SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
----- -----
ITEM 1. FINANCIAL STATEMENTS
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Revenue bonds-at fair value $ 1,948,126 $ 1,871,009
Cash and cash equivalents 207,892 58,257
Cash and cash equivalents-restricted 25,582 26,636
Other investments 63,942 48,460
Mortgage servicing rights 34,305 33,351
Deferred costs - net of amortization of $16,565 and $13,463 58,958 58,408
Goodwill 207,582 214,744
Other intangible assets - net of amortization of $12,503 and $4,163 185,863 194,203
Loan to affiliate 3,122 --
Other assets 163,021 75,946
Investments in partnerships of consolidated VIEs 2,301,697 --
Other assets of consolidated VIEs 249,266 --
----------- -----------
Total assets $ 5,449,356 $ 2,581,014
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Financing arrangements $ 959,952 $ 900,008
Preferred shares of subsidiary (subject to mandatory
repurchase) 273,500 273,500
Notes payable 254,130 153,350
Accounts payable, accrued expenses and other liabilities 57,029 56,318
Deferred tax liability 41,674 60,370
Distributions payable 35,491 27,612
Notes payable and other liabilities of consolidated VIEs 1,119,860 --
----------- -----------
Total liabilities 2,741,636 1,471,158
----------- -----------
Minority interests in subsidiaries 278,339 292,199
----------- -----------
Limited partners' interests in consolidated VIEs 1,400,002 --
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Beneficial owners' equity - Convertible CRA Shareholders
(7,192 shares issued
and outstanding in 2004 and
8,180 issued and outstanding in 2003) 159,733 160,618
Preferred shares of subsidiary (not subject to mandatory
repurchase) 104,000 --
Beneficial owners' equity - special preferred voting shares 151 161
Beneficial owners' equity-other common shareholders
(100,000 shares authorized; 50,599 shares issued
and 50,516 outstanding in 2004 and 42,726
shares issued and 42,704 outstanding in 2003) 733,021 622,771
Deferred compensation (14,099) (19,385)
Treasury shares of beneficial interest at cost (83 shares in
2004 and 23 shares in 2003) (1,706) (378)
Accumulated other comprehensive income 48,279 53,870
----------- -----------
Total shareholders' equity 1,029,379 817,657
----------- -----------
Total liabilities and shareholders' equity $ 5,449,356 $ 2,581,014
=========== ===========
See accompanying notes to consolidated financial statements.
2
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Revenue bond interest income $ 32,487 $ 26,925 $ 64,338 $ 53,175
Fee income:
Mortgage banking fees 4,687 3,473 7,803 6,540
Fund management 11,070 -- 18,937 --
Guarantees 2,929 995 4,826 1,991
Other income 3,478 1,815 6,131 3,423
Revenues of consolidated VIEs 2,790 -- 2,790 --
--------- --------- --------- ---------
Total revenues 57,441 33,208 104,825 65,129
--------- --------- --------- ---------
Expenses:
Interest expense 6,444 4,887 11,965 8,703
Interest expense of consolidated VIEs 6,689 -- 6,689 --
Interest expense - distributions to
preferred shareholders of subsidiary 4,725 -- 9,449 --
Recurring fees - securitizations 1,067 1,019 2,132 1,982
Salaries and benefits 13,050 3,360 26,932 5,325
Interest rate derivatives (3,361) -- 26 --
General and administrative 11,706 2,575 18,055 7,664
Depreciation and amortization 7,796 2,915 14,689 4,602
Other expenses of consolidated VIEs 8,481 -- 8,481 --
--------- --------- --------- ---------
Total expenses 56,597 14,756 98,418 28,276
--------- --------- --------- ---------
Income 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 844 18,452 6,407 36,853
Equity in earnings of investments 565 555 1,120 1,110
Loss on investments held by consolidated
VIEs (48,677) -- (48,677) --
Gain on sale of loans 3,330 411 5,075 2,550
Gain (loss) on repayment of revenue bonds (38) 2,652 222 2,240
--------- --------- --------- ---------
Income (loss) before allocation of income
(loss) to preferred shareholders of subsidiary,
Special Common Units of subsidiary,
minority interests and limited partners of
consolidated VIEs (43,976) 22,070 (35,853) 42,753
Income allocated to preferred shareholders of
subsidiary (830) (4,725) (830) (9,449)
Income allocated to Special Common Units of
subsidiary (9,548) -- (13,253) --
(Income) loss allocated to minority interests (260) 67 (365) 39
Loss allocated to limited partners of
consolidated VIEs 71,818 -- 71,818 --
--------- --------- --------- ---------
Income before income taxes 17,204 17,412 21,517 33,343
Income tax benefit 7,228 788 11,066 2,764
--------- --------- --------- ---------
Net income $ 24,432 $ 18,200 $ 32,583 $ 36,107
========= ========= ========= =========
Allocation of net income to:
Special distribution to Manager $ -- $ 1,459 $ -- $ 2,870
========= ========= ========= =========
Manager $ -- $ 1 $ -- $ 3
========= ========= ========= =========
Common shareholders $ 20,924 $ 15,316 $ 27,847 $ 30,405
Convertible CRA shareholders 3,508 1,424 4,736 2,829
--------- --------- --------- ---------
Total for shareholders $ 24,432 $ 16,740 $ 32,583 $ 33,234
========= ========= ========= =========
Net income per share:
Basic $ 0.47 $ 0.37 $ 0.63 $ 0.74
========= ========= ========= =========
Diluted $ 0.47 $ 0.37 $ 0.62 $ 0.74
========= ========= ========= =========
Weighted average shares outstanding:
Basic 52,017 45,090 51,805 45,054
========= ========= ========= =========
Diluted 52,359 45,130 52,193 45,090
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
3
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Six Months Ended
June 30,
--------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,583 $ 36,107
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on repayment of revenue bonds (222) (2,240)
Depreciation and amortization 16,032 5,790
Income allocated to preferred shareholders of subsidiary 10,279 9,449
Income allocated to Special Common Units of subsidiary 13,253 --
Income (loss) allocated to minority interests 365 (39)
