was a Shareholder of record both at
the time of giving of notice provided for in this Section 12(a)
and at the time of the annual meeting, who is entitled to vote at
the meeting and who complied with the notice procedures set forth
in this Section 12(a).
(2) For nominations or other business to be properly brought before
an annual meeting of Shareholders by a Shareholder pursuant to
clause (iii) of paragraph (a)(1) of this Section 12, the
Shareholder must have given timely notice thereof in writing to
the Board of Trustees. To be timely, a Shareholder's notice shall
be delivered to the Board of Trustees at the principal executive
offices of the Trust not less than 60 days nor more than 90 days
prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of
the annual meeting is advanced by more than 30 days or delayed by
more than 60 days from such anniversary date or if the Trust has
not previously held an annual meeting, notice by the Shareholder
to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of
business on the later of the 60th day prior to such annual
meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. Such
Shareholder's notice shall set forth (i) as to each Person whom
the Shareholder proposes to nominate for election or reelection
as a Managing Trustee all information relating to such Person
that is required to be disclosed in solicitations of proxies for
election of Managing Trustees, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT") (including such Person's
written consent to being named in the proxy statement as a
nominee and to serving as a Managing Trustee if elected); (ii) as
to any other business that the Shareholder proposes to bring
before the meeting, a brief description of the business desired
to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such
business of such Shareholder and of the beneficial owner, if any,
on whose behalf the proposal is made; and (iii) as to the
Shareholder giving the notice and the beneficial owner, if any,
on whose behalf the nomination or proposal is made, (x) the name
and address of such Shareholder, as they appear on the Trust's
books, and of such beneficial owner and (y) the number of Shares
of each class of beneficial interests of the Trust which are
owned beneficially and of record by such Shareholder and such
beneficial owner. Notwithstanding the foregoing provisions, the
Board of Trustees shall have the right, pursuant to Regulation
14A under the Exchange Act, to reject any Shareholder proposal or
nomination raised.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 12 to the contrary, in the event that the
number of Managing Trustees to be elected to the Board of
Trustees is increased and there is no public announcement naming
all of the nominees for Managing Trustee or specifying the size
of the increased Board of Trustees made by the Trust at least 70
days prior to the first anniversary of the preceding year's
annual meeting, a Shareholder's notice required by this Section
12(a) shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it
shall be delivered to the Board of Trustees at the principal
office of the Trust not later than the close of business on the
tenth day following the day on which such public announcement is
first made by the Trust.
(b) SPECIAL MEETINGS OF SHAREHOLDERS. Only such business shall be
conducted at a special meeting of Shareholders as shall have been
brought before the meeting pursuant to the Trust's notice of meeting.
Subject to paragraph (c) of this Section 12, nominations of Persons
for election to the Board of Trustees may be made at a special meeting
of Shareholders at which Managing Trustees are to be elected (i)
pursuant to the Trust's notice of meeting, (ii) by or at the direction
of the Board of Trustees or (iii) provided that the Board of Trustees
has determined that Managing Trustees shall be elected at such special
meeting, by any Shareholder of the Trust who is a Shareholder of
record both at the time of giving of notice provided for in this
Section 12(b) and at the time of the special meeting, who is entitled
to vote at the meeting and who complied with the notice procedures set
forth in this Section 12(b). Subject to paragraph (c) of this Section
12, in the event the Trust calls a special meeting of Shareholders for
the purpose of electing one or more Managing Trustees to the Board of
Trustees, any such Shareholder may nominate a Person or Persons (as
the case may be) for election to such position as specified in the
Trust's notice of meeting, if the Shareholder's notice containing the
information required by paragraph (a)(2) of this Section 12 shall be
delivered to the Board of Trustees at the principal office of the
Trust not earlier than the 90th day prior to such special meeting and
not later than the close of business on the later of the 60th day
prior to such special meeting or the tenth day following the day on
which public announcement is first made of the date of the special
meeting and of the nominees proposed by the Board of Trustees to be
elected at such meeting.
(c) SPECIAL NOMINATION PROVISIONS.
(1) NOMINATION OF THE INDEPENDENT TRUSTEES. Notwithstanding anything
herein to the contrary, the Independent Trustees nominated by the
Board of Trustees shall be nominated by the Nominating Committee
of the Board of Trustees, which nominations shall be subject to
the approval of two-thirds of the Board of Trustees. All Managing
Trustees shall have the right to recommend to the Nominating
Committee for its consideration their choices for the Independent
Trustee nominees.
(2) NOMINATION OF THE NON-INDEPENDENT TRUSTEES. Subject to the
provisions of the Trust Agreement (including, without limitation,
any Certificate of Designation attached thereto), non-Independent
Trustees nominated by the Board of Trustees shall be nominated by
the Nominating Committee of the Board of Trustees, which
nominations shall be subject to the approval of a majority of the
Board of Trustees. All Managing Trustees shall have the right to
recommend to the Nominating Committee for its consideration their
choices for the non-Independent Trustee nominees.
(d) GENERAL
(1) Only such Persons who are nominated in accordance with the
procedures set forth in this Section 12 shall be eligible to
serve as Managing Trustees and only such business shall be
conducted at a meeting of Shareholders as shall have been brought
before the meeting in accordance with the procedures set forth in
this Section 12. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made in accordance
with the procedures set forth in this Section 12 and, if any
proposed nomination or business is not in compliance with this
Section 12, to declare that such defective nomination or proposal
be disregarded.
(2) "Public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or
comparable news service or in a document publicly filed by the
Trust with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a
Shareholder shall also comply with all applicable requirements of
state law and of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this Section
12. Nothing in this Section 12 shall be deemed to affect any
rights of Shareholders to request inclusion of proposals or the
Trust's right to exclude such proposals in the Trust's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 13. VOTING BY BALLOT. Voting on any question or in any election may be
viva voce unless the chairman of the meeting shall order or any Shareholder
shall demand that voting be by ballot.
Section 14. CONDUCT OF MEETINGS. The Board of Trustees may adopt by resolution
such rules and regulations for the conduct of meeting of Shareholders as it
shall deem appropriate. Except to the extent inconsistent with such rules and
regulations as adopted by the Board of Trustees, the chairman of any meeting of
Shareholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are appropriate for the proper conduct of the meeting. Such rules,
regulations or procedures, whether adopted by the Board of Trustees or
prescribed by the chairman of the meeting, may include, without limitation, the
following:
(a) The establishment of an agenda or order of business for the meeting;
(b) Rules and procedures for maintaining order at the meeting and the
safety of those present;
(c) Limitations on attendance at or participation in the meeting of
Shareholders of record, their duly authorized and constituted proxies
or such other Persons as the chairman of the meeting shall determine;
(d) Restrictions on entry to the meeting after the time fixed for the
commencement thereof; and
(e) Limitations on the time allotted to questions or comments by
participants. Unless and to the extent determined by the Board of
Trustees or the chairman of the meeting, meetings of Shareholders
shall not be required to be held in accordance with the rules of
parliamentary procedure.
Section 15. ACTION BY CONSENT OF SHAREHOLDERS. Any action required or permitted
to be taken at any annual or special meeting of the Shareholders may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding Shares having not less than the minimum number of votes
that would be necessary to author