UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-4408
RESOURCE AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0654145
- ---------------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1845 WALNUT STREET, SUITE 1000
PHILADELPHIA, PA 19103
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-546-5005
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
--------------------------------------
Title of class
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(a) of the Act. Yes [ ] No [ X ]
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant, based on the closing price of such stock on the last business
day of the registrant's most recently completed second fiscal quarter (March 31,
2005) was approximately $512,845,000.
The number of outstanding shares of the registrant's common stock on December 1,
2005 was 18,060,825 shares.
DOCUMENTS INCORPORATED BY REFERENCE
[None]
EXPLANATORY NOTE -- AMENDMENT
This Form 10-K/A amends the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2005, which was originally filed on December 14, 2005
(the "Original Filing"). This Form 10-K/A includes the separate financial
statements of five entities that were deemed to be significant subsidiaries of
the Company pursuant to Regulation S-X, Subsection 210.1-02(w) and 210.3-09.
These financial statements are being filed within the timeframe as permitted by
Regulation S-X Subsection 210.3-09(b)(2).
In addition, the Company is filing two stock option grants as exhibits that had
been omitted in the Original Filing.
Except as described above, this Form 10-K/A does not amend, update or change the
financial statements or any other items or disclosures in the Original Filing.
RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K/A
Page
---------
PART I
Item 1: Business................................................................................ 3 - 8
Item 1A: Risk Factors............................................................................ 9 - 13
Item 1B: Unresolved Staff Comments............................................................... 13
Item 2: Properties.............................................................................. 13
Item 3: Legal Proceedings....................................................................... 14
Item 4: Submission of Matters to a Vote of Security Holders..................................... 14
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities................................................. 14 - 15
Item 6: Selected Financial Data................................................................. 16
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 17 - 40
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.............................. 41
Item 8: Financial Statements and Supplementary Data............................................. 42 - 85
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 86
Item 9A: Controls and Procedures................................................................. 86 - 87
Item 9B: Other Information....................................................................... 88
PART III
Item 10: Directors and Executive Officers of the Registrant...................................... 89 - 91
Item 11: Executive Compensation.................................................................. 92 - 95
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters........................................................... 96 - 97
Item 13: Certain Relationships and Related Transactions.......................................... 98 - 99
Item 14: Principal Accounting Fees and Services.................................................. 100
PART IV
Item 15: Exhibits, Financial Statement Schedules................................................. 101 - 102
SIGNATURES.................................................................................................... 103
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at September 30, 2005 and 2004
Consolidated Statements of Operations for the years ended
September 30, 2005, 2004 and 2003
Consolidated Statements of Comprehensive Income (Loss) for the
years ended September 30, 2005, 2004 and 2003
Consolidated Statements of Changes in Stockholders' Equity for
the years ended September 30, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended
September 30, 2005, 2004 and 2003
Notes to Consolidated Financial Statements - September 30, 2005
2. FINANCIAL STATEMENT SCHEDULES
Schedule III - Investments in Real Estate
Schedule IV - Investments in Mortgage Loans on Real Estate
Schedule - Significant Subsidiary Financials
a) Consolidated Financial Statements for Trapeza Funding, LLC
for the years ended December 31, 2005 and 2004 (unaudited)
b) Consolidated Financial Statements for Trapeza Funding, LLC
for the years ended December 31, 2004 and 2003 (unaudited)
c) Consolidated Financial Statements for Trapeza Funding II,
LLC for the years ended December 31, 2005 and 2004
(unaudited)
d) Consolidated Financial Statements for Trapeza Funding II,
LLC for the years ended December 31, 2004 and 2003
(unaudited)
e) Consolidated Financial Statements for Trapeza Funding III,
LLC for the years ended December 31, 2005 and 2004
(unaudited)
f) Consolidated Financial Statements for Trapeza Funding III,
LLC for the years ended December 31, 2004 and 2003
(unaudited)
g) Trapeza Capital Management, LLC Audited Financial Statements
for the years ended December 31, 2005 and 2004
h) Trapeza Management Group, LLC Audited Financial Statements
for the years ended December 31, 2005 and 2004
i) Trapeza Capital Management, LLC Financial Statements for
the year ended December 31, 2003 (unaudited)
Schedule a)
TRAPEZA FUNDING, LLC
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Years ended December 31, 2005 and 2004
Trapeza Funding, LLC
Consolidated Financial Statements
Years ended December 31, 2005 and 2004
Unaudited
CONTENTS
Consolidated Statements of Financial Condition...............................3
Consolidated Schedules of Investments........................................4
Consolidated Statements of Operations........................................6
Consolidated Statements of Changes in Members' Interests.....................7
Consolidated Statements of Cash Flows........................................8
Notes to Consolidated Financial Statements...................................9
2
Trapeza Funding, LLC
Consolidated Statements of Financial Condition
Unaudited
DECEMBER 31
2005 2004
--------------- ---------------
ASSETS
Investments in trust preferred securities, at fair value
(amortized cost $319,163,818 and $320,338,643) $ 323,519,767 $ 325,175,799
Cash and cash equivalents 4,086,160 3,519,814
Deferred debt issuance costs (net of accumulated amortization of
$2,218,100 and $1,498,584) 5,925,789 6,645,305
Interest receivable on trust preferred securities 4,029,310 3,199,650
Net interest receivable from swap counterparty 10,454 -
Investment in Trapeza Note I, LLC 8,893,125 7,551,747
Prepaid expenses 4,910 3,691
Other 1,248 11,386
--------------- ---------------
Total Assets $ 346,470,763 $ 346,107,392
=============== ===============
LIABILITIES AND MEMBERS' INTERESTS
Liabilities
Class A-1 Notes $ 160,129,324 $ 161,464,034
Class A-2 Notes 19,830,257 19,995,546
Class B-1 Notes 54,600,000 54,600,000
Class B-2 Notes 2,000,000 2,000,000
Class B-3 Notes 16,000,000 16,000,000
Class C-1 Notes 29,600,000 29,600,000
Class C-2 Notes 10,000,000 10,000,000
Class D Notes 16,408,511 16,500,000
Interest payable 1,493,826 1,057,666
Unrealized depreciation on swap agreements 43,540 250,153
Professional fees 95,346 89,196
Collateral management fees 80,995 81,370
Net interest payable to swap counterparty - 9,696
Trustee fees 11,546 11,592
Accrued expenses 41,250 41,250
--------------- ---------------
Total Liabilities 310,334,595 311,700,503
--------------- ---------------
Minority interest 35,472,597 34,057,776
Members' Interests 663,571 349,113
--------------- ---------------
Total Liabilities and Members' Interests $ 346,470,763 $ 346,107,392
=============== ===============
See accompanying notes to consolidated financial statements.
3
Trapeza Funding, LLC
Consolidated Schedules of Investments
Unaudited
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------------- ----------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(000) FAIR VALUE (000) FAIR VALUE
--------- ---------- --------- ----------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
BANKS (82.24% AND 81.89%)*
1st Source Capital Trust III, 6.95%, due 11/14/2032 (a) $ 10,000 $ 9,935,056 $ 10,000 $ 9,934,261
Access National Capital Trust I, 3 month libor + 4.125%, due 9/30/2032 (a) 4,000 3,981,653 4,000 3,981,089
Ambank Capital Trust I, 3 month libor + 3.625%, due 7/30/2032 (a) 8,000 7,941,800 8,000 7,940,849
Bank of Kentucky Capital Trust I, 3 month libor + 3.35%, due 11/14/2032 (a) 11,000 11,001,226 11,000 11,001,249
Banponce Trust I, 8.327%, due 2/1/2027 1,200 1,284,000 1,200 1,359,300
Colonial Capital II, 8.92%, due 1/15/2027 5,000 5,382,855 5,000 5,540,630
Community Bancshares Capital Trust III, 6 month libor + 3.625%, due 7/30/2032 (a) 5,000 4,856,866 5,000 4,854,533
Community Capital Trust I, 9.75%, due 1/31/2027 1,850 1,979,500 1,850 2,073,215
FBOP Capital Trust XII, 6 month libor + 3.625%, 7/30/2032 (a) 11,000 11,000,000 11,000 11,000,000
FCB/SC Capital Trust I, 8.25%, due 3/15/2028 (a) 2,000 2,028,133 2,000 2,213,298
First Indiana Capital Trust I, 6.92%, due 10/30/2032 (a) 2,000 1,998,350 2,000 1,998,330
First Group Capital Statutory Trust III, 3 month libor + 3.35%, due 11/15/2032 (a) 10,000 10,086,842 10,000 10,085,433
First Gothenburg Capital Trust I, 3 month libor + 3.35%, due 11/15/2032 (a) 4,000 3,943,027 4,000 3,942,006
Franklin Bank Capital Trust I, 3 month libor + 3.35%, due 11/14/2032 (a) 11,000 10,905,145 11,000 10,903,445
GB&T Bancshares Statutory Trust I, 3 month libor + 3.40%, due 10/30/2032 (a) 11,000 10,875,704 11,000 10,873,618
Hanmi Capital Trust II, 3 month libor + 2.90%, due 3/15/2034 (a) 6,479 6,479,000 6,479 6,479,000
Iberiabank Statutory Trust I, 3 month libor + 3.25%, due 11/15/2032 (a) 10,000 9,887,502 10,000 9,885,448
Industry Bancshares Capital Trust I, 6 month libor + 3.625%, due 7/30/2032 (a) 5,000 4,952,288 5,000 4,951,510
Local Financial Capital Trust II, 6 month libor + 3.625%, due 7/30/2032 (a) 10,000 9,858,773 10,000 9,856,471
Main Street Banks Statutory Trust I, 3 month libor + 3.25%, due 11/15/2032 (a) 5,000 4,943,690 5,000 4,942,683
MB Financial Capital Trust I, 8.60%, due 9/30/2032 (a) 5,000 5,000,000 5,000 5,000,000
MBNA Capital B, 3 month libor + 0.80%, due 2/1/2027 8,000 7,840,000 8,000 7,576,000
Merchants and Manufacturers Statutory Trust I, 3 month libor +3.35%, due
11/12/2032 (a) 8,000 7,924,046 8,000 7,922,681
Onbank Capital Trust I, 9.25%, due 2/1/2027 2,000 2,140,000 2,000 2,156,348
Pacific Mercantile Capital Trust I, 3 month libor + 3.75%, due 7/15/2032 (a) 5,000 4,977,136 5,000 4,976,409
PMB Capital Trust I, 6 month libor + 3.625%, due 8/22/2032 (a) 5,000 4,952,300 5,000 4,951,519
Progress Capital Trust III, 3 month libor + 3.35%, due 11/15/2032 (a) 6,000 5,951,483 6,000 5,950,643
Provident Capital Trust I, 8.60%, due 12/1/2026 7,500 8,025,000 7,500 7,892,565
Provident Trust I, 8.29%, due 4/15/2028 5,500 5,830,000 5,500 5,707,658
Reliance Capital Trust I, 8.17%, due 5/1/2028 (a) 1,000 1,002,875 1,000 1,043,914
Riverside Bancshares Statutory Trust I, 3 month libor + 3.45%, due 10/1/2032 (a) 10,000 9,886,970 10,000 9,885,084
Riverside Gulf Coast Capital Trust I, 3 month libor + 3.25%, due 7/29/2032 (a) 5,000 4,977,045 5,000 4,976,350
Sky Financial Capital Trust I, 9.34%, due 5/1/2030 (a) 3,500 3,678,539 3,500 3,811,161
South Financial Capital Trust II, 6 month libor + 3.625%, due 7/30/2032 (a) 11,000 10,895,033 11,000 10,893,323
Southcoast Capital Trust II, 3 month libor + 3.75%, due 5/3/2032 (a) 4,000 3,981,890 4,000 3,981,251
Sterling Bancshares Statutory Trust One, 3 month libor + 3.45%, due
8/30/2032 (a) 10,000 9,887,008 10,000 9,885,110
Texas Capital Bancshares Statutory Trust I, 3 month libor + 3.35%,
due 11/19/2032 (a) 10,000 9,887,501 10,000 9,885,448
UCBH Capital Trust II, 3 month libor + 3.45%, due 11/7/2032 (a) 11,000 11,000,000 11,000 11,000,000
Umpqua Statutory Trust II, 3 month libor + 3.35%, due 10/17/2032 (a) 11,000 10,863,250 11,000 10,860,947
Union State Capital Trust I, 9.58%, due 2/1/2027 (a) 1,000 1,075,618 1,000 1,135,699
VCBI Capital Trust II, 6 month libor + 3.40%, due 11/15/2032 (a) 3,000 2,971,500 3,000 2,970,994
----------- -----------
Total Banks (amortized cost $261,712,655 and $261,557,502) 266,068,604 266,279,472
----------- -----------
4
Trapeza Funding, LLC
Consolidated Schedules of Investments (continued)
Unaudited
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------------- ----------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(000) FAIR VALUE (000) FAIR VALUE
--------- ---------- --------- ----------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) * (CONTINUED)
THRIFTS (17.76% AND 18.11%)
BBC Capital Trust VI, 3 month libor + 3.35%, due 9/27/2032 (a) $ 10,000 $ 9,919,498 $10,000 $ 9,918,143
BankUnited Statutory Trust IV, 3 month libor + 3.40%, due 11/15/2032 (a) 11,000 10,876,086 11,000 10,873,881
Beal Financial Trust I, 6 month libor + 3.625%, due 7/30/2032 (a) 11,000 10,895,033 11,000 10,893,323
First Keystone Capital Trust I, 9.70%, due 8/15/2027 (a) 1,500 1,626,680 1,500 1,657,500
HFC Capital Trust IV, 6 month libor + 3.35%, due 11/15/2032 (a) 8,450 8,270,995 8,450 8,267,902
ITLA Capital Statutory Trust III, 6 month libor + 3.40%, due 10/30/2032 (a) 11,000 10,904,877 11,000 10,903,262
Matrix Bancorp Capital Trust V, 6 month libor + 3.625%, due 7/25/2032 (a) 5,000 4,957,994 5,000 4,957,316
WSFS Capital Trust I, 3 month libor + 2.50%, due 12/01/2028 - - 1,500 1,425,000
------------ ------------
Total Thrifts (amortized cost $57,451,163 and $58,781,141 ) 57,451,163 58,896,327
------------ ------------
Total Investments in Trust Preferred Securities (amortized cost
$319,163,818 and $320,338,643) $323,519,767 $325,175,799
============ ============
FAIR VALUE FAIR VALUE
---------- ----------
INTEREST RATE SWAP AGREEMENTS
Credit Suisse First Boston $ (43,540) $ (250,153)
------------ ------------
Total Interest Rate Swap Agreements $ (43,540) $ (250,153)
============ ============
*Amounts in parenthesis indicate percentage of investments in trust-preferred
securities.
(a) Private placement, illiquid securities, where amortized cost approximates
fair value.
See accompanying notes to consolidated financial statements.
5
Trapeza Funding, LLC
Consolidated Statements of Operations
Unaudited
YEAR ENDED DECEMBER 31,
2005 2004
------------ ------------
INVESTMENT INCOME
Interest $ 23,590,716 $ 18,139,801
Equity in earnings of Trapeza Note I, LLC 2,875,914 2,502,231
------------ ------------
TOTAL INVESTMENT INCOME 26,466,630 20,642,032
------------ ------------
EXPENSES
Interest 14,139,658 9,834,015
Collateral management fees 813,323 818,250
Amortization of deferred debt issuance costs 719,516 721,298
Professional fees 104,933 126,777
Trustee fees 124,448 126,115
Administration fee 64,085 67,452
Taxes 6,120 (769)
Other 193,895 251,848
------------ ------------
Total expenses 16,165,978 11,944,986
------------ ------------
NET INVESTMENT INCOME 10,300,652 8,697,046
------------ ------------
Net realized gain (loss) and unrealized appreciation (depreciation) on
investment transactions:
Net realized loss on investment transactions - (4,420,343)
Net unrealized appreciation (depreciation) on investments in
trust preferred securities (481,207) 6,535,336
Net unrealized appreciation on interest rate swap agreements 206,613 147,177
------------ ------------
Net realized gain (loss) and unrealized appreciation
(depreciation) on investment transactions (274,594) 2,262,170
------------ ------------
Net income before minority interest 10,026,058 10,959,216
Minority interest 8,137,839 8,926,324
------------ ------------
NET INCOME $ 1,888,219 $ 2,032,892
============ ============
See accompanying notes to consolidated financial statements.
6
Trapeza Funding, LLC
Consolidated Statements of Changes in Members' Interests
Years ended December 31, 2005 and 2004
Unaudited
Balance at January 1, 2004 $ (273,697)
Net income 2,032,892
Distributions to members (1,410,082)
-------------
Balance at December 31, 2004 349,113
Net income 1,888,219
Distributions to members (1,573,761)
-------------
Balance at December 31, 2005 $ 663,571
=============
See accompanying notes to consolidated financial statements.
7
Trapeza Funding, LLC
Consolidated Statements of Cash Flows
Unaudited
YEAR ENDED DECEMBER 31,
2005 2004
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,888,219 $ 2,032,892
Adjustments to reconcile net income to net cash and cash equivalents
provided by operating activities:
Amortization of deferred debt issuance costs 719,516 721,298
Accretion of discount of investments in trust preferred securities (325,175) (160,197)
Minority interest 8,137,839 8,926,324
Net realized loss on investment transactions 274,594 4,420,343
Net unrealized (appreciation) depreciation on investments - (6,682,513)
Net change in operating assets and liabilities:
Investment in trust preferred securities 1,500,000 -
Interest receivable on trust preferred securities (829,660) (401,123)
Investment in Trapeza Note I, LLC (1,341,378) (1,059,741)
Prepaid expenses (1,219) 46,427
Other 10,138 96,221
Warehouse facility payable - -
Interest payable 436,160 330,940
Professional fees 6,150 (13,168)
Collateral management fees (375) (3,422)
Net interest payable to swap counterparty (20,150) (16,026)
Trustee fees (46) 872
Accrued expenses - (36,250)
Minority interest (6,723,018) (6,054,153)
------------ -----------
Net cash and cash equivalents provided by operating activities 3,731,595 2,148,724
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes (1,591,488) -
Distributions to partners (1,573,761) (1,410,082)
------------ -----------
Net cash and cash equivalents used in financing activities (3,165,249) (1,410,082)
------------ -----------
Net increase in cash and cash equivalents 566,346 738,642
Cash and cash equivalents, beginning of year 3,519,814 2,781,172
------------ -----------
Cash and cash equivalents, end of year $ 4,086,160 $ 3,519,814
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 13,723,648 $ 9,509,517
============ ===========
See accompanying notes to consolidated financial statements.
8
Trapeza Funding, LLC
Notes to Unaudited Consolidated Financial Statements
December 31, 2005
1. ORGANIZATION AND PURPOSE
Trapeza Funding, LLC ("Funding"), was organized on March 25, 2002 as a Delaware
limited liability company. Funding commenced operations on June 1, 2002. Funding
was organized for the purpose of being the General Partner of Trapeza Partners
L.P. (the "Partnership"). Per the partnership agreement, the limited partners
have no right to remove the Funding at any time. Funding has complete and
exclusive control of the management of the business affairs of the Partnership.
The Partnership was organized on May 21, 2002 as a Delaware limited partnership.
The Partnership commenced operations on July 1, 2002. The Partnership was
organized for the purpose of investing in membership interests and other
securities to be issued by Trapeza CDO I, LLC ("Issuer I"), an affiliated
collateralized debt obligation, which was formed by Funding. In addition, the
Partnership also invested in Trapeza CDO II, LLC ("Issuer II"), an affiliated
collateralized debt obligation, which closed on March 11, 2003. On May 15, 2003,
Trapeza Note I, LLC ("Note I") was formed to issue Class BB fixed rate notes and
purchase 100% of the members' interests of Issuer II. In addition, the
Partnership's investment in Issuer II was transferred to Note I at this time.
The Partnership has an 11-year term, which Funding may extend on a year-to-year
basis.
All material intercompany transactions have been eliminated. Minority interest
reflects the 99.99% of partners' interest of the limited partners of the
Partnership. The consolidated entity is referred to as the "Company."
Funding and the Collateral Manager are owned equally by Financial Stocks, Inc.
("FSI") and Resource Financial Fund Management, Inc., a wholly owned subsidiary
of Resource America, Inc. ("REXI") (collectively, the "Owners"). FSI is a
Registered Investment Adviser under the Investment Advisers Act of 1940. REXI, a
publicly traded company, is a specialized asset management company that uses
industry specific expertise to generate and administer investment opportunities
for their own account and for outside investors in the financial fund
management, real estate and equipment leasing sectors. The Owners and certain
officers and directors of the Owners hold partnership interests of approximately
17% of the Partnership. Funding has complete and exclusive control of the
management of the business affairs of the Partnership.
Issuer I and II's objective is to purchase, acquire, own, hold, sell, endorse,
transfer, assign, pledge, finance, refinance, exchange, restructure, workout,
advance and collect funds pursuant to and otherwise deal with and exercise
rights of ownership with respect to the collateral of Issuer I and Issuer II,
including other securities or equity interests
9
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
1. ORGANIZATION AND PURPOSE (CONTINUED)
owned from time to time by Issuer I and Issuer II, all in accordance with the
terms of the indentures.
Trapeza Capital Management, LLC (the "Collateral Manager"), a Delaware limited
liability company, is responsible for supervising and directing the investment
of the collateral of Issuer I and Issuer II. Issuer I and Issuer II are charged
a collateral management fee by the Collateral Manager, who is affiliated with
Funding through common ownership.
The business and affairs of Funding are managed by a Board of Managers. The
Board of Managers has full, complete and exclusive authority, power and
discretion to manage and control the business affairs and properties of Funding,
to make all decisions regarding those matters and to perform any activities
customary or incident to the management of Funding's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Company in the preparation of its financial statements.
BASIS OF ACCOUNTING
The Company's accounting policies are in conformity with accounting principles
generally accepted in the United States. The Company maintains its financial
records in United States dollars. For financial reporting purposes, the Company
follows the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits with banks and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
INVESTMENT TRANSACTIONS
The Company records transactions on their trade dates. Realized gains and losses
on investments are determined on the specific identification basis for financial
accounting purposes. Interest is accrued as earned or incurred and includes the
amortization/accretion of premiums and discounts on debt securities.
10
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT VALUATION
Investments are carried at fair value. Securities for which market quotations
are not readily available are valued by procedures adopted by Funding. In
valuing investments in which market quotations are not readily available,
Funding utilizes data from a variety of different sources, taking into account
the characteristics of a security, any changes in the credit quality of the
securities in the portfolio, the overall movement of interest rates and other
factors which, in Funding's good faith and judgment, are relevant to the value
of a security. For exchange-traded securities, management will obtain current
market data and quotes from independent brokers.
The Company has invested a significant portion of the portfolio in private
placement, illiquid issues having no ready market. At December 31, 2005, these
securities aggregate $291,038,412 and have been valued in good faith by Funding
as described in the preceding paragraph. Because of the inherent uncertainty of
valuation, the fair values estimated by Funding may not necessarily represent
the amounts that could be realized from sales or other dispositions of
investments and the differences may be material.
CREDIT RISKS AND GENERAL LIQUIDITY CONSIDERATIONS
Investments in trust preferred securities are subject to credit, interest rate
and liquidity risks. Adverse changes in the financial condition of an issuer of
trust preferred securities or in general economic conditions or both may impair
the ability of the issuer to make payments of principal and interest. Adverse
changes in the financial condition of an issuer may affect the liquidity of the
market for an issuer's securities and may reduce the market price of such
securities. In addition, changes in general economic and regulatory conditions
may affect the liquidity of the market for trust preferred securities in general
and may reduce the values of some or all of the securities.
ALLOCATION OF PROFITS AND LOSSES
The Company allocates profits to the members in proportion to their respective
capital account balances until the cumulative profits for this current period
and all prior fiscal years are equal to the cumulative losses allocated;
thereafter, among the members in
11
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOCATION OF PROFITS AND LOSSES (CONTINUED)
proportion to their respective units. Losses shall be allocated to the members
in proportion to their respective capital account balances.
Funding's investment in the Partnership is accounted for based on its pro-rata
share of its investment in the Partnership. Profits and losses from
non-portfolio income are allocated to all members in proportion to their
allocable shares. Twenty percent (20%) of the cumulative net profits from
portfolio investments are allocated to Funding.
Non-portfolio income of the Partnership, consisting primarily of income earned
on short-term investments, is allocated to all limited partners of the
Partnership in proportion to their respective capital account balances prior to
the allocation of any other item.
Portfolio income of the Partnership, consisting primarily of interest income and
profits and losses from the sale of such investments, is allocated to all
partners of the Partnership in proportion to their respective contributed
capital of the Partnership in relation to total contributed capital, but 20% of
the cumulative net profits otherwise allocable to all partners of the
Partnership will be allocated to Funding, defined as the incentive allocation.
For the years ended December 31, 2005 and 2004, Funding received an incentive
allocation of $1,616,558 and $1,735,478, respectively.
TAXATION
The Company is treated as a partnership for Federal income tax purposes and,
therefore, no provision for federal income tax is recorded.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
12
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS
As of December 31, 2005, the Company has 300 membership units issued and
outstanding. No member shall be required to make any additional contributions
beyond their initial contribution. If the Board of Managers unanimously
determines that the Company requires additional funds, any member may, but is
not obligated to, advance such funds.
No member shall have the right to withdraw any of its capital contribution,
except upon dissolution and liquidation of the Company. For the years ended
December 31, 2005 and 2004, the Company made distributions of $1,573,761 and
$1,410,082, respectively, to the members.
In accordance with the partnership agreement, each partner has contributed a
specified amount of capital which is set forth in the partnership agreement. No
limited partner is required to contribute any capital in excess of its
commitment. As of August 13, 2003, all commitments of the Partnership were fully
funded.
A limited partner will not have the right to redeem its interest in the
Partnership. Funding, in its sole discretion, may redeem all or part of the
partnership interest of any limited partner, for an amount equal to the capital
account of the partnership interest being redeemed, if the limited partner
consents to such redemption and all redemptions in any year do not exceed five
percent of the aggregate allocable percentage of all limited partners.
Funding will cause the Partnership to distribute the lesser of (i) ninety
percent (90%) of cash available from profits and (ii) all cash then available to
the partnership less any reserves for partnership expenses or liabilities. All
other distributions will be at the discretion of Funding. Funding will determine
at its sole discretion the source of funds for all distributions. For the years
ended December 31, 2005 and 2004, the Partnership made distributions of
$6,435,312 and $5,793,210, respectively, to the partners.
4. ISSUER I
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $8,143,889 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is period ending with the distribution date occurring in November
2012, as defined in the indenture. Amortization of deferred debt issuance costs
commenced on November 19, 2002.
13
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER I (CONTINUED)
COLLATERAL MANAGEMENT AND TRUSTEE FEES
Pursuant to a collateral management agreement, the Collateral Manager is
entitled to a semiannual fee, payable in arrears on the distribution dates,
equal to 0.10% per annum of the semi-annual asset amount ("Base Collateral
Management Fee"), of the net outstanding portfolio collateral, as defined in the
indenture. After certain expenses have been paid, the Collateral Manager is
entitled to an additional semiannual fee equal to 0.15% per annum, calculated in
the same manner as the Base Collateral Management Fee. For the years ended
December 31, 2005 and 2004, total collateral management fees were $813,323 and
$818,250, respectively, and are reflected on the consolidated statements of
operations.
Pursuant to a trustee agreement, the trustee is entitled to a semiannual fee, on
each distribution date, equal to 0.026% per annum of the sum of the aggregate
principal amount of the investments plus cash and cash equivalents at the
beginning of the period relating to such distribution dates, an annual fee of
$13,000, and reimbursement of out of pocket expenses. For the years ended
December 31, 2005 and 2004, total trustee fees were $102,656 and $104,453,
respectively, and are included in total trustee fees reflected on the
consolidated statements of operations.
On November 19, 2002, Issuer I issued notes (the "Notes") at their respective
principal values, which are secured by Issuer I's investments and are
non-recourse to the Company.
14
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER I (CONTINUED)
NOTES PAYABLE
At December 31, 2005 and 2004, Notes outstanding consisted of the following:
2005 2004
PRINCIPAL PRINCIPAL INTEREST RATE STATED MATURITY
--------------- ---------------- ----------------------- ----------------------
Class A-1 Notes $160,129,324 $161,464,034 For the period to but November 30, 2032
the distribution date
in November 2012,
Libor + 0.78%; at all
times thereafter,
Libor + 1.28%
Class A-2 Notes $ 19,830,257 $ 19,995,546 For the period to but November 30, 2032
excluding the
distribution date in
November 2012,
4.974%; at all times
thereafter, 5.474%
Class B-1 Notes $ 54,600,000 $ 54,600,000 See Class B-1 note November 30, 2032
Class B-2 Notes $ 2,000,000 $ 2,000,000 Libor + 1.20% November 30, 2032
Class B-3 Notes $ 16,000,000 $ 16,000,000 5.932% November 30, 2032
Class C-1 Notes $ 29,600,000 $ 29,600,000 Libor + 1.80% November 30, 2032
Class C-2 Notes $ 10,000,000 $ 10,000,000 6.482% November 30, 2032
Class D Notes $ 16,408,511 $ 16,500,000 Libor + 2.65% November 30, 2032
15
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER I (CONTINUED)
NOTES PAYABLE (CONTINUED)
Pursuant to the terms of the Class B agency agreement, the holders of the Class
B Notes will be entitled to receive interest, certain third parties will be
entitled to receive compensation, at an aggregate, floating rate per annum not
to exceed Libor plus 1.05% in the aggregate after taking into consideration the
effect of a basis swap to be entered into in connection with the Class B Notes.
Holders of the Notes are to receive semiannual interest payments on May 30 and
November 30, commencing in May 2003 (the "Initial Payment Date"). The order of
payment will be first to Class A (includes Class A-1 and Class A-2), second,
Class B, third, Class C and fourth to Class D, with each Class of Notes being
senior to each of the other classes of Notes. No payments of interest on any
class of Notes will be made until all accrued and unpaid interest on the Notes
of each class that is senior to a class and that remain outstanding has been
paid in full. No payment of principal of any class of Notes will be made until
the principal of, and all accrued and unpaid interest, the Notes of each class
that is senior to such class and that remain outstanding have been paid in full.
In the event that the coverage tests, as defined in the indenture, are not
satisfied as of any distribution date, each class of Notes may be redeemed in
the manner specified in the indenture.
Principal payments will be made in the following manner. First, payment of
principal of the Class A Notes (includes Class A-1 and Class A-2) until the
Class A Notes has been paid in full. Next, payment of principal on the Class B
Notes until the Class B Notes has been paid in full. Next, payment of principal
of the Class C Notes until the Class C Notes has been paid in full. Next,
payment of principal of the Class D Notes. Finally, the remainder to the members
as a dividend on the members' interests or as a return of capital of the
members' interests as provided in Issuer I's Agreement (the "Agreement").
If on any distribution date, the amount available in the payment account from
amounts received in the related due period are insufficient to make the full
amount of the disbursements required by the priority of payments to different
persons, the trustee will make the disbursements ratably in accordance with the
indenture.
If the Notes and the members' interests have not been released prior to November
30, 2032, it is expected that the Company or the Collateral Manager, acting on
behalf of Issuer I, will sell all of the investments and all eligible
investments and sell or liquidate all other collateral, and all net proceeds
from such sales and liquidations and all available cash after the payment (in
the order of priorities set forth above) of all (i) fees, (ii)
16
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER I (CONTINUED)
NOTES PAYABLE (CONTINUED)
expenses and (iii) interest (including any defaulted interest and interest on
defaulted interest, any Class C deferred interest and interest on any Class C
deferred interest and any Class D deferred interest and interest on any Class D
deferred interest) and principal of the Notes, will be distributed to the
members in accordance with the Agreement.
ACCELERATION OF MATURITY AND REDEMPTION
The indenture provides for an acceleration of maturity or redemption of all of
the senior Notes and accrued and unpaid interest upon the occurrence of a
default event. Default events include a) failure of Issuer I to pay interest for
a period of three business days on any Class A or B senior Notes, b) failure of
Issuer I to pay principal of any senior Note when such payment becomes due and
payable at its stated maturity or redemption date, c) failure of Issuer I, on
any distribution date to disburse amounts available to the interest collection
account or principal collection account in accordance with the order of the
priority of payments set forth in the indenture, which continues for three
business days, d) Issuer I or pool of collateral becomes an investment company
required to be registered under the Investment Company Act, e) default in
performance, or a breach, of any other covenant or other agreement of Issuer I
under the indenture or any representation of warranty of Issuer I made in the
indenture or in any certificate or other writing proves to be incorrect in any
material respect when made, and in both clauses, the continuation of such
default or breach for a period of thirty days after Issuer I or the Collateral
Manager has actual knowledge that such default or breach has occurred or after
written notice to Issuer I and the Collateral Manager by the trustee, or to
Issuer I, the Collateral Manager and the trustee by the holders of at least 25%
in aggregate outstanding principal amount of the notes of the controlling class
or hedge counterparty, f) one or more final judgments being rendered against
Issuer I that exceed, in the aggregate, $5,000,000, and which remain unstayed,
undischarged and unsatisfied for thirty days after such judgment(s) becomes
nonappealable, unless adequate funds have been reserved or set aside for the
payment thereof, and g) failure, on any measurement date, to cause the Class A/B
overcollateralization ratio to be equal to or greater than 100%. Each of these
conditions is further described in the indenture.