Non-cash compensation expense 6,031 676
Deferred taxes (10,699) (2,020)
Changes in operating assets and liabilities:
Mortgage servicing rights (4,571) (1,737)
Loans to affiliates (3,122) --
Other assets (73,698) 49,826
Accounts payable, accrued expenses and other liabilities (9,865) (16,500)
----------- -----------
Net cash (used in) provided by operating activities (23,634) 79,312
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from revenue bonds and notes 47,484 75,071
Revenue bond acquisitions and fundings (164,208) (146,036)
Investments in partnerships (14,695) (12,100)
Other investments (543) --
Increase in goodwill (835) (64)
Decrease (increase) in cash and cash equivalents - restricted 1,054 (346)
----------- -----------
Net cash used in investing activities (131,743) (83,475)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (38,063) (31,600)
Distributions to preferred shareholders of subsidiary (9,449) (9,449)
Distributions to Special Common Unit holders (11,787) --
Proceeds from financing arrangements 127,569 109,421
Repayments of financing arrangements (67,624) (591)
Increase (decrease) in notes payable 100,548 (5,447)
Issuance of common shares 105,541 --
Issuance of preferred shares 101,920 --
Retirement of special preferred voting shares (10) --
Proceeds from stock options exercised -- 1,530
Treasury stock purchases (1,328) --
Deferred financing costs (2,305) (6,469)
----------- -----------
Net cash provided by financing activities 305,012 57,395
----------- -----------
Net increase in cash and cash equivalents 149,635 53,232
Cash and cash equivalents at the beginning of the year 58,257 55,227
----------- -----------
Cash and cash equivalents at the end of the period $ 207,892 $ 108,459
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 13,320 $ 8,394
=========== ===========
Taxes paid $ 482 $ 135
=========== ===========
See accompanying notes to consolidated financial statements.
4
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Six Months Ended
June 30,
--------------------------
2004 2003
----------- -----------
SUPPLEMENTAL NON-CASH INFORMATION:
Supplemental disclosure of non cash activities relating to adoption of
FIN 46R:
Decrease in revenue bonds $ 31,101
Increase in investments in partnerships of consolidated VIEs (2,301,697)
Increase in other assets of consolidated VIEs (249,266)
Increase in notes payable and other liabilities of consolidated
VIEs 1,119,860
Increase in limited partners' interests of consolidated VIEs 1,400,002
-----------
$ --
===========
Conversion of Special Common Units to Common Shares $ 17,789
===========
See accompanying notes to consolidated financial statements.
5
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CharterMac, its
wholly owned and majority owned subsidiaries and entities consolidated pursuant
to the adoption of 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.
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 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.
We had not applied FIN 46 to any entities; 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 the 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 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 ("VIEs") 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 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 financial
statements are as of March 31, 2004, the latest date available.
6
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
NOTE 3 - REVENUE BONDS
The following table summarizes our revenue bond portfolio:
(In thousands) June 30, December 31,
2004 2003
----------- -----------
Unamortized cost basis $ 1,931,255 $ 1,814,180
Gross unrealized gains 65,467 65,394
Gross unrealized losses (13,897) (8,565)
----------- -----------
Subtotal/fair value 1,982,825 1,871,009
Less: eliminations (1) (34,699) --
----------- -----------
Total fair value per balance sheet $ 1,948,126 $ 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 June 30, 2004, is summarized in the table below:
Less than 12 Months
(Dollars in thousands) 12 Months or More Total
--------- --------- ---------
Number of bonds 63 10 73
Fair value $ 307,195 $ 52,626 $ 359,821
Gross unrealized loss $ (13,132) $ (765) $ (13,897)
All these debt securities are performing as expected. The unrealized losses
related to these revenue bonds are due solely to changes in interest rates. We
have the intent and ability to hold these bonds to maturity and have therefore
concluded that these impairments are temporary.
The following summarizes the maturity dates of our revenue bonds, all of which
have fixed interest rates:
Weighted
Outstanding Average
(In thousands) Bond Amount Fair Value Interest Rate
----------- ----------- -------------
Due in less than one year $ 166 $ 344 7.65%
Due between one and
five years 34,944 32,517 7.02%
Due after five years 1,908,308 1,949,964 6.81%
----------- ----------- -------------
Total / Weighted
Average 1,943,418 1,982,825 6.82%
=============
Less: eliminations (1) (31,101) (34,699)
----------- -----------
Total per balance sheet $ 1,912,317 $ 1,948,126
=========== ===========
(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.
The following table summarizes our acquisition activity and additional fundings
to previously acquired revenue bonds for the six months ended June 30, 2004.
Weighted Weighted Number of
Aggregate Average Average Revenue
Purchase Construction Permanent Bonds
(In thousands) Face Amount Price Interest Rate Interest Rate Acquired
------------ ------------ ------------- ------------- -------------
Construction/rehabilitation $164,208 $164,208 5.38% 6.34% 20
properties
7
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
During the six months ended June 30, 2004, six revenue bonds were repaid with
net proceeds of approximately $26.5 million. The bonds had a net carrying value
of approximately $26.3 million, resulting in a gain of approximately $222,000.
At June 30, 2004, $1.87 billion of revenue bonds were pledged as collateral for
our borrowing facilities. Two of these bonds, aggregating approximately $25.8
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:
June 30, December 31,
(In thousands) 2004 2003
------------- -------------
Investment to acquire equity interests $38,914 $24,644
Investment in properties under development 2,419 1,994
Investment in ARCap 19,054 19,054
Other investments 3,555 2,768
------------- -------------
$63,942 $48,460
============= =============
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 -- -- -- -- 835
Tax effect of conversion of --
SCUs to common shares -- -- -- -- (7,997)
(237)
Amortization expense (8,103) -- - (8,340) --
-------------- -------------- -------------- ------------- ------------
Net balance at June 30, 2004 $175,261 $ 8,639 $ 1,963 $185,863 $207,582
============== ============== ============== ============= ============
Amortization expense for the
six months ended June 30, 2004 $ 8,103 $ -- $ 237 $ 8,340 $ --
============== ============== ============== ============= ============
Estimated amortization expense $ 16,206 $ -- $ 474 $ 16,680 $ --
per year for next five years
============== ============== ============== ============= ============
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.
8
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS
Following are the expenses and the special distributions paid or payable to
related parties. 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 Six Months Ended
June 30, June 30,
--------------------------- ------------------------------
(In thousands) 2004 2003 2004 2003
----------- ------------ ------------- -------------
Special distribution/investment
management fee $ -- $ 1,539 $ -- $ 3,022
Bond servicing fees -- 3,651 -- 4,666
Expense reimbursement -- 246 -- 479
Shared services agreement 917 -- 1,936 --
----------- ------------ ------------- -------------
$ 917 $ 5,436 $ 1,936 $ 8,167
=========== ============ ============= =============
In addition, Related Management Company ("RMC"), 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. These fees totaled
approximately $661,000 and are included in other expenses of consolidated VIEs
for the three and six months ended June 30, 2004.
A subsidiary of RCC collects asset management and incentive management fees from
American Mortgage Acceptance Company ("AMAC"), an affiliated publicly-traded
real estate investment trust. These fees totaled $808,000 for the six months
ended June 30, 2004.
In June 2004, we entered into a revolving credit facility (the "Revolving
Facility") with AMAC. The Revolving Facility will provide up to $20.0 million
and bear interest at LIBOR plus 300 basis points. The Revolving Facility is for
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 June 30, 2004, we have advanced
approximately $3.1 million through the Revolving Facility.
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 perfectly effective to date. The effectiveness of the other swaps is
measured using the hypothetical swap method until they go into effect in 2005.
During the first quarter of 2004, we incurred an expense for the ineffective
portion of these swaps, which due to interest rate fluctuations, completely
reversed during the second quarter of 2004. For the six months ended June 30,
2004, we recorded approximately $26,000 of expense related to an interest rate
cap.
NOTE 8 - YIELD GUARANTEE AND FUND SPONSORSHIP TRANSACTIONS
Yield Guarantees
- ----------------
In April 2004, we completed a transaction to guarantee tax benefits to an
investor in a partnership designed to generate LIHTCs. Our subsidiary,
CharterMac Corporation ("CM Corp."), has agreed to back-up the guarantee of a
primary guarantor of an agreed upon internal rate of return to the investor in
Related Capital Guaranteed Corporate Partners II, L.P. - Series D (a fund
managed by RCC), for which we will receive guarantee fees totaling approximately
$6.5 million in three installments, as well as acquisition, partnership
management and asset management fees amounting to $7.4 million. We recorded a
liability of approximately $2.8 million in deferred income relating to this
guarantee.
In June 2004, we completed a transaction to guarantee tax benefits to an
investor in a partnership designed to generate Georgia State LIHTCs. CM Corp.
has agreed to back-up the guarantee of a primary guarantor of an agreed upon
9
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
internal rate of return to the investor in Related Capital Guaranteed Corporate
Partners II, L.P - Series E (a fund managed by RCC), for which we will receive
guarantee fees totaling approximately $1.1 million in three installments, as
well as acquisition, partnership management and asset management fees amounting
to approximately $883,000. We recorded a liability of approximately $658,000 in
deferred income relating to this guarantee.
Fund Sponsorship
- ----------------
In May 2004, RCC completed the sponsorship of Related Corporate Partners XXVI,
L.P. ("RCP 26"), a $225 million multi-investor corporate tax credit fund. RCP
26, which is comprised of LIHTC equity investments in more than 30 properties in
15 states across the country, was sold to seven institutional investors, of
which the majority are Fortune 500 companies.
NOTE 9 - EQUITY
Equity Conversions
- ------------------
In January 2004, at a holder's request, we converted 992,688 special common
units to an equivalent number of common shares.
In February and April 2004, at shareholders' requests, we converted 771,080 and
216,450 of Convertible CRA Shares to an equivalent number of common shares.
Preferred Shares of a Subsidiary
- --------------------------------
On May 14, 2004, our subsidiary CharterMac Equity Issuer Trust ("Equity Issuer")
completed a $104.0 million preferred equity offering to institutional investors.
Securities sold were as follows:
o 60 of its 5.75% Series A-4-1 Perpetual Preferred Shares with an
aggregate liquidation amount of $30 million;
o 58 of its 6.00% Series A-4-2 Perpetual Preferred Shares with an
aggregate liquidation amount of $29 million;
o 50 of its 6.00% Series B-3-1 Subordinate Perpetual Preferred Shares
with an aggregate liquidation amount of $25 million and
o 40 of its 6.30% Series B-3-2 Subordinate Perpetual Preferred Shares
with an aggregate liquidation amount of $20 million.
Total net proceeds of the offering, after deducting underwriter discounts and
commissions, were $101.9 million. The underwriter for this offering was Merrill
Lynch & Co.
These preferred shares have most of the same characteristics of previously
outstanding preferred shares of Equity Issuer, with the exception that they are
not subject to mandatory redemption. As such, they are classified as equity on
our balance sheet, with their dividends classified as preferred dividends on the
income statement. The previously issued preferred shares, due to the mandatory
redemption feature, are classified on our balance sheet as liabilities with
their dividends classified as interest expense.