5. INTEREST RATE SWAP AGREEMENTS
The Company maintains a policy of valuing its derivative instruments at fair
values, with the resulting unrealized gain or loss included in the consolidated
statements of operations.
17
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
5. INTEREST RATE SWAP AGREEMENTS (CONTINUED)
A swap is an agreement that obligates two parties to exchange a series of cash
flows at specified intervals based upon or calculated by reference to changes in
specified prices or rates for a specified amount of an underlying asset or
otherwise determined notional amount.
Risks may arise as a result of the failure of the counterparty to the swap
agreement. The loss incurred by the failure of a counterparty is generally
limited to the net payment to be received by the Company and/or the termination
value at the end of the agreement. Therefore, the Company considers the
creditworthiness of each counterparty to a swap agreement in evaluating
potential credit risk. Additionally, risks may arise from unanticipated
movements in interest rates.
The Company records a net receivable or payable for the net income or expense
expected to be received or paid in the interest period. Net amounts received or
paid on swap agreements are recorded as interest income or interest expense on
the consolidated statements of operations. The amount recorded as interest
income on basis swap agreements for the years ended December 31, 2005 and 2004
totaled $378,528 and $302,181, respectively.
The Company entered into interest rate swap agreements with Credit Suisse First
Boston ("CSFB") for the purpose of hedging interest rate and cash flow risk
between the fixed-rate investments and floating-rate investments.
At December 31, 2005 and 2004, the Company had three interest rate swap
agreements outstanding with CSFB, which pay on a semi-annual basis, as follows:
FLOATING RATE RATE PAID DECEMBER 31
NOTIONAL MATURITY RECEIVED BY BY THE 2005 2004
AMOUNT DATE THE COMPANY COMPANY FAIR VALUE FAIR VALUE
- --------------- ---------- -------------------- -------------------- -------------- ------------
$ 2,000,000 11/30/07 6 month Libor + 3.41% 6.92% $ 47,912 $ 2,217
$ 10,000,000 11/30/07 6 month Libor + 3.37% 6.95% 226,130 (9,047)
$ 54,600,000 11/30/12 1 month Libor + 1.015% 6 month Libor + 1.05% (317,582) (243,323)
-------- ---------
$(43,540) $(250,153)
======== =========
18
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS
The Partnership pays Funding an administration fee (payable semi-annually in
advance) equal to one and one-half percent (1.5%) per annum of the aggregate
capital accounts of the limited partners, which will be used to cover management
fees and other ordinary and recurring administrative and related operating
expenses. For the years ended December 31, 2005 and 2004, administration fees
totaled $357,564 and $380,231, respectively.
In exchange for interests sold on behalf of the Partnership, Funding pays
external broker-dealers an administration fee, equal to the percentage of equity
raised by the broker-dealer multiplied by one-third of the total administration
fee being charged by Funding to the Partnership. For the years ended December
31, 2005 and 2004, total administration fee expense equaled $64,085 and $67,452,
respectively.
19
Schedule b)
TRAPEZA FUNDING, LLC
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Years ended December 31, 2004 and 2003
1
Trapeza Funding, LLC
Consolidated Financial Statements
Years ended December 31, 2004 and 2003
Unaudited
CONTENTS
Consolidated Statements of Financial Condition................................3
Consolidated Schedule of Investments..........................................4
Consolidated Statements of Operations.........................................6
Consolidated Statements of Changes in Members' Interests......................7
Consolidated Statements of Cash Flows.........................................8
Notes to Consolidated Financial Statements....................................9
2
Trapeza Funding, LLC
Consolidated Statements of Financial Condition
Unaudited
DECEMBER 31
2004 2003
------------- -------------
ASSETS
Investments in trust preferred securities, at fair value
(amortized cost $320,338,643 and $324,598,789) $ 325,175,799 $ 322,900,609
Cash and cash equivalents 3,519,814 2,781,172
Deferred debt issuance costs (net of accumulated amortization of
$1,498,584 and $777,286) 6,645,305 7,366,603
Interest receivable on trust preferred securities 3,199,650 2,798,527
Investment in Trapeza Note I, LLC 7,551,747 6,492,006
Prepaid expenses 3,691 50,118
Other 11,386 107,607
------------- -------------
Total Assets $ 346,107,392 $ 342,496,642
============= =============
LIABILITIES AND MEMBERS' INTERESTS
Liabilities
Class A-1 Notes $ 161,464,034 $ 161,464,034
Class A-2 Notes 19,995,546 19,995,546
Class B-1 Notes 54,600,000 54,600,000
Class B-2 Notes 2,000,000 2,000,000
Class B-3 Notes 16,000,000 16,000,000
Class C-1 Notes 29,600,000 29,600,000
Class C-2 Notes 10,000,000 10,000,000
Class D Notes 16,500,000 16,500,000
Interest payable 1,057,666 726,726
Unrealized depreciation on swap agreements 250,153 397,330
Professional fees 89,196 102,364
Collateral management fees 81,370 84,792
Net interest payable to swap counterparty 9,696 25,722
Trustee fees 11,592 10,720
Accrued expenses 41,250 77,500
------------- -------------
Total Liabilities 311,700,503 311,584,734
------------- -------------
Minority interest 34,057,776 31,185,605
Members' Interests (Deficit) 349,113 (273,697)
------------- -------------
Total Liabilities and Members' Interests $ 346,107,392 $ 342,496,642
============= =============
See accompanying notes to consolidated financial statements.
3
Trapeza Funding, LLC.
Consolidated Schedule of Investments
Unaudited
PRINCIPAL PRINCIPAL
AMOUNT 2004 FAIR AMOUNT 2003 FAIR
(000) VALUE (000) VALUE
---------- --------- --------- ---------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
BANKS (81.89% AND 81.80%)*
1st Source Capital Trust III, 6.95%, due 11/14/2032 (a) $ 10,000 $ 9,934,261 $ 10,000 $ 9,933,519
Access National Capital Trust I, 3 month libor + 4.125%, due 7/29/2032 (a) 4,000 3,981,089 4,000 3,980,557
Ambank Capital Trust I, 3 month libor + 3.625%, due 7/30/2032 (a) 8,000 7,940,849 8,000 7,939,948
Bank of Kentucky Capital Trust I, 3 month libor + 3.35%, due 11/14/2032 (a) 11,000 11,001,249 11,000 11,001,271
Banponce Trust I, 8.327%, due 2/1/2027 1,200 1,359,300 1,200 1,257,000
CIB Marine Statutory Trust V, 3 month libor + 3.40%, due 9/27/2032 - - 11,000 6,600,000
Colonial Capital II, 8.92%, due 1/15/2027 5,000 5,540,630 5,000 5,225,001
Community Bancshares Capital Trust III, 6 month libor + 3.625%, due 7/30/2032 (a) 5,000 4,854,533 5,000 4,852,324
Community Capital Trust I, 9.75%, due 1/31/2027 1,850 2,073,215 1,850 1,942,500
FBOP Capital Trust XII, 6 month libor + 3.625%, 7/30/2032 (a) 11,000 11,000,000 11,000 11,000,000
FBC/SC Capital Trust I, 8.25%, due 3/15/2028 2,000 2,213,298 2,000 1,999,999
First Indiana Capital Trust I, 6.92%, due 10/30/2032 (a) 2,000 1,998,330 2,000 1,998,312
First Group Capital Statutory Trust III, 3 month libor + 3.35%, due 11/15/2032 (a) 10,000 10,085,433 10,000 10,084,090
First Gothenburg Capital Trust I, 3 month libor + 3.35%, due 11/15/2032 (a) 4,000 3,942,006 4,000 3,941,032
Franklin Bank Capital Trust I, 3 month libor + 3.35%, due 11/14/2032 (a) 11,000 10,903,445 11,000 10,901,824
GB&T Bancshares Statutory Trust I, 3 month libor + 3.40%, due 10/30/2032 (a) 11,000 10,873,618 11,000 10,871,637
Hanmi Capital Trust II, 3 month libor + 2.90%, due 3/15/2034 (a) 6,479 6,479,000 -- -
Iberiabank Statutory Trust I, 3 month libor + 3.25%, due 11/15/2032 (a) 10,000 9,885,448 10,000 9,883,488
Industry Bancshares Capital Trust I, 6 month libor + 3.625%, due 7/30/2032 (a) 5,000 4,951,510 5,000 4,950,774
Local Financial Capital Trust II, 6 month libor + 3.625%, due 7/30/2032 (a) 10,000 9,856,471 10,000 9,854,292
Main Street Banks Statutory Trust I, 3 month libor + 3.25%, due 11/15/2032 (a) 5,000 4,942,683 5,000 4,941,723
MB Financial Capital Trust I, 8.60%, due 9/30/2032 (a) 5,000 5,000,000 5,000 5,000,000
MBNA Capital B, 3 month libor + 0.80%, due 2/1/2027 8,000 7,576,000 8,000 6,960,000
Merchants and Manufacturers Statutory Trust I, 3 month libor +3.35%,
due 11/12/2032 (a) 8,000 7,922,681 8,000 7,921,379
Onbank Capital Trust I, 9.25%, due 2/1/2027 2,000 2,156,348 2,000 2,139,999
Pacific Mercantile Capital Trust I, 3 month libor + 3.75%, due 7/15/2032 (a) 5,000 4,976,409 5,000 4,975,779
PMB Capital Trust I, 6 month libor + 3.625%, due 8/22/2032 (a) 5,000 4,951,519 5,000 4,950,722
Progress Capital Trust III, 3 month libor + 3.35%, due 11/15/2032 (a) 6,000 5,950,643 6,000 5,949,844
Provident Capital Trust I, 8.60%, due 12/1/2026 7,500 7,892,565 7,500 7,425,000
Provident Trust I, 8.29%, due 4/15/2028 5,500 5,707,658 5,500 5,555,001
Reliance Capital Trust I, 8.17%, due 5/1/2028 1,000 1,043,914 1,000 1,045,000
Riverside Bancshares Statutory Trust I, 3 month libor + 3.45%, due 10/1/2032 (a) 10,000 9,885,084 10,000 9,883,295
Riverside Gulf Coast Capital Trust I, 3 month libor + 3.25%, due 7/29/2032 (a) 5,000 4,976,350 5,000 4,975,691
Sky Financial Capital Trust I, 9.34%, due 5/1/2030 3,500 3,811,161 3,500 3,675,001
South Financial Capital Trust II, 6 month libor + 3.625%, due 7/30/2032 (a) 11,000 10,893,323 11,000 10,891,703
Southcoast Capital Trust II, 3 month libor + 3.35%, due 5/3/2032 (a) 4,000 3,981,251 4,000 3,980,642
Sterling Bancshares Statutory Trust One, 3 month libor + 3.45%, due 8/30/2032 (a) 10,000 9,885,110 10,000 9,883,308
Texas Capital Bancshares Statutory Trust I, 3 month libor + 3.35%,
due 11/19/2032 (a) 10,000 9,885,448 10,000 9,883,488
UCBH Capital Trust II, 3 month libor + 3.45%, due 11/7/2032 (a) 11,000 11,000,000 11,000 11,000,000
Umpqua Statutory Trust II, 3 month libor + 3.35%, due 10/17/2032 (a) 11,000 10,860,947 11,000 10,858,759
Union State Capital Trust I, 9.58%, due 2/1/2027 1,000 1,135,699 1,000 1,057,501
VCBI Capital Trust II, 6 month libor + 3.30%, due 11/15/2032 (a) 3,000 2,970,994 3,000 2,970,510
----------- -----------
Total Banks (amortized cost $261,557,502 and $265,830,038) 266,279,472 264,141,913
----------- -----------
4
Trapeza Funding, LLC
Consolidated Schedule of Investments (continued)
Unaudited
PRINCIPAL PRINCIPAL
AMOUNT 2004 FAIR AMOUNT 2003 FAIR
(000) VALUE (000) VALUE
---------- --------- --------- ---------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) * (CONTINUED)
THRIFTS (18.11% AND 18.20%)
BBC Capital Trust VI, 3 month libor + 3.35%, due 9/27/2032 (a) 10,000 9,918,143 10,000 9,916,857
BankUnited Statutory Trust IV, 3 month libor + 3.40%, due 11/15/2032 (a) 11,000 10,873,881 11,000 10,871,777
Beal Financial Trust I, 6 month libor + 3.625%, due 7/30/2032 (a) 11,000 10,893,323 11,000 10,891,703
First Keystone Capital Trust I, 9.70%, due 8/15/2027 1,500 1,657,500 1,500 1,590,000
HFC Capital Trust IV, 6 month libor + 3.35%, due 11/15/2032 (a) 8,450 8,267,902 8,450 8,264,959
ITLA Capital Statutory Trust III, 6 month libor + 3.40%, due 10/30/2032 (a) 11,000 10,903,262 11,000 10,901,726
Matrix Bancorp Capital Trust V, 6 month libor + 3.625%, due 7/25/2032 (a) 5,000 4,957,316 5,000 4,956,674
WSFS Capital Trust I, 3 month libor + 2.50%, due 12/01/2028 1,500 1,425,000 1,500 1,365,000
------------ ------------
Total Thrifts (amortized cost $58,781,141 and $58,768,751) 58,896,327 58,758,696
------------ ------------
Total Investments in Trust Preferred Securities (amortized cost $320,338,643 and
$324,598,789) $325,175,799 $322,900,609
============ ============
FAIR VALUE FAIR VALUE
---------- ----------
INTEREST RATE SWAP AGREEMENTS
Credit Suisse First Boston $ (250,153) $ (397,330)
------------ ------------
Total Interest Rate Swap Agreements $ (250,153) $ (397,330)
============ ============
*Amounts in parenthesis indicate percentage of investments in trust-preferred
securities.
(a) Private placement, illiquid securities, where amortized cost approximates
fair value.
See accompanying notes to consolidated financial statements.
5
Trapeza Funding, LLC
Consolidated Statements of Operations
Unaudited
YEAR ENDED DECEMBER 31,
2004 2003
------------ ------------
INVESTMENT INCOME
Interest $ 18,139,801 $ 18,530,122
Equity in earnings of Trapeza CDO II, LLC - 49,006
Equity in earnings of Trapeza Note I, LLC 2,502,231 740,500
------------ ------------
TOTAL INVESTMENT INCOME 20,642,032 19,319,628
------------ ------------
EXPENSES
Interest 9,834,015 9,536,526
Collateral management fees 818,250 829,243
Amortization of deferred debt issuance costs 721,298 697,624
Professional fees 126,777 117,612
Trustee fees 126,115 107,374
Administration fee 67,452 73,382
Taxes (769) 17,447
Other 251,848 296,187
------------ ------------
Total expenses 11,944,986 11,675,395
------------ ------------
NET INVESTMENT INCOME 8,697,046 7,644,233
------------ ------------
Net realized gain (loss) and unrealized appreciation (depreciation) on
investment transactions:
Net realized loss on investment transactions (4,420,343) -
Net unrealized appreciation (depreciation) on investments in
trust preferred securities 6,535,336 (2,007,168)
Net unrealized appreciation on interest rate swap agreements 147,177 120,710
------------ ------------
Net realized gain (loss) and unrealized appreciation
(depreciation) on investment transactions 2,262,170 (1,886,458)
------------ ------------
Net income before minority interest 10,959,216 5,757,775
Minority interest 8,926,324 4,658,767
------------ ------------
NET INCOME $ 2,032,892 $ 1,099,008
============ ============
See accompanying notes to consolidated financial statements.
6
Trapeza Funding, LLC
Consolidated Statements of Changes in Members' Interests
Years ended December 31, 2004 and 2003
Unaudited
Balance at January 1, 2003 $ 722,749
Net income 1,099,008
Distribution to members (2,095,454)
------------
Balance at December 31, 2003 $ (273,697)
Net income 2,032,892
Distribution to members (1,410,082)
------------
Balance at December 31, 2004 $ 349,113
============
See accompanying notes to consolidated financial statements.
7
Trapeza Funding, LLC
Consolidated Statements of Cash Flows
Unaudited
YEAR ENDED DECEMBER 31,
2004 2003
----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,032,892 $ 1,099,008
Adjustments to reconcile net income to net cash and cash equivalents
provided by (used in) operating activities:
Amortization of deferred debt issuance costs 721,298 697,624
Accretion of discount of investments in trust preferred securities (160,197) (154,288)
Minority interest 2,872,171 (1,882,027)
Net realized loss on investment transactions 4,420,343 -
Net unrealized (appreciation) depreciation on investments (6,682,513) 1,886,458
Net change in operating assets and liabilities:
Investment in trust preferred securities - 113,124,124
Interest receivable on trust preferred securities (401,123) 2,581,794
Investment in Trapeza Note I, LLC (1,059,741) (6,492,006)
Prepaid expenses 46,427 52,240
Other 96,221 19,212
Warehouse facility payable - (113,397,528)
Interest payable 330,940 (536,160)
Professional fees (13,168) (82,739)
Collateral management fees (3,422) (4,975)
Net interest payable to swap counterparty (16,026) (33,556)
Trustee fees 872 (52)
Accrued expenses (36,250) (17,284)
----------- -------------
Net cash and cash equivalents provided by (used in) operating
activities 2,148,724 (3,140,155)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes - (40,420)
Distributions to partners (1,410,082) (2,095,454)
----------- -------------
Net cash and cash equivalents used in financing activities (1,410,082) (2,135,874)
----------- -------------
Net increase (decrease) in cash and cash equivalents 738,642 (5,276,029)
Cash, beginning of year 2,781,172 8,057,201
----------- -------------
Cash, end of year $ 3,519,814 $ 2,781,172
=========== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 9,509,517 $ 10,106,241
=========== =============
See accompanying notes to consolidated financial statements.
8
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements
December 31, 2004
1. ORGANIZATION AND PURPOSE
Trapeza Funding, LLC ("Funding"), was organized on March 25, 2002 as a Delaware
limited liability company. Funding commenced operations on June 1, 2002. Funding
was organized for the purpose of being the General Partner of Trapeza Partners
L.P. (the "Partnership"). Per the partnership agreement, the limited partners
have no right to remove the Funding at any time. Funding has complete and
exclusive control of the management of the business affairs of the Partnership.
The Partnership was organized on May 21, 2002 as a Delaware limited partnership.
The Partnership commenced operations on July 1, 2002. The Partnership was
organized for the purpose of investing in membership interests and other
securities to be issued by Trapeza CDO I, LLC ("Issuer I"), an affiliated
collateralized debt obligation, which was formed by Funding. In addition, the
Partnership also invested in Trapeza CDO II, LLC ("Issuer II"), an affiliated
collateralized debt obligation, which closed on March 11, 2003. On May 15, 2003,
Trapeza Note I, LLC ("Note I") was formed to issue Class BB fixed rate notes and
purchase 100% of the members' interests of Issuer II. In addition, the
Partnership's investment in Issuer II was transferred to Note I at this time.
The Partnership has an 11-year term, which Funding may extend on a year-to-year
basis.
All material intercompany transactions have been eliminated. Minority interest
reflects the 99.99% of partners' interest of the limited partners of the
Partnership. The consolidated entity is referred to as the "Company."
Funding and the Collateral Manager are owned equally by Financial Stocks, Inc.
("FSI") and Resource Financial Fund Management, Inc., a wholly owned subsidiary
of Resource America, Inc. ("REXI") (collectively, the "Owners"). FSI is a
Registered Investment Adviser under the Investment Advisers Act of 1940. REXI is
a publicly traded company operating in energy, real estate and financial
services sectors. The Owners and certain officers and directors of the Owners
hold partnership interests of approximately 17% of the Partnership. Funding has
complete and exclusive control of the management of the business affairs of the
Partnership.
Issuer I and II's objective is to purchase, acquire, own, hold, sell, endorse,
transfer, assign, pledge, finance, refinance, exchange, restructure, workout,
advance and collect funds pursuant to and otherwise deal with and exercise
rights of ownership with respect to the collateral of Issuer I and Issuer II,
including other securities or equity interests owned from time to time by Issuer
I and Issuer II, all in accordance with the terms of the indentures.
9
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
1. ORGANIZATION AND PURPOSE (CONTINUED)
Trapeza Capital Management, LLC (the "Collateral Manager"), a Delaware limited
liability company, is responsible for supervising and directing the investment
of the collateral of Issuer I and Issuer II. Issuer I and Issuer II are charged
a collateral management fee by the Collateral Manager, who is affiliated with
Funding through common ownership.
The business and affairs of Funding are managed by a Board of Managers. The
Board of Managers has full, complete and exclusive authority, power and
discretion to manage and control the business affairs and properties of Funding,
to make all decisions regarding those matters and to perform any activities
customary or incident to the management of Funding's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Company in the preparation of its financial statements.
BASIS OF ACCOUNTING
The Company's accounting policies are in conformity with accounting principles
generally accepted in the United States. The Company maintains its financial
records in United States dollars. For financial reporting purposes, the Company
follows the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits with banks and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
INVESTMENT TRANSACTIONS
The Company records transactions on their trade dates. Realized gains and losses
on investments are determined on the specific identification basis for financial
accounting purposes. Interest is accrued as earned or incurred and includes the
amortization/accretion of premiums and discounts on debt securities.
10
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT VALUATION
Investments are carried at market or fair value. Securities for which market
quotations are not readily available are valued by procedures adopted by
Funding. In valuing investments in which market quotations are not readily
available, Funding utilizes data from a variety of different sources, taking
into account the characteristics of a security, any changes in the credit
quality of the securities in the portfolio, the overall movement of interest
rates and other factors which, in Funding's good faith and judgment, are
relevant to the value of a security. For exchange-traded securities, management
will obtain current market data and quotes from independent brokers.
The Company has invested a significant portion of the portfolio in private
placement, illiquid issues having no ready market. At December 31, 2004, these
securities aggregate $281,583,511 and have been valued in good faith by Funding
as described in the preceding paragraph. Because of the inherent uncertainty of
valuation, the fair values estimated by Funding may not necessarily represent
the amounts that could be realized from sales or other dispositions of
investments and the differences may be material.
CREDIT RISKS AND GENERAL LIQUIDITY CONSIDERATIONS
Investments in trust preferred securities are subject to credit, interest rate
and liquidity risks. Adverse changes in the financial condition of an issuer of
trust preferred securities or in general economic conditions or both may impair
the ability of the issuer to make payments of principal and interest. Adverse
changes in the financial condition of an issuer may affect the liquidity of the
market for an issuer's securities and may reduce the market price of such
securities. In addition, changes in general economic and regulatory conditions
may affect the liquidity of the market for trust preferred securities in general
and may reduce the values of some or all of the securities.
OFFERING COSTS
During 2003, the Partnership incurred offering costs related to the closing of
Issuer II of $60,173. All costs were charged directly to the partners' capital
and member's accounts, respectively.
ALLOCATION OF PROFITS AND LOSSES
The Company allocates profits to the members in proportion to their respective
capital account balances until the cumulative profits for this current period
and all prior fiscal years are equal to the cumulative losses allocated;
thereafter, among the members in
11
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOCATION OF PROFITS AND LOSSES (CONTINUED)
proportion to their respective units. Losses shall be allocated to the members
in proportion to their respective capital account balances.
Funding's investment in the Partnership is accounted for based on its pro-rata
share of its investment in the Partnership. Profits and losses from
non-portfolio income are allocated to all members in proportion to their
allocable shares. Twenty percent (20%) of the cumulative net profits from
portfolio investments are allocated to Funding.
Non-portfolio income of the Partnership, consisting primarily of income earned
on short-term investments, is allocated to all limited partners of the
Partnership in proportion to their respective capital account balances prior to
the allocation of any other item.
Portfolio income of the Partnership, consisting primarily of interest income and
profits and losses from the sale of such investments, is allocated to all
partners of the Partnership in proportion to their respective contributed
capital of the Partnership in relation to total contributed capital, but 20% of
the cumulative net profits otherwise allocable to all partners of the
Partnership will be allocated to Funding, defined as the incentive allocation.
For the years ended December 31, 2004 and 2003, Funding received an incentive
allocation of $1,735,478 and $889,939, respectively.
TAXATION
The Company is treated as a partnership for Federal income tax purposes and,
therefore, no provision for federal income tax is recorded.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
12
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS
As of December 31, 2003, the Company has 300 membership units issued and
outstanding. No member shall be required to make any additional contributions
beyond their initial contribution. If the Board of Managers unanimously
determines that the Company requires additional funds, any member may, but is
not obligated to, advance such funds. For the years ended December 31, 2004 and
2003, the Company received no contributions from the members.
No member shall have the right to withdraw any of its capital contribution,
except upon dissolution and liquidation of the Company. For the years ended
December 31, 2004 and 2003, the Company made distributions of $1,410,082 and
$2,095,454, respectively, to the members.
In accordance with the partnership agreement, each partner has contributed a
specified amount of capital which is set forth in the partnership agreement. No
limited partner is required to contribute any capital in excess of its
commitment. As of August 13, 2003, all commitments of the Partnership were fully
funded.
A limited partner will not have the right to redeem its interest in the
Partnership. Funding, in its sole discretion, may redeem all or part of the
partnership interest of any limited partner, for an amount equal to the capital
account of the partnership interest being redeemed, if the limited partner
consents to such redemption and all redemptions in any year do not exceed five
percent of the aggregate allocable percentage of all limited partners.
Funding will cause the Partnership to distribute the lesser of (i) ninety
percent (90%) of cash available from profits and (ii) all cash then available to
the partnership less any reserves for partnership expenses or liabilities. All
other distributions will be at the discretion of Funding. Funding will determine
at its sole discretion the source of funds for all distributions. For the years
ended December 31, 2004 and 2003, the Partnership made distributions of
$5,793,210 and $6,098,125, respectively, to the partners.
4. ISSUER I
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $8,143,889 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is period ending with the distribution date occurring in November
2012, as defined in the indenture. Amortization of deferred debt issuance costs
commenced on November 19, 2002.
13
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER I (CONTINUED)
COLLATERAL MANAGEMENT AND TRUSTEE FEES
Pursuant to a collateral management agreement, the Collateral Manager is
entitled to a semiannual fee, payable in arrears on the distribution dates,
equal to 0.10% per annum of the semi-annual asset amount ("Base Collateral
Management Fee"), of the net outstanding portfolio collateral, as defined in the
indenture. After certain expenses have been paid, the Collateral Manager is
entitled to an additional semiannual fee equal to 0.15% per annum, calculated in
the same manner as the Base Collateral Management Fee. For the years ended
December 31, 2004 and 2003, total collateral management fees were $818,250 and
$829,243, respectively, and are reflected on the consolidated statements of
operations.
Pursuant to a trustee agreement, the trustee is entitled to a semiannual fee, on
each distribution date, equal to 0.026% per annum of the sum of the aggregate
principal amount of the investments plus cash and cash equivalents at the
beginning of the period relating to such distribution dates, an annual fee of
$13,000, and reimbursement of out of pocket expenses. For the years ended
December 31, 2004 and 2003, total trustee fees were $104,453 and $104,912,
respectively, and are included in total trustee fees reflected on the
consolidated statements of operations.
14
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER I (CONTINUED)
NOTES PAYABLE
On November 19, 2002, Issuer I issued notes (the "Notes") at their respective
principal values, which are secured by Issuer I's investments and are
non-recourse to the Company.
At December 31, 2004 and 2003, Notes outstanding consisted of the following:
2004 2003
PRINCIPAL PRINCIPAL INTEREST RATE STATED MATURITY
--------------- -------------- ----------------------- ----------------------
Class A-1 Notes $161,464,034 $161,464,034 For the period to but November 30, 2032
the distribution date
in November 2012,
Libor + 0.78%; at all
times thereafter,
Libor + 1.28%
Class A-2 Notes $ 19,995,546 $ 19,995,546 For the period to but November 30, 2032
excluding the
distribution date in
November 2012,
4.974%; at all times
thereafter, 5.474%
Class B-1 Notes $ 54,600,000 $ 54,600,000 See Class B-1 note November 30, 2032
Class B-2 Notes $ 2,000,000 $ 2,000,000 Libor + 1.20% November 30, 2032
Class B-3 Notes $ 16,000,000 $ 16,000,000 5.932% November 30, 2032
Class C-1 Notes $ 29,600,000 $ 29,600,000 Libor + 1.80% November 30, 2032
Class C-2 Notes $ 10,000,000 $ 10,000,000 6.482% November 30, 2032
Class D Notes $ 16,500,000 $ 16,500,000 Libor + 2.65% November 30, 2032
15
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER I (CONTINUED)
NOTES PAYABLE (CONTINUED)
Pursuant to the terms of the Class B agency agreement, the holders of the Class
B Notes will be entitled to receive interest, certain third parties will be
entitled to receive compensation, at an aggregate, floating rate per annum not
to exceed Libor plus 1.05% in the aggregate after taking into consideration the
effect of a basis swap to be entered into in connection with the Class B Notes.
Holders of the Notes are to receive semiannual interest payments on May 30 and
November 30, commencing in May 2003 (the "Initial Payment Date"). The order of
payment will be first to Class A (includes Class A-1 and Class A-2), second,
Class B, third, Class C and fourth to Class D, with each Class of Notes being
senior to each of the other classes of Notes. No payments of interest on any
class of Notes will be made until all accrued and unpaid interest on the Notes
of each class that is senior to a class and that remain outstanding has been
paid in full. No payment of principal of any class of Notes will be made until
the principal of, and all accrued and unpaid interest, the Notes of each class
that is senior to such class and that remain outstanding have been paid in full.
In the event that the coverage tests, as defined in the indenture, are not
satisfied as of any distribution date, each class of Notes may be redeemed in
the manner specified in the indenture.
Principal payments will be made in the following manner. First, payment of
principal of the Class A Notes (includes Class A-1 and Class A-2) until the
Class A Notes has been paid in full. Next, payment of principal on the Class B
Notes until the Class B Notes has been paid in full. Next, payment of principal
of the Class C Notes until the Class C Notes has been paid in full. Next,
payment of principal of the Class D Notes. Finally, the remainder to the members
as a dividend on the members' interests or as a return of capital of the
members' interests as provided in Issuer I's Agreement (the "Agreement").
If on any distribution date, the amount available in the payment account from
amounts received in the related due period are insufficient to make the full
amount of the disbursements required by the priority of payments to different
persons, the trustee will make the disbursements ratably in accordance with the
indenture.
If the Notes and the members' interests have not been released prior to November
30, 2032, it is expected that the Company or the Collateral Manager, acting on
behalf of Issuer I, will sell all of the investments and all eligible
investments and sell or liquidate all other collateral, and all net proceeds
from such sales and liquidations and all available cash after the payment (in
the order of priorities set forth above) of all (i) fees, (ii)
16
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER I (CONTINUED)
NOTES PAYABLE (CONTINUED)
expenses and (iii) interest (including any defaulted interest and interest on
defaulted interest, any Class C deferred interest and interest on any Class C
deferred interest and any Class D deferred interest and interest on any Class D
deferred interest) and principal of the Notes, will be distributed to the
members in accordance with the Agreement.
ACCELERATION OF MATURITY AND REDEMPTION
The indenture provides for an acceleration of maturity or redemption of all of
the senior Notes and accrued and unpaid interest upon the occurrence of a
default event. Default events include a) failure of Issuer I to pay interest for
a period of three business days on any Class A or B senior Notes, b) failure of
Issuer I to pay principal of any senior Note when such payment becomes due and
payable at its stated maturity or redemption date, c) failure of Issuer I, on
any distribution date to disburse amounts available to the interest collection
account or principal collection account in accordance with the order of the
priority of payments set forth in the indenture, which continues for three
business days, d) Issuer I or pool of collateral becomes an investment company
required to be registered under the Investment Company Act, e) default in
performance, or a breach, of any other covenant or other agreement of Issuer I
under the indenture or any representation of warranty of Issuer I made in the
indenture or in any certificate or other writing proves to be incorrect in any
material respect when made, and in both clauses, the continuation of such
default or breach for a period of thirty days after Issuer I or the Collateral
Manager has actual knowledge that such default or breach has occurred or after
written notice to Issuer I and the Collateral Manager by the trustee, or to
Issuer I, the Collateral Manager and the trustee by the holders of at least 25%
in aggregate outstanding principal amount of the notes of the controlling class
or hedge counterparty, f) one or more final judgments being rendered against
Issuer I that exceed, in the aggregate, $5,000,000, and which remain unstayed,
undischarged and unsatisfied for thirty days after such judgment(s) becomes
nonappealable, unless adequate funds have been reserved or set aside for the
payment thereof, and g) failure, on any measurement date, to cause the Class A/B
overcollateralization ratio to be equal to or greater than 100%. Each of these
conditions is further described in the indenture.
5. INTEREST RATE SWAP AGREEMENTS
The Company maintains a policy of valuing its securities positions and
derivative instruments at market or fair values, with the resulting unrealized
gain or loss included in the consolidated statements of operations.