Common Share Offering
- ---------------------
On June 30, 2004, we completed a common share offering, whereby we sold 5.75
million shares (including an over-allotment of 750,000 shares) to the public at
a price of $19.27 per share. This offering resulted in net proceeds of
approximately $105.5 million after deducting underwriting discounts and
commissions. The underwriters for this offering were Wachovia Securities, UBS
Securities LLC, RBC Capital Markets Corporation and Legg Mason Wood Walker.
Treasury Stock Repurchased
- --------------------------
During the six months ended June 30, 2004, we increased the number of treasury
shares by 59,798 for a total cost of approximately $1.3 million, in conjunction
with the tax withholdings associated with stock based compensation awards to
employees.
10
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
NOTE 10 - COMPREHENSIVE INCOME
Comprehensive income for the first six months ended June 30, 2004 and 2003, was
as follows:
(In thousands) 2004 2003
-------- --------
Net income $ 32,583 $ 36,107
Net unrealized gain on interest rate derivatives 3,266 1,040
Net unrealized gain on revenue bonds:
Unrealized gain (loss) during the period (8,635) 17,682
Reclassification adjustment for net gain included in net income (222) (2,240)
-------- --------
Comprehensive income $ 26,992 $ 52,589
======== ========
NOTE 11 - EARNINGS PER SHARE
Three Months Ended June 30, 2004 Six Months Ended June 30, 2004
-------------------------------- ----------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
-------------------------------- ----------------------------------
Basic EPS $24,432 52,017 $ .47 $32,583 51,805 $ .63
======= =========
Effect of dilutive securities -- 342 -- 388
------- ------ ------- ------
Diluted EPS $24,432 52,359 $ .47 $32,583 52,193 $ .62
======= ====== ======= ======= ====== =========
Three Months Ended June 30, 2003 Six Months Ended June 30, 2003
-------------------------------- ----------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
-------------------------------- ----------------------------------
Basic EPS $16,740 45,090 $ .37 $33,234 45,054 $ .74
======= =========
Effect of dilutive securities -- 40 -- 36
------- ------ ------- ------
Diluted EPS $16,740 45,130 $ .37 $33,234 45,090 $ .74
======= ====== ======= ======= ====== =========
The number of shares includes common and Convertible CRA Shares as the
Convertible CRA Shares have the same economic benefits as common shares.
NOTE 12 - BUSINESS SEGMENTS
We operate in three business segments, which include Portfolio Investing,
Mortgage Banking, and Fund Management.
o The Portfolio Investing segment consists primarily of subsidiaries
holding investments in revenue bonds producing primarily tax-exempt
interest income.
o 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.
o The Fund Management segment includes two business lines. The first
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 an affiliate. The
second business line encompasses credit enhancement for properties
underlying fund investments and yield guarantee to fund investors.
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 services 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.
11
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
The following table provides more information regarding our segments:
Three Months Ended June 30, 2004 Three Months Ended June 30, 2003
----------------------------------------------- -----------------------------------------------
Portfolio Mortgage Fund Portfolio Mortgage Fund
(In thousands) Investing Banking Management Total Investing Banking Management Total
----------------------------------------------- -----------------------------------------------
Total revenues $ 33,101 $ 6,657 $ 17,683 $ 57,441 $ 26,928 $ 5,285 $ 995 $ 33,208
=============================================== ===============================================
Net income $ 21,173 $ 1,731 $ 1,528 $ 24,432 $ 17,123 $ 366 $ 711 $ 18,200
=============================================== ===============================================
Six Months Ended June 30, 2004 Six Months Ended June 30, 2003
----------------------------------------------- -----------------------------------------------
Portfolio Mortgage Fund Portfolio Mortgage Fund
Investing Banking Management Total Investing Banking Management Total
----------------------------------------------- -----------------------------------------------
Total revenues $ 65,685 $ 10,537 $ 28,603 $ 104,825 $ 54,534 $ 8,604 $ 1,991 $ 65,129
=============================================== ===============================================
Net income (loss) $ 37,429 $ 2,431 $ (7,277) $ 32,583 $ 34,614 $ (214) $ 1,707 $ 36,107
=============================================== ===============================================
Total assets as of June
30 $2,322,106 $176,407 $2,950,843 $5,449,356 $1,881,843 $75,058 $ 1,927 $1,958,828
=============================================== ===============================================
Assets as of June 30 of
consolidated VIEs included in
total assets (see Note 2) $ (34,699) $ -- $2,550,963 $2,516,264
===============================================
NOTE 13 - SUBSEQUENT EVENTS
New Revenue Bond Acquisitions
- -----------------------------
In July 2004, we have advanced additional funds to one revenue bond which was
previously acquired totaling approximately $2.5 million.
Capri Capital Loan
- ------------------
On July 16, 2004, CM Investor LLC ("CM Investor"), one of our subsidiaries,
provided two interim loans totaling $84 million ("Interim Loans") to
Chicago-based Capri Capital Limited Partnership ("CCLP"), both of which bear
interest at a rate of 11.5% and mature on or before December 31, 2004. Pending
the required regulatory and agency approval, the completion of due diligence and
the negotiation and execution of additional documents and agreements with CCLP.
We anticipate that the loan will be the first step in CM Investor's subsequent
acquisition of 100% of CCLP's mortgage banking affiliate, Capri Capital Finance,
and the formation of a strategic alliance with Capri Capital Advisors, CCLP's
pension fund advisory affiliate.
We anticipate that the Interim Loans will be repaid in full and that CM Investor
would then make two new loans in the aggregate principal amount of $90 million,
one of which would give CM Investor the right to acquire 100% of Capri Capital
Finance 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 on or after
August 1, 2005, but no later than June 30, 2006. The acquisition of 100% of
Capri Capital Finance and the acquisition of a 49% equity interest in Capri
Capital Advisors are both subject to certain approvals, including agency
approval for the acquisition of Capri Capital Finance. We have signed a letter
of intent with respect to the subsequent transactions; however, definitive
agreements have yet to be signed, and there can be no assurance that the
subsequent transactions will occur.
CM Corp. has funded the Interim Loans through a bridge loan from Fleet National
Bank, a subsidiary of Bank of America Corporation, which bears interest at a
rate of LIBOR plus 1.65% and matures in 12 months. At the time of closing, the
weighted average interest rate on the notes was 3.15%
If CM Investor ultimately acquires both the 100% ownership interest in Capri
Capital Finance and the 49% interest in Capri Capital Advisors, pursuant to
these arrangements, the total purchase price will be based on the operating
performance of the businesses.
LIHTC Guarantee
- ---------------
In July 2004, we completed a transaction to guarantee tax benefits to an
investor in a partnership designed to generate Georgia State LIHTCs. CM Corp.
has agreed to back-up the guarantee of a primary guarantor of an agreed upon
internal rate of return to the investor in Related Capital 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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Statements
- --------------------------
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are not historical facts, but rather our
beliefs and expectations 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 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 limited partners.
Results of Operations
- ---------------------
QUARTER ENDED JUNE 30, 2004 VS. QUARTER ENDED JUNE 30, 2003
- -----------------------------------------------------------
The following is a summary of our operations for the three months ended June 30,
2004 and 2003:
% of % of
2004 Revenues 2003 Revenues % Change
---------------------------------------------------
Revenues $57,441 $33,208 73.0
Income before income taxes 17,204 30.0 17,412 52.4 (1.2)
Net income 24,432 42.5 18,200 54.8 34.2
Compared to 2003, the second 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. These revenue gains drove an
increase in net income, although the increase was partially offset by the net
increase in costs of the Fund Management business in the current year results
due to the RCC acquisition. In addition, non-cash income related to interest
rate derivatives is recognized in the current period (which is a reversal of
expense recognized in the first quarter of 2004), while no such instruments were
in place in 2003 (see Note 7 to the Consolidated Financial Statements).
Offsetting these gains is the elimination of $10.8 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 limited partners of the VIEs; as such, the elimination in
consolidation has no impact on our net income.
13
REVENUES
Our revenues were as follows:
For the Three Months Ended June 30,
(In thousands) 2004 2003 % Change
-------- -------- --------
Revenue bond interest income $32,487 $26,925 20.7
Fee income
Mortgage banking fees 4,687 3,473 35.0
Fund management fees 11,070 -- N/A
Guarantee fees 2,929 995 194.4
Other income 3,478 1,815 91.6
Revenues of consolidated VIEs 2,790 -- N/A
------- ------- -----
Total revenues $57,441 $33,208 73.0
======= ======= =====
The increase in revenue bond interest income is primarily due to new bonds
acquired during later quarters of 2003 and during 2004. We acquired $73.1
million of bonds at an average yield of 6.0% in the 2004 period as compared to
acquisitions of $141.3 million at an average yield of 6.7% in the same period in
2003. The weighted average level of bond investments in the quarter was $1,886
million, an increase of 25.0% over the same period in 2003. The average annual
yield for the bond portfolio was 6.94% compared to 7.14% in the 2003 period.
Offsetting these increases is the elimination in consolidation of approximately
$247,000 of revenue on bonds where the debtor is a VIE that is now consolidated
in our financial statements.
The increase in mortgage banking fees resulted from an 85% increase in
origination fees, with solid increases in origination activity under Freddie Mac
and FHA programs. Loan originations amounted to $418.1 million in the 2004
quarter as compared to $171.7 million in the same period last year and the total
serviced loan portfolio reached $4.3 billion compared to $3.9 billion at June
30, 2003. Originations in the second quarter are broken down as follows:
2004 % of total 2003 % of total
-------- ---------- -------- ----------
Fannie Mae $121,264 29.0 $ 76,263 44.4
Freddie Mac 229,131 54.8 9,015 5.3
FHA 27,749 6.6 -- --
Assumptions 6,983 1.7 10,764 6.3
Conduit - Bank 32,934 7.9 71,838 41.8
Other -- -- 3,800 2.2
-------- ----- -------- -----
Total $418,061 100.0 $171,680 100.0
======== ===== ======== =====
In addition, servicing fees increased 7.4% over 2003 due to the growth in the
servicing portfolio.
The increase in Fund Management fees represents the fee income earned by RCC
which was not acquired until the fourth quarter of 2003. The reported amounts,
however, exclude $9.6 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 37% 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, due to a
decrease in revenue bond acquisitions. Equity raised for fund sponsorships in
the quarter totaled $370 million compared to $170 million in the second quarter
of 2003. Revenue bonds acquired by us, totaled in excess of $70 million in the
second quarter of 2004 compared to revenue bonds acquired in excess of $140
million in the second quarter of 2003.
The increase in guarantee fee income relates to acceleration of the credit
enhancement business. In the second quarter of 2004, we completed two
transactions to guarantee tax benefits to investors, and continued to earn fees
from three transactions completed in 2003.
14
EXPENSES
Our expenses were as follows:
For the Three Months Ended June 30,
(In thousands) 2004 2003 % Change
-------- -------- --------
Interest expense $ 6,444 $ 4,887 31.9
Interest expense on preferred
shares of subsidiary 4,725 -- N/A
Recurring fees - securitizations 1,067 1,019 4.7
Salaries and benefits 13,050 3,360 288.4
Interest rate derivatives (3,361) -- N/A
General and administrative 11,706 2,575 354.6
Depreciation and amortization 7,796 2,915 167.4
Expenses of consolidated VIEs 15,170 -- N/A
-------- -------- -----
Total expenses $ 56,597 $ 14,756 283.5
======== ======== =====
The increase in interest expense reflects the higher borrowing levels stemming
from our acquisition of RCC, additional investments in revenue bonds and the
short term investments to acquire equity interests inherent in the Fund
Management fund sponsorship business, which was not yet part of our Company in
the second quarter of 2003. The increase was partially offset by a decline in
the average borrowing rate to 2.4% as compared to 2.7% in the 2003 period.