17
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
5. INTEREST RATE SWAP AGREEMENTS (CONTINUED)
A swap is an agreement that obligates two parties to exchange a series of cash
flows at specified intervals based upon or calculated by reference to changes in
specified prices or rates for a specified amount of an underlying asset or
otherwise determined notional amount.
Risks may arise as a result of the failure of the counterparty to the swap
agreement. The loss incurred by the failure of a counterparty is generally
limited to the net payment to be received by the Company and/or the termination
value at the end of the agreement. Therefore, the Company considers the
creditworthiness of each counterparty to a swap agreement in evaluating
potential credit risk. Additionally, risks may arise from unanticipated
movements in interest rates.
The Company records a net receivable or payable for the net income or expense
expected to be received or paid in the interest period. Net amounts received or
paid on swap agreements are recorded as interest income or interest expense on
the consolidated statements of operations. The amount recorded as interest
income on basis swap agreements for the years ended December 31, 2004 and 2003
totaled $302,181 and $342,105, respectively.
The Company entered into interest rate swap agreements with Credit Suisse First
Boston ("CSFB") for the purpose of hedging interest rate and cash flow risk
between the fixed-rate investments and floating-rate investments.
At December 31, 2004 and 2003, the Company had three interest rate swap
agreements outstanding with CSFB, which pay on a semi-annual basis, as follows:
FLOATING RATE RATE PAID DECEMBER 31
NOTIONAL MATURITY RECEIVED BY BY THE 2004 2003
AMOUNT DATE THE COMPANY COMPANY FAIR VALUE FAIR VALUE
- --------------- ---------- -------------------- -------------------- -------------- ------------
2,000,000 11/30/07 6 month Libor + 3.41% 6.92% $ 2,217 $(24,140)
10,000,000 11/30/07 6 month Libor + 3.37% 6.95% (9,047) (147,597)
54,600,000 11/30/12 1 month Libor + 1.015% 6 month Libor + 1.05% (243,323) (225,593)
--------- ---------
$(250,153) $(397,330)
========= =========
18
Trapeza Funding, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS
The Partnership pays Funding an administration fee (payable semi-annually in
advance) equal to one and one-half percent (1.5%) per annum of the aggregate
capital accounts of the limited partners, which will be used to cover management
fees and other ordinary and recurring administrative and related operating
expenses. For the years ended December 31, 2004 and 2003, administration fees
totaled $380,231 and $413,657, respectively.
In exchange for interests sold on behalf of the Partnership, Funding pays
external broker-dealers an administration fee, equal to the percentage of equity
raised by the broker-dealer multiplied by one-third of the total administration
fee being charged by Funding to the Partnership. For the years ended December
31, 2004 and 2003, total administration fee expense equaled $67,452 and $73,382,
respectively.
19
Schedule c)
TRAPEZA FUNDING II, LLC
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Years ended December 31, 2005 and 2004
Trapeza Funding II, LLC
Consolidated Unudited Financial Statements
Years ended December 31, 2005 and 2004
Unaudited
CONTENTS
Consolidated Statements of Financial Condition...............................1
Consolidated Schedules of Investments........................................2
Consolidated Statements of Operations........................................5
Consolidated Statements of Changes in Members' Interests.....................6
Consolidated Statements of Cash Flows........................................7
Notes to Consolidated Financial Statements...................................8
Trapeza Funding II, LLC
Consolidated Statements of Financial Condition
Unaudited
DECEMBER 31
2005 2004
-------------- --------------
ASSETS
Investments in trust preferred securities, at fair value
(amortized cost $689,352,865 and $690,569,714) $ 694,986,541 $ 696,246,408
Cash and cash equivalents 19,627,097 15,255,017
Deferred debt issuance costs (net of accumulated amortization
of $4,119,838 and $2,562,385) 13,874,853 15,432,306
Interest receivable on trust preferred securities 4,189,666 3,555,918
Net interest receivable from swap counterparty 436,729 -
Prepaid expenses 25,960 26,796
Unrealized appreciation on swap agreements 5,865,799 972,087
-------------- --------------
Total Assets $ 739,006,645 $ 731,488,532
============== ==============
LIABILITIES AND MEMBERS' INTERESTS
Liabilities
Class A1A Notes $ 238,996,446 $ 240,496,445
Class A1B Notes 171,500,000 171,500,000
Class B Notes 52,000,000 52,000,000
Class C-1 Notes 74,750,000 74,750,000
Class C-2 Notes 86,050,000 86,050,000
Class D Notes 31,709,797 32,165,288
Class E Notes 4,285,713 5,142,856
Class BB Notes 6,428,571 7,857,143
Interest payable 11,232,196 7,505,789
Professional fees 158,859 174,134
Collateral management fees 590,570 591,507
Net interest payable to swap counterparty - 759,841
Trustee fees 68,142 68,420
Accrued expenses 111,667 111,667
-------------- --------------
Total Liabilities 677,881,961 679,173,090
-------------- --------------
Minority interest 58,161,400 50,882,576
Members' Interests 2,963,284 1,432,866
-------------- --------------
Total Liabilities and Members' Interests $ 739,006,645 $ 731,488,532
============== ==============
See accompanying notes to consolidated financial statements.
1
Trapeza Funding II, LLC
Consolidated Schedules of Investments
Unaudited
DECEMBER 31, 2005 DECEMBER 31, 2004
--------------------------- -------------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(000) FAIR VALUE (000) FAIR VALUE
------------ -------------- --------- --------------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
BANKS (80.30% AND 80.14%)*
B.P.C. Corp Statutory Trust I, 3 month libor + 3.250%, due
6/18/2033 (a) $ 3,000 $ 3,000,000 $ 3,000 $ 3,000,000
Bank of Kentucky Capital Trust I, 3 month libor +3.350%, due
11/14/2032 (a) 6,000 6,000,674 6,000 6,000,685
Benjamin Franklin Capital Trust I, 6.940%, due 11/01/2032 (a) 9,000 8,930,681 9,000 8,929,802
BNC Bancorp Capital Trust I, 3 month libor + 3.250%, due
4/15/2033 (a) 5,000 4,952,173 5,000 4,951,356
Catawba Valley Capital Trust I, 3 month libor + 3.35%, due
12/30/2032 (a) 5,000 4,946,927 5,000 4,946,116
Catawba Valley Capital Trust II, 6.850%, due 12/30/2032 (a) 5,000 4,946,318 5,000 4,945,609
Cathay Capital Trust I, 3 month libor + 3.150%, due 6/30/2033 (a) 6,550 6,550,000 6,550 6,550,000
Century Bancshares Capital Trust I, 6.850%, due 1/15/2033 (a) 3,000 3,003,389 3,000 3,003,431
Colonial Capital II, 8.920%, due 1/15/2027 10,500 11,303,996 10,500 11,635,323
Community Bankshares Capital Trust IV, 6 month libor + 3.300%,
due 4/15/2033 (a) 5,000 5,013,447 5,000 5,013,654
Corus Statutory Trust II, 3 month libor + 3.100%, due
6/30/2033 (a) 9,000 8,932,198 9,000 8,931,197
CPB Capital Trust I, 3 month libor + 3.250%, due 4/7/2033 (a) 5,000 5,000,000 5,000 5,000,000
F.N.B Statutory Trust I, 3 month libor + 3.250%, due
3/31/2033 (a) 9,000 9,000,000 9,000 9,000,000
FBOP Capital Trust XII, 6 month libor + 3.625%, due 7/30/2032 (a) 1,000 1,000,000 1,000 1,000,000
FBOP Capital Trust XV, 6 month libor + 3.625%, due 12/15/2032 (a) 14,000 14,000,000 14,000 14,000,000
FBR Capital Trust I, 3 month libor + 3.250%, due 3/30/2033 (a) 19,000 18,854,879 19,000 18,852,747
First Banks Statutory Trust I, 8.100%, due 3/20/2033 (a) 21,000 21,000,000 21,000 21,000,000
First Financial Statutory Trust II, 3 month libor + 3.100%, due
9/30/2033 (a) 9,000 9,000,000 9,000 9,000,000
First Group Capital Statutory Trust III, 3 month libor + 3.35%,
due 11/15/2032 (a) 5,000 5,039,490 5,000 5,040,103
First Group Capital Statutory Trust V, 3 month libor + 3.250%,
due 4/15/2033 (a) 15,000 15,095,357 15,000 15,096,875
First Indiana Capital Trust I, 6.920%, due 10/30/2032 (a) 10,000 9,991,732 10,000 9,991,629
First Mariner Capital Trust II, 3 month libor + 3.350%, due
12/10/2032 (a) 4,000 3,962,738 4,000 3,962,183
First Mutual Capital Trust II, 6.870%, due 1/15/2033 (a) 4,000 3,954,982 4,000 3,954,426
First National Bank Group Inc, 6.580%, due 4/7/2013 (a) 8,500 8,314,391 8,500 8,312,023
First South Bancorp Statutory Trust I, 3 month libor + 3.250%,
due 6/9/2033 (a) 9,000 9,000,000 9,000 9,000,000
First Southern Bancorp Statutory Trust I, 3 month libor +
3.250%, due 2/19/2033 (a) 11,000 11,000,000 11,000 11,000,000
FNB Statutory Trust I, 3 month libor + 3.250%, due 3/31/2033 (a) 13,330 13,330,000 13,330 13,330,000
FNB/MT Statutory II, 3 month libor + 3.250%, due 5/30/2033 (a) 5,000 4,996,634 5,000 4,996,585
Franklin Bancorp Capital Trust I, 3 month libor + 3.250%, due
2/25/2033 (a) 7,000 6,932,138 7,000 6,931,106
GB&T Bancshares Statutory Trust I, 3 month libor + 3.400%, due
10/30/2032 (a) 4,000 4,000,000 4,000 4,000,000
Guaranty (TX) Capital Trust II, 7.940%, due 10/30/2032 (a) 3,000 3,000,487 3,000 3,000,492
Hanmi Capital Trust II, 3 month libor + 2.90%, due 3/15/2034 (a) 5,301 5,301,000 5,301 5,301,000
Hudson United Capital Trust I, 6.85%, due 3/31/2033 (a) 20,000 19,930,843 20,000 19,930,002
IBC Capital Financial II, 8.250%, due 12/31/2026 (a) 300 300,000 300 300,000
Iberiabank Statutory Trust II, 3 month libor + 3.150%, due
6/17/2033 (a) 9,000 9,041,262 9,000 9,041,869
ITLA Capital Statutory Trust III, 6 month libor + 3.400%, due
10/30/2032 (a) 9,000 8,921,743 9,000 8,920,534
ITLA Capital Statutory Trust IV, 6 month libor + 3.400%, due
12/10/2032 (a) 4,330 4,292,636 4,330 4,292,102
Lakeland Bancorp Capital Trust II, 5.710%, due 6/30/2033 (a) 9,000 8,960,218 9,000 8,959,637
Macatawa Statutory Trust I, 3 month libor + 3.050%, due
7/15/2033 (a) 9,000 9,000,000 9,000 9,000,000
Main Street Banks Statutory Trust II, 3 month libor + 3.250%,
due 6/30/2033 (a) 9,000 9,000,000 9,000 9,000,000
MainSource Statutory Trust II, 3 month libor + 3.250%, due
4/1/2033 (a) 14,000 14,000,000 14,000 14,000,000
MainSource Statutory Trust III, 3 month libor + 3.150%, due
6/15/2033 (a) 7,000 6,987,995 7,000 6,987,817
Mariner Capital Trust II, 3 month libor + 3.350%, due
12/10/2032 (a) 2,000 1,981,056 2,000 1,980,774
MBNA Capital B, 3 month libor + 0.800%, due 2/1/2027 7,000 6,860,000 7,000 6,629,000
2
Trapeza Funding II, LLC
Consolidated Schedules of Investments (continued)
Unaudited
DECEMBER 31, 2005 DECEMBER 31, 2004
--------------------------- -------------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(000) FAIR VALUE (000) FAIR VALUE
------------ -------------- --------- --------------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
BANKS (80.30% AND 80.14%)*- CONTINUED
Merchants & Manufacturers Statutory Trust I, 3 month libor +
3.350%, due 11/12/2032 (a) $ 2,000 $ 2,000,000 $ 2,000 $ 2,000,000
Merchants and Manufacturers Statutory Trust II, 8.250%, due
5/30/2033 (a) 9,000 9,000,000 9,000 9,000,000
Mystic Financial Capital Trust II, 3 month libor + 3.250%, due
2/15/2033 (a) 7,000 6,924,525 7,000 6,923,354
Nara Capital Trust III, 3 month libor + 3.150%, due 6/15/2033 (a) 5,000 4,972,617 5,000 4,972,210
New Mexico Banquest Capital Trust I, 3 month libor + 3.350%,
due 12/19/2032 (a) 9,000 9,065,528 9,000 9,066,494
North American Capital Trust I, 3 month libor + 3.35%, due
11/15/2032 (a) 5,000 5,118,470 5,000 5,120,308
Northrim Capital Trust I, 3 month libor + 3.150%, due
5/15/2033 (a) 8,000 7,917,428 8,000 7,916,149
Old Second Capital I, 7.800%, due 6/30/2033 (a) 1,500 1,500,000 1,500 1,500,000
Orion Bancorp Inc Statutory Trust I, 3 month libor + 3.250%,
due 5/5/2033 (a) 9,000 9,000,000 9,000 9,000,000
Pacific Crest Capital Trust I, 6.335%, due 3/20/2033 (a) 13,330 13,483,006 13,330 13,485,058
Pacific Crest Capital Trust II, 6.580%, due 4/30/2033 (a) 6,000 6,022,813 6,000 6,023,102
Provident Capital Trust I, 8.600%, due 12/1/2026 9,395 10,052,650 9,395 9,886,754
Provident Trust I, 8.290%, due 4/15/2028 6,500 6,890,000 6,500 6,745,414
Red River Statutory Trust II, 3 month libor + 3.250%, due
5/28/2033 (a) 3,000 3,000,000 3,000 3,000,000
Seacoast Capital Trust II, 6.650%, due 4/7/2033 (a) 5,000 5,000,000 5,000 5,000,000
South Financial Capital Trust II, 6 month libor + 3.25%, due
7/30/2032 (a) 6,500 6,437,868 6,500 6,436,875
Southcoast Capital Trust II, 3 month libor + 3.350%, due
12/16/2032 (a) 7,000 6,934,710 7,000 6,933,747
State National Capital Trust I, 3 month libor + 3.050%, due
9/30/2033 (a) 6,000 6,014,597 6,000 6,014,811
Stearns Financial Capital Trust, 3 month libor + 3.150%, due
3/30/2033 (a) 10,000 9,984,714 10,000 9,984,485
Sterling Bank Houston Texas, 7.375%, due 4/15/2013 (a) 12,330 12,326,402 12,330 12,435,494
Sterling Bancshares Statutory Trust I, 3 month libor + 3.450%,
due 8/30/2032 (a) 10,000 10,000,000 10,000 10,000,000
UCBH Capital Trust II, 3 month libor + 3.450%, due 11/7/2032 (a) 9,000 9,000,000 9,000 9,000,000
Umpqua Statutory Trust II Units, 3 month libor + 3.350%, due
10/17/2032 (a) 9,000 8,887,855 9,000 8,886,065
United Bancorporation of Wyoming Capital Trust I, 3 month libor
+ 3.100%, due 9/30/2033 (a) 6,000 6,011,528 6,000 6,011,696
VCBI Capital Trust II, 6 month libor + 3.300%, due 12/19/2032 (a) 1,670 1,659,921 1,670 1,659,776
Virginia Capital Trust II, 6 month libor + 3.300%, due
12/19/2032 (a) 13,330 13,249,962 13,330 13,248,814
Wesbanco Capital Trust II, 5.800%, due 6/30/2033 (a) 9,000 8,985,611 9,000 8,985,404
Woodforest Statutory Trust IV, 3 month libor + 3.250%, due
3/3/2033 (a) 10,000 10,000,000 10,000 10,000,000
----------- -----------
Total Banks (amortized cost $553,474,532 and $553,379,484) 558,069,589 557,954,087
----------- -----------
3
Trapeza Funding II, LLC
Consolidated Schedules of Investments (continued)
Unaudited
DECEMBER 31, 2005 DECEMBER 31, 2004
--------------------------- -------------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(000) FAIR VALUE (000) FAIR VALUE
------------ -------------- --------- --------------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
(CONTINUED)
THRIFTS (19.70% AND 19.86%)
BankUnited Statutory Trust IV, 3 month libor + 3.400%, due
11/14/2032 (a) $ 6,000 $ 6,000,000 $ 6,000 $ 6,000,000
BBC Capital Trust VI, 3 month libor + 3.350%, due 12/10/2032 (a) 15,000 14,864,128 15,000 14,862,123
BBC Capital Trust XII, 6.650%, due 4/7/2033 (a) 3,670 3,670,000 3,670 3,670,000
Beal Financial Trust I, 6 month libor + 3.625%, due 7/30/2032 (a) 9,000 8,913,949 9,000 8,912,596
Beal Financial Trust II, 3 month libor + 3.350%, due
3/27/2033 (a) 13,000 12,891,554 13,000 12,889,932
Capital One Capital I, 3 month libor + 1.550%, due 2/1/2027 4,000 4,020,000 4,000 3,980,000
Coastal Financial Capital Trust I, 3 month libor + 3.050%,
due 7/3/2033 (a) 9,000 9,078,891 9,000 9,080,066
Flagstar Statutory Trust IV, 6.750%, due 3/19/2033 (a) 22,330 22,236,250 22,330 22,235,082
Franklin Bank Capital Trust I, 3 month libor + 3.35%, due
11/15/2032 (a) 9,000 8,921,915 9,000 8,920,702
HFC Capital Trust IV, 6 month libor +3.350%, due 11/15/2032 (a) 6,550 6,410,385 6,550 6,408,292
IndyMac Capital Trust, 6.050%, due 7/11/2033 (a) 9,000 8,973,513 9,000 8,973,149
Progress Capital Trust III, 3 month libor + 3.350%, due
11/15/2032 (a) 4,000 3,967,474 4,000 3,966,970
Sterling Capital Trust IV, 3 month libor + 3.150%, due
5/15/2033 (a) 9,000 8,968,893 9,000 8,968,409
Waypoint Capital Trust II, 3 month libor + 3.300%, due
1/7/2033 (a) 3,000 3,000,000 3,000 3,000,000
Waypoint Statutory Trust III, 3 month libor + 3.250%, due
3/13/2033 (a) 15,000 15,000,000 15,000 15,000,000
WSFS Capital Trust I, 3 month libor +2.500%, due 12/1/2028 - - 1,500 1,425,000
------------ ------------
Total Thrifts (amortized cost $135,878,333 and $137,190,230) 136,916,952 138,292,321
------------ ------------
Total Investments in Trust Preferred Securities (amortized
cost $689,352,865 and $690,569,714) $694,986,541 $696,246,408
============ ============
FAIR VALUE FAIR VALUE
---------- ----------
INTEREST RATE SWAP AGREEMENTS
Credit Suisse First Boston $5,865,799 $ 972,087
---------- -----------
Total Interest Rate Swap Agreements $5,865,799 $ 972,087
========== ===========
* Amounts in parenthesis indicate percentage of investments in trust preferred
securities.
(a) Private placement, illiquid securities, where amortized cost approximates
fair value.
See accompanying notes to consolidated financial statements.
4
Trapeza Funding II, LLC
Consolidated Statements of Operations
Unaudited
YEAR ENDED DECEMBER 31,
2005 2004
------------ ------------
INVESTMENT INCOME
Interest $ 47,980,287 $ 38,700,292
EXPENSES
Interest 30,382,232 23,374,628
Collateral management fees 1,740,103 1,741,272
Amortization 1,557,453 1,559,366
Trustee fees 269,990 249,125
Professional fees 169,841 196,742
Administration fees 102,584 104,762
Other 359,125 293,664
------------ ------------
Total expenses 34,581,328 27,519,559
------------ ------------
NET INVESTMENT INCOME 13,398,959 11,180,733
------------ ------------
Net realized gain and unrealized appreciation (depreciation)
on investment transactions:
Net realized loss on investment transactions - (3,616,391)
Net unrealized appreciation (depreciation) on
investments in trust preferred securities (43,018) 6,153,459
Net unrealized appreciation on interest rate
swap agreements 4,893,712 1,388,550
------------ ------------
Net realized gain and unrealized appreciation (depreciation) on
investment transactions 4,850,694 3,925,618
------------ ------------
Net income before minority interest 18,249,653 15,106,351
Minority interest 14,809,563 12,226,236
------------ ------------
NET INCOME $ 3,440,090 $ 2,880,115
============ ============
See accompanying notes to consolidated financial statements.
5
Trapeza Funding II, LLC
Consolidated Statements of Changes in Members' Interests
Years ended December 31, 2005 and 2004
Unaudited
Balance at January 1, 2004 $ 537,185
Net income 2,880,115
Distributions to members (1,984,434)
-------------
Balance at December 31, 2004 1,432,866
Net income 3,440,090
Distributions to members (1,909,672)
-------------
Balance at December 31, 2005 $ 2,963,284
=============
See accompanying notes to consolidated financial statements.
6
Trapeza Funding II, LLC
Consolidated Statements of Cash Flows
Unaudited
YEAR ENDED DECEMBER 31,
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,440,090 $ 2,880,115
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities:
Amortization of deferred debt issuance costs 1,557,453 1,543,494
Accretion of discount on investments in trust preferred
securities (283,151) (146,810)
Minority interest 14,809,563 12,226,236
Net realized loss on investment transactions - 3,616,391
Net unrealized appreciation on investment transactions (4,850,694) (7,542,009)
Net change in operating assets and liabilities:
Investment in trust preferred securities 1,500,000 -
Interest receivable on trust preferred securities (633,748) (328,266)
Prepaid expenses 836 (16,789)
Interest payable 3,726,407 1,271,404
Professional fees (15,275) 22,406
Collateral management fees (937) (48,198)
Net interest payable to swap counterparty (1,196,570) (665,169)
Trustee fees (278) (5,051)
Accrued expenses - (30,989)
Minority interest (7,530,739) (8,024,465)
------------ ------------
Net cash and cash equivalents provided by operating activities 10,522,957 4,752,300
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes (4,241,205) (3,073,096)
Distributions to members (1,909,672) (1,984,434)
------------ ------------
Net cash and cash equivalents used in financing activities (6,150,877) (5,057,530)
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,372,080 (305,230)
Cash and cash equivalents, beginning of year 15,255,017 15,560,247
------------ ------------
Cash and cash equivalents, end of year $ 19,627,097 $ 15,255,017
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 27,944,173 $ 22,976,508
============ ============
See accompanying notes to consolidated financial statements.
7
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements
December 31, 2005
1. ORGANIZATION AND PURPOSE
Trapeza Funding II, LLC ("Funding"), was organized on August 26, 2002 as a
Delaware limited liability company. Funding commenced operations on November 1,
2002. Funding was organized for the purpose of being the general partner (the
"General Partner"), of Trapeza Partners II L.P. (the "Partnership"). Per the
partnership agreement, the limited partners have no right to remove Funding at
any time. Funding has complete and exclusive control of the management of the
business affairs of the Partnership.
The Partnership was organized on September 27, 2002 as a Delaware limited
partnership. The Partnership commenced operations on November 19, 2002. The
Partnership was organized for the purpose of investing in membership interests
and other securities to be issued by Trapeza CDO II, LLC ("Issuer II"), an
affiliated collateralized debt obligation, which was formed by Funding. On May
15, 2003, Trapeza Note I, LLC ("Note I") was formed to issue Class BB fixed rate
notes, purchase 100% of the membership interests of Issuer II and return a
portion of equity to the Partnership for the purpose of investing in membership
interests and other securities to be issued by Trapeza CDO III, LLC ("Issuer
III"), an affiliated collateralized debt obligation. Issuer III closed on June
25, 2003. The Partnership has an 11-year term, which the General Partner may
extend on a year-to-year basis.
All material intercompany transactions have been eliminated. Minority interest
reflects the 99.99% of partners' interest of the limited partners of the
Partnership. The consolidated entity is referred to as the "Company."
Funding and the Collateral Manager are owned equally by Financial Stocks, Inc.
("FSI") and Resource Financial Fund Management, Inc., a wholly owned subsidiary
of Resource America, Inc. ("REXI") (collectively, the "Owners"). FSI is a
Registered Investment Adviser under the Investment Advisers Act of 1940. REXI, a
publicly traded company, is a specialized asset management company that uses
industry specific expertise to generate and administer investment opportunities
for their own account and for outside investors in the financial fund
management, real estate and equipment leasing sectors. The Owners and certain
officers and directors of the Owners hold partnership interests of approximately
18% of the Partnership. Funding has complete and exclusive control of the
management of the business affairs of the Partnership.
8
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
1. ORGANIZATION AND PURPOSE (CONTINUED)
Issuer II and Issuer III's objective is to purchase, acquire, own, hold, sell,
endorse, transfer, assign, pledge, finance, refinance, exchange, restructure,
workout, advance and collect funds pursuant to and otherwise deal with and
exercise rights of ownership with respect to the collateral of Issuer II and
Issuer III, including other securities or equity interests owned from time to
time by Issuer II and Issuer III, all in accordance with the terms of the
indentures.
Trapeza Capital Management, LLC (the "Collateral Manager"), a Delaware limited
liability company, is responsible for supervising and directing the investment
the collateral of Issuer II and Issuer III. Issuer II and III are charged a
collateral management fee by the Collateral Manager, who is affiliated with
Funding through common ownership.
The business and affairs of Funding are managed by a Board of Managers. The
Board of Managers has full, complete and exclusive authority, power and
discretion to manage and control the business affairs and properties of Funding,
to make all decisions regarding those matters and to perform any activities
customary or incident to the management of Funding's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Company in the preparation of its financial statements.
BASIS OF ACCOUNTING
The Company's accounting policies are in conformity with accounting principles
generally accepted in the United States. The Company maintains its financial
records in United States dollars. For financial reporting purposes, the Company
follows the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits with banks and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
9
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT TRANSACTIONS
The Company records transactions on their trade dates. Realized gains and losses
on investments are determined on the specific identification basis for financial
accounting purposes. Interest is accrued as earned or incurred and includes the
amortization/accretion of premiums and discounts on debt securities.
INVESTMENT VALUATION
Investments are carried at fair value. Securities for which market quotations
are not readily available are valued by procedures adopted by Funding. In
valuing investments in which market quotations are not readily available,
Funding utilizes data from a variety of different sources, taking into account
the characteristics of a security, any changes in the credit quality of the
securities in the portfolio, the overall movement of interest rates and other
factors which, in Funding's good faith and judgment, are relevant to the value
of a security. For exchange-traded securities, management will obtain current
market data and quotes from independent brokers.
The Company has invested a significant portion of the portfolio in private
placement, illiquid issues having no ready market. At December 31, 2005, these
securities aggregate $655,859,895 and have been valued in good faith by Funding
as described in the preceding paragraph. Because of the inherent uncertainty of
valuation, the fair values estimated by Funding may not necessarily represent
the amounts that could be realized from sales or other dispositions of
investments and the differences may be material.
CREDIT RISKS AND GENERAL LIQUIDITY CONSIDERATIONS
Investments in trust preferred securities are subject to credit, interest rate
and liquidity risks. Adverse changes in the financial condition of an issuer of
trust preferred securities or in general economic conditions or both may impair
the ability of the issuer to make payments of principal and interest. Debt
obligations are also subject to liquidity risk and the risk of market price
fluctuations. Adverse changes in the financial condition of an issuer may affect
the liquidity of the market for an issuer's securities and may reduce the market
price of such securities. In addition, changes in general economic and
regulatory conditions may affect the liquidity of the market for trust preferred
securities in general and may reduce the values of some or all of the
securities.
10
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOCATION OF PROFITS AND LOSSES
The Company allocates profits to the members in proportion to their respective
capital account balances until the cumulative profits for this current period
and all prior fiscal years are equal to the cumulative losses allocated;
thereafter, among the members in proportion to their respective units. Losses
shall be allocated to the members in proportion to their respective capital
account balances.
Funding's investment in the Partnership is accounted for based on its pro-rata
share of its investment in the Partnership. Profits and losses from
non-portfolio income are allocated to all members in proportion to their
allocable shares. Twenty percent (20%) of the cumulative net profits from
portfolio investments are allocated to Funding.
Non-portfolio income of the Partnership, consisting primarily of income earned
on short-term investments, is allocated to all limited partners in proportion to
their respective capital account balances prior to the allocation of any other
item.
Portfolio income of the Partnership, consisting primarily of interest income and
profits and losses from the sale of such investments, are allocated to all
partners of the Partnership in proportion to their respective contributed
capital of the Partnership in relation to total contributed capital, but 20% of
the cumulative net profits otherwise allocable to all partners will be allocated
to Funding, defined as the incentive allocation. For the years ended December
31, 2005 and 2004, Funding received an incentive allocation of $2,982,801 and
$2,430,901, respectively.
TAXATION
The Company is treated as a partnership for Federal income tax purposes and,
therefore, no provision for federal income tax is recorded.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
11
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS
As of December 31, 2005, the Company has 100 membership units issued and
outstanding. No member shall be required to make any additional contributions
beyond their initial contribution. If the Board of Managers unanimously
determines that the Company requires additional funds, any member may, but is
not obligated to, advance such funds.
No member shall have the right to withdraw any of its capital contribution,
except upon dissolution and liquidation of the Company. For the years ended
December 31, 2005 and 2004, the Company made distributions of $1,909,672 and
$1,984,434, respectively, to the members.
In accordance with the partnership agreement, each partner has contributed a
specified amount of capital which is set forth in the partnership agreement. No
limited partner is required to contribute any capital in excess of its
commitment. As of December 24, 2002, all commitments of the Partnership were
fully funded.
A limited partner will not have the right to redeem its interest in the
Partnership. Funding, in its sole discretion, may redeem all or part of the
partnership interest of any limited partner, for an amount equal to the capital
account of the partnership interest being redeemed, if the limited partner
consents to such redemption and all redemptions in any year do not exceed five
percent of the aggregate allocable percentage of all limited partners.
12
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS (CONTINUED)
Funding will cause the Partnership to distribute the lesser of (i) ninety
percent (90%) of cash available from profits and (ii) all cash then available to
the partnership less any reserves for partnership expenses or liabilities. All
other distributions will be at the discretion of Funding. Funding will determine
at its sole discretion the source of funds for all distributions. For the years
ended December 31, 2005 and 2004, the Partnership made distributions of
$7,423,843 and $8,138,564, respectively, to the partners.
4. ISSUER II
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $9,831,231 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is the period ending with the distribution date occurring in April
2013, as defined in the indenture ("Indenture II"). Amortization of deferred
debt issuance costs commenced on March 11, 2003.
COLLATERAL MANAGEMENT AND TRUSTEE FEES
Pursuant to a collateral management agreement, the Collateral Manager is
entitled to a semiannual fee, payable in arrears on the distribution dates,
equal to 0.10% per annum of the semi-annual asset amount ("Base Collateral
Management Fee"), of the net outstanding portfolio collateral, as defined in the
indenture. After certain expenses have been paid, the Collateral Manager is
entitled to an additional semiannual fee equal to 0.15% per annum, calculated in
the same manner as the Base Collateral Management Fee. For the years ended
December 31, 2005 and 2004, total collateral management fees were $990,103 and
$993,352, respectively, and are included in total collateral management fees
reflected on the consolidated statements of operations.
Pursuant to a trustee agreement, the trustee is entitled to a semiannual fee, on
each distribution date, equal to 0.023625% per annum of the sum of the aggregate
principal amount of the investments plus cash and cash equivalents at the
beginning of the period relating to such distribution dates, an annual fee of
$15,000, and reimbursement of out of pocket expenses. For the years ended
December 31, 2005 and 2004, total trustee fees were $114,178 and $114,226,
respectively, and are included in total trustee fees reflected on the
consolidated statements of operations.
13
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER II (CONTINUED)
NOTES PAYABLE
On March 11, 2003, Issuer II issued notes (the "Notes") at their respective
principal values, which are secured by Issuer II's investments and are
non-recourse to the Company.
At December 31, 2005 and 2004, Notes outstanding consisted of the following:
2005 2004 STATED
PRINCIPAL PRINCIPAL INTEREST RATE MATURITY
----------------- ------------------ --------------------- ------------------
Class A1A Notes $ 130,499,115 $ 131,999,114 Libor + 0.65% until October 5, 2033
the distribution
date in April 2013
and Libor + 1.30%
thereafter
Class A1B Notes $ 100,000,000 $ 100,000,000 Libor + 0.88% October 5, 2033
Class B Notes $ 27,000,000 $ 27,000,000 Libor + 0.70% October 5, 2033
Class C-1 $ 43,500,000 $ 43,500,000 Libor + 1.90% October 5, 2033
Floating Notes
Class C-2 Fixed $ 54,800,000 $ 54,800,000 5.20% until the October 5, 2033
Notes distribution date
in April 2008 and
Libor + 1.90%
thereafter
Class D Notes $ 18,450,000 $ 18,450,000 Libor + 2.65% October 5, 2033
Holders of the Notes are to receive semiannual interest payments on October 5
and April 5, commencing in October 2003 (the "Initial Payment Date"). The order
of payment will be first to Class A1A, second, Class A1B, third, Class B, fourth
to Class C, and fifth Class D of notes being senior to each of the other classes
of notes. No payments of interest on any class of notes will be made until all
accrued and unpaid interest on the notes of each class that is senior to a class
and that remain outstanding has been paid in full. No payment of principal of
any class of notes will be made until the principal of, and all accrued and
unpaid interest, on the notes of each class that is senior to such class and
that remain outstanding have been paid in full.