The amount reported as interest expense on preferred shares of subsidiary
represents dividends on our preferred shares subject to mandatory redemption,
which had previously been reported as an allocation of income outside of
operating earnings.
Despite a 23.0% increase in the average balance of financing arrangements in the
second quarter of 2004 over the prior year period, securitization fees increased
only 4.7% because of more favorable terms due to a lower proportionate share of
financing arrangements generating recurring fees.
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 new
ownership structure, as well as amortization of intangible assets acquired.
General and administrative expenses in the 2004 quarter also included $5.0
million of recoverable costs relating to originations.
See Note 7 to the Consolidated Financial Statements for information regarding
the expense related to interest rate derivatives.
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 limited partners of the VIEs.
OTHER ITEMS
Gains on sales of loans increased for the three months ended June 30, 2004
compared to the second quarter of 2003, due to the higher level of originations
in 2004. The income allocation to SCUs represents distributions payable to
holders of the new class of equity issued at the time of the RCC acquisition in
the fourth quarter of 2003.
SIX MONTHS ENDED JUNE 30, 2004 VS. SIX MONTHS ENDED JUNE 30, 2003
- -----------------------------------------------------------------
The following is a summary of our operations for the six months ended June 30,
2004 and 2003:
% of % of
2004 Revenues 2003 Revenues % Change
-----------------------------------------------------
Revenues $104,825 $65,129 60.9
Income before income taxes 21,517 20.5 33,343 51.2 (35.5)
Net income 32,583 31.1 36,107 55.4 (9.8)
The first half 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. Despite these gains, net income declined
primarily due to the costs of the Fund Management business in the current year
results, whereby newly incorporated expenses exceeded newly incorporated
revenues and the benefit of fees eliminated by the new ownership structure.
15
Offsetting these gains is the elimination of $10.8 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 limited partners of the VIEs; as such, the elimination in
consolidation has no impact on our net income.
REVENUES
Our revenues were as follows:
For the Six Months Ended June 30,
(In thousands) 2004 2003 % Change
-------- -------- --------
Revenue bond interest income $ 64,338 $ 53,175 21.0
Fee income
Mortgage banking fees 7,803 6,540 19.3
Fund management fees 18,937 -- N/A
Guarantee fees 4,826 1,991 142.4
Other income 6,131 3,423 79.1
Revenues of consolidated VIEs 2,790 -- N/A
-------- -------- -----
Total revenues $104,825 $ 65,129 60.9
======== ======== =====
The increase in revenue bond interest income is primarily due to new bonds
acquired during later quarters of 2003 and during 2004. We acquired $164.2
million of bonds at an average yield of 6.34% in the 2004 period as compared to
acquisitions of $141.3 million at an average yield of 6.70% in the same period
in 2003. The weighted average level of bond investments in the first half of
2004 was $1,912 million, an increase of 26.1% over the same period in 2003. The
average annual yield for the bond portfolio was 6.76% compared to 7.01% in the
2003 period. Offsetting these increases is the elimination in consolidation of
approximately $247,000 of revenue on bonds where the debtor is a VIE that is now
consolidated in our financial statements.
The increase in mortgage banking fees resulted from a 42% increase in
origination fees with solid increases in Freddie Mac and FHA originations. Loan
originations amounted to $551.0 million in 2004 as compared to $299.9 million in
the same period last year. Originations in the first six months are broken down
as follows:
(in thousands) 2004 % of total 2003 % of total
--------------------------------------------------------
Fannie Mae $199,275 36.2 $151,378 50.5
Freddie Mac 237,631 43.1 37,585 12.5
FHA 27,749 5.0 -- --
Assumptions 31,957 5.8 27,900 9.3
Conduit - Bank 54,437 9.9 78,538 26.2
Other -- -- 4,500 1.5
--------------------------------------------------------
Total $551,049 100.0 $299,901 100.0
========================================================
In addition, servicing fees increased 8% over the first half of 2003 due to the
9.4% growth in the servicing portfolio.
The increase in Fund Management fees represents the fee income earned by RCC,
which was not acquired until the fourth quarter of 2003. The reported amounts,
however, exclude $9.6 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 38% 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 and revenue bonds acquired by us. Equity raised for fund
sponsorships in first half of 2004 totaled $399 million compared to $253 million
in the first half of 2003. Debt and debt securities acquired, mostly revenue
bonds, by us and AMAC, which is managed by RCC, totaled $198 million in the
first half of 2004 compared to $168 million in the first half of 2003. Of the
debt acquired in the first half of 2004, $33.8 million has not been funded as of
June 30, 2004.
The increase in guarantee fee income relates to acceleration of the credit
enhancement business. In the first half of 2004, we completed two transactions
to guarantee tax benefits to investors, and continued to earn fees three from
transactions completed in 2003.
16
EXPENSES
Our expenses were as follows:
For the Six Months Ended June 30,
(In thousands) 2004 2003 % Change
------- ------- --------
Interest expense $11,965 $ 8,703 37.5
Interest expense on preferred shares of
subsidiary 9,449 -- N/A
Recurring fees - securitizations 2,132 1,982 7.6
Salaries and benefits 26,932 5,325 405.8
Interest rate derivatives 26 -- N/A
General and administrative 18,055 7,664 135.6
Depreciation and amortization 14,689 4,602 219.2
Expenses of consolidated VIEs 15,170 -- N/A
------- ------- -----
Total expenses $98,418 $28,276 248.1
======= ======= =====
The increase in interest expense reflects the higher borrowing levels stemming
from our acquisition of RCC, additional investments in revenue bonds and the
short term investments to acquire equity interests inherent in the Fund
Management fund sponsorship portion of the Fund Management segment, which was
not yet part of our Company in the first half of 2003. The increase was
partially offset by a decline in the average borrowing rate to 2.4% as compared
to 2.7% 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 previously been reported as an allocation of income outside of
operating earnings.