14
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER II (CONTINUED)
NOTES PAYABLE (CONTINUED)
In the event that the coverage tests, as defined in Indenture II, are not
satisfied as of any distribution date, each class of notes may be redeemed in
the manner specified in Indenture II.
Principal payments will be made in the following manner. First, payment of
principal of the Class A1A notes until the Class A1A notes have been paid in
full. Next, payment of principal on the Class A1B notes until the Class A1B
notes have been paid in full. Next, payment of principal of the Class B notes
until the Class B notes have been paid in full. Next, payment of principal of
the Class C notes until Class C notes have been paid in full. Next, payment of
principal of the Class D notes. Finally, the remainder to the members as a
dividend on the members' interests or as a return of capital of the members'
interests as provided in Issuer II's Agreement ("Agreement II").
If on any distribution date, the amount available in the payment account from
amounts received in the related due period are insufficient to make the full
amount of the disbursements required by the priority of payments to different
persons, the trustee will make the disbursements ratably in accordance with
Indenture II.
If the notes and the member's interests have not been released prior to October
5, 2033, it is expected that Issuer II or Collateral Manager, acting on behalf
of Issuer II, will sell all of the investments and sell or liquidate all other
collateral, and all net proceeds from such sales and liquidations and all
available cash after the payment (in the order of priorities set forth above) of
all (i) fees, (ii) expenses and (iii) interest (including any defaulted interest
and interest on defaulted interest, any Class C deferred interest and interest
on any Class C deferred interest and any Class D deferred interest and interest
on any Class D deferred interest) and principal of the notes, will be
distributed to the members in accordance with Agreement II.
15
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER II (CONTINUED)
ACCELERATION OF MATURITY AND REDEMPTION
Indenture II provides for an acceleration of maturity or redemption of all of
the senior notes and accrued and unpaid interest upon the occurrence of a
default event. Default events include a) failure of Issuer II to pay interest
for a period of three business days on any Class A or B senior Notes, b) failure
of Issuer II to pay principal of any senior Note when such payment becomes due
and payable at its stated maturity or redemption date, c) failure of Issuer II,
on any distribution date to disburse amounts available to the interest
collection account or principal collection account in accordance with the order
of the priority of payments set forth in Indenture II, which continues for three
business days, d) Issuer II or pool of collateral becomes an investment company
required to be registered under the Investment Company Act, e) default in
performance, or a breach, of any other covenant or other agreement of Issuer II
under the Indenture II or any representation of warranty of Issuer II made in
Indenture II or in any certificate or other writing proves to be incorrect in
any material respect when made, and in both clauses, the continuation of such
default or breach for a period of thirty days after Issuer II or the Collateral
Manager has actual knowledge that such default or breach has occurred or after
written notice to Issuer II and the Collateral Manager by the trustee, or to
Issuer II, the Collateral Manager and the Trustee by the holders of at least 25%
in aggregate outstanding principal amount of the Notes of the controlling class
or hedge counterparty, f) one or more final judgments being rendered against
Issuer II that exceed, in the aggregate, $5,000,000, and which remain unstayed,
undischarged and unsatisfied for thirty days after such judgment(s) becomes
nonappealable, unless adequate funds have been reserved or set aside for the
payment thereof, and g) failure, on any measurement date, to cause the Class A/B
overcollateralization ratio to be equal to or greater than 100%. Each of these
conditions is further described in Indenture II.
5. NOTE I
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $300,000 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is April 2010, as defined in the fiscal and collateral agency
agreement ("Note Agreement"), assuming all scheduled principal payments are made
when due. Amortization of deferred debt issuance costs commenced on May 15,
2003.
16
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
5. NOTE I (CONTINUED)
NOTES PAYABLE
On May 15, 2003, Note I issued Notes at their respective principal value, which
are secured by Note I's investments and are non-recourse to the Company.
At December 31, 2005 and 2004, the Notes outstanding consisted of the following:
INTEREST
2005 PRINCIPAL 2004 PRINCIPAL RATE STATED MATURITY
---------------- ------------------ ------------ -----------------------
Class BB Notes $6,428,571 $ 7,857,143 11.00% October 5, 2033
Holders of the Notes are to receive semiannual interest payments on October 5
and April 5, commencing in October 2003 (the "Initial Payment Date"). On each
payment date, in addition to scheduled interest, Note I shall prepay the
scheduled principal to the holders of the notes, if and only to the extent Note
I receives payments on membership interests and funds available on deposit in
the note collection account to pay scheduled principal. If Note I fails to pay
any of the scheduled principal due to insufficient funds received by Note I in
respect to the membership interests, such unpaid scheduled principal shall not
be considered "due and payable" for any purposes hereunder and will be deferred
until such date as Note I receives sufficient payments.
In the event that the coverage tests, as defined in the Note Agreement, are not
satisfied as of any distribution date, the notes may be redeemed in the manner
specified in the Note Agreement.
If the notes and the members' interests have not been released prior to October
5, 2033, it is expected that Note I or Collateral Manager, acting on behalf of
the Note I, will sell all of the investments and all eligible investments and
sell or liquidate all other collateral, and all net proceeds from such sales and
liquidations and all available cash after the payment (in the order of
priorities set forth above) of all (i) fees, (ii) expenses and (iii) interest
and principal of the notes, will be distributed to the members in accordance
with the Note Agreement.
The Note Agreement provides for an option by holders of more than 50% of the
notes outstanding an acceleration of maturity or redemption of all of the notes
and accrued and unpaid interest upon the occurrence of a default event. Default
events include a) Note I fails to perform its obligations under the Note
Agreement, and such failure could
17
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
5. NOTE I (CONTINUED)
NOTES PAYABLE (CONTINUED)
reasonably be expected to have a material adverse effect on the interest of the
holders and has not been cured within thirty days after the date of an officer
obtaining actual knowledge of such default, or, b) a court or governmental
authority of competent jurisdiction enters an order appointing, without consent
of Note I, a custodian, receiver, trustee or each officer with similar powers
with respect to Note I or with respect to any substantial part of Note I's
property, or constituting an order for relief or reorganization or any petition
in bankruptcy or for liquidation or to take advantage of any bankruptcy or
insolvency law of any jurisdiction, or ordering the dissolution, winding-up or
liquidation of Note I, or any such petition shall be filed against the issuer
and such petition shall not be dismissed within sixty days.
6. ISSUER III
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $7,863,460 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is the period ending with the distribution date occurring in July
2013, as defined in the indenture ("Indenture III"). Amortization of deferred
debt issuance costs commenced on June 25, 2003.
COLLATERAL MANAGEMENT AND TRUSTEE FEES
Pursuant to a collateral management agreement, the Collateral Manager is
entitled to a semiannual fee, payable in arrears on the distribution dates,
equal to 0.10% per annum of the semi-annual asset amount ("Base Collateral
Management Fee"), of the net outstanding portfolio collateral, as defined in
Indenture III. After certain expenses have been paid, the Collateral Manager is
entitled to an additional semiannual fee equal to 0.15% per annum, calculated in
the same manner as the Base Collateral Management Fee. For the years ended
December 31, 2005 and 2004, total collateral management fees were $750,000 and
$747,920, respectively, and are included in total collateral management fees
reflected on the consolidated statements of operations.
18
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. ISSUER III (CONTINUED)
COLLATERAL MANAGEMENT AND TRUSTEE FEES (CONTINUED)
Pursuant to a trustee agreement, the trustee is entitled to a semiannual fee, on
each distribution date, equal to 0.0225% per annum of the sum of the aggregate
principal amount of the investments plus cash and cash equivalents at the
beginning of the period relating to such distribution dates, as defined in
Indenture III. For the years ended December 31, 2005 and 2004, total trustee
fees were $84,342 and $83,874, respectively, and are included in total trustee
fees reflected on the consolidated statements of operations.
NOTES PAYABLE
On June 25, 2003, Issuer III issued Notes at their respective principal values,
which are secured by Issuer III's investments and are non-recourse to the
Company.
At December 31, 2005 and 2004, the Notes outstanding consisted of the following:
INTEREST
2005 PRINCIPAL 2004 PRINCIPAL RATE STATED MATURITY
----------------- ----------------- ------------ ---------------------
Class A1A Notes $ 108,497,331 $ 108,497,331 Libor + January 20, 2034
0.63%
Class A1B Notes $ 71,500,000 $ 71,500,000 Libor + January 20, 2034
0.85%
Class B Notes $ 25,000,000 $ 25,000,000 See Class January 20, 2034
B note
Class C-1 Notes $ 31,250,000 $ 31,250,000 Libor + January 20, 2034
1.75%
Class C-2 Notes $ 31,250,000 $ 31,250,000 Libor + January 20, 2034
1.75%
Class D Notes $ 13,259,797 $ 13,715,288 Libor + January 20, 2034
2.65%
Class E Notes $ 5,714,284 $ 6,857,142 10.00% January 20, 2034
19
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. ISSUER III (CONTINUED)
NOTES PAYABLE (CONTINUED)
Pursuant to the terms of the Class B agency agreement, the holders of the Class
B Notes will be entitled to receive interest, certain third parties will be
entitled to receive compensation, at an aggregate, floating rate per annum not
to exceed Libor plus 1.05% in the aggregate after taking into consideration the
effect of a basis swap to be entered into in connection with the Class B Notes.
Holders of the Notes are to receive semiannual interest payments on January 20
and July 20, commencing in January 2004 (the "Initial Payment Date"). The order
of payment will be first to Class A1A, second, Class A1B, third, Class B,
fourth, Class C (includes Class C-1 and Class C-2), fifth to Class D and sixth
to Class E with each Class of Notes being senior to each of the other classes of
notes. No payments of interest on any class of Notes will be made until all
accrued and unpaid interest on the Notes of each class that is senior to a class
and that remain outstanding has been paid in full. No payment of principal of
any class of Notes will be made until the principal of, and all accrued and
unpaid interest, on the Notes of each class that is senior to such class and
that remain outstanding have been paid in full.
In the event that the coverage tests, as defined in Indenture III, are not
satisfied as of any distribution date, each class of Notes may be redeemed in
the manner specified in Indenture III.
Principal payments will be made in the following manner. First, payment of
principal of the Class A1A Notes until the Class A1A Notes have been paid in
full. Next, payment of principal on the Class A1B Notes until the Class A1B
Notes have been paid in full. Next, payment of principal on the Class B Notes
until the Class B Notes have been paid in full. Next, payment of principal of
the Class C Notes until the Class C Notes have been paid in full. Next, payment
of principal of the Class D Notes. Next, payment of principal of the Class E
Notes. Finally, the remainder to the members as a dividend on the members'
interests or as a return of capital of the members' interests as provided in the
Trapeza CDO III, LLC Agreement ("Agreement III").
If on any distribution date, the amount available in the payment account from
amounts received in the related due period are insufficient to make the full
amount of the disbursements required by the priority of payments to different
persons, the trustee will make the disbursements ratably in accordance with
Indenture III.
20
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. ISSUER III (CONTINUED)
NOTES PAYABLE (CONTINUED)
If the Notes and the members' interests have not been released prior to January
20, 2034, it is expected that Issuer III or Collateral Manager, acting on behalf
of Issuer III, will sell all of the investments and all eligible investments and
sell or liquidate all other collateral, and all net proceeds from such sales and
liquidations and all available cash after the payment (in the order of
priorities set forth above) of all (i) fees, (ii) expenses and (iii) interest
(including any defaulted interest and interest on defaulted interest, any Class
C deferred interest and interest on any Class C deferred interest and any Class
D deferred interest and interest on any Class D deferred interest and any Class
E deferred interest and interest on any Class E deferred interest) and principal
of the Notes, will be distributed to the members in accordance with the
Agreement III.
ACCELERATION OF MATURITY AND REDEMPTION
Indenture III provides for an acceleration of maturity or redemption of all of
the senior Notes and accrued and unpaid interest upon the occurrence of a
default event. Default events include a) failure of Issuer III to pay interest
for a period of three business days on any Class A or B senior Notes, b) failure
of Issuer III to pay principal of any senior Note when such payment becomes due
and payable at its stated maturity or redemption date, c) failure of Issuer III,
on any distribution date to disburse amounts available to the interest
collection account or principal collection account in accordance with the order
of the priority of payments set forth in Indenture III, which continues for
three business days, d) Issuer III or pool of collateral becomes an investment
company required to be registered under the Investment Company Act, e) default
in performance, or a breach, of any other covenant or other agreement of Issuer
III under Indenture III or any representation of warranty of Issuer III made in
Indenture III or in any certificate or other writing proves to be incorrect in
any material respect when made, and in both clauses, the continuation of such
default or breach for a period of thirty days after Issuer III or the General
Partner has actual knowledge that such default or breach has occurred or after
written notice to Issuer III and the General Partner by the trustee, or to
Issuer III, the General Partner and the Trustee by the holders of at least 25%
in aggregate outstanding principal amount of the Notes of the controlling class
or hedge counterparty, f) one or more final judgments being rendered against
Issuer III that exceed, in the aggregate, $5,000,000, and which remain unstayed,
undischarged and unsatisfied for thirty days after such judgment(s) becomes
nonappealable, unless adequate funds have been reserved or set aside for the
payment thereof, and g) failure, on any measurement date, to cause the Class A/B
overcollateralization ratio to be equal to or greater than 100%. Each of these
conditions is further described in Indenture III.
21
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
7. INTEREST RATE SWAP AGREEMENTS
The Company maintains a policy of valuing its derivative instruments at fair
values, with the resulting unrealized gain or loss included in the consolidated
statements of operations.
A swap is an agreement that obligates two parties to exchange a series of cash
flows at specified intervals based upon or calculated by reference to changes in
specified prices or rates for a specified amount of an underlying asset or
otherwise determined notional amount.
Risks may arise as a result of the failure of the counterparty to the swap
agreement. The loss incurred by the failure of a counterparty is generally
limited to the net payment to be received by the Company and/or the termination
value at the end of the agreement. Therefore, the Company considers the
creditworthiness of each counterparty to a swap agreement in evaluating
potential credit risk. Additionally, risks may arise from unanticipated
movements in interest rates.
The Company records a net receivable or payable for the net income or expense
expected to be received or paid in the interest period. Net amounts received or
paid on swap agreements are recorded as interest income or interest expense on
the consolidated statements of operations. The amount recorded as interest
income on basis swap agreements for the years ended December 31, 2005 and 2004
totaled $197,269 and $153,097, respectively.
The Company entered into interest rate swap agreements with Credit Suisse First
Boston ("CSFB") for the purpose of hedging interest rate and cash flow risk
between the fixed-rate investments and floating-rate investments.
22
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
7. INTEREST RATE SWAP AGREEMENTS (CONTINUED)
At December 31, 2005 and 2004, the Company had nine interest rate swap
agreements outstanding with CSFB, which pay as follows:
FLOATING RATE RATE/AMOUNT DECEMBER 31
NOTIONAL MATURITY RECEIVED BY PAID BY THE 2005 2004
AMOUNT DATE THE COMPANY COMPANY FAIR VALUE FAIR VALUE
---------------- --------- ----------------- ------------------ -------------- -------------
$ 3,330,000 4/5/10 6 month Libor 7.375% $ 125,378 $ 11,970
+ 3.4425%
$ 8,670,000 4/5/08 6 month Libor 6.65% 279,301 50,098
+ 3.30%
$ 13,330,000 4/5/08 6 month Libor 6.75% 413,468 54,714
+ 3.35%
$ 13,330,000 4/5/08 6 month Libor 6.335% 545,880 239,893
+ 3.35%
$ 13,330,000 4/5/08 6 month Libor 8.10% 452,246 106,241
+ 4.69%
$ 47,330,000 4/5/08 6 month Libor 6.952% 1,205,244 (173,298)
+ 3.32%
$ 69,500,000 7/20/08 6 month Libor 6.35% 3,025,285 1,025,085
+ 3.25%
$ 25,000,000 7/20/13 6 month Libor 6 month Libor + (555,025) (355,381)
+ 1.0875% 1.05%
$ 9,000,000 7/20/08 6 month Libor 6.05% 442,046 199,715
+ 3.145%
----------- ----------
$ 5,933,823 $1,159,037
=========== ==========
At December 31, 2005 and 2004, the Company had one interest rate cap agreement
outstanding with CSFB, which pays on a semi-annual basis as follows:
FLOATING RATE RATE/AMOUNT DECEMBER 31
NOTIONAL MATURITY RECEIVED BY PAID BY THE 2004 2003
AMOUNT DATE THE COMPANY COMPANY FAIR VALUE FAIR VALUE
---------------- --------- ----------------- ------------------ -------------- -------------
$ 82,000,000 4/5/07 N/A $ 69,000 $ (68,024) $ (186,950)
23
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS
The Partnership pays Funding an administration fee (payable semi-annually in
advance) equal to one and one-half percent (1.5%) per annum of the aggregate
capital accounts of the limited partners, which will be used to cover management
fees and other ordinary and recurring administrative and related operating
expenses. For the years ended December 31, 2005 and 2004, administration fees
totaled $603,039 and $615,848, respectively.
In exchange for interests sold on behalf of the Partnership, Funding pays
external broker-dealers an administration fee, equal to the percentage of equity
raised by the broker-dealer multiplied by one-third of the total administration
fee being charged by Funding to the Partnership. For the years ended December
31, 2005 and 2004, total administration fee expense equaled $102,584 and
$104,762, respectively.
24
Schedule d)
TRAPEZA FUNDING II, LLC
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Years ended December 31, 2004 and 2003
Trapeza Funding II, LLC
Consolidated Financial Statements
Years ended December 31, 2004 and 2003
Unaudited
CONTENTS
Consolidated Statements of Financial Condition................................1
Consolidated Schedule of Investments..........................................2
Consolidated Statements of Operations.........................................5
Consolidated Statements of Changes in Members' Interests......................6
Consolidated Statements of Cash Flows.........................................7
Notes to Consolidated Financial Statements....................................8
Trapeza Funding II, LLC
Consolidated Statements of Financial Condition
Unaudited
DECEMBER 31
2004 2003
------------- -------------
ASSETS
Investments in trust preferred securities, at fair value
(amortized cost $690,569,714 and $694,039,293) $ 696,246,408 $ 693,562,530
Cash and cash equivalents 15,255,017 15,560,247
Deferred debt issuance costs (net of accumulated amortization
of $2,562,385 and $1,018,891) 15,432,306 16,975,800
Interest receivable on trust preferred securities 3,555,918 3,227,652
Prepaid expenses 26,796 10,007
Unrealized appreciation on swap agreements 972,087 -
------------- -------------
Total Assets $ 731,488,532 $ 729,336,236
============= =============
LIABILITIES AND MEMBERS' INTERESTS
Liabilities
Class A1A notes $ 240,496,445 $ 240,499,496
Class A1B notes 171,500,000 171,499,618
Class B notes 52,000,000 52,000,000
Class C-1 notes 74,750,000 74,750,000
Class C-2 notes 86,050,000 86,050,000
Class D notes 32,165,288 32,950,000
Class E notes 5,142,856 6,000,000
Class BB notes 7,857,143 9,285,714
Interest payable 7,505,789 6,234,385
Unrealized depreciation on swap agreements - 416,463
Professional fees 174,134 151,728
Collateral management fees 591,507 639,705
Net interest payable to swap counterparty 759,841 1,425,010
Trustee fees 68,420 73,471
Accrued expenses 111,667 142,656
------------- -------------
Total Liabilities 679,173,090 682,118,246
------------- -------------
Minority interest 50,882,576 46,680,805
Members' Interests 1,432,866 537,185
------------- -------------
Total Liabilities and Members' Interests $ 731,488,532 $ 729,336,236
============= =============
See accompanying notes to consolidated financial statements.
1
Trapeza Funding II, LLC
Consolidated Schedule of Investments
Unaudited
PRINCIPAL PRINCIPAL
AMOUNT 2004 FAIR AMOUNT 2003 FAIR
(000) VALUE (000) VALUE
--------- --------- --------- ---------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
BANKS (80.14% AND 80.15%)*
B.P.C. Corp Statutory Trust I, 3 month libor + 3.250%, due
6/18/2033 (a) $ 3,000 $ 3,000,000 $ 3,000 $ 3,000,000
Bank of Kentucky Capital Trust I, 3 month libor +3.350%, due
11/14/2032 (a) 6,000 6,000,685 6,000 6,000,697
Benjamin Franklin Capital Trust I, 6.940%, due 11/01/2032 (a) 9,000 8,929,802 9,000 8,929,001
BNC Bancorp Capital Trust I, 3 month libor + 3.250%, due
4/15/2033 (a) 5,000 4,951,356 5,000 4,950,525
Catawba Valley Capital Trust I, 3 month libor + 3.35%, due
12/30/2032 (a) 5,000 4,946,116 5,000 4,945,217
Catawba Valley Capital Trust II, 6.850%, due 12/30/2032 (a) 5,000 4,945,609 5,000 4,944,987
Cathay Capital Trust I, 3 month libor + 3.150%, due
6/30/2033 (a) 6,550 6,550,000 6,550 6,550,000
Century Bancshares Capital Trust I, 6.850%, due 1/15/2033 (a) 3,000 3,003,431 3,000 3,003,470
CIB Statutory Trust V, 3 month libor + 3.400%, due 9/27/2032 - - 9,000 5,400,000
Colonial Capital II, 8.920%, due 1/15/2027 10,500 11,635,323 10,500 10,972,500
Community Bankshares Capital Trust IV, 6 month libor + 3.300%,
due 4/15/2033 (a) 5,000 5,013,654 5,000 5,013,887
Corus Statutory Trust II, 3 month libor + 3.100%, due
6/30/2033 (a) 9,000 8,931,197 9,000 8,929,953
CPB Capital Trust I, 3 month libor + 3.250%, due 4/7/2033 (a) 5,000 5,000,000 5,000 5,000,000
F.N.B Statutory Trust I, 3 month libor + 3.250%, due
3/31/2033 (a) 9,000 9,000,000 9,000 9,000,000
FBOP Capital Trust XII, 6 month libor + 3.625%, due
7/30/2032 (a) 1,000 1,000,000 1,000 1,000,000
FBOP Capital Trust XV, 6 month libor + 3.625%, due
12/15/2032 (a) 14,000 14,000,000 14,000 14,000,000
FBR Capital Trust I, 3 month libor + 3.250%, due 3/30/2033 (a) 19,000 18,852,747 19,000 18,850,241
First Banks Statutory Trust I, 8.100%, due 3/20/2033 (a) 21,000 21,000,000 21,000 21,000,000
First Financial Statutory Trust II, 3 month libor + 3.100%, due
9/30/2033 (a) 9,000 9,000,000 9,000 9,000,000
First Group Capital Statutory Trust III, 3 month libor + 3.35%,
due 11/15/2032 (a) 5,000 5,040,103 5,000 5,040,788
First Group Capital Statutory Trust V, 3 month libor + 3.250%,
due 4/15/2033 (a) 15,000 15,096,875 15,000 15,098,531
First Indiana Capital Trust I, 6.920%, due 10/30/2032 (a) 10,000 9,991,629 10,000 9,991,533
First Mariner Capital Trust II, 3 month libor + 3.350%, due
12/10/2032 (a) 4,000 3,962,183 4,000 3,961,542
First Mutual Capital Trust II, 6.870%, due 1/15/2033 (a) 4,000 3,954,426 4,000 3,953,907
First National Bank Group Inc, 6.580%, due 4/7/2013 (a) 8,500 8,312,023 8,500 8,309,805
First South Bancorp Statutory Trust I, 3 month libor + 3.250%,
due 6/9/2033 (a) 9,000 9,000,000 9,000 9,000,000
First Southern Bancorp Statutory Trust I, 3 month libor +
3.250%, due 2/19/2033 (a) 11,000 11,000,000 11,000 11,000,000
FNB Statutory Trust I, 3 month libor + 3.250%, due 3/31/2033 (a) 13,330 13,330,000 13,330 13,330,000
FNB/MT Statutory II, 3 month libor + 3.250%, due 5/30/2033 (a) 5,000 4,996,585 5,000 4,996,528
Franklin Bancorp Capital Trust I, 3 month libor + 3.250%, due
2/25/2033 (a) 7,000 6,931,106 7,000 6,929,935
GB&T Bancshares Statutory Trust I, 3 month libor + 3.400%, due
10/30/2032 (a) 4,000 4,000,000 4,000 4,000,000
Guaranty (TX) Capital Trust II, 7.940%, due 10/30/2032 (a) 3,000 3,000,492 3,000 3,000,496
Hanmi Capital Trust II, 3 month libor + 2.90%, due 3/15/2034 (a) 5,301 5,301,000 - -
Hudson United Capital Trust I, 6 month libor + 3.300%, due
3/31/2033 (a) 20,000 19,930,002 20,000 19,929,216
IBC Capital Financial II, 8.250%, due 12/31/2026 (a) 300 300,000 300 300,000
Iberiabank Statutory Trust II, 3 month libor + 3.150%, due
6/17/2033 (a) 9,000 9,041,869 9,000 9,042,614
ITLA Capital Statutory Trust III, 6 month libor + 3.400%, due
10/30/2032 (a) 9,000 8,920,534 9,000 8,919,372
ITLA Capital Statutory Trust IV, 6 month libor + 3.400%, due
12/10/2032 (a) 4,330 4,292,102 4,330 4,291,477
Lakeland Bancorp Capital Trust II, 5.710%, due 6/30/2033 (a) 9,000 8,959,637 9,000 8,959,088
Macatawa Statutory Trust I, 3 month libor + 3.050%, due
7/15/2033 (a) 9,000 9,000,000 9,000 9,000,000
Main Street Banks Statutory Trust II, 3 month libor + 3.250%,
due 6/30/2033 (a) 9,000 9,000,000 9,000 9,000,000
MainSource Statutory Trust II, 3 month libor + 3.250%, due
4/1/2033 (a) 14,000 14,000,000 14,000 14,000,000
MainSource Statutory Trust III, 3 month libor + 3.150%, due
6/15/2033 (a) 7,000 6,987,817 7,000 6,987,603
Mariner Capital Trust II, 3 month libor + 3.350%, due
12/10/2037 (a) 2,000 1,980,774 2,000 1,980,538
MBNA Capital B, 3 month libor + 0.800%, due 2/1/2027 7,000 6,629,000 7,000 6,090,000
2
Trapeza Funding II, LLC
Consolidated Schedule of Investments (continued)
Unaudited
PRINCIPAL PRINCIPAL
AMOUNT 2004 FAIR AMOUNT 2003 FAIR
(000) VALUE (000) VALUE
--------- --------- --------- ---------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
BANKS (80.14% AND 80.15%)* - CONTINUED
Merchants & Manufacturers Statutory Trust I, 3 month libor +
3.350%, due 11/12/2032 (a) 2,000 2,000,000 2,000 2,000,000
Merchants and Manufacturers Statutory Trust II, 8.250%, due
5/30/2033 (a) 9,000 9,000,000 9,000 9,000,000
Mystic Financial Capital Trust II, 3 month libor + 3.250%, due
2/15/2033 (a) 7,000 6,923,354 7,000 6,922,045
Nara Capital Trust III, 3 month libor + 3.150%, due
6/15/2033 (a) 5,000 4,972,210 5,000 4,971,731
New Mexico Banquest Capital Trust I, 3 month libor + 3.350%,
due 12/19/2032 (a) 9,000 9,066,494 9,000 9,067,609
North American Capital Trust I, 3 month libor + 3.35%, due
11/15/2032 (a) 5,000 5,120,308 5,000 5,122,361
Northrim Capital Trust I, 3 month libor + 3.150%, due
5/15/2033 (a) 8,000 7,916,149 8,000 7,914,700
Old Second Capital I, 7.800%, due 6/30/2033 (a) 1,500 1,500,000 1,500 1,500,000
Orion Bancorp Inc Statutory Trust I, 3 month libor + 3.250%,
due 5/5/2033 (a) 9,000 9,000,000 9,000 9,000,000
Pacific Crest Capital Trust I, 6.335%, due 3/20/2033 (a) 13,330 13,485,058 13,330 13,486,985
Pacific Crest Capital Trust II, 6.580%, due 4/30/2033 (a) 6,000 6,023,102 6,000 6,023,373
Provident Capital Trust I, 8.600%, due 12/1/2026 9,395 9,886,754 9,395 9,223,669
Provident Trust I, 8.290%, due 4/15/2028 6,500 6,745,414 6,500 6,565,001
Red River Statutory Trust II, 3 month libor + 3.250%, due
5/28/2033 (a) 3,000 3,000,000 3,000 3,000,000
Seacoast Capital Trust II, 6.650%, due 4/7/2033 (a) 5,000 5,000,000 5,000 5,000,000
South Financial Capital Trust II, 6 month libor + 3.625%, due
7/30/2032 (a) 6,500 6,436,875 6,500 6,435,831
Southcoast Capital Trust II, 3 month libor + 3.350%, due
12/16/2032 (a) 7,000 6,933,747 7,000 6,932,636
State National Capital Trust I, 3 month libor + 3.050%, due
9/30/2033 (a) 6,000 6,014,811 6,000 6,015,073
Stearns Financial Capital Trust, 3 month libor + 3.150%, due
3/30/2033 (a) 10,000 9,984,485 10,000 9,984,216
Sterling Bank Houston Texas, 7.375%, due 4/15/2013 12,330 12,435,494 12,330 12,363,300
Sterling Bancshares Statutory Trust I, 3 month libor + 3.450%,
due 8/30/2032 (a) 10,000 10,000,000 10,000 10,000,000
UCBH Capital Trust II, 3 month libor + 3.450%, due 11/7/2032 (a) 9,000 9,000,000 9,000 9,000,000
Umpqua Statutory Trust II Units, 3 month libor + 3.350%, due
10/17/2032 (a) 9,000 8,886,065 9,000 8,884,111
United Bancorporation of Wyoming Capital Trust I, 3 month libor
+ 3.100%, due 9/30/2033 (a) 6,000 6,011,696 6,000 6,011,901
VCBI Capital Trust II, 6 month libor + 3.300%, due
12/19/2032 (a) 1,670 1,659,776 1,670 1,659,604
Virginia Capital Trust II, 6 month libor + 3.300%, due
12/19/2032 (a) 13,330 13,248,814 13,330 13,247,446
Wesbanco Capital Trust II, 5.800%, due 6/30/2033 (a) 9,000 8,985,404 9,000 8,985,209
Woodforest Statutory Trust IV, 3 month libor + 3.250%, due
3/3/2033 (a) 10,000 10,000,000 10,000 10,000,000
----------- -----------
Total Banks (amortized cost $553,379,484 and $556,896,380) 557,954,087 555,920,252
----------- -----------
3
Trapeza Funding II, LLC
Consolidated Schedule of Investments (continued)
Unaudited
PRINCIPAL PRINCIPAL
AMOUNT 2004 FAIR AMOUNT 2003 FAIR
(000) VALUE (000) VALUE
--------- --------- --------- ---------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
(CONTINUED)
THRIFTS (19.86% AND 19.85%)
BankUnited Statutory Trust IV, 3 month libor + 3.400%, due
11/14/2032 (a) 6,000 6,000,000 6,000 6,000,000
BBC Capital Trust VI, 3 month libor + 3.350%, due
12/10/2032 (a) 15,000 14,862,123 15,000 14,860,136
BBC Capital Trust XII, 6.650%, due 4/7/2033 (a) 3,670 3,670,000 3,670 3,670,000
Beal Financial Trust I, 6 month libor + 3.625%, due
7/30/2032 (a) 9,000 8,912,596 9,000 8,911,151
Beal Financial Trust II, 3 month libor + 3.350%, due
3/27/2033 (a) 13,000 12,889,932 13,000 12,888,086
Capital One Capital I, 3 month libor + 1.550%, due 2/1/2027 4,000 3,980,000 4,000 3,400,000
Coastal Financial Capital Trust I, 3 month libor + 3.050%,
due 7/3/2033 (a) 9,000 9,080,066 9,000 9,081,503
Flagstar Statutory Trust IV, 6.750%, due 3/19/2033 (a) 22,330 22,235,082 22,330 22,233,989
Franklin Bank Capital Trust I, 3 month libor + 3.35%, due
11/15/2032 (a) 9,000 8,920,702 9,000 8,919,349
HFC Capital Trust IV, 6 month libor +3.350%, due
11/15/2032 (a) 6,550 6,408,292 6,550 6,405,987
IndyMac Capital Trust, 6.050%, due 7/11/2033 (a) 9,000 8,973,149 9,000 8,972,806
Progress Capital Trust III, 3 month libor + 3.350%, due
11/15/2032 (a) 4,000 3,966,970 4,000 3,966,406
Sterling Capital Trust IV, 3 month libor + 3.150%, due
5/15/2033 (a) 9,000 8,968,409 9,000 8,967,864
Waypoint Capital Trust II, 3 month libor + 3.300%, due
1/7/2033 (a) 3,000 3,000,000 3,000 3,000,000
Waypoint Statutory Trust III, 3 month libor + 3.250%, due
3/13/2033 (a) 15,000 15,000,000 15,000 15,000,000
WSFS Capital Trust I, 3 month libor +2.500%, due 12/1/2028 1,500 1,425,000 1,500 1,365,001
------------ ------------
Total Thrifts (amortized cost $137,190,229 and $137,142,913) 138,292,321 137,642,278
------------ ------------
Total Investments in Trust Preferred Securities (amortized
cost $690,569,713 and $694,039,293) $696,246,408 $693,562,530
============ ============
FAIR VALUE FAIR VALUE
--------------- ---------------
INTEREST RATE SWAP AGREEMENTS
Credit Suisse First Boston $ 972,087 $ (416,463)
----------- -----------
Total Interest Rate Swap Agreements $ 972,087 $ (416,463)
=========== ===========
*Amounts in parenthesis indicate percentage of investments in trust preferred
securities.
(a) Private placement, illiquid securities, where amortized cost approximates
fair value.
See accompanying notes to consolidated financial statements.
4
Trapeza Funding II, LLC
Consolidated Statements of Operations
Unaudited
YEAR ENDED DECEMBER 31,
2004 2003
------------- -------------
INVESTMENT INCOME
Interest $ 38,700,292 $ 28,084,015
Reimbursement fees - 855,093
------------- -------------
TOTAL INVESTMENT INCOME 38,700,292 28,939,108
------------- -------------
EXPENSES
Interest 23,374,628 16,375,576
Collateral management fees 1,741,272 1,195,421
Amortization 1,559,366 1,034,381
Trustee fees 249,125 139,278
Professional fees 196,742 710,322
Administration fees 104,762 102,243
Wages, payroll taxes and benefits - 141,220
Travel, meals and entertainment - 73,664
Overhead - 73,615
Printing and copying - 3,214
Delivery services - 736
Other 293,664 356,292
------------- -------------
Total expenses 27,519,559 20,205,962
------------- -------------
NET INVESTMENT INCOME 11,180,733 8,733,146
------------- -------------
Net realized gain (loss) and unrealized appreciation
(depreciation) on investment transactions:
Net realized loss on investment transactions (3,616,391) -
Net unrealized appreciation (depreciation) on investments
in trust preferred securities 6,153,459 (476,764)
Net unrealized appreciation (depreciation) on interest
rate swap agreements 1,388,550 (61,789)
------------- -------------
Net realized gain (loss) and unrealized appreciation
(depreciation) on investment transactions 3,925,618 (538,553)
------------- -------------
Net income before minority interest 15,106,351 8,194,593
Minority interest 12,226,236 6,110,384
------------- -------------
NET INCOME $ 2,880,115 $ 2,084,209
============ =============
See accompanying notes to consolidated financial statements.
5
Trapeza Funding II, LLC
Consolidated Statements of Changes in Members' Interests
Years Ended December 31, 2004 and 2003
Unaudited
Balance at January 1, 2003 $ 26,500
Placement costs (1)
Offering costs (1)
Net income 2,084,209
Distributions to members (1,573,522)
------------
Balance at December 31, 2003 537,185
Net income 2,880,115
Distributions to members (1,984,434)
------------
Balance at December 31, 2004 $ 1,432,866
============
See accompanying notes to consolidated financial statements.
6
Trapeza Funding II, LLC
Consolidated Statements of Cash Flows
Unaudited
YEAR ENDED DECEMBER 31,
2004 2003
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,880,115 $ 2,084,209
Adjustments to reconcile net income to net cash and cash
equivalents provided by (used in) operating activities:
Amortization of deferred debt issuance costs 1,543,494 1,018,891
Accretion of discount on investments in trust preferred
securities (146,810) (105,414)
Minority interest 4,201,771 8,024,947
Net realized loss on investment transactions 3,616,391 -
Net unrealized (appreciation) depreciation on investment
transactions (7,542,009) 538,553
Net change in operating assets and liabilities:
Investment in trust preferred securities - (586,432,449)
Interest receivable on trust preferred securities (328,266) (1,504,284)
Due from affiliate - 233,222
Prepaid expenses (16,789) (10,007)
Other - 100
Warehouse facility payable - (107,782,033)
Interest payable 1,271,404 5,942,581
Professional fees 22,406 (11,531)
Collateral management fees (48,198) 639,705
Net interest payable to swap counterparty (665,169) 1,376,760
Trustee fees (5,051) 73,471
Accrued expenses (30,989) (1,858)
------------- --------------
Net cash and cash equivalents provided by (used in) operating
activities 4,752,300 (675,915,137)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes - 673,750,000
Principal payments on notes (3,073,096) (715,172)
Deferred debt issuance costs - (17,994,692)
Proceeds from capital contributions, net of placement costs - (1)
Payments of offering costs - (1)
Distributions to members (1,984,434) (1,573,522)
------------- --------------
Net cash and cash equivalents (used in) provided by financing
activities (5,057,530) 653,466,612
------------- --------------
Net decrease in cash and cash equivalents (305,230) (22,448,525)
Cash and cash equivalents, beginning of year 15,560,247 38,008,772
------------- --------------
Cash and cash equivalents, end of year $ 15,255,017 $ 15,560,247
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 22,976,508 $ 9,056,235
============= ==============
See accompanying notes to consolidated financial statements.
7
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements
December 31, 2004
1. ORGANIZATION AND PURPOSE
Trapeza Funding II, LLC ("Funding"), was organized on August 26, 2002 as a
Delaware limited liability company. Funding commenced operations on November 1,
2002. Funding was organized for the purpose of being the general partner (the
"General Partner"), of Trapeza Partners II L.P. (the "Partnership"). Per the
partnership agreement, the limited partners have no right to remove Funding at
any time. Funding has complete and exclusive control of the management of the
business affairs of the Partnership.
The Partnership was organized on September 27, 2002 as a Delaware limited
partnership. The Partnership commenced operations on November 19, 2002. The
Partnership was organized for the purpose of investing in membership interests
and other securities to be issued by Trapeza CDO II, LLC ("Issuer II"), an
affiliated collateralized debt obligation, which was formed by Funding. On May
15, 2003, Trapeza Note I, LLC ("Note I") was formed to issue Class BB fixed rate
notes, purchase 100% of the membership interests of Issuer II and return a
portion of equity to the Partnership for the purpose of investing in membership
interests and other securities to be issued by Trapeza CDO III, LLC ("Issuer
III"), an affiliated collateralized debt obligation. Issuer III closed on June
25, 2003. The Partnership has an 11-year term, which the General Partner may
extend on a year-to-year basis.
All material intercompany transactions have been eliminated. Minority interest
reflects the 99.99% of partners' interest of the limited partners of the
Partnership. The consolidated entity is referred to as the "Company."
Funding and the Collateral Manager are owned equally by Financial Stocks, Inc.
("FSI") and Resource Financial Fund Management, Inc., a wholly owned subsidiary
of Resource America, Inc. ("REXI") (collectively, the "Owners"). FSI is a
Registered Investment Adviser under the Investment Advisers Act of 1940. REXI is
a publicly traded company operating in energy, real estate and financial
services sectors. The Owners and certain officers and directors of the Owners
hold partnership interests of approximately 17% of the Partnership. Funding has
complete and exclusive control of the management of the business affairs of the
Partnership.
8
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
1. ORGANIZATION AND PURPOSE (CONTINUED)
Issuer II and Issuer III's objective is to purchase, acquire, own, hold, sell,
endorse, transfer, assign, pledge, finance, refinance, exchange, restructure,
workout, advance and collect funds pursuant to and otherwise deal with and
exercise rights of ownership with respect to the collateral of Issuer II and
Issuer III, including other securities or equity interests owned from time to
time by Issuer II and Issuer III, all in accordance with the terms of the
indentures.
Trapeza Capital Management, LLC (the "Collateral Manager"), a Delaware limited
liability company, is responsible for supervising and directing the investment
the collateral of Issuer II and Issuer III. Issuer II and III are charged a
collateral management fee by the Collateral Manager, who is affiliated with
Funding through common ownership.
The business and affairs of Funding are managed by a Board of Managers. The
Board of Managers has full, complete and exclusive authority, power and
discretion to manage and control the business affairs and properties of Funding,
to make all decisions regarding those matters and to perform any activities
customary or incident to the management of Funding's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Company in the preparation of its financial statements.
BASIS OF ACCOUNTING
The Company's accounting policies are in conformity with accounting principles
generally accepted in the United States. The Company maintains its financial
records in United States dollars. For financial reporting purposes, the Company
follows the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits with banks and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
9
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT TRANSACTIONS
The Company records transactions on their trade dates. Realized gains and losses
on investments are determined on the specific identification basis for financial
accounting purposes. Interest is accrued as earned or incurred and includes the
amortization/accretion of premiums and discounts on debt securities.
INVESTMENT VALUATION
Investments are carried at market or fair value. Securities for which market
quotations are not readily available are valued by procedures adopted by
Funding. In valuing investments in which market quotations are not readily
available, Funding utilizes data from a variety of different sources, taking
into account the characteristics of a security, any changes in the credit
quality of the securities in the portfolio, the overall movement of interest
rates and other factors which, in Funding's good faith and judgment, are
relevant to the value of a security. For exchange-traded securities, management
will obtain current market data and quotes from independent brokers.
The Company has invested a significant portion of the portfolio in private
placement, illiquid issues having no ready market. At December 31, 2004, these
securities aggregate $643,509,423 and have been valued in good faith by Funding
as described in the preceding paragraph. Because of the inherent uncertainty of
valuation, the fair values estimated by Funding may not necessarily represent
the amounts that could be realized from sales or other dispositions of
investments and the differences may be material.
CREDIT RISKS AND GENERAL LIQUIDITY CONSIDERATIONS
Investments in trust preferred securities are subject to credit, interest rate
and liquidity risks. Adverse changes in the financial condition of an issuer of
trust preferred securities or in general economic conditions or both may impair
the ability of the issuer to make payments of principal and interest. Debt
obligations are also subject to liquidity risk and the risk of market price
fluctuations. Adverse changes in the financial condition of an issuer may affect
the liquidity of the market for an issuer's securities and may reduce the market
price of such securities. In addition, changes in general economic and
regulatory conditions may affect the liquidity of the market for trust preferred
securities in general and may reduce the values of some or all of the
securities.
10
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OFFERING COSTS
During 2003, the Partnership incurred offering costs related to the closing of
Issuer II and Issuer III of $247,867 and $192,446, respectively, of which $1 and
$0 was allocated to Funding, respectively. These costs were charged directly to
the partners' capital accounts.
ALLOCATION OF PROFITS AND LOSSES
The Company allocates profits to the members in proportion to their respective
capital account balances until the cumulative profits for this current period
and all prior fiscal years are equal to the cumulative losses allocated;
thereafter, among the members in proportion to their respective units. Losses
shall be allocated to the members in proportion to their respective capital
account balances.
Funding's investment in the Partnership is accounted for based on its pro-rata
share of its investment in the Partnership. Profits and losses from
non-portfolio income are allocated to all members in proportion to their
allocable shares. Twenty percent (20%) of the cumulative net profits from
portfolio investments are allocated to Funding.
Non-portfolio income of the Partnership, consisting primarily of income earned
on short-term investments, is allocated to all limited partners in proportion to
their respective capital account balances prior to the allocation of any other
item.
Portfolio income of the Partnership, consisting primarily of interest income and
profits and losses from the sale of such investments, are allocated to all
partners of the Partnership in proportion to their respective contributed
capital of the Partnership in relation to total contributed capital, but 20% of
the cumulative net profits otherwise allocable to all partners will be allocated
to Funding, defined as the incentive allocation. For the years ended December
31, 2004 and 2003, Funding received an incentive allocation of $2,430,901 and
$1,282,064, respectively.
TAXATION
The Company is treated as a partnership for Federal income tax purposes and,
therefore, no provision for federal income tax is recorded.
11
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS
As of December 31, 2004, the Company has 100 membership units issued and
outstanding. No member shall be required to make any additional contributions
beyond their initial contribution. If the Board of Managers unanimously
determines that the Company requires additional funds, any member may, but is
not obligated to, advance such funds. For the years ended December 31, 2004 and
2003, the Company received no contributions from the members.
No member shall have the right to withdraw any of its capital contribution,
except upon dissolution and liquidation of the Company. For the years ended
December 31, 2004 and 2003, the Company made distributions of $1,984,434 and
$1,573,522, respectively, to the members.
In accordance with the partnership agreement, each partner has contributed a
specified amount of capital which is set forth in the partnership agreement. No
limited partner is required to contribute any capital in excess of its
commitment. As of December 24, 2002, all commitments of the Partnership were
fully funded.
A limited partner will not have the right to redeem its interest in the
Partnership. Funding, in its sole discretion, may redeem all or part of the
partnership interest of any limited partner, for an amount equal to the capital
account of the partnership interest being redeemed, if the limited partner
consents to such redemption and all redemptions in any year do not exceed five
percent of the aggregate allocable percentage of all limited partners.
12
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS (CONTINUED)
Funding will cause the Partnership to distribute the lesser of (i) ninety
percent (90%) of cash available from profits and (ii) all cash then available to
the partnership less any reserves for partnership expenses or liabilities. All
other distributions will be at the discretion of Funding. Funding will determine
at its sole discretion the source of funds for all distributions. For the years
ended December 31, 2004 and 2003, the Partnership made distributions of
$8,138,564 and $3,689,493, respectively, to the partners.
4. ISSUER II
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $9,831,231 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is the period ending with the distribution date occurring in April
2013, as defined in the indenture ("Indenture II"). Amortization of deferred
debt issuance costs commenced on March 11, 2003.
COLLATERAL MANAGEMENT AND TRUSTEE FEES
Pursuant to a collateral management agreement, the Collateral Manager is
entitled to a semiannual fee, payable in arrears on the distribution dates,
equal to 0.10% per annum of the semi-annual asset amount ("Base Collateral
Management Fee"), of the net outstanding portfolio collateral, as defined in the
indenture. After certain expenses have been paid, the Collateral Manager is
entitled to an additional semiannual fee equal to 0.15% per annum, calculated in
the same manner as the Base Collateral Management Fee. For the years ended
December 31, 2004 and 2003, total collateral management fees were $993,352 and
$805,788, respectively, and are included in total collateral management fees
reflected on the consolidated statements of operations.
Pursuant to a trustee agreement, the trustee is entitled to a semiannual fee, on
each distribution date, equal to 0.023625% per annum of the sum of the aggregate
principal amount of the investments plus cash and cash equivalents at the
beginning of the period relating to such distribution dates, an annual fee of
$15,000, and reimbursement of out of pocket expenses. For the years ended
December 31, 2004 and 2003, total trustee fees were $114,226 and $94,607,
respectively, and are included in total trustee fees reflected on the
consolidated statements of operations.
13
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER II (CONTINUED)
NOTES PAYABLE
On March 11, 2003, Issuer II issued notes (the "Notes") at their respective
principal values, which are secured by Issuer II's investments and are
non-recourse to the Company.
At December 31, 2004 and 2003, Notes outstanding consisted of the following:
2004 PRINCIPAL 2003 PRINCIPAL INTEREST RATE STATED MATURITY
------------------ ------------------ --------------------- ------------------
Class A1A Notes $ 131,999,114 $ 131,999,496 Libor + 0.65% until October 5, 2033
the distribution
date in April 2013
and Libor + 1.30%
thereafter
Class A1B Notes $ 100,000,000 $ 99,999,618 Libor + 0.88% October 5, 2033
Class B Notes $ 27,000,000 $ 27,000,000 Libor + 0.70% October 5, 2033
Class C-1 $ 43,500,000 $ 43,500,000 Libor + 1.90% October 5, 2033
Floating Notes
Class C-2 Fixed $ 54,800,000 $ 54,800,000 5.20% until the October 5, 2033
Notes distribution date
in April 2008 and
Libor + 1.90%
thereafter
Class D Notes $ 18,450,000 $ 18,450,000 Libor + 2.65% October 5, 2033
Holders of the Notes are to receive semiannual interest payments on October 5
and April 5, commencing in October 2003 (the "Initial Payment Date"). The order
of payment will be first to Class A1A, second, Class A1B, third, Class B, fourth
to Class C, and fifth Class D of notes being senior to each of the other classes
of notes. No payments of interest on any class of notes will be made until all
accrued and unpaid interest on the notes of each class that is senior to a class
and that remain outstanding has been paid in full. No payment of principal of
any class of notes will be made until the principal of, and all accrued and
unpaid interest, on the notes of each class that is senior to such class and
that remain outstanding have been paid in full.
14
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER II (CONTINUED)
NOTES PAYABLE (CONTINUED)
In the event that the coverage tests, as defined in Indenture II, are not
satisfied as of any distribution date, each class of notes may be redeemed in
the manner specified in Indenture II.
Principal payments will be made in the following manner. First, payment of
principal of the Class A1A notes until the Class A1A notes have been paid in
full. Next, payment of principal on the Class A1B notes until the Class A1B
notes have been paid in full. Next, payment of principal of the Class B notes
until the Class B notes have been paid in full. Next, payment of principal of
the Class C notes until Class C notes have been paid in full. Next, payment of
principal of the Class D notes. Finally, the remainder to the members as a
dividend on the members' interests or as a return of capital of the members'
interests as provided in Issuer II's Agreement ("Agreement II").
If on any distribution date, the amount available in the payment account from
amounts received in the related due period are insufficient to make the full
amount of the disbursements required by the priority of payments to different
persons, the trustee will make the disbursements ratably in accordance with
Indenture II.
If the notes and the member's interests have not been released prior to October
5, 2033, it is expected that Issuer II or Collateral Manager, acting on behalf
of Issuer II, will sell all of the investments and sell or liquidate all other
collateral, and all net proceeds from such sales and liquidations and all
available cash after the payment (in the order of priorities set forth above) of
all (i) fees, (ii) expenses and (iii) interest (including any defaulted interest
and interest on defaulted interest, any Class C deferred interest and interest
on any Class C deferred interest and any Class D deferred interest and interest
on any Class D deferred interest) and principal of the notes, will be
distributed to the members in accordance with Agreement II.
15
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER II (CONTINUED)
ACCELERATION OF MATURITY AND REDEMPTION
Indenture II provides for an acceleration of maturity or redemption of all of
the senior notes and accrued and unpaid interest upon the occurrence of a
default event. Default events include a) failure of Issuer II to pay interest
for a period of three business days on any Class A or B senior Notes, b) failure
of Issuer II to pay principal of any senior Note when such payment becomes due
and payable at its stated maturity or redemption date, c) failure of Issuer II,
on any distribution date to disburse amounts available to the interest
collection account or principal collection account in accordance with the order
of the priority of payments set forth in Indenture II, which continues for three
business days, d) Issuer II or pool of collateral becomes an investment company
required to be registered under the Investment Company Act, e) default in
performance, or a breach, of any other covenant or other agreement of Issuer II
under the Indenture II or any representation of warranty of Issuer II made in
Indenture II or in any certificate or other writing proves to be incorrect in
any material respect when made, and in both clauses, the continuation of such
default or breach for a period of thirty days after Issuer II or the Collateral
Manager has actual knowledge that such default or breach has occurred or after
written notice to Issuer II and the Collateral Manager by the trustee, or to
Issuer II, the Collateral Manager and the Trustee by the holders of at least 25%
in aggregate outstanding principal amount of the Notes of the controlling class
or hedge counterparty, f) one or more final judgments being rendered against
Issuer II that exceed, in the aggregate, $5,000,000, and which remain unstayed,
undischarged and unsatisfied for thirty days after such judgment(s) becomes
nonappealable, unless adequate funds have been reserved or set aside for the
payment thereof, and g) failure, on any measurement date, to cause the Class A/B
overcollateralization ratio to be equal to or greater than 100%. Each of these
conditions is further described in Indenture II.
5. NOTE I
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $300,000 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is April 2010, as defined in the fiscal and collateral agency
agreement ("Note Agreement"), assuming all scheduled principal payments are made
when due. Amortization of deferred debt issuance costs commenced on May 15,
2003.
16
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
5. NOTE I (CONTINUED)
NOTES PAYABLE
On May 15, 2003, Note I issued Notes at their respective principal value, which
are secured by Note I's investments and are non-recourse to the Company.
At December 31, 2004 and 2003, the Notes outstanding consisted of the following:
INTEREST
2004 PRINCIPAL 2003 PRINCIPAL RATE STATED MATURITY
---------------- ------------------ ------------ -----------------------
Class BB Notes $ 7,857,143 $ 9,285,714 11.00% October 5, 2033
Holders of the Notes are to receive semiannual interest payments on October 5
and April 5, commencing in October 2003 (the "Initial Payment Date"). On each
payment date, in addition to scheduled interest, Note I shall prepay the
scheduled principal to the holders of the notes, if and only to the extent Note
I receives payments on membership interests and funds available on deposit in
the note collection account to pay scheduled principal. If Note I fails to pay
any of the scheduled principal due to insufficient funds received by Note I in
respect to the membership interests, such unpaid scheduled principal shall not
be considered "due and payable" for any purposes hereunder and will be deferred
until such date as Note I receives sufficient payments.
In the event that the coverage tests, as defined in the Note Agreement, are not
satisfied as of any distribution date, the notes may be redeemed in the manner
specified in the Note Agreement.
If the notes and the members' interests have not been released prior to October
5, 2033, it is expected that Note I or Collateral Manager, acting on behalf of
the Note I, will sell all of the investments and all eligible investments and
sell or liquidate all other collateral, and all net proceeds from such sales and
liquidations and all available cash after the payment (in the order of
priorities set forth above) of all (i) fees, (ii) expenses and (iii) interest
and principal of the notes, will be distributed to the members in accordance
with the Note Agreement.
The Note Agreement provides for an option by holders of more than 50% of the
notes outstanding an acceleration of maturity or redemption of all of the notes
and accrued and unpaid interest upon the occurrence of a default event. Default
events include a) Note I fails to perform its obligations under the Note
Agreement, and such failure could
17
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
5. NOTE I (CONTINUED)
NOTES PAYABLE (CONTINUED)
reasonably be expected to have a material adverse effect on the interest of the
holders and has not been cured within thirty days after the date of an officer
obtaining actual knowledge of such default, or, b) a court or governmental
authority of competent jurisdiction enters an order appointing, without consent
of Note I, a custodian, receiver, trustee or each officer with similar powers
with respect to Note I or with respect to any substantial part of Note I's
property, or constituting an order for relief or reorganization or any petition
in bankruptcy or for liquidation or to take advantage of any bankruptcy or
insolvency law of any jurisdiction, or ordering the dissolution, winding-up or
liquidation of Note I, or any such petition shall be filed against the issuer
and such petition shall not be dismissed within sixty days.
6. ISSUER III
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $7,863,460 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is the period ending with the distribution date occurring in July
2013, as defined in the indenture ("Indenture III"). Amortization of deferred
debt issuance costs commenced on June 25, 2003.
COLLATERAL MANAGEMENT AND TRUSTEE FEES
Pursuant to a collateral management agreement, the Collateral Manager is
entitled to a semiannual fee, payable in arrears on the distribution dates,
equal to 0.10% per annum of the semi-annual asset amount ("Base Collateral
Management Fee"), of the net outstanding portfolio collateral, as defined in
Indenture III. After certain expenses have been paid, the Collateral Manager is
entitled to an additional semiannual fee equal to 0.15% per annum, calculated in
the same manner as the Base Collateral Management Fee. For the years ended
December 31, 2004 and 2003, total collateral management fees were $747,920 and
$389,633, respectively, and are included in total collateral management fees
reflected on the consolidated statements of operations.
18
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. ISSUER III (CONTINUED)
COLLATERAL MANAGEMENT AND TRUSTEE FEES (CONTINUED)
Pursuant to a trustee agreement, the trustee is entitled to a semiannual fee, on
each distribution date, equal to 0.0225% per annum of the sum of the aggregate
principal amount of the investments plus cash and cash equivalents at the
beginning of the period relating to such distribution dates, as defined in
Indenture III. For the years ended December 31, 2004 and 2003, total trustee
fees were $83,874 and $44,671, respectively, and are included in total trustee
fees reflected on the consolidated statements of operations.
NOTES PAYABLE
On June 25, 2003, Issuer III issued Notes at their respective principal values,
which are secured by Issuer III's investments and are non-recourse to the
Company.
At December 31, 2004 and 2003, the Notes outstanding consisted of the following:
INTEREST
2004 PRINCIPAL 2003 PRINCIPAL RATE STATED MATURITY
----------------- ----------------- ------------ ---------------------
Class A1A Notes $ 108,497,331 $ 108,500,000 Libor + January 20, 2034
0.63%
Class A1B Notes $ 71,500,000 $ 71,500,000 Libor + January 20, 2034
0.85%
Class B Notes $ 25,000,000 $ 25,000,000 See Class January 20, 2034
B note
Class C-1 Notes $ 31,250,000 $ 31,250,000 Libor + January 20, 2034
1.75%
Class C-2 Notes $ 31,250,000 $ 31,250,000 Libor + January 20, 2034
1.75%
Class D Notes $ 13,715,288 $ 14,500,000 Libor + January 20, 2034
2.65%
Class E Notes $ 6,857,142 $ 8,000,000 10.00% January 20, 2034
19
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. ISSUER III (CONTINUED)
NOTES PAYABLE (CONTINUED)
Pursuant to the terms of the Class B agency agreement, the holders of the Class
B Notes will be entitled to receive interest, certain third parties will be
entitled to receive compensation, at an aggregate, floating rate per annum not
to exceed Libor plus 1.05% in the aggregate after taking into consideration the
effect of a basis swap to be entered into in connection with the Class B Notes.
Holders of the Notes are to receive semiannual interest payments on January 20
and July 20, commencing in January 2004 (the "Initial Payment Date"). The order
of payment will be first to Class A1A, second, Class A1B, third, Class B,
fourth, Class C (includes Class C-1 and Class C-2), fifth to Class D and sixth
to Class E with each Class of Notes being senior to each of the other classes of
notes. No payments of interest on any class of Notes will be made until all
accrued and unpaid interest on the Notes of each class that is senior to a class
and that remain outstanding has been paid in full. No payment of principal of
any class of Notes will be made until the principal of, and all accrued and
unpaid interest, on the Notes of each class that is senior to such class and
that remain outstanding have been paid in full.
In the event that the coverage tests, as defined in Indenture III, are not
satisfied as of any distribution date, each class of Notes may be redeemed in
the manner specified in Indenture III.
Principal payments will be made in the following manner. First, payment of
principal of the Class A1A Notes until the Class A1A Notes have been paid in
full. Next, payment of principal on the Class A1B Notes until the Class A1B
Notes have been paid in full. Next, payment of principal on the Class B Notes
until the Class B Notes have been paid in full. Next, payment of principal of
the Class C Notes until the Class C Notes have been paid in full. Next, payment
of principal of the Class D Notes. Next, payment of principal of the Class E
Notes. Finally, the remainder to the members as a dividend on the members'
interests or as a return of capital of the members' interests as provided in the
Trapeza CDO III, LLC Agreement ("Agreement III").
If on any distribution date, the amount available in the payment account from
amounts received in the related due period are insufficient to make the full
amount of the disbursements required by the priority of payments to different
persons, the trustee will make the disbursements ratably in accordance with
Indenture III.
20
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. ISSUER III (CONTINUED)
NOTES PAYABLE (CONTINUED)
If the Notes and the members' interests have not been released prior to January
20, 2034, it is expected that Issuer III or Collateral Manager, acting on behalf
of Issuer III, will sell all of the investments and all eligible investments and
sell or liquidate all other collateral, and all net proceeds from such sales and
liquidations and all available cash after the payment (in the order of
priorities set forth above) of all (i) fees, (ii) expenses and (iii) interest
(including any defaulted interest and interest on defaulted interest, any Class
C deferred interest and interest on any Class C deferred interest and any Class
D deferred interest and interest on any Class D deferred interest and any Class
E deferred interest and interest on any Class E deferred interest) and principal
of the Notes, will be distributed to the members in accordance with the
Agreement III.
ACCELERATION OF MATURITY AND REDEMPTION
Indenture III provides for an acceleration of maturity or redemption of all of
the senior Notes and accrued and unpaid interest upon the occurrence of a
default event. Default events include a) failure of Issuer III to pay interest
for a period of three business days on any Class A or B senior Notes, b) failure
of Issuer III to pay principal of any senior Note when such payment becomes due
and payable at its stated maturity or redemption date, c) failure of Issuer III,
on any distribution date to disburse amounts available to the interest
collection account or principal collection account in accordance with the order
of the priority of payments set forth in Indenture III, which continues for
three business days, d) Issuer III or pool of collateral becomes an investment
company required to be registered under the Investment Company Act, e) default
in performance, or a breach, of any other covenant or other agreement of Issuer
III under Indenture III or any representation of warranty of Issuer III made in
Indenture III or in any certificate or other writing proves to be incorrect in
any material respect when made, and in both clauses, the continuation of such
default or breach for a period of thirty days after Issuer III or the General
Partner has actual knowledge that such default or breach has occurred or after
written notice to Issuer III and the General Partner by the trustee, or to
Issuer III, the General Partner and the Trustee by the holders of at least 25%
in aggregate outstanding principal amount of the Notes of the controlling class
or hedge counterparty, f) one or more final judgments being rendered against
Issuer III that exceed, in the aggregate, $5,000,000, and which remain unstayed,
undischarged and unsatisfied for thirty days after such judgment(s) becomes
nonappealable, unless adequate funds have been reserved or set aside for the
payment thereof, and g) failure, on any measurement date, to cause the Class A/B
overcollateralization ratio to be equal to or greater than 100%. Each of these
conditions is further described in Indenture III.
21
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
7. INTEREST RATE SWAP AGREEMENTS
The Company maintains a policy of valuing its securities positions and
derivative instruments at market or fair values, with the resulting unrealized
gain or loss included in the consolidated statements of operations.
A swap is an agreement that obligates two parties to exchange a series of cash
flows at specified intervals based upon or calculated by reference to changes in
specified prices or rates for a specified amount of an underlying asset or
otherwise determined notional amount.
Risks may arise as a result of the failure of the counterparty to the swap
agreement. The loss incurred by the failure of a counterparty is generally
limited to the net payment to be received by the Company and/or the termination
value at the end of the agreement. Therefore, the Company considers the
creditworthiness of each counterparty to a swap agreement in evaluating
potential credit risk. Additionally, risks may arise from unanticipated
movements in interest rates.
The Company records a net receivable or payable for the net income or expense
expected to be received or paid in the interest period. Net amounts received or
paid on swap agreements are recorded as interest income or interest expense on
the consolidated statements of operations. The amount recorded as interest
income on basis swap agreements for the years ended December 31, 2004 and 2003
totaled $153,097 and $70,267, respectively.
The Company entered into interest rate swap agreements with Credit Suisse First
Boston ("CSFB") for the purpose of hedging interest rate and cash flow risk
between the fixed-rate investments and floating-rate investments.
22
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
7. INTEREST RATE SWAP AGREEMENTS (CONTINUED)
At December 31, 2004 and 2003, the Company had nine interest rate swap
agreements outstanding with CSFB, which pay as follows:
FLOATING RATE RATE/AMOUNT PAID DECEMBER 31
NOTIONAL MATURITY RECEIVED BY BY THE 2004 2003
AMOUNT DATE THE COMPANY COMPANY FAIR VALUE FAIR VALUE
---------------- --------- ----------------- ------------------ -------------- -------------
$ 3,330,000 4/5/10 6 month Libor 7.375% $ 11,970 $ 2,132
+ 3.4425%
8,670,000 4/5/08 6 month Libor 6.65% 50,098 (29,155)
+ 3.30%
13,330,000 4/5/08 6 month Libor 6.75% 54,714 (73,464)
+ 3.35%
13,330,000 4/5/08 6 month Libor 6.335% 239,893 164,243
+ 3.35%
13,330,000 4/5/08 6 month Libor 8.10% 106,241 (9,353)
+ 4.69%
47,330,000 4/5/08 6 month Libor 6.952% (173,298) (732,678)
+ 3.32%
69,500,000 7/20/08 6 month Libor 6.35% 1,025,085 468,036
+ 3.25%
25,000,000 7/20/13 6 month Libor 6 month Libor + (355,381) (312,663)
+ 1.0875% 1.05%
9,000,000 7/20/08 6 month Libor 6.05% 199,715 160,176
+ 3.145%
---------- ----------
$1,159,037 $ (362,726)
========== ==========
At December 31, 2004 and 2003, the Company had one interest rate cap agreement
outstanding with CSFB, which pays on a semi-annual basis as follows:
FLOATING RATE RATE/AMOUNT PAID DECEMBER 31
NOTIONAL MATURITY RECEIVED BY BY THE 2004 2003
AMOUNT DATE THE COMPANY COMPANY FAIR VALUE FAIR VALUE
---------------- --------- ----------------- ------------------ -------------- -------------
$82,000,000 4/5/07 N/A $69,000 (186,950) (53,737)
8. RELATED PARTY TRANSACTIONS
During 2003, Issuer II paid a one-time contractually determined reimbursement
fee $1,000,000 to Funding in connection with the formation of Issuer II. Issuer
II also paid a one-time contractually determined reimbursement fee for roadshow
expenses to Funding of $10,000.