Despite a 23.0% increase in the average balance of financing arrangements in the
first half of 2004 over the prior year period, securitization fees increased
only 7.6% because of more favorable terms due to a lower proportionate share of
financing arrangements generating recurring fees.
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 new
ownership structure, as well as amortization of intangible assets acquired.
General and administrative expenses in the first half of 2004 also include $5.2
million of recoverable costs relating to 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 limited partners of the VIEs.
OTHER ITEMS
Gains on sales of loans increased approximately 99.0% for the six months ended
June 30, 2004 versus the same period in 2003, due to the higher level of
originations in 2004. The income allocation to SCUs represents distributions
payable to holders of the new class of equity issued at the time of the RCC
acquisition in the fourth quarter of 2003.
Income Taxes
- ------------
We are organized as a Delaware statutory trust and, for tax purposes, are
classified as a partnership. Much of our recurring income is tax-exempt. From
time to time we may sell or securitize various assets which may result in
capital gains and losses. This tax structure allows us to have the pass-through
income characteristics of a partnership for both taxable and tax-exempt income
while we do not pay tax at the partnership level. Instead, the distributive
share of our income, deductions and credits is reported to each shareholder for
inclusion on their respective income tax return. The tax-exempt income derived
from most of our revenue bonds remains tax-exempt as it is passed through to
shareholders. Any cash dividends received by us from subsidiaries, organized as
corporations, will be recorded as dividend income for tax purposes. For such
subsidiaries, created in 2001, there were no dividends distributed for tax
purposes to date.
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.
17
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 three revolving warehouse facilities:
o $100.0 million, used for mortgage banking needs, which is renewable
annually; a temporary increase to $200 million was secured through July
2004.
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 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, 2004, with a one year extension at our
option.
As of June 30, 2004, we had approximately $189.3 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 increase in cash and cash equivalents during the first half of 2004
exceeded the increase in the 2003 period primarily as a result of financing cash
flows, particularly issuances of common and preferred shares and increased
borrowings from credit facilities. The increased financing cash flows were
offset by higher investing outflows, most notably for revenue bond purchases.
The decline in operating cash flows resulted primarily from the increase in our
asset base resulting from the sharp increase in mortgage loan originations in
the latter part of the second quarter of 2004.
During August 2004, distributions of approximately $21.5 million ($.38 per
share) will be paid to holders of common and Convertible CRA Shares, which were
declared in June 2004.
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.
Commitments, Contingencies and Off Balance Sheet Arrangements
- -------------------------------------------------------------
Our annual report on Form 10-K for the year ended December 31, 2003 contains a
summary of the Company's guarantees and off-balance sheet arrangements. There
have been no material changes to these items since December 31, 2003.
The following table reflects our maximum exposure and carrying amount as of June
30, 2004 for guarantees we and our subsidiaries have entered into:
Maximum Carrying
(In thousands) Exposure Amount
- -------------------------------- --------- ---------
Payment guarantees $ 17,933 $ --
Completion guarantees 53,236 --
Operating deficit guarantees 614 --
CMC credit enhancement 19,000 --
LIHTC guarantees 321,000 6,662
--------- ---------
$ 411,783 $ 6,662
========= =========
18
CONTRACTUAL OBLIGATIONS
The following table provides our commitments as of June 30, 2004 to make future
payments under our debt agreements and other contractual obligations.
Payments due by Period
----------------------------------------------------
(In thousands) Less than 1 More than
Total year 1-3 years 3-5 years 5 years
-------- ----------- --------- --------- ---------
Notes payable $254,130 $209,908 $ 27,182 $ 17,040 $ --
Operating lease obligations 5,105 705 2,691 1,418 291
Unfunded loan commitments 169,840 87,470 82,370 -- --
Fixed rate securitization 100,000 -- 100,000 -- --
Employee contracts 5,000 2,000 3,000 -- --
-------- -------- -------- -------- --------
Total $534,075 $300,083 $215,243 $ 18,458 $ 291
======== ======== ======== ======== ========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest in certain financial instruments, primarily revenue bonds and other
bond related investments that are subject to various forms of market risk,
including real estate risk and 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.
REAL ESTATE RISK
- ----------------
We derive income by investing in revenue bonds secured by multifamily affordable
residential properties. Investing in such revenue bonds collateralized by such
properties subjects us to various types and degrees of risk that could adversely
affect the value of our assets and our ability to generate revenue. The factors
that may reduce our revenues, net income and cash available for distributions to
shareholders include the following:
o the property securing a revenue bond may not generate income sufficient
to meet its operating expenses and debt service on its related revenue
bond;
o economic conditions, either local, regional or national, may limit the
amount of rent that can be charged for rental units at the properties,
and may result in a reduction in timely rent payments or a reduction in
occupancy levels;
o occupancy and rent levels may be affected by construction of additional
housing units and national, regional and local politics, including
current or future rent stabilization and rent control laws and
agreements;
o federal LIHTC and city, state and federal housing subsidy or similar
programs which apply to many of the properties, could impose rent
limitations and adversely affect the ability to increase rents to
maintain the properties in proper condition during periods of rapid
inflation or declining market value of such properties;
o if a revenue bond defaults, the value of the property securing such
revenue bond (plus, for properties that have availed themselves of the
federal LIHTC, the value of such credit) may be less than the face
amount of such revenue bond.
Additionally, some of our income may come from additional interest received from
the participation of a portion of the cash flow, sale or refinancing proceeds on
underlying properties. The collection of such additional interest may decrease
in periods of economic slowdown due to lower cash flows or values available from
the properties. In a few instances, the revenue bonds are subordinated to the
claims of other senior interest and uncertainties may exist as to a borrower's
ability to meet principal and interest payments.