During 2003, Issuer III paid a one-time contractually determined reimbursement
fee of $900,000 to Trapeza Funding III, LLC in connection with the formation of
Issuer III. Issuer III also paid a one-time contractually determined
reimbursement fee for roadshow expenses to Trapeza Funding III, LLC of $10,000.
23
Trapeza Funding II, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
The Partnership pays Funding an administration fee (payable semi-annually in
advance) equal to one and one-half percent (1.5%) per annum of the aggregate
capital accounts of the limited partners, which will be used to cover management
fees and other ordinary and recurring administrative and related operating
expenses. For the years ended December 31, 2004 and 2003, administration fees
totaled $615,848 and $601,034, respectively. The Partnership also reimbursed
Funding for $78,315 for certain fees paid on behalf of the Partnership for the
year ended December 31, 2003.
In exchange for interests sold on behalf of the Partnership, Funding pays
external broker-dealers an administration fee, equal to the percentage of equity
raised by the broker-dealer multiplied by one-third of the total administration
fee being charged by Funding to the Partnership. For the years ended December
31, 2004 and 2003, total administration fee expense equaled $104,762 and
$102,243, respectively.
24
Schedule e)
TRAPEZA FUNDING III, LLC
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Years ended December 31, 2005 and 2004
Trapeza Funding III, LLC
Consolidated Financial Statements
Years ended December 31, 2005 and 2004
Unaudited
CONTENTS
Consolidated Statements of Financial Condition................................3
Consolidated Schedules of Investments.........................................4
Consolidated Statements of Operations.........................................6
Consolidated Statements of Changes in Members' Interests......................7
Consolidated Statements of Cash Flows.........................................8
Notes to Consolidated Financial Statements....................................9
Trapeza Funding III, LLC
Consolidated Statements of Financial Condition
Unaudited
DECEMBER 31
2005 2004
-------------- --------------
ASSETS
Cash and cash equivalents $ 7,360,269 $ 5,453,128
Prepaid expenses 28,617 27,260
Investments in trust preferred securities, at fair value
(amortized cost $399,499,096 and $399,481,628) 400,172,908 400,145,681
Deferred debt issuance costs (net of accumulated amortization
of $1,730,717 and $917,401) 7,729,905 8,543,221
Interest receivable on trust preferred securities 800,625 617,180
Net interest receivable from swap counterparty 85,208 -
Unrealized appreciation on swap agreements 3,073,174 1,159,571
Other 142,966 132,998
-------------- --------------
Total Assets $ 419,393,672 $ 416,079,039
============== ==============
LIABILITIES AND MEMBERS' INTERESTS
Liabilities
Class A1A Notes $ 144,996,417 $ 144,996,417
Class A1B Notes 95,000,000 95,000,000
Class B Notes 33,000,000 33,000,000
Class C-1 Notes 44,500,000 44,500,000
Class C-2 Notes 44,500,000 44,500,000
Class D Notes 13,500,000 13,750,000
Class E Notes 7,142,856 8,571,428
Interest payable 2,124,435 1,517,483
Professional fees 93,275 86,965
Collateral management fees 122,222 122,222
Net interest payable to swap counterparty - 64,656
Trustee fees 13,535 13,160
Accrued expenses 183,466 172,549
-------------- --------------
Total Liabilities 385,176,206 386,294,880
-------------- --------------
Minority interest 32,951,996 29,151,590
Members' Interests 1,265,470 632,569
-------------- --------------
Total Liabilities and Members' Interests $ 419,393,672 $ 416,079,039
============== ==============
See accompanying notes to consolidated financial statements.
3
Trapeza Funding III, LLC
Consolidated Schedules of Investments
Unaudited
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------- --------------------------
PRINCIPAL FAIR PRINCIPAL FAIR
AMOUNT (000) VALUE AMOUNT (000) VALUE
------------ ----------- ------------ -----------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
BANKS (85.84% AND 85.84%)*
Alabama National Statutory Trust III, 3 month libor + 3.050%, due
9/26/2033 (a) $11,210 $11,210,000 $11,210 $11,210,000
Ambank Holdings Capital Trust I, 3 month libor + 3.150%, due 6/30/2033 (a) 9,000 8,936,265 9,000 8,935,326
Arrow Capital Statutory Trust II, 6.530%, due 7/23/2033 (a) 10,000 10,000,000 10,000 10,000,000
Cathay Capital Trust I, 3 month libor + 3.150%, due 6/30/2033 (a) 10,450 10,450,000 10,450 10,450,000
CB Trico Capital Trust, 3 month libor + 3.050%, due 10/20/2033 (a) 10,000 10,000,000 10,000 10,000,000
Centerstate Banks Florida Statutory Trust I, 3 month libor + 3.050%,
due 9/22/2033 (a) 10,000 10,000,000 10,000 10,000,000
Corus Statutory Trust II, 3 month libor + 3.100%, due 6/30/2033 (a) 11,000 10,916,638 11,000 10,915,400
F.N.B. Statutory Trust I, 3 month libor + 3.250%, due 3/31/2033 (a) 1,000 1,000,000 1,000 1,000,000
FBR Capital Trust I, 3 month libor + 3.250%, due 3/30/2033 (a) 1,000 992,309 1,000 992,196
FBR Capital Trust II, 3 month libor + 3.100%, due 9/30/2033 (a) 11,000 11,014,878 11,000 11,015,094
First Community / CA Statutory Trust VI, 3 month libor + 3.050%,
due 9/15/2033 (a) 10,000 10,105,239 10,000 10,106,805
First Financial OH Statutory Trust II, 3 month libor + 3.100%, due
9/30/2033 (a) 11,000 11,000,000 11,000 11,000,000
First Group Capital Statutory Trust VII, 3 month libor + 2.900%, due
10/30/2033 (a) 12,000 12,065,017 12,000 12,066,063
First South Preferred Trust I, 3 month libor + 2.950%, due 9/30/2033 (a) 10,000 10,059,839 10,000 10,060,736
FNB Statutory Trust I, 3 month libor + 3.250%, due 3/31/2033 (a) 11,000 11,000,000 11,000 11,000,000
Heartland Financial Statutory Trust III, 8.250%, due 10/10/2033 (a) 11,000 11,000,000 11,000 11,000,000
Iberiabank Statutory Trust II, 3 month libor + 3.150%, due 6/17/2033 (a) 1,000 1,004,610 1,000 1,004,679
Industry Bancshares Capital Trust II, 3 month libor + 3.050%, due
8/30/2033 (a) 2,000 1,971,045 2,000 1,970,604
James Monroe Statutory Trust II, 3 month libor + 3.100%, due 7/31/2033 (a) 4,000 4,000,000 4,000 4,000,000
Lakeland Bancorp Capital Trust II, 5.710%, due 6/30/2033 (a) 11,000 10,951,180 11,000 10,950,462
Lakeland Statutory Trust II, 3 month libor + 3.050%, due 10/1/2033 (a) 12,000 12,000,000 12,000 12,000,000
Lone Star National Capital Trust II, 3 month libor + 2.950%, due
9/30/2033 (a) 10,000 10,057,909 10,000 10,058,776
Macatawa Statutory Trust I, 3 month libor + 3.050%, due 7/15/2033 (a) 11,000 11,000,000 11,000 11,000,000
Main Street Banks Statutory Trust II, 3 month libor + 3.250%, due
6/30/2033 (a) 9,000 9,000,000 9,000 9,000,000
Mariner Capital Trust IV, 3 month libor + 3.050%, due 8/30/2033 (a) 12,000 12,053,077 12,000 12,053,884
Merchants and Manufacturers Statutory Trust II, 8.250%, due 5/30/2033 (a) 1,000 1,000,000 1,000 1,000,000
Merchants and Manufacturers Statutory Trust III, 8.250%, due 10/15/2033 (a) 3,500 3,500,000 3,500 3,500,000
Merchants and Manufacturers Statutory Trust IV, 3 month libor + 2.950%, due
10/15/2033 (a) 7,500 7,500,000 7,500 7,500,000
National Bancshares Capital Trust II, 3 month libor + 3.000%, due
9/15/2033 (a) 7,000 7,004,279 7,000 7,004,343
Orion Bancorp, Inc. Statutory Trust I, 3 month libor + 3.250%, due
5/5/2033 (a) 11,000 11,000,000 11,000 11,000,000
Ozark Capital Statutory Trust II, 3 month libor + 2.900%, due 9/29/2033 (a) 6,000 6,000,000 6,000 6,000,000
Raton Capital Trust I, 3 month libor + 2.900%, due 9/30/2033 (a) 5,000 5,048,242 5,000 5,048,971
Salin Statutory Trust I, 3 month libor + 2.950%, due 10/17/2033 (a) 11,000 11,000,000 11,000 11,000,000
Sleepy Hollow Capital Trust I, 3 month libor + 3.050%, due 8/30/2033 (a) 4,000 4,013,510 4,000 4,013,716
SNB Capital Trust IV, 3 month libor + 3.000%, due 9/30/2033 (a) 5,000 5,028,481 5,000 5,028,904
Southside Statutory Trust III, 3 month libor + 2.940%, due 9/4/2033 (a) 12,000 12,000,000 12,000 12,000,000
St. Josephs Financial Capital Trust I, 3 month libor + 3.050%, due
7/11/2033 (a) 3,000 3,036,681 3,000 3,037,227
Sterling Bank Houston Texas, 7.375%, due 4/15/2013 (a) 4,670 4,670,000 4,670 4,670,000
Summit Bank Corporation Capital Trust I, 3 month libor + 3.100%, due
9/30/2033 (a) 12,000 11,939,140 12,000 11,938,252
United Bancorporation of Wyoming Capital Trust I, 3 month libor + 3.100%,
due 9/30/2033 (a) 9,000 9,028,981 9,000 9,029,404
Wesbanco Capital Trust II, 5.800%, due 6/30/2033 (a) 4,000 3,993,579 4,000 3,993,486
West Bancorporation Capital Trust I, 6.975%, due 7/18/2033 (a) 11,000 10,943,954 11,000 10,943,302
Wintrust Capital Trust III, 3 month libor + 3.250%, due 4/7/2033 (a) 5,000 5,000,000 5,000 5,000,000
----------- -----------
Total Banks (amortized cost $343,494,853 and $343,497,630) 343,494,853 343,497,630
----------- -----------
4
Trapeza Funding III, LLC
Consolidated Schedules of Investments (continued)
Unaudited
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------- --------------------------
PRINCIPAL FAIR PRINCIPAL FAIR
AMOUNT (000) VALUE AMOUNT (000) VALUE
------------ ----------- ------------ -----------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) * (CONTINUED)
THRIFTS (14.16% AND 14.16%)
BankSouth of Georgia Statutory Trust I, 3 month libor + 3.150%, due
9/23/2033 (a) $ 5,000 $ 5,000,000 $ 5,000 $5,000,000
BSC Capital Trust I, 3 month libor + 2.900%, due 9/30/2033 (a) 12,000 12,033,000 12,000 12,033,496
Capital One Capital I, 3 month libor + 1.550%, due 2/1/2027 3,000 3,015,000 3,000 2,985,002
Coastal Capital Trust II, 3 month libor + 3.050%, due 6/23/2033 (a) 10,000 9,970,082 10,000 9,969,634
Coastal Financial Capital Trust I, 3 month libor + 3.050%, due
7/3/2033 (a) 6,000 6,052,897 6,000 6,053,685
Flagstar Statutory III, 6.550%, due 4/7/2033 (a) 5,000 5,000,000 5,000 5,000,000
Flagstar Statutory Trust IV, 6.750%, due 3/19/2033 (a) 2,670 2,646,006 2,670 2,645,707
IndyMac Capital Trust V, 6.050%, due 7/11/2033 (a) 12,000 11,964,543 12,000 11,964,055
Sterling Capital Trust IV, 3 month libor + 3.150%, due 5/15/2033 (a) 1,000 996,527 1,000 996,472
------------ ------------
Total Thrifts (amortized cost $56,004,243 and $55,983,998) 56,678,055 56,648,051
------------ ------------
Total Investments in Trust Preferred Securities (amortized cost
$399,499,096 and $399,481,628) $400,172,908 $400,145,681
============ ============
FAIR VALUE FAIR VALUE
------------ ------------
INTEREST RATE SWAP AGREEMENTS
Credit Suisse First Boston $ 3,073,174 $ 1,159,571
------------ ------------
Total Interest Rate Swap Agreements $ 3,073,174 $ 1,159,571
============ ============
*Amounts in parenthesis indicate percentage of investments in trust preferred
securities.
(a) Private placement, illiquid securities, where amortized cost approximates
fair value.
See accompanying notes to consolidated financial statements.
5
Trapeza Funding III, LLC
Consolidated Statements of Operations
Unaudited
YEAR ENDED DECEMBER 31,
2005 2004
------------- -------------
INVESTMENT INCOME
Interest $ 26,594,501 $ 20,405,244
EXPENSES
Interest 17,283,476 13,055,196
Collateral management fees 1,000,000 1,000,201
Amortization 813,316 875,352
Trustee fees 121,365 118,989
Professional fees 109,620 103,665
Administration fees 32,858 29,672
Other 203,786 230,339
------------- -------------
Total expenses 19,564,421 15,413,414
------------- -------------
NET INVESTMENT INCOME 7,030,080 4,991,830
------------- -------------
Unrealized appreciation on investment transactions:
Investments in trust preferred securities 9,759 412,710
Interest rate swap agreements 1,913,603 292,390
------------- -------------
Net unrealized appreciation on investment transactions 1,923,362 705,100
------------- -------------
Net income before minority interest 8,953,442 5,696,930
Minority interest 7,500,787 4,749,073
------------- -------------
NET INCOME $ 1,452,655 $ 947,857
============= =============
See accompanying notes to consolidated financial statements.
6
Trapeza Funding III, LLC
Consolidated Statements of Changes in Members' Interests
Years ended December 31, 2005 and 2004
Unaudited
Balance at January 1, 2004 $ 200,805
Net income 947,857
Distributions to members (516,093)
-----------
Balance at December 31, 2004 632,569
Net income 1,452,655
Distributions to members (819,754)
-----------
Balance at December 31, 2005 $ 1,265,470
===========
See accompanying notes to consolidated financial statements.
7
Trapeza Funding III, LLC
Consolidated Statements of Cash Flows
Unaudited
YEAR ENDED DECEMBER 31,
2005 2004
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,452,655 $ 947,857
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities:
Amortization of deferred debt issuance costs 813,316 875,352
Accretion of discount on investments in trust preferred (17,468) (18,412)
securities
Minority interest 7,500,787 4,749,073
Net unrealized appreciation on investment transactions (1,923,362) (705,100)
Net change in operating assets and liabilities:
Interest receivable on trust preferred securities (183,445) (76,134)
Prepaid expenses (1,357) 41,652
Other (9,968) (17,508)
Interest payable 606,952 (564,743)
Professional fees 6,310 19,479
Collateral management fees - (72,326)
Net interest payable to swap counterparty (149,864) (256,821)
Trustee fees 375 (7,928)
Accrued expenses 10,917 14,698
Minority interest (3,700,381) (1,972,479)
--------------- ---------------
Net cash and cash equivalents provided by operating activities 4,405,467 2,956,660
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes (1,678,572) (1,682,155)
Distributions to members (819,754) (516,093)
--------------- ---------------
Net cash and cash equivalents used in financing activities (2,498,326) (2,198,248)
--------------- ---------------
Net increase in cash and cash equivalents 1,907,141 758,412
Cash and cash equivalents, beginning of year 5,453,128 4,694,716
--------------- ---------------
Cash and cash equivalents, end of year $ 7,360,269 $ 5,453,128
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 16,813,807 $ 13,863,234
=============== ===============
See accompanying notes to consolidated financial statements.
8
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements
December 31, 2005
1. ORGANIZATION AND PURPOSE
Trapeza Funding III, LLC ("Funding"), was organized on January 30, 2003 as a
Delaware limited liability company. Funding commenced operations on April 1,
2003. Funding was organized for the purpose of being the general partner of
Trapeza Partners III L.P. (the "Partnership"). Per the partnership agreement,
the limited partners have no right to remove Funding at any time. Funding has
complete and exclusive control of the management of the business affairs of the
Partnership.
The Partnership was organized on February 27, 2003 as a Delaware limited
partnership. The Partnership commenced operations on April 1, 2003. The
Partnership was organized for the purpose of investing in membership interests
and other securities to be issued by Trapeza CDO IV, LLC ("Issuer IV"), which
was formed by Funding. Funding also formed Trapeza CDO III, LLC ("Issuer III").
The Partnership has an 11-year term, which Funding may extend on a year-to-year
basis.
Minority interest reflects the 99.99% of partners' interest of the limited
partners of the Partnership. The consolidated entity is referred to as the
"Company."
Funding and the Collateral Manager are owned equally by Financial Stocks, Inc.
("FSI") and Resource Financial Fund Management, Inc., a wholly owned subsidiary
of Resource America, Inc. ("REXI") (collectively, the "Owners"). FSI is a
Registered Investment Adviser under the Investment Advisers Act of 1940. REXI, a
publicly traded company, is a specialized asset management company that uses
industry specific expertise to generate and administer investment opportunities
for their own account and for outside investors in the financial fund
management, real estate and equipment leasing sectors. The Owners hold
partnership interests of approximately 11% of the Partnership. Funding has
complete and exclusive control of the management of the business affairs of the
Partnership.
Issuer IV's objective is to purchase, acquire, own, hold, sell, endorse,
transfer, assign, pledge, finance, refinance, exchange, restructure, workout,
advance and collect funds pursuant to and otherwise deal with and exercise
rights of ownership with respect to the collateral of Issuer IV, including other
securities or equity interests owned from time to time by Issuer IV, all in
accordance with the terms of the indenture.
Trapeza Capital Management, LLC (the "Collateral Manager"), a Delaware limited
liability company, is responsible for supervising and directing the investment
of the collateral of Issuer IV. Issuer IV is charged a collateral management fee
by the Collateral
9
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
1. ORGANIZATION AND PURPOSE (CONTINUED)
Manager, who is affiliated with Funding through common ownership. All material
intercompany transactions have been eliminated.
The business and affairs of Funding are managed by a Board of Managers. The
Board of Managers has full, complete and exclusive authority, power and
discretion to manage and control the business affairs and properties of Funding,
to make all decisions regarding those matters and to perform any activities
customary or incident to the management of Funding's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Company in the preparation of its financial statements.
BASIS OF ACCOUNTING
The Company's accounting policies are in conformity with accounting principles
generally accepted in the United States. The Company maintains its financial
records in United States dollars. For financial reporting purposes, the Company
follows the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits with banks and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
INVESTMENT TRANSACTIONS
The Partnership records transactions on their trade dates. Realized gains and
losses on investments are determined on the specific identification basis for
financial accounting purposes. Interest is accrued as earned or incurred and
includes the amortization/accretion of premiums and discounts on debt
securities.
INVESTMENT VALUATION
Investments are carried at fair value. Securities for which market quotations
are not readily available are valued by procedures adopted by Funding. In
valuing investments in which market quotations are not readily available,
Funding utilizes data from a variety of different sources, taking into account
the characteristics of a security, any changes in the
10
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT VALUATION (CONTINUED)
credit quality of the securities in the portfolio, the overall movement of
interest rates and other factors which, in Funding's good faith and judgment,
are relevant to the value of a security. For exchange-traded securities,
management will obtain current market data and quotes from independent brokers.
The Company has invested a significant portion of the portfolio in private
placement, illiquid issues having no ready market. At December 31, 2005, these
securities aggregate $397,157,908 and have been valued in good faith by Funding
as described in the preceding paragraph. Because of the inherent uncertainty of
valuation, the fair values estimated by Funding may not necessarily represent
the amounts that could be realized from sales or other dispositions of
investments and the differences may be material.
CREDIT RISKS AND GENERAL LIQUIDITY CONSIDERATIONS
Investments in trust preferred securities are subject to credit, interest rate
and liquidity risks. Adverse changes in the financial condition of an issuer of
trust preferred securities or in general economic conditions or both may impair
the ability of an issuer to make payments of principal and interest. Debt
obligations are also subject to liquidity risk and the risk of market price
fluctuations. Adverse changes in the financial condition of an issuer may affect
the liquidity of the market for an issuer's securities and may reduce the market
price of such securities. In addition, changes in general economic and
regulatory conditions may affect the liquidity of the market for trust preferred
securities in general and may reduce the values of some or all of the
securities.
ALLOCATION OF PROFITS AND LOSSES
The Company allocates profits to the members in proportion to their respective
capital account balances until the cumulative profits for this current period
and all prior fiscal years are equal to the cumulative losses allocated;
thereafter, among the members in proportion to their respective units. Losses
are allocated to the members in proportion to their respective capital account
balances.
11
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOCATION OF PROFITS AND LOSSES (CONTINUED)
Funding's investment in the Partnership is accounted for based on its pro-rata
share of its investment in the Partnership. Profits and losses from
non-portfolio income are allocated to all members in proportion to their
allocable shares. Twenty percent (20%) of the cumulative net profits from
portfolio investments are allocated to Funding.
Non-portfolio income of the Partnership, consisting primarily of income earned
on short-term investments, is allocated to all limited partners of the
Partnership in proportion to their respective capital account balances prior to
the allocation of any other item.
Portfolio income of the Partnership, consisting primarily of accrued interest
and profits and losses from the sale of such investments, is allocated to all
partners of the Partnership in proportion to their respective contributed
capital in relation to total contributed capital of the Partnership, but 20% of
the cumulative net profits otherwise allocable to all partners will be allocated
to Funding, defined as the incentive allocation. For the years ended December
31, 2005 and 2004, Funding received an incentive allocation of $1,219,613 and
$763,327, respectively.
TAXATION
The Company is treated as a partnership for Federal income tax purposes and,
therefore, no provision for federal income tax is recorded.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS
As of December 31, 2005, the Company has 100 Membership Units issued and
outstanding. No member shall be required to make any additional contributions
beyond their initial contribution. If the Board of Managers unanimously
determines that the Company requires additional funds, any member may, but is
not obligated to, advance such funds.
12
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS (CONTINUED)
No member shall have the right to withdraw any of its capital contribution,
except upon dissolution and liquidation of the Company. The Company is required
to make a distribution to each member at least quarterly. For the years ended
December 31, 2005 and 2004, the Company made distributions of $819,754 and
$516,093, respectively, to the members.
In accordance with the partnership agreement, each partner has contributed a
specified amount of capital which is set forth in the partnership agreement. No
limited partner is required to contribute any capital in excess of its
commitment. As of June 4, 2003, all commitments of the Partnership are fully
funded.
A limited partner will not have the right to redeem its interest in the
Partnership. Funding, in its sole discretion, may redeem all or part of the
partnership interest of any limited partner, for an amount equal to the capital
account of the partnership interest being redeemed, if the limited partner
consents to such redemption and all redemptions in any year do not exceed five
percent of the aggregate allocable percentage of all limited partners.
Funding will cause the Partnership to distribute the lesser of (i) ninety
percent (90%) of cash available from profits and (ii) all cash then available to
the partnership less any reserves for partnership expenses or liabilities. All
other distributions will be at the discretion of Funding. Funding will determine
at its sole discretion the source of funds for all distributions. For the years
ended December 31, 2005 and 2004, the Partnership made distributions of
$2,934,377 and $1,551,940, respectively, to the partners.
4. ISSUER IV
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $9,460,622 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is the period ending with the distribution date occurring in
November 2013, as defined in the indenture. Amortization of deferred debt
issuance costs commenced on October 21, 2003.
13
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
COLLATERAL MANAGEMENT AND TRUSTEE FEES
Pursuant to a collateral management agreement, the Collateral Manager is
entitled to a semiannual fee, payable in arrears on the distribution dates,
equal to 0.10% per annum of the semi-annual asset amount ("Base Collateral
Management Fee"), of the net outstanding portfolio collateral, as defined in the
indenture. After certain expenses have been paid, the Collateral Manager is
entitled to an additional semiannual fee equal to 0.15% per annum, calculated in
the same manner as the Base Collateral Management Fee. For the years ended
December 31, 2005 and 2004, collateral management fees were $1,000,000 and
$1,000,201, respectively, and are reflected on the consolidated statement of
operations.
Pursuant to a trustee agreement, the trustee is entitled to a semiannual fee, on
each distribution date, equal to 0.0225% per annum of the sum of the aggregate
principal amount of the investments plus cash and cash equivalents at the
beginning of the period relating to such distribution dates, as defined in the
indenture. For the years ended December 31, 2005 and 2004, total trustee fees
were $121,365 and $118,989, respectively, and are reflected on the consolidated
statement of operations.
14
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
NOTES PAYABLE
On October 21, 2003, Issuer IV issued notes (the "Notes") at their respective
principal values, which are secured by Issuer IV's investments and are
non-recourse to the Company.
At December 31, 2005 and 2004, the Notes outstanding consisted of the following:
2005 PRINCIPAL 2004 PRINCIPAL INTEREST RATE STATED MATURITY
--------------- --------------- ------------------------ ----------------
Class A1A Notes $ 144,996,417 $ 144,996,417 Libor + 0.58% until May 24, 2034
and including the
distribution date in
November 2013; at all
times thereafter,
Libor + 1.16%
Class A1B Notes $ 95,000,000 $ 95,000,000 Libor + 0.83% May 24, 2034
Class B Notes $ 33,000,000 $ 33,000,000 See Class B note May 24, 2034
Class C-1 Notes $ 44,500,000 $ 44,500,000 Libor + 1.65% May 24, 2034
Class C-2 Notes $ 44,500,000 $ 44,500,000 5.006% until the last May 24, 2034
day of the interest
period immediately
prior to the
distribution date in
November 2008 and
Libor + 1.65%,
thereafter
Class D Notes $ 13,500,000 $ 13,750,000 Libor + 2.60% May 24, 2034
Class E Notes $ 7,142,856 $ 8,571,428 10.00% May 24, 2034
Pursuant to the terms of the Class B agency agreement, the holders of the Class
B Notes will be entitled to receive interest, certain third parties will be
entitled to receive compensation, at an aggregate, floating rate per annum not
to exceed Libor plus 1.25% in the aggregate, after taking into consideration the
effect of a basis swap to be entered into in connection with the Class B Notes.
15
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
NOTES PAYABLE (CONTINUED)
Holders of the Notes are to receive semiannual interest payments on May 24 and
November 24, commencing in May 2004 (the "Initial Payment Date"). The order of
payment will be first to Class A1A, second, Class A1B, third, Class B, fourth to
Class C, fifth to Class D and sixth to Class E with each Class of Notes being
senior to each of the other classes of Notes. No payments of interest on any
class of Notes will be made until all accrued and unpaid interest on the Notes
of each class that is senior to a class and that remain outstanding has been
paid in full. No payment of principal of any class of Notes will be made until
the principal of, and all accrued and unpaid interest, on the Notes of each
class that is senior to such class and that remain outstanding have been paid in
full.
In the event that the coverage tests, as defined in the indenture, are not
satisfied as of any distribution date, each class of notes may be redeemed in
the manner specified in the indenture.
Principal payments will be made in the following manner. First, payment of
principal of the Class A1A Notes until the Class A1A Notes have been paid in
full. Next, payment of principal on the Class A1B Notes until the Class A1B
Notes have been paid in full. Next, payment of principal of the Class B Notes
until the Class B Notes have been paid in full. Next, payment of principal of
the Class C Notes until the Class C Notes have been paid in full. Next, payment
of principal of the Class D Notes until the Class D Notes have been paid in
full. Next, payment of principal of the Class E Notes. Finally, the remainder to
the members as a dividend on the members' interests or as a return of capital of
the members' interests as provided in the Trapeza CDO IV, LLC Agreement (the
"Agreement").
If on any distribution date, the amount available in the payment account from
amounts received in the related due period are insufficient to make the full
amount of the disbursements required by the priority of payments to different
persons, the trustee will make the disbursements ratably in accordance with the
indenture.
16
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
NOTES PAYABLE (CONTINUED)
If the Notes and the members' interests have not been released prior to May 24,
2034, it is expected that the Company or Collateral Manager, acting on behalf of
the Company, will sell all of the investments and sell or liquidate all other
collateral, and all net proceeds from such sales and liquidations and all
available cash after the payment (in the order of priorities set forth above) of
all (i) fees, (ii) expenses and (iii) interest (including any defaulted interest
and interest on defaulted interest, any Class C deferred interest and interest
on any Class C deferred interest and any Class D deferred interest and interest
on any Class D deferred interest and any Class E deferred interest and interest
on any Class E deferred interest) and principal of the Notes, will be
distributed to the members in accordance with the Agreement.
ACCELERATION OF MATURITY AND REDEMPTION
The indenture provides for an acceleration of maturity or redemption of all of
the senior Notes and accrued and unpaid interest upon the occurrence of a
default event. Default events include a) failure of Issuer IV to pay interest
for a period of three business days on any Class A or B senior Notes, b) failure
of Issuer IV to pay principal of any senior Note when such payment becomes due
and payable at its stated maturity or redemption date, c) failure of Issuer IV,
on any distribution date to disburse amounts available to the interest
collection account or principal collection account in accordance with the order
of the priority of payments set forth in the Indenture, which continues for
three business days, d) Issuer IV or pool of collateral becomes an investment
company required to be registered under the Investment Company Act, e) default
in performance, or a breach, of any other covenant or other agreement of Issuer
IV under the indenture or any representation of warranty of Issuer IV made in
the indenture or in any certificate or other writing proves to be incorrect in
any material respect when made, and in both clauses, the continuation of such
default or breach for a period of thirty days after Issuer IV or the General
Partner has actual knowledge that such default or breach has occurred or after
written notice to Issuer IV and the General Partner by the trustee, or to Issuer
IV, the General Partner and the trustee by the holders of at least 25% in
aggregate outstanding principal amount of the Notes of the controlling class or
hedge counterparty, f) one or more final judgments being rendered against Issuer
IV that exceed, in the aggregate, $5,000,000, and which remain unstayed,
undischarged and unsatisfied for thirty days after such judgment(s) becomes
nonappealable, unless adequate funds have been reserved or set aside for the
payment thereof, and g) failure, on any measurement date, to cause the
17
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
ACCELERATION OF MATURITY AND REDEMPTION (CONTINUED)
Class A/B overcollateralization ratio to be equal to or greater than 100%. Each
of these conditions is further described in the indenture.
5. INTEREST RATE SWAP AGREEMENTS
The Company maintains a policy of valuing its derivative instruments at fair
values, with the resulting unrealized gain or loss included in the consolidated
statements of operations.
A swap is an agreement that obligates two parties to exchange a series of cash
flows at specified intervals based upon or calculated by reference to changes in
specified prices or rates for a specified amount of an underlying asset or
otherwise determined notional amount.
Risks may arise as a result of the failure of the counterparty to the swap
agreement. The loss incurred by the failure of a counterparty is generally
limited to the net payment to be received by the Company and/or the termination
value at the end of the agreement. Therefore, the Company considers the
creditworthiness of each counterparty to a swap agreement in evaluating
potential credit risk. Additionally, risks may arise from unanticipated
movements in interest rates.
The Company records a net receivable or payable for the net income or expense
expected to be received or paid in the interest period. Net amounts received or
paid on swap agreements are recorded as interest income or interest expense on
the consolidated statements of operations. The amount recorded as interest
income on basis swap agreements for the years ended December 31, 2005 and 2004
totaled $324,591 and $268,103, respectively.
The Company entered into interest rate swap agreements with Credit Suisse First
Boston ("CSFB") and SunTrust Equity Funding, LLC ("SunTrust"), for the purpose
of hedging interest rate and cash flow risk between the fixed-rate investments
and floating-rate investments.
18
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
5. INTEREST RATE SWAP AGREEMENTS (CONTINUED)
At December 31, 2005 and 2004, the Company has one interest rate swap agreement
outstanding with CSFB and one interest rate swap agreement outstanding with
SunTrust. They pay as follows:
FLOATING RATE RATE/AMOUNT
NOTIONAL MATURITY RECEIVED BY THE PAID BY THE 2005 FAIR 2004 FAIR
AMOUNT DATE COMPANY COMPANY VALUE VALUE
- ---------------- ----------- ------------------ ---------------- -------------- -------------
$75,000,000 11/24/08 6 month Libor + 6.385% $ 3,214,102 $ 1,393,828
3.15%
$33,000,000 11/24/13 1 month Libor + 6 month Libor (164,868)
1.25% + 1.29% (195,703)
----------- ------------
$ 3,018,399 $ 1,228,960
=========== ============
At December 31, 2005 and 2004, the Company has one rate cap agreement
outstanding with CSFB which pays on a semi-annual basis, as follows:
FLOATING RATE RATE/AMOUNT
NOTIONAL MATURITY RECEIVED BY THE PAID BY THE 2005 FAIR 2004 FAIR
AMOUNT DATE COMPANY COMPANY VALUE VALUE
- ---------------- ----------- ------------------ ---------------- -------------- -------------
$52,500,000 5/24/20 N/A $ 85,000 $ 54,775 $ (69,389)
19
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS
The Partnership pays Funding an administration fee (payable semi-annually in
advance) equal to one and one-half percentage (1.5%) per annum of the aggregate
capital accounts of the limited partners, which will be used to cover management
fees and other ordinary and recurring administrative and related operating
expenses. For the years ended December 31, 2005 and 2004, administration fees
totaled $314,209 and $283,741, respectively.