All of these conditions and events may increase the possibility that a property
owner may be unable to meet its obligations to us under its mortgage revenue
bond. This could affect our net income and cash available for distribution to
shareholders. We manage these risks through diligent and comprehensive
underwriting, asset management and ongoing monitoring of loan performance.
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
19
and political considerations and other factors beyond our control. Our exposure
to interest rate is twofold:
o the potential increase in interest expense on our variable rate debt; and
o the impact of interest rate on the value of our assets.
IMPACT ON EARNINGS
Our investments in revenue bonds generally bear interest at fixed rates, or pay
interest according to the cash flows of the underlying properties, which do not
fluctuate with changes in market interest rates.
In contrast, payments required under our floating rate securitization programs
vary based on market interest rates based on TBMA 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, 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 $11.6
million.
We manage this risk through the use of interest rate swaps, interest rate caps
and forward bond origination commitments, as described in the notes to our
financial statements.
IMPACT ON VALUATION OF ASSETS
A rising interest rate environment could reduce the demand for multifamily
tax-exempt and taxable financing, which could limit our ability to invest in
revenue bonds or to structure transactions. Conversely, falling interest rates
may prompt historical renters to become homebuyers, in turn potentially reducing
the demand for multifamily housing.
Changes in market interest rates would also impact the estimated fair value of
our portfolio of revenue bonds. We estimate the fair value for each revenue bond
as the present value of its expected cash flows, using a discount rate for
comparable tax-exempt investments. Therefore, as market interest rates for
tax-exempt investments increase, the estimated fair value of our revenue bonds
will generally decline, and a decline in interest rates would be expected to
result in an increase in their estimated fair values. For example, we estimate,
using the same methodology used to estimate the portfolio fair market value
under SFAS 115, that a 1% increase in market rates for tax-exempt investments
would decrease the estimated fair value of our portfolio of revenue bonds from
its June 30, 2004 value of approximately $2.0 billion to approximately $1.9
billion. A 1% decline in interest rates would increase the value of the June 30,
2004 portfolio to approximately $2.1 billion. Changes in the estimated fair
value of the revenue bonds do not impact our reported net income, earnings per
share, distributions or cash flows, but are reported as components of other
accumulated comprehensive income and affect reported shareholders' equity.
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
See Note 9 to our Consolidated Financial Statements regarding:
o an offering of preferred securities by one of our
subsidiaries for gross proceeds of approximately $104.0
million; and
o our offering of common shares for gross proceeds of
approximately $110.8 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A proxy and proxy statement soliciting the vote of our shareholders
for the annual meeting of shareholders were sent to shareholders on or
about April 30, 2004. Such meeting was held on June 10, 2004. Peter T.
Allen, Jeff T. Blau, Denise L. Kiley, Robert A. Meister and Andrew L.
Farkas were elected as trustees for three-year terms expiring in 2007.
Continuing to serve their current terms are the following trustees:
Stuart J. Boesky, Stephen M. Ross, Alan P. Hirmes, Thomas M. White,
Charles L. Edson, Marc D. Schnitzer, Jerome V. Halperin, Janice Cook
Roberts, Nathan Gantcher and Robert L. Loverd. The five individuals
elected, and the number of votes cast for and abstaining, with respect
to each of them, were as follows (no votes were cast "against"):
For Abstain
---------- ---------
Peter T. Allen
Common Shares 47,277,825 354,237
Restricted Common Shares 589,112 15,520
Special Preferred Voting Shares 13,592,915 1,486,186
Jeff T. Blau
Common Shares 41,144,077 487,985
Restricted Common Shares 589,112 15,520
Special Preferred Voting Shares 13,592,915 1,486,186
Andrew L. Farkas
Common Shares 41,228,031 404,031
Restricted Common Shares 589,112 15,520
Special Preferred Voting Shares 13,592,915 1,486,186
Denise L. Kiley
Common Shares 41,142,458 489,604
Restricted Common Shares 589,112 15,520
Special Preferred Voting Shares 13,592,915 1,486,186
Robert A. Meister
Common Shares 41,264,680 367,382
Restricted Common Shares 589,112 15,520
Special Preferred Voting Shares 13,592,915 1,486,186
ITEM 5. OTHER INFORMATION - None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1 Chief Executive Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
21
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 June 30, 2004.
Current report on Form 8-K relating to a press release we issued
reporting our first quarter financial results, dated May 6, 2004.
Current report on Form 8-K relating to the consent of our
independent auditors to the incorporation by reference in our
previously filed Registration Statements of the independent
auditors' report dated March 15, 2004, which was inadvertently
omitted from the exhibit index of our Annual Report on Form 10-K
for the year ended December 31, 2003, dated June 22, 2004.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHARTERMAC
(Registrant)
Date: August 5, 2004 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee and Chief Executive Officer
Date: August 5, 2004 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee, Chief Financial Officer and
Chief Operating Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending June 30, 2004 of CharterMac;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors or persons performing the equivalent
functions:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 5, 2004 By: /s/Stuart J. Boesky
-------------------
Stuart J. Boesky
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Alan P. Hirmes, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending June 30, 2004 of CharterMac;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors or persons performing the equivalent
functions:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 5, 2004 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Chief Financial Officer
Exhibit 32.1
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(UNITED STATES CODE, TITLE 18, CHAPTER 63, SECTION 1350)
ACCOMPANYING QUARTERLY REPORT ON FORM 10-Q OF
CHARTERMAC FOR THE QUARTER ENDED JUNE 30, 2004
In connection with the Quarterly Report on Form 10-Q of CharterMac for the
quarterly period ending June 30, 2004, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), Stuart J. Boesky, as Chief
Executive Officer of our Company, and Alan P. Hirmes, as Chief Financial Officer
of our Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of our Company.
By: /s/ Stuart J. Boesky By: /s/ Alan P. Hirmes
-------------------- ------------------
Stuart J. Boesky Alan P. Hirmes
Chief Executive Officer Chief Financial Officer
August 5, 2004 August 5, 2004