In exchange for interests sold on behalf of the Partnership, Funding pays
external broker-dealers an administration fee, equal to the percentage of equity
raised by the broker-dealer multiplied by one-third of the total administration
fee being charged by Funding to the Partnership. For the years ended December
31, 2005 and 2004, total administration fee expense equaled $32,858 and $29,672,
respectively, and are reflected on the consolidated statements of operations.
20
Schedule f)
TRAPEZA FUNDING III, LLC
Consolidated Financial Statements (Unaudited)
Year ended December 31, 2004 and period from April 1, 2003
(commencement of operations) to December 31, 2003
Trapeza Funding III, LLC
Consolidated Financial Statements
Year ended December 31, 2004 and period from April 1, 2003
(commencement of operations) to December 31, 2003
Unaudited
CONTENTS
Consolidated Statements of Financial Condition...............................3
Consolidated Schedule of Investments.........................................4
Consolidated Statements of Operations........................................6
Consolidated Statements of Changes in Members' Interests.....................7
Consolidated Statements of Cash Flows........................................8
Notes to Consolidated Financial Statements...................................9
Trapeza Funding III, LLC
Consolidated Statements of Financial Condition
Unaudited
DECEMBER 31
2004 2003
------------- -------------
ASSETS
Cash and cash equivalents $ 5,453,128 $ 4,694,716
Prepaid expenses 27,260 68,912
Investments in trust preferred securities, at fair value
(amortized cost $399,481,628 and $399,463,216) 400,145,681 399,714,559
Deferred debt issuance costs (net of accumulated amortization
of $917,401 and $42,049) 8,543,221 9,418,573
Interest receivable on trust preferred securities 617,180 541,046
Unrealized appreciation on swap agreements 1,159,571 867,181
Other 132,998 115,490
------------- -------------
Total Assets $ 416,079,039 $ 415,420,477
============= =============
LIABILITIES AND MEMBERS' INTERESTS
Liabilities
Class A1A Notes $ 144,996,417 $ 145,000,000
Class A1B Notes 95,000,000 95,000,000
Class B Notes 33,000,000 33,000,000
Class C-1 Notes 44,500,000 44,500,000
Class C-2 Notes 44,500,000 44,500,000
Class D Notes 13,750,000 14,000,000
Class E Notes 8,571,428 10,000,000
Interest payable 1,517,483 2,082,226
Professional fees 86,965 67,486
Collateral management fees 122,222 194,548
Net interest payable to swap counterparty 64,656 321,477
Trustee fees 13,160 21,088
Accrued expenses 172,549 157,851
------------- -------------
Total Liabilities 386,294,880 388,844,676
------------- -------------
Minority interest 29,151,590 26,374,996
Members' Interests 632,569 200,805
------------- -------------
Total Liabilities and Members' Interests $ 416,079,039 $ 415,420,477
============= =============
See accompanying notes to consolidated financial statements.
3
Trapeza Funding III L.L.C.
Consolidated Schedule of Investments
December 31, 2004
Unaudited
PRINCIPAL 2004 FAIR PRINCIPAL 2003 FAIR
AMOUNT (000) VALUE AMOUNT (000) VALUE
------------ --------- ------------ ---------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) *
BANKS (85.84% AND 85.94%)*
Alabama National Statutory Trust III, 3 month libor + 3.050%, due
9/26/2033 (a) $ 11,210 $ 11,210,000 $ 11,210 $ 11,210,000
Ambank Holdings Capital Trust I, 3 month libor + 3.150%, due 6/30/2033 (a) 9,000 8,935,326 9,000 8,934,185
Arrow Capital Statutory Trust II, 6.530%, due 7/23/2033 (a) 10,000 10,000,000 10,000 10,000,000
Cathay Capital Trust I, 3 month libor + 3.150%, due 6/30/2033 (a) 10,450 10,450,000 10,450 10,450,000
CB Trico Capital Trust, 3 month libor + 3.050%, due 10/20/2033 (a) 10,000 10,000,000 10,000 10,000,000
Centerstate Banks Florida Statutory Trust I, 3 month libor + 3.050%, due
9/22/2033 (a) 10,000 10,000,000 10,000 10,000,000
Corus Statutory Trust II, 3 month libor + 3.100%, due 6/30/2033 (a) 11,000 10,915,400 11,000 10,913,895
F.N.B. Statutory Trust I, 3 month libor + 3.250%, due 3/31/2033 (a) 1,000 1,000,000 1,000 1,000,000
FBR Capital Trust I, 3 month libor + 3.250%, due 3/30/2033 (a) 1,000 992,196 1,000 992,060
FBR Capital Trust II, 3 month libor + 3.100%, due 9/30/2033 (a) 11,000 11,015,094 11,000 11,015,357
First Community / CA Statutory Trust VI, month libor + 3.050%, due
9/15/2033 (a) 10,000 10,106,805 10,000 10,108,693
First Financial OH Statutory Trust II, 3 month libor + 3.100%, due
9/30/2033 (a) 11,000 11,000,000 11,000 11,000,000
First Group Capital Statutory Trust VII, 3 month libor + 2.900%, due
10/30/2033 (a) 12,000 12,066,063 12,000 12,067,247
First South Preferred Trust I, 3 month libor + 2.950%, due 9/30/2033 (a) 10,000 10,060,736 10,000 10,061,823
FNB Statutory Trust I, 3 month libor + 3.250%, due 3/31/2033 (a) 11,000 11,000,000 11,000 11,000,000
Heartland Financial Statutory Trust III, 8.250%, due 10/10/2033 (a) 11,000 11,000,000 11,000 11,000,000
Iberiabank Statutory Trust II, 3 month libor + 3.150%, due 6/17/2033 (a) 1,000 1,004,679 1,000 1,004,762
Industry Bancshares Capital Trust II, 3 month libor + 3.050%, due
8/30/2033 (a) 2,000 1,970,604 2,000 1,970,085
James Monroe Statutory Trust II, 3 month libor + 3.100%, due 7/31/2033 (a) 4,000 4,000,000 4,000 4,000,000
Lakeland Bancorp Capital Trust II, 5.710%, due 6/30/2033 (a) 11,000 10,950,462 11,000 10,949,784
Lakeland Statutory Trust II, 3 month libor + 3.050%, due 10/1/2033 (a) 12,000 12,000,000 12,000 12,000,000
Lone Star National Capital Trust II, 3 month libor + 2.950%, due
9/30/2033 (a) 10,000 10,058,776 10,000 10,059,829
Macatawa Statutory Trust I, 3 month libor + 3.050%, due 7/15/2033 (a) 11,000 11,000,000 11,000 11,000,000
Main Street Banks Statutory Trust II, 3 month libor + 3.250%, due
6/30/2033 (a) 9,000 9,000,000 9,000 9,000,000
Mariner Capital Trust IV, 3 month libor + 3.050%, due 8/30/2033 (a) 12,000 12,053,884 12,000 12,054,843
Merchants and Manufacturers Statutory Trust II, 8.250%, due 5/30/2033 (a) 1,000 1,000,000 1,000 1,000,000
Merchants and Manufacturers Statutory Trust III, 8.250%, due 10/15/2033 (a) 3,500 3,500,000 3,500 3,500,000
Merchants and Manufacturers Statutory Trust IV, 3 month libor + 2.950%, due
10/15/2033 (a) 7,500 7,500,000 7,500 7,500,000
National Bancshares Capital Trust II, 3 month libor + 3.000%, due 9/15/2033 (a) 7,000 7,004,343 7,000 7,004,420
Orion Bancorp, Inc. Statutory Trust I, 3 month libor + 3.250%, due 5/5/2033 (a) 11,000 11,000,000 11,000 11,000,000
Ozark Capital Statutory Trust II, 3 month libor + 2.900%, due 9/29/2033 (a) 6,000 6,000,000 6,000 6,000,000
Raton Capital Trust I, 3 month libor + 2.900%, due 9/30/2033 (a) 5,000 5,048,971 5,000 5,049,856
Salin Statutory Trust I, 3 month libor + 2.950%, due 10/17/2033 (a) 11,000 11,000,000 11,000 11,000,000
Sleepy Hollow Capital Trust I, 3 month libor + 3.050%, due 8/30/2033 (a) 4,000 4,013,716 4,000 4,013,960
SNB Capital Trust IV, 3 month libor + 3.000%, due 9/30/2033 (a) 5,000 5,028,904 5,000 5,029,417
Southside Statutory Trust III, 3 month libor + 2.940%, due 9/4/2033 (a) 12,000 12,000,000 12,000 12,000,000
St. Josephs Financial Capital Trust I, 3 month libor + 3.050%, due
7/11/2033 (a) 3,000 3,037,227 3,000 3,037,892
Sterling Bank Houston Texas, 7.375%, due 4/15/2013 (a) 4,670 4,670,000 4,670 4,670,000
Summit Bank Corporation Capital Trust I, 3 month libor + 3.100%, due
9/30/2033 (a) 12,000 11,938,252 12,000 11,937,175
United Bancorporation of Wyoming Capital Trust I, 3 month libor + 3.100%,
due 9/30/2033 (a) 9,000 9,029,404 9,000 9,029,917
Wesbanco Capital Trust II, 5.800%, due 6/30/2033 (a) 4,000 3,993,486 4,000 3,993,398
West Bancorporation Capital Trust I, 6.975%, due 7/18/2033 (a) 11,000 10,943,302 11,000 10,942,693
Wintrust Capital Trust III, 3 month libor + 3.250%, due 4/7/2033 (a) 5,000 5,000,000 5,000 5,000,000
----------- -----------
Total Banks (amortized cost $343,497,630 and $343,501,291) 343,497,630 343,501,291
----------- -----------
4
Trapeza Funding III, L.L.C.
Consolidated Schedule of Investments (continued)
December 31, 2004
Unaudited
PRINCIPAL 2004 FAIR PRINCIPAL 2003 FAIR
AMOUNT (000) VALUE AMOUNT (000) VALUE
------------ --------- ------------ ---------
INVESTMENTS IN TRUST PREFERRED SECURITIES - (100%) * (CONTINUED)
THRIFTS (14.16% AND 14.06%)
BankSouth of Georgia Statutory Trust I, 3 month libor + 3.150%, due
9/23/2033 (a) 5,000 5,000,000 5,000 5,000,000
BSC Capital Trust I, 3 month libor + 2.900%, due 9/30/2033 (a) 12,000 12,033,496 12,000 12,034,102
Capital One Capital I, 3 month libor + 1.550%, due 2/1/2027 3,000 2,985,002 3,000 2,549,999
Coastal Capital Trust II, 3 month libor + 3.050%, due 6/23/2033 (a) 10,000 9,969,634 10,000 9,969,089
Coastal Financial Capital Trust I, 3 month libor + 3.050%, due
7/3/2033 (a) 6,000 6,053,685 6,000 6,054,644
Flagstar Statutory III, 6.550%, due 4/7/2033 (a) 5,000 5,000,000 5,000 5,000,000
Flagstar Statutory Trust IV, 6.750%, due 3/19/2033 (a) 2,670 2,645,707 2,670 2,645,428
IndyMac Capital Trust V, 6.050%, due 7/11/2033 (a) 12,000 11,964,055 12,000 11,963,596
Sterling Capital Trust IV, 3 month libor + 3.150%, due 5/15/2033 (a) 1,000 996,472 1,000 996,410
------------ ------------
Total Thrifts (amortized cost $55,983,998 and $55,961,925) 56,648,051 56,213,268
------------ ------------
Total Investments in Trust Preferred Securities (amortized cost
$399,481,628 and $399,463,216) $400,145,681 $399,714,559
============ ============
FAIR VALUE FAIR VALUE
------------ ------------
INTEREST RATE SWAP AGREEMENTS
Credit Suisse First Boston $ 1,159,571 $ 867,181
------------ ------------
Total Interest Rate Swap Agreements $ 1,159,571 $ 867,181
============ ============
*Amounts in parenthesis indicate percentage of investments in trust preferred
securities.
(a) Private placement, illiquid securities, where amortized cost approximates
fair value.
See accompanying notes to consolidated financial statements.
5
Trapeza Funding III, LLC
Consolidated Statements of Operations
Unaudited
PERIOD FROM APRIL 1,
2003 (COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
INVESTMENT INCOME
Interest $ 20,405,244 $ 7,055,055
Reimbursement fees - 2,280,962
------------- ------------
TOTAL INVESTMENT INCOME 20,405,244 9,336,017
------------- ------------
EXPENSES
Interest 13,055,196 4,123,224
Collateral management fees 1,000,201 194,548
Amortization 875,352 54,562
Trustee fees 118,989 21,088
Professional fees 103,665 749,621
Administration fees 29,672 16,558
Wages, payroll taxes and benefits - 703,991
Overhead - 234,744
Travel, meals and entertainment - 178,330
Printing and copying - 28,728
Delivery services - 4,817
Other 230,339 248,784
------------- ------------
Total expenses 15,413,414 6,558,995
------------- ------------
NET INVESTMENT INCOME 4,991,830 2,777,022
------------- ------------
Unrealized appreciation on investment transactions:
Investments in trust preferred securities 412,710 251,342
Interest rate swap agreements 292,390 867,181
------------- ------------
Net unrealized appreciation on investment transactions 705,100 1,118,523
------------- ------------
Net income before minority interest 5,696,930 3,895,545
Minority interest 4,749,073 2,640,854
------------- ------------
NET INCOME $ 947,857 $ 1,254,691
============= ============
See accompanying notes to consolidated financial statements.
6
Trapeza Funding III, LLC
Consolidated Statements of Changes in Members' Interests
Year ended December 31, 2004 and period from April 1, 2003
(commencement of operations) to December 31, 2003
Unaudited
Balance at April 1, 2003 $ -
Capital contributions 20,000
Offering costs (1)
Net income 1,254,691
Distributions to members (1,073,885)
------------
Balance at December 31, 2003 200,805
Net income 947,857
Distributions to members (516,093)
------------
Balance at December 31, 2004 $ 632,569
============
See accompanying notes to consolidated financial statements.
7
Trapeza Funding III, LLC
Consolidated Statements of Cash Flows
Unaudited
PERIOD FROM
APRIL 1, 2003
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 947,857 $ 1,254,691
Adjustments to reconcile net income to net cash and cash
equivalents provided by (used in) operating activities:
Amortization of deferred debt issuance costs 875,352 42,049
Accretion of discount on investments in trust preferred (18,412)
securities (3,023)
Minority interest 2,776,594 26,374,996
Net unrealized appreciation on investment transactions (705,100) (1,118,523)
Net change in operating assets and liabilities:
Investment in trust preferred securities - (399,460,194)
Interest receivable on trust preferred securities (76,134) (541,046)
Prepaid expenses 41,652 (68,912)
Other (17,508) (115,490)
Interest payable (564,743) 2,082,226
Professional fees 19,479 67,486
Collateral management fees (72,326) 194,548
Net interest payable to swap counterparty (256,821) 321,477
Trustee fees (7,928) 21,088
Accrued expenses 14,698 157,851
--------------- ---------------
Net cash and cash equivalents provided by (used in) operating
activities 2,956,660 (370,790,776)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes - 386,000,000
Principal payments on notes (1,682,155) -
Deferred debt issuance costs - (9,460,622)
Proceeds from capital contributions - 20,000
Payments of offering costs - (1)
Distributions to members (516,093) (1,073,885)
--------------- ---------------
Net cash and cash equivalents (used in) provided by financing
activities (2,198,248) 375,485,492
--------------- ---------------
Net increase in cash and cash equivalents 758,412 4,694,716
Cash and cash equivalents, beginning of period 4,694,716 -
--------------- ---------------
Cash and cash equivalents, end of period $ 5,453,128 $ 4,694,716
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 13,863,234 $ 1,529,775
=============== ===============
See accompanying notes to consolidated financial statements.
8
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements
December 31, 2004
1. ORGANIZATION AND PURPOSE
Trapeza Funding III, LLC ("Funding"), was organized on January 30, 2003 as a
Delaware limited liability company. Funding commenced operations on April 1,
2003. Funding was organized for the purpose of being the general partner of
Trapeza Partners III L.P. (the "Partnership"). Per the partnership agreement,
the limited partners have no right to remove Funding at any time. Funding has
complete and exclusive control of the management of the business affairs of the
Partnership.
The Partnership was organized on February 27, 2003 as a Delaware limited
partnership. The Partnership commenced operations on April 1, 2003. The
Partnership was organized for the purpose of investing in membership interests
and other securities to be issued by Trapeza CDO IV, LLC ("Issuer IV"), which
was formed by Funding. Funding also formed Trapeza CDO III, LLC ("Issuer III").
The Partnership has an 11-year term, which Funding may extend on a year-to-year
basis.
Minority interest reflects the 99.99% of partners' interest of the limited
partners of the Partnership. The consolidated entity is referred to as the
"Company."
Funding and the Collateral Manager are owned equally by Financial Stocks, Inc.
("FSI") and Resource Financial Fund Management, Inc., a wholly owned subsidiary
of Resource America, Inc. ("REXI") (collectively, the "Owners"). FSI is a
Registered Investment Adviser under the Investment Advisers Act of 1940. REXI is
a publicly traded company operating in energy, real estate and financial
services sectors. The Owners hold partnership interests of approximately 11% of
the Partnership. Funding has complete and exclusive control of the management of
the business affairs of the Partnership.
Issuer IV's objective is to purchase, acquire, own, hold, sell, endorse,
transfer, assign, pledge, finance, refinance, exchange, restructure, workout,
advance and collect funds pursuant to and otherwise deal with and exercise
rights of ownership with respect to the collateral of Issuer IV, including other
securities or equity interests owned from time to time by Issuer IV, all in
accordance with the terms of the indenture.
Trapeza Capital Management, LLC (the "Collateral Manager"), a Delaware limited
liability company, is responsible for supervising and directing the investment
of the collateral of Issuer IV. Issuer IV is charged a collateral management fee
by the Collateral Manager, who is affiliated with Funding through common
ownership. All material intercompany transactions have been eliminated.
9
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
1. ORGANIZATION AND PURPOSE (CONTINUED)
The business and affairs of Funding are managed by a Board of Managers. The
Board of Managers has full, complete and exclusive authority, power and
discretion to manage and control the business affairs and properties of Funding,
to make all decisions regarding those matters and to perform any activities
customary or incident to the management of Funding's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Company in the preparation of its financial statements.
BASIS OF ACCOUNTING
The Company's accounting policies are in conformity with accounting principles
generally accepted in the United States. The Company maintains its financial
records in United States dollars. For financial reporting purposes, the Company
follows the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits with banks and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
INVESTMENT TRANSACTIONS
The Partnership records transactions on their trade dates. Realized gains and
losses on investments are determined on the specific identification basis for
financial accounting purposes. Interest is accrued as earned or incurred and
includes the amortization/accretion of premiums and discounts on debt
securities.
INVESTMENT VALUATION
Investments are carried at market or fair value. Securities for which market
quotations are not readily available are valued by procedures adopted by
Funding. In valuing investments in which market quotations are not readily
available, Funding utilizes data from a variety of different sources, taking
into account the characteristics of a security, any changes in the credit
quality of the securities in the portfolio, the overall movement of interest
rates and other factors which, in Funding's good faith and judgment, are
10
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT VALUATION (CONTINUED)
relevant to the value of a security. For exchange-traded securities, management
will obtain current market data and quotes from independent brokers.
The Company has invested a significant portion of the portfolio in private
placement, illiquid issues having no ready market. At December 31, 2004, these
securities aggregate $397,160,679 and have been valued in good faith by Funding
as described in the preceding paragraph. Because of the inherent uncertainty of
valuation, the fair values estimated by Funding may not necessarily represent
the amounts that could be realized from sales or other dispositions of
investments and the differences may be material.
CREDIT RISKS AND GENERAL LIQUIDITY CONSIDERATIONS
Investments in trust preferred securities are subject to credit, interest rate
and liquidity risks. Adverse changes in the financial condition of an issuer of
trust preferred securities or in general economic conditions or both may impair
the ability of an issuer to make payments of principal and interest. Debt
obligations are also subject to liquidity risk and the risk of market price
fluctuations. Adverse changes in the financial condition of an issuer may affect
the liquidity of the market for an issuer's securities and may reduce the market
price of such securities. In addition, changes in general economic and
regulatory conditions may affect the liquidity of the market for trust preferred
securities in general and may reduce the values of some or all of the
securities.
OFFERING COSTS
During 2003, the Partnership incurred offering costs related to the closing of
Issuer IV of $166,999, of which $1 was allocated to Funding. These costs were
charged directly to the partners' capital and members' capital accounts,
respectively.
ALLOCATION OF PROFITS AND LOSSES
The Company allocates profits to the members in proportion to their respective
capital account balances until the cumulative profits for this current period
and all prior fiscal years are equal to the cumulative losses allocated;
thereafter, among the members in proportion to their respective units. Losses
are allocated to the members in proportion to their respective capital account
balances.
11
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOCATION OF PROFITS AND LOSSES (CONTINUED)
Funding's investment in the Partnership is accounted for based on its pro-rata
share of its investment in the Partnership. Profits and losses from
non-portfolio income are allocated to all members in proportion to their
allocable shares. Twenty percent (20%) of the cumulative net profits from
portfolio investments are allocated to Funding.
Non-portfolio income of the Partnership, consisting primarily of income earned
on short-term investments, is allocated to all limited partners of the
Partnership in proportion to their respective capital account balances prior to
the allocation of any other item.
Portfolio income of the Partnership, consisting primarily of accrued interest
and profits and losses from the sale of such investments, is allocated to all
partners of the Partnership in proportion to their respective contributed
capital in relation to total contributed capital of the Partnership, but 20% of
the cumulative net profits otherwise allocable to all partners will be allocated
to Funding, defined as the incentive allocation. For the year ended December 31,
2004 and period ended December 31, 2003, Funding received an incentive
allocation of $763,327 and $518,390, respectively.
TAXATION
The Company is treated as a partnership for Federal income tax purposes and,
therefore, no provision for federal income tax is recorded.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS
As of December 31, 2004, the Company has 100 Membership Units issued and
outstanding. No member shall be required to make any additional contributions
beyond their initial contribution. If the Board of Managers unanimously
determines that the Company requires additional funds, any member may, but is
not obligated to, advance such funds. For the year
12
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS (CONTINUED)
ended December 31, 2004 and period ended December 31, 2003, the Company received
total contributions of $0 and $20,000, respectively, from the members.
No member shall have the right to withdraw any of its capital contribution,
except upon dissolution and liquidation of the Company. The Company is required
to make a distribution to each member at least quarterly. For the year ended
December 31, 2004 and period ended December 31, 2003, the Company made
distributions of $516,093 and $1,073,885, respectively, to the members.
In accordance with the partnership agreement, each partner has contributed a
specified amount of capital which is set forth in the partnership agreement. No
limited partner is required to contribute any capital in excess of its
commitment. As of June 4, 2003, all commitments of the Partnership are fully
funded.
A limited partner will not have the right to redeem its interest in the
Partnership. Funding, in its sole discretion, may redeem all or part of the
partnership interest of any limited partner, for an amount equal to the capital
account of the partnership interest being redeemed, if the limited partner
consents to such redemption and all redemptions in any year do not exceed five
percent of the aggregate allocable percentage of all limited partners.
Funding will cause the Partnership to distribute the lesser of (i) ninety
percent (90%) of cash available from profits and (ii) all cash then available to
the partnership less any reserves for partnership expenses or liabilities. All
other distributions will be at the discretion of Funding. Funding will determine
at its sole discretion the source of funds for all distributions. For the year
ended December 31, 2004 and period ended December 31, 2003, the Partnership made
distributions of $1,551,940 and $1,223,014, respectively, to the partners.
4. ISSUER IV
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs of $9,460,622 are being amortized over the expected
life of the related debt using the effective interest method. The expected life
of the debt is the period ending with the distribution date occurring in
November 2013, as defined in the indenture. Amortization of deferred debt
issuance costs commenced on October 21, 2003.
13
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
COLLATERAL MANAGEMENT AND TRUSTEE FEES
Pursuant to a collateral management agreement, the Collateral Manager is
entitled to a semiannual fee, payable in arrears on the distribution dates,
equal to 0.10% per annum of the semi-annual asset amount ("Base Collateral
Management Fee"), of the net outstanding portfolio collateral, as defined in the
indenture. After certain expenses have been paid, the Collateral Manager is
entitled to an additional semiannual fee equal to 0.15% per annum, calculated in
the same manner as the Base Collateral Management Fee. For the year ended
December 31, 2004 and period ended December 31, 2003, total collateral
management fees were $1,000,201 and $194,548, respectively, and are reflected on
the consolidated statement of operations.
Pursuant to a trustee agreement, the trustee is entitled to a semiannual fee, on
each distribution date, equal to 0.0225% per annum of the sum of the aggregate
principal amount of the investments plus cash and cash equivalents at the
beginning of the period relating to such distribution dates, as defined in the
indenture. For the year ended December 31, 2004 and period ended December 31,
2003, total trustee fees were $118,989 and $21,088, respectively, and are
reflected on the consolidated statement of operations.
14
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
NOTES PAYABLE
On October 21, 2003, Issuer IV issued notes (the "Notes") at their respective
principal values, which are secured by Issuer IV's investments and are
non-recourse to the Company.
At December 31, 2004 and 2003, the Notes outstanding consisted of the following:
2004 PRINCIPAL 2003 PRINCIPAL INTEREST RATE STATED MATURITY
--------------- --------------- ------------------------ ----------------
Class A1A Notes $ 144,996,417 $ 145,000,000 Libor + 0.58% until May 24, 2034
and including the
distribution date in
November 2013; at all
times thereafter,
Libor + 1.16%
Class A1B Notes $ 95,000,000 $ 95,000,000 Libor + 0.83% May 24, 2034
Class B Notes $ 33,000,000 $ 33,000,000 See Class B note May 24, 2034
Class C-1 Notes $ 44,500,000 $ 44,500,000 Libor + 1.65% May 24, 2034
Class C-2 Notes $ 44,500,000 $ 44,500,000 5.006% until the last May 24, 2034
day of the interest
period immediately
prior to the
distribution date in
November 2008 and
Libor + 1.65%,
thereafter
Class D Notes $ 13,750,000 $ 14,000,000 Libor + 2.60% May 24, 2034
Class E Notes $ 8,571,428 $ 10,000,000 10.00% May 24, 2034
Pursuant to the terms of the Class B agency agreement, the holders of the Class
B Notes will be entitled to receive interest, certain third parties will be
entitled to receive compensation, at an aggregate, floating rate per annum not
to exceed Libor plus 1.25% in the aggregate, after taking into consideration the
effect of a basis swap to be entered into in connection with the Class B Notes.
15
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
NOTES PAYABLE (CONTINUED)
Holders of the Notes are to receive semiannual interest payments on May 24 and
November 24, commencing in May 2004 (the "Initial Payment Date"). The order of
payment will be first to Class A1A, second, Class A1B, third, Class B, fourth to
Class C, fifth to Class D and sixth to Class E with each Class of Notes being
senior to each of the other classes of Notes. No payments of interest on any
class of Notes will be made until all accrued and unpaid interest on the Notes
of each class that is senior to a class and that remain outstanding has been
paid in full. No payment of principal of any class of Notes will be made until
the principal of, and all accrued and unpaid interest, on the Notes of each
class that is senior to such class and that remain outstanding have been paid in
full.
In the event that the coverage tests, as defined in the indenture, are not
satisfied as of any distribution date, each class of notes may be redeemed in
the manner specified in the indenture.
Principal payments will be made in the following manner. First, payment of
principal of the Class A1A Notes until the Class A1A Notes have been paid in
full. Next, payment of principal on the Class A1B Notes until the Class A1B
Notes have been paid in full. Next, payment of principal of the Class B Notes
until the Class B Notes have been paid in full. Next, payment of principal of
the Class C Notes until the Class C Notes have been paid in full. Next, payment
of principal of the Class D Notes until the Class D Notes have been paid in
full. Next, payment of principal of the Class E Notes. Finally, the remainder to
the members as a dividend on the members' interests or as a return of capital of
the members' interests as provided in the Trapeza CDO IV, LLC Agreement (the
"Agreement").
If on any distribution date, the amount available in the payment account from
amounts received in the related due period are insufficient to make the full
amount of the disbursements required by the priority of payments to different
persons, the trustee will make the disbursements ratably in accordance with the
indenture.
16
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
NOTES PAYABLE (CONTINUED)
If the Notes and the members' interests have not been released prior to May 24,
2034, it is expected that the Company or Collateral Manager, acting on behalf of
the Company, will sell all of the investments and sell or liquidate all other
collateral, and all net proceeds from such sales and liquidations and all
available cash after the payment (in the order of priorities set forth above) of
all (i) fees, (ii) expenses and (iii) interest (including any defaulted interest
and interest on defaulted interest, any Class C deferred interest and interest
on any Class C deferred interest and any Class D deferred interest and interest
on any Class D deferred interest and any Class E deferred interest and interest
on any Class E deferred interest) and principal of the Notes, will be
distributed to the members in accordance with the Agreement.
ACCELERATION OF MATURITY AND REDEMPTION
The indenture provides for an acceleration of maturity or redemption of all of
the senior Notes and accrued and unpaid interest upon the occurrence of a
default event. Default events include a) failure of Issuer IV to pay interest
for a period of three business days on any Class A or B senior Notes, b) failure
of Issuer IV to pay principal of any senior Note when such payment becomes due
and payable at its stated maturity or redemption date, c) failure of Issuer IV,
on any distribution date to disburse amounts available to the interest
collection account or principal collection account in accordance with the order
of the priority of payments set forth in the Indenture, which continues for
three business days, d) Issuer IV or pool of collateral becomes an investment
company required to be registered under the Investment Company Act, e) default
in performance, or a breach, of any other covenant or other agreement of Issuer
IV under the indenture or any representation of warranty of Issuer IV made in
the indenture or in any certificate or other writing proves to be incorrect in
any material respect when made, and in both clauses, the continuation of such
default or breach for a period of thirty days after Issuer IV or the General
Partner has actual knowledge that such default or breach has occurred or after
written notice to Issuer IV and the General Partner by the trustee, or to Issuer
IV, the General Partner and the trustee by the holders of at least 25% in
aggregate outstanding principal amount of the Notes of the controlling class or
hedge counterparty, f) one or more final judgments being rendered against Issuer
IV that exceed, in the aggregate, $5,000,000, and which remain unstayed,
undischarged and unsatisfied for thirty days after such judgment(s) becomes
nonappealable, unless adequate funds have been reserved or set aside for the
payment thereof, and g) failure, on any measurement date, to cause the
17
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
4. ISSUER IV (CONTINUED)
ACCELERATION OF MATURITY AND REDEMPTION (CONTINUED)
Class A/B overcollateralization ratio to be equal to or greater than 100%. Each
of these conditions is further described in the indenture.
5. INTEREST RATE SWAP AGREEMENTS
The Company maintains a policy of valuing its securities positions and
derivative instruments at market or fair values, with the resulting unrealized
gain or loss included in the consolidated statements of operations.
A swap is an agreement that obligates two parties to exchange a series of cash
flows at specified intervals based upon or calculated by reference to changes in
specified prices or rates for a specified amount of an underlying asset or
otherwise determined notional amount.
Risks may arise as a result of the failure of the counterparty to the swap
agreement. The loss incurred by the failure of a counterparty is generally
limited to the net payment to be received by the Company and/or the termination
value at the end of the agreement. Therefore, the Company considers the
creditworthiness of each counterparty to a swap agreement in evaluating
potential credit risk. Additionally, risks may arise from unanticipated
movements in interest rates.
The Company records a net receivable or payable for the net income or expense
expected to be received or paid in the interest period. Net amounts received or
paid on swap agreements are recorded as interest income or interest expense on
the consolidated statements of operations. The amount recorded as interest
income on basis swap agreements for the years ended December 31, 2004 and 2003
totaled $268,103 and $49,195, respectively.
The Company entered into interest rate swap agreements with Credit Suisse First
Boston ("CSFB") and Suntrust Equity Funding, LLC ("SunTrust"), for the purpose
of hedging interest rate and cash flow risk between the fixed-rate investments
and floating-rate investments.
18
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
5. INTEREST RATE SWAP AGREEMENTS (CONTINUED)
At December 31, 2004, the Company has one interest rate swap agreement
outstanding with CSFB and one interest rate swap agreement outstanding with
SunTrust. At December 31, 2003, the Company had one interest rate swap agreement
outstanding with CSFB. They pay as follows:
FLOATING RATE RATE/AMOUNT
NOTIONAL MATURITY RECEIVED BY THE PAID BY THE 2004 FAIR 2003 FAIR
AMOUNT DATE COMPANY COMPANY VALUE VALUE
- ---------------- ----------- ------------------ ---------------- -------------- -------------
$75,000,000 11/24/08 6 month Libor + 6.385% $ 1,393,828 $ 992,926
3.15%
$33,000,000 11/24/13 1 month Libor + 6 month Libor (164,868) -
1.25% + 1.29%
------------ ----------
$ 1,228,960 $ 992,926
============ ==========
At December 31, 2004 and 2003, the Company has one rate cap agreement
outstanding with CSFB which pays on a semi-annual basis, as follows:
FLOATING RATE RATE/AMOUNT
NOTIONAL MATURITY RECEIVED BY THE PAID BY THE 2004 FAIR 2003 FAIR
AMOUNT DATE COMPANY COMPANY VALUE VALUE
- ---------------- ----------- ------------------ ---------------- -------------- -------------
$52,500,000 5/24/20 N/A $85,000 (69,389) (125,745)
6. RELATED PARTY TRANSACTIONS
During 2003, Issuer III paid a one-time contractually determined reimbursement
fee of $900,000 to Funding in connection with the formation of Issuer III.
Issuer III also paid a one-time non-accountable reimbursement fee for roadshow
expenses to Funding of $10,000.
During 2003, Issuer IV paid a one-time contractually determined reimbursement
fee of $1,200,000 to Funding in connection with the formation of Issuer IV.
Issuer IV also paid a one-time non-accountable reimbursement for roadshow
expenses to Funding of $10,000.
19
Trapeza Funding III, LLC
Notes to Consolidated Unaudited Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
The Partnership pays Funding an administration fee (payable semi-annually in
advance) equal to one and one-half percentage (1.5%) per annum of the aggregate
capital accounts of the limited partners, which will be used to cover management
fees and other ordinary and recurring administrative and related operating
expenses. For the year ended December 31, 2004 and period from April 1, 2003 to
December 31, 2003, administration fees totaled $283,741 and $158,339,
respectively. The Partnership also reimbursed Funding for $160,962 for certain
fees paid on behalf of the Partnership.
In exchange for interests sold on behalf of the Partnership, Funding pays
external broker-dealers an administration fee, equal to the percentage of equity
raised by the broker-dealer multiplied by one-third of the total administration
fee being charged by Funding to the Partnership. For the year ended December 31,
2004 and period from April 1, 2003 to December 31, 2003, total administration
fee expense equaled $29,672 and $16,558, respectively, and are reflected on the
consolidated statements of operations.
20
Schedule g)
TRAPEZA CAPITAL MANAGEMENT, LLC
AUDITED FINANCIAL STATEMENTS
Years ended December 31, 2005 and 2004 with Report of Independent Auditors
Trapeza Capital Management, LLC
Audited Financial Statements
Years ended December 31, 2005 and 2004
CONTENTS
Report of Independent Auditors............................................... 1
Audited Financial Statements
Statements of Financial Condition............................................ 2
Statements of Operations..................................................... 3
Statements of Changes in Members' Interests.................................. 4
Statements of Cash Flows..................................................... 5
Notes to Audited Financial Statements........................................ 6
Report of Independent Auditors
To the Members of
Trapeza Capital Management, LLC:
We have audited the accompanying statements of financial condition of Trapeza
Capital Management, LLC (the "Company"), as of December 31, 2005 and 2004, and
the related statements of operations, changes in members' interest and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trapeza Capital Management, LLC
at December 31, 2005 and 2004, and the results of its operations, changes in its
members' interest and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States.
January 27, 2006
1
Trapeza Capital Management, LLC
Statements of Financial Condition
DECEMBER 31
2005 2004
------------- -------------
ASSETS
Cash and cash equivalents $ 462,006 $ 638,992
Investment in Trapeza Partners II L.P. 4,444,074 3,908,503
Collateral management fees 1,630,506 1,383,074
Prepaid expense 134,462 79,145
Accounts receivable - 30,000
Website redesign (net of accumulated depreciation of $27,153
and $14,119) 11,947 24,981
Computer equipment and database configuration (net of
accumulated depreciation of $57,327 and $21,158) 51,293 88,019
------------- -------------
Total Assets $ 6,734,288 $ 6,152,714
============= =============
LIABILITIES AND MEMBERS' INTERESTS
Liabilities
Loan payable $ 700,000 $ 1,900,000
Interest payable 7,998 12,836
Professional fees 44,000 44,000
License fee payable - 5,110
Accounts payable 18,485 15,000
Trustee fees 445,000 543,001
Accrued expenses 283,521 258,585
------------- -------------
Total Liabilities 1,499,004 2,778,532
------------- -------------
Members' Interests 5,235,284 3,374,182
------------- -------------
Total Members' Interests 5,235,284 3,374,182
------------- -------------
Total Liabilities and Members' Interests $ 6,734,288 $ 6,152,714
============= =============
See accompanying notes to financial statements.
2
Trapeza Capital Management, LLC
Statements of Operations
YEAR ENDED DECEMBER 31,
2005 2004
------------- -------------
INVESTMENT INCOME
Collateral management fees $ 4,841,971 $ 4,610,103
Equity in earnings of Trapeza Partners II L.P. 1,076,438 877,116
Assignment fee 758,715 -
Interest 5,960 3,210
------------- -------------
TOTAL INVESTMENT INCOME 6,683,084 5,490,429
------------- -------------
EXPENSES
Consulting and advisory fees 528,000 528,000
Wages, payroll taxes and benefits 400,171 303,703
Licensing fees 129,413 80,289
Taxes 96,091 85,609
Interest expense 55,139 61,553
Amortization/Depreciation 49,203 72,033
Rent 42,525 32,275
Professional fees 39,810 65,210
Other 15,554 6,847
Supplies 14,247 10,813
Financial publications 14,028 10,647
Telephone 10,354 7,859
Delivery services 10,229 8,468
Trustee fees 9,000 950
Printing 1,461 1,109
Amortization of deferred debt issuance costs - 37,842
------------- -------------
Total expenses 1,415,225 1,313,207
------------- -------------
NET INCOME $ 5,267,859 $ 4,177,222
============= =============
See accompanying notes to financial statements.
3
Trapeza Capital Management, LLC
Statements of Changes in Members' Interests
Years ended December 31, 2005 and 2004
Balance at January 1, 2004 $ 1,521,300
Capital contributions, net of placement costs 140,000
Net income 4,177,222
Distributions to members (2,464,340)
------------
Balance at December 31, 2004 3,374,182
Capital contributions, net of placement costs 72,000
Net income 5,267,859
Distributions to members (3,478,757)
------------
Balance at December 31, 2005 $ 5,235,284
============
See accompanying notes to financial statements.
4
Trapeza Capital Management, LLC
Statements of Cash Flows
YEARS ENDED DECEMBER 31,
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,267,859 $ 4,177,222
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities:
Amortization of deferred debt issuance costs - 37,842
Amortization/Depreciation 49,203 34,191
Net change in operating assets and liabilities:
Investment in Trapeza Partners II L.P. (535,571) (283,412)
Collateral management fees (247,432) (426,086)
Prepaid expense (55,317) 18,047
Accounts receivable 30,000 (30,000)
Computer equip. and database configuration 557 (109,177)
Interest payable (4,838) (1,300)
Professional fees - (15,000)
License fee payable (5,110) 5,110
Accounts payable 3,485 (24,100)
Trustee fees (98,001) 61,001
Accrued expenses 24,936 233,353
------------ ------------
Net cash and cash equivalents provided by operating activities 4,429,771 3,677,691
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on loan (1,200,000) (1,200,000)
Proceeds from capital contributions, net of placement costs 72,000 140,000
Distributions to members (3,478,757) (2,464,340)
------------ ------------
Net cash and cash equivalents used in financing activities (4,606,757) (3,524,340)
------------ ------------
Net increase (decrease) in cash and cash equivalents (176,986) 153,351
Cash and cash equivalents, beginning of year 638,992 485,641
------------ ------------
Cash and cash equivalents, end of year $ 462,006 $ 638,992
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 6 1,079 $ 62,853
============ ============
See accompanying notes to financial statements.
5
Trapeza Capital Management, LLC
Notes to Audited Financial Statements
December 31, 2005
1. ORGANIZATION AND PURPOSE
Trapeza Capital Management, LLC (the "Company"), was organized on August 26,
2002 as a Delaware limited liability company. The Company commenced operations
on November 19, 2002. The Company was organized for the purpose of supervising
and directing the investment and reinvestment of collateral for six
collateralized debt obligations, Trapeza CDO I, LLC ("Issuer I"), Trapeza CDO
II, LLC ("Issuer II"), Trapeza CDO III, LLC ("Issuer III"), Trapeza CDO IV, LLC
("Issuer IV"), Trapeza CDO V, Ltd. ("Issuer V"), and Trapeza CDO Edge, Ltd.
("Issuer Edge"), (collectively the "Issuers").
The Company shall provide services to the Issuers as follows, 1) supervise and
direct the administration of the collateral, 2) determine, upon request of the
trustee, when payments received in respect to the collateral shall be applied as
principal proceeds, 3) monitor the collateral on behalf of the Issuers and, on
an ongoing basis, provide to the Issuers and the trustee all schedules and other
information and data relating to the collateral which the Issuers or the
trustee, on behalf of the noteholders, is required to be prepared and delivered,
4) take or direct the trustee to sell or dispose of any collateral subject to
the requirements of such in the indentures and 5) cause the trustee to exercise
or acquire any rights or remedies with respect to such collateral (including
waiving any default or voting to accelerate the maturity of any defaulted
security).
The Company is owned equally by Financial Stocks, Inc. ("FSI") and Resource Fund
Financial Management, Inc., a wholly owned subsidiary of Resource America, Inc.
("REXI"). FSI is a Registered Investment Adviser under the Investment Advisers
Act of 1940. REXI, a publicly traded company is a specialized asset management
company that uses industry specific expertise to generate and administer
investment opportunities for their own account and for outside investors in the
financial fund management, real estate and equipment leasing sectors.
The business and affairs of the Company shall be managed by a Board of Managers.
The Board of Managers has full, complete and exclusive authority, power and
discretion to manage and control the business affairs and properties of the
Company, to make all decisions regarding those matters and to perform any
activities customary or incident to the management of the Company's business.
The Company shall continue in perpetuity, unless sooner terminated upon
unanimous determination of the members to terminate the Company.
The Company has a partnership interest of approximately 9% in Trapeza Partners
II L.P. (the "Partnership"). The Partnership was organized for the purpose of
investing in
6
Trapeza Capital Management, LLC
Notes to Audited Financial Statements (continued)
1. ORGANIZATION AND PURPOSE (CONTINUED)
membership interests and other securities to be issued by Issuer II, an
affiliated collateralized debt obligation, which was formed by Trapeza Funding
II, LLC, a Delaware limited liability company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Company in the preparation of its financial statements.
BASIS OF ACCOUNTING
The Company's accounting policies are in conformity with accounting principles
generally accepted in the United States. The Company maintains its financial
records in United States dollars. For financial reporting purposes, the Company
follows the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits with banks and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
ALLOCATION OF PROFITS AND LOSSES
Profits and losses shall be allocated to the members in proportion to their
respective capital account balances.
USE OF ESTIMATES
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could differ
from those estimates.
TAXATION
The Company is treated as a partnership for Federal income tax purposes and,
therefore, no provision for federal income tax is recorded.
7
Trapeza Capital Management, LLC
Notes to Audited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made in the prior-year financial statements
to conform to the current-year presentation.
3. NOTE PURCHASE AND SECURITY AGREEMENT
Pursuant to an agreement dated March 11, 2003, the Company entered into a Note
Purchase and Security Agreement with Credit Suisse First Boston, LLC ("CSFB"),
the initial purchaser of the notes, and Credit Suisse First Boston, Cayman
Islands Branch, purchaser of the notes. Under the terms of the agreement, the
Company authorized the issue and sale of $3,700,000 aggregate principal amount
of its floating rate senior notes due October 15, 2006. At December 31, 2005 and
2004 the outstanding note balance was $700,000 and $1,900,000, respectively, as
the first principal payment was made on October 15, 2003. Set forth in the terms
of the agreement, the Company is required to prepay the remaining principal of
the notes in the following principal amounts:
PAYMENT DATE PRINCIPAL AMOUNT
---------------- ------------------
April 15, 2006 $600,000
October 15, 2006 $100,000
To secure timely payment of all obligations and the performance of all
obligations, CSFB requires that the collateral management fee related to Issuer
II, the limited partnership interests of the Company, FSI, and REXI in the
Issuer, the interest collection account of the Issuer, and all proceeds of the
foregoing are pledged as security interests.
If any optional redemption or other redemption of the notes issued occurs prior
to the final payment date, the Company shall on the date of such redemption
prepay the outstanding principal amount of the notes plus all accrued and unpaid
interest thereon, any additional amounts and all other obligations outstanding.
The Company may opt to prepay at any time all, or from time to time any part of
the notes in an amount not less than 50% of the aggregate principal amount of
the notes then outstanding in the case of a partial prepayment, at 100% of the
principal amount. Each prepayment shall be in an amount of $100,000 or an
integral multiple thereof.
Interest on the principal amount of the notes is required to be paid to the
holder of the notes on each payment date, or early payment date, if applicable.
Computed interest shall equal the sum of the product of libor plus 1%, the sum
of the aggregate outstanding
8
Trapeza Capital Management, LLC
Notes to Audited Financial Statements (continued)
3. NOTE PURCHASE AND SECURITY AGREEMENT (CONTINUED)
principal balance of the notes, any past due interest and any additional amounts
due and payable, on such payment date. For the years ended December 31, 2005 and
2004, interest expense attributable to the repayment of the notes is $55,139 and
$61,553, respectively, as reflected in the statements of operations.
4. TRUSTEE FEES PAYABLE
The Company maintains a cash account restricted for future payment of trustee
fees deposited from the closing of specific collateral. Depending upon the
contractual terms, the trustee fees will be paid to the Bank of New York or
Deutsche Bank annually over the next four years on the anniversary date of each
specific collateral involved. An initial trustee fee was paid to the Bank of New
York or Deutsche Bank at the time of the closing of the collateral.
5. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS
As of December 31, 2005, the Company has 100 membership units issued and
outstanding. No member shall be required to make any additional contributions
beyond their initial contribution. If the Board of Managers unanimously
determines that the Company requires additional funds, any member may, but is
not obligated to, advance such funds.
No member shall have the right to withdraw any of its capital contribution,
except upon dissolution and liquidation of the Company. For the years ended
December 31, 2005 and 2004, the Company made distributions of $3,478,757 and
$2,464,340, respectively, to the members.
6. RELATED PARTY TRANSACTIONS
Pursuant to the collateral management agreements with Issuers I, II, III, and
IV, the Collateral Manager is entitled to a semi-annual fee, payable in arrears
on the distribution dates of the issuers, equal to 0.10% per annum of the
semi-annual asset amount ("Base Collateral Management Fee"), of the net
outstanding portfolio collateral, as defined in the indenture. After certain
expenses have been paid, the Collateral Manager is entitled to an additional
semiannual fee equal to 0.15% per annum, calculated in the same manner as the
Base Collateral Management Fee. For years ended December 31, 2005 and 2004,
total collateral management fees were $3,553,425 and $3,559,723, respectively.
9
Trapeza Capital Management, LLC
Notes to Audited Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to the collateral management agreement with Issuer Edge, the Collateral
Manager is entitled to a quarterly fee, payable in arrears on the distribution
dates of the issuers, equal to 0.10% per annum of the semi-annual asset amount
("Base Collateral Management Fee"), of the net outstanding portfolio collateral,
as defined in the indenture. After certain expenses have been paid, the
Collateral Manager is entitled to an additional semiannual fee equal to 0.15%
per annum, calculated in the same manner as the Base Collateral Management Fee.
For years ended December 31, 2005 and 2004, total collateral management fees
were $238,500 and $0, respectively.
Pursuant to the collateral management agreement with Issuer V, the Collateral
Manager is entitled to a semiannual fee, payable in arrears on the distribution
dates, equal to 0.10% per annum of the semi-annual asset amount ("Base
Collateral Management Fee"), of the net outstanding portfolio collateral, as
defined in the indenture. After certain expenses have been paid, the Collateral
Manager is entitled to an additional semiannual fee equal to 0.20% per annum,
calculated in the same manner as the Base Collateral Management Fee. The
Collateral Manager is entitled to additional incentive fees of 0.05%, 0.10%, and
0.25% per annum in arrears dependent upon the target returns reached on the
preference shares as defined in the indenture. For the years ended December 31,
2005 and 2004, total collateral management fees were $1,050,046 and $1,050,380,
respectively.
7. ASSIGNMENT FEE
During April 2005, the Company received an assignment fee in the amount of
$758,715 in connection with the facilitation of the purchase and sale of trust
preferred collateral from one financial institution to another during the
warehouse period of Issuer Edge. This fee was initially deferred as the Company
continued to manage the securities. In August 2005, the securities were sold
into Issuer Edge and the income was recognized at that time.
10
Schedule h)
TRAPEZA MANAGEMENT GROUP, LLC
AUDITED FINANCIAL STATEMENTS
Year ended December 31, 2005 and period from April 1, 2004 (commencement of
operations) to December 31, 2004 with Report of Independent Auditors
Trapeza Management Group, LLC
Audited Financial Statements
Year ended December 31, 2005 and period from April 1, 2004
(commencement of operations) to December 31, 2004
CONTENTS
Report of Independent Auditors............................................... 1
Audited Financial Statements
Statements of Financial Condition............................................ 2
Statements of Operations..................................................... 3
Statements of Changes in Members' Interests.................................. 4
Statements of Cash Flows..................................................... 5
Notes to Audited Financial Statements........................................ 6
Report of Independent Auditors
To the Members of
Trapeza Management Group, LLC:
We have audited the accompanying statements of financial condition of Trapeza
Management Group, LLC (the "Company"), as of December 31, 2005 and 2004, and the
related statements of operations, changes in members' interest and cash flows
for the year ended December 31, 2005 and period from April 1, 2004 (commencement
of operations) to December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trapeza Management Group, LLC
at December 31, 2005 and 2004, and the results of its operations, changes in its
members' interest and its cash flows for the year ended December 31, 2005 and
period from April 1, 2004 (commencement of operations) to December 31, 2004, in
conformity with accounting principles generally accepted in the United States.
January 27, 2006
1
Trapeza Management Group, LLC
Statements of Financial Condition
DECEMBER 31
2005 2004
------------- -------------
ASSETS
Cash and cash equivalents $ 87,558 $ 31,171
Collateral management fees 903,624 568,506
Prepaid expense 46,458 31,338
Database configuration (net of accumulated amortization of
$11,598 and $4,273) 10,377 17,702
------------- -------------
Total Assets $ 1,048,017 $ 648,717
============= =============
LIABILITIES AND MEMBERS' INTERESTS
Liabilities
Professional fees $ 12,500 $ 15,000
Accrued expenses 31,630 24,539
License fee payable - 2,023
Taxes payable - 32,293
------------- -------------
Total Liabilities 44,130 73,855
------------- -------------
Members' Interests 1,003,887 574,862
------------- -------------
Total Members' Interests 1,003,887 574,862
------------- -------------
Total Liabilities and Members' Interests $ 1,048,017 $ 648,717
============= =============
See accompanying notes to financial statements.
2
Trapeza Management Group, LLC
Statements of Operations
PERIOD FROM
APRIL 1, 2004
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
INVESTMENT INCOME
Collateral management fees $ 2,737,777 $ 1,249,047
Reimbursement income - 1,005,000
--------------- ---------------
Total investment income 2,737,777 2,254,047
--------------- ---------------
EXPENSES
Wages, payroll taxes and benefits 131,644 68,381
Licensing fees 87,348 8,291
Taxes 73,960 44,293
Insurance 45,204 -
Professional fees 19,036 18,647
Rent 15,678 8,144
Amortization/Depreciation 7,325 4,273
Supplies 5,500 2,728
Financial publications 5,172 2,686
Telephone 3,818 1,983
Delivery services 3,523 1,959
Other 3,431 788
Printing 135 244
--------------- ---------------
Total expenses 401,774 162,417
--------------- ---------------
NET INCOME $ 2,336,003 $ 2,091,630
=============== ===============
See accompanying notes to financial statements.
3
Trapeza Management Group, LLC
Statements of Changes in Members' Interests
Year ended December 31, 2005 and period from April 1, 2004
(commencement of operations) to December 31, 2004
Balance at April 1, 2004 $ -
Capital contributions 6,000
Net income 2,091,630
Distributions to members (1,522,768)
------------
Balance at December 31, 2004 574,862
Net income 2,336,003
Distributions to members (1,906,978)
------------
Balance at December 31, 2005 $ 1,003,887
============
See accompanying notes to financial statements.
4
Trapeza Management Group, LLC
Statements of Cash Flows
PERIOD FROM
APRIL 1, 2004
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,336,003 $ 2,091,630
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities:
Amortization/Depreciation 7,325 4,273
Net change in operating assets and liabilities:
Collateral management fees (335,118) (568,506)
Prepaid expense (15,120) (31,338)
Database configuration - (21,975)
Accounts payable (2,500) 15,000
Accrued expenses 7,091 24,539
License fee payable (2,023) 2,023
Taxes payable (32,293) 32,293
--------------- ---------------
Net cash and cash equivalents provided by operating activities 1,963,365 1,547,939
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions - 6,000
Distributions to members (1,906,978) (1,522,768)
--------------- ---------------
Net cash and cash equivalents used in financing activities (1,906,978) (1,516,768)
--------------- ---------------
Net increase in cash and cash equivalents 56,387 31,171
Cash and cash equivalents, beginning of period 31,171 -
--------------- ---------------
Cash and cash equivalents, end of period $ 87,558 $ 31,171
=============== ===============
See accompanying notes to financial statements.
5
Trapeza Management Group, LLC
Notes to Audited Financial Statements
December 31, 2005
1. ORGANIZATION AND PURPOSE
Trapeza Management Group, LLC (the "Company"), was organized on April 1, 2004 as
a Delaware limited liability company. The Company commenced operations on April
1, 2004. The Company was organized for the purpose of supervising and directing
the investment and reinvestment of collateral for two collateralized debt
obligations, Trapeza CDO VI, LLC ("Issuer VI") and Trapeza CDO VII, LLC ("Issuer
VII").
The Company shall provide services to the Issuers as follows, 1) supervise and
direct the administration of the collateral, 2) determine, upon request of the
trustee, when payments received in respect to the collateral shall be applied as
principal proceeds, 3) monitor the collateral on behalf of the Issuers and, on
an ongoing basis, provide to the Issuers and the trustee all schedules and other
information and data relating to the collateral which the Issuers or the
trustee, on behalf of the noteholders, is required to be prepared and delivered,
4) take or direct the trustee to sell or dispose of any collateral subject to
the requirements of such in the indentures and 5) cause the trustee to exercise
or acquire any rights or remedies with respect to such collateral (including
waiving any default or voting to accelerate the maturity of any defaulted
security).
The Company is owned equally by Financial Stocks, Inc. ("FSI"), SunTrust Equity
Funding, LLC ("SunTrust"), and Resource Fund Financial Management, Inc., a
wholly owned subsidiary of Resource America, Inc. ("REXI"). FSI is a Registered
Investment Adviser under the Investment Advisers Act of 1940. SunTrust is a
financial holding company that provides deposit, credit and trust and investment
services. REXI, a publicly traded company, is a specialized asset management
company that uses industry specific expertise to generate and administer
investment opportunities for their own account and for outside investors in the
financial fund management, real estate and equipment leasing sectors.
The business and affairs of the Company shall be managed by a Board of Managers.
The Board of Managers has full, complete and exclusive authority, power and
discretion to manage and control the business affairs and properties of the
Company, to make all decisions regarding those matters and to perform any
activities customary or incident to the management of the Company's business.
The Company shall continue in perpetuity, unless sooner terminated upon
unanimous determination of the members to terminate the Company.
6
Trapeza Management Group, LLC
Notes to Audited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Company in the preparation of its financial statements.
BASIS OF ACCOUNTING
The Company's accounting policies are in conformity with accounting principles
generally accepted in the United States. The Company maintains its financial
records in United States dollars. For financial reporting purposes, the Company
follows the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits with banks and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
ALLOCATION OF PROFITS AND LOSSES
Profits and losses shall be allocated to the members in proportion to their
respective capital account balances.
USE OF ESTIMATES
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could differ
from those estimates.
TAXATION
The Company is treated as a partnership for Federal income tax purposes and,
therefore, no provision for federal income tax is recorded.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior-year financial statements
to conform to the current-year presentation.
7
Trapeza Management Group, LLC
Notes to Audited Financial Statements (continued)
3. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS
As of December 31, 2005, the Company has 300 membership units issued and
outstanding. No member shall be required to make any additional contributions
beyond their initial contribution. If the Board of Managers unanimously
determines that the Company requires additional funds, any member may, but is
not obligated to, advance such funds.
No member shall have the right to withdraw any of its capital contribution,
except upon dissolution and liquidation of the Company. For the year ended
December 31, 2005 and period from April 1, 2004 (commencement of operations) to
December 31, 2004, the Company made distributions of $1,906,978 and $1,522,768,
respectively, to the members.
4. RELATED PARTY TRANSACTIONS
Pursuant to the collateral management agreements with Issuer VI and VII, the
Collateral Manager is entitled to a semiannual fee, payable in arrears on the
distribution dates, equal to 0.10% per annum of the semi-annual asset amount
("Base Collateral Management Fee"), of the net outstanding portfolio collateral,
as defined in the indenture. After certain expenses have been paid, the
Collateral Manager is entitled to an additional semiannual fee equal to 0.25%
per annum, calculated in the same manner as the Base Collateral Management Fee.
The Collateral Manager is entitled to additional incentive fees of 0.05%, 0.10%,
and 0.25% per annum in arrears dependent upon the target returns reached on the
preference shares as defined in the indenture. For the year ended December 31,
2005 and period from April 1, 2004 (commencement of operations) to December 31,
2004, total collateral management fees were $2,737,777 and $1,249,047,
respectively.
During 2004, Issuer VII paid the Company a one time reimbursement fee of
$1,005,000 in connection with the formation of Issuer VII.
8
Schedule i)
TRAPEZA CAPITAL MANAGEMENT, LLC
FINANCIAL STATEMENTS (UNAUDITED)
Year Ended December 31, 2003
Trapeza Capital Management, LLC
Financial Statements
Year Ended December 31, 2003
Unaudited
CONTENTS
Statement of Financial Condition..............................................3
Statement of Operations.......................................................4
Statement of Changes in Members' Interests....................................5
Statement of Cash Flows.......................................................6
Notes to Financial Statements.................................................7
Trapeza Capital Management, LLC
Statement of Financial Condition
Unaudited
DECEMBER 31,
2003
------------
ASSETS
Cash and cash equivalents $ 485,641
Investments in Trapeza Partners II L.P. 3,625,091
Collateral management fees 956,988
Prepaid expense 97,192
Website redesign 38,014
Deferred debt issuance costs (net of accumulated
amortization of $37,158) 37,842
-----------
Total Assets $ 5,240,768
===========
LIABILITIES AND MEMBERS' INTERESTS
Liabilities
Loan payable $ 3,100,000
Interest payable 14,136
Professional fees 59,000
Accounts payable 39,100
Trustee fees 482,000
Accrued expenses 25,232
-----------
Total Liabilities 3,719,468
-----------
Members' Interests 1,521,300
-----------
Total Members' Interests 1,521,300
-----------
Total Liabilities and Members' Interests $ 5,240,768
===========
See accompanying notes to financial statements.
Trapeza Capital Management, LLC
Statement of Operations
Unaudited
YEAR ENDED
DECEMBER 31,
2003
---------------
INVESTMENT INCOME
Collateral management fees $ 2,257,155
Equity in earnings (loss) of Trapeza Partners II L.P. 479,951
---------------
Total investment income 2,737,106
---------------
EXPENSES
Consulting and advisory fees 528,000
Professional fees 114,810
Interest expense 95,233
Amortization of deferred debt issuance costs 37,158
Amortization - other 20,524
Wages, payroll taxes and benefits 13,503
Other 3,286
---------------
Total expenses 812,514
---------------
NET INCOME $ 1,924,592
===============
See accompanying notes to financial statements.
Trapeza Capital Management, LLC
Statement of Changes in Members' Interests
Year Ended December 31, 2003
Unaudited
MEMBERS'
INTERESTS
----------
Balance at December 31, 2002 $ 71,931
Capital contributions, net of placement costs 74,277
Offering costs (39,717)
Net income 1,924,592
Distributions to members (509,783)
----------
Balance at December 31, 2003 $1,521,300
==========
See accompanying notes to financial statements.
Trapeza Capital Management, LLC
Statement of Cash Flows
Unaudited
YEAR ENDED
DECEMBER 31,
2003
------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,924,592
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities:
Amortization of deferred debt issuance costs 37,158
Amortization - other 20,524
Net change in operating assets and liabilities:
Investment in Trapeza Partners II L.P. (321,125)
Collateral management fees (867,221)
Prepaid expense (116,630)
Website redesign (39,100)
Interest payable 9,494
Professional fees 59,000
Accounts payable 39,100
Trustee fees 482,000
Accrued expenses 25,232
Net cash and cash equivalents provided by operating activities 1,435,876
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loan 3,700,000
Principal payments on loan (600,000)
Principal payments on loan - affiliates (3,500,000)
Proceeds from capital contributions, net of placement costs 74,277
Deferred debt issuance costs (75,000)
Payments for offering costs (39,717)
Distributions to members (509,783)
------------
Net cash and cash equivalents used in financing activities (950,223)
Net increase in cash and cash equivalents 485,653
Cash and cash equivalents, beginning of period (12)
------------
Cash and cash equivalents, end of period $ 485,641
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 85,739
============
See accompanying notes to financial statements.
Trapeza Capital Management, LLC
Notes to Unaudited Financial Statements
December 31, 2003
1. ORGANIZATION AND PURPOSE
Trapeza Capital Management, LLC (the "Company"), was organized on August 26,
2002 as a Delaware limited liability company. The Company commenced operations
on November 19, 2002. The Company was organized for the purpose of supervising
and directing the investment and reinvestment of collateral for five
collateralized debt obligations, Trapeza CDO I, LLC ("Issuer I"), Trapeza CDO
II, LLC ("Issuer II"), Trapeza CDO III, LLC ("Issuer III"), Trapeza CDO IV, LLC
("Issuer IV"), and Trapeza CDO V, Ltd. (Issuer V), (collectively the "Issuers").
The Company shall provide services to the Issuers as follows 1) supervise and
direct the administration of the collateral, 2) determine, upon request of the
trustee, when payments received in respect to the collateral shall be applied as
principal proceeds, 3) monitor the collateral on behalf of the Issuers and, on
an ongoing basis, provide to the Issuers and the trustee all schedules and other
information and data relating to the collateral which the Issuers or the
trustee, on behalf of the noteholders, is required to be prepared and delivered,
4) take or direct the trustee to sell or dispose of any collateral subject to
the requirements of such in the indentures and 5) cause the trustee to exercise
or acquire any rights or remedies with respect to such collateral (including
waiving any default or voting to accelerate the maturity of any defaulted
security).
The Company is owned equally by Financial Stocks, Inc. ("FSI") and Resource Fund
Financial Management, Inc., a wholly owned subsidiary of Resource America, Inc.
("REXI"). FSI is a Registered Investment Adviser under the Investment Advisers
Act of 1940. REXI is a publicly traded company operating in energy, real estate
and financial services sectors.
The business and affairs of the Company shall be managed by a Board of Managers.
The Board of Managers has full, complete and exclusive authority, power and
discretion to manage and control the business affairs and properties of the
Company, to make all decisions regarding those matters and to perform any
activities customary or incident to the management of the Company's business.
The Company shall continue in perpetuity, unless sooner terminated upon
unanimous determination of the members to terminate the Company.
Trapeza Capital Management, LLC
Notes to Unaudited Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Company in the preparation of its financial statements.
BASIS OF ACCOUNTING
The Company's accounting policies are in conformity with accounting principles
generally accepted in the United States. The Company maintains its financial
records in United States dollars. For financial reporting purposes, the Company
follows the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits with banks and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
ALLOCATION OF PROFITS AND LOSSES
Profits and losses shall be allocated to the members in proportion to their
respective capital account balances.
USE OF ESTIMATES
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could differ
from those estimates.
TAXATION
The Company is treated as a partnership for Federal income tax purposes and,
therefore, no provision for income tax is recorded.
3. INVESTMENT IN TRAPEZA PARTNERS II L.P. (THE "PARTNERSHIP)
Pursuant to agreements dated December 20, 2002, the Company entered into
promissory notes with FSI and REXI, respectively, for the purpose of providing
the Company with equity to invest in the Partnership. Under the terms of the
agreement, the Company promised to pay $1,750,000 each to FSI and REXI,
respectively, plus accrued interest at
Trapeza Capital Management, LLC
Notes to Unaudited Financial Statements (continued)
3. INVESTMENT IN TRAPEZA PARTNERS II L.P. (THE "PARTNERSHIP) (CONTINUED)
libor plus 3.00% before or by May 20, 2003, the maturity date. The loans were
repaid on March 11, 2003.
The Company has a partnership interest of approximately 9% in the Partnership.
4. NOTE PURCHASE AND SECURITY AGREEMENT
Pursuant to an agreement dated March 11, 2003, the Company entered into a Note
Purchase and Security Agreement with Credit Suisse First Boston, LLC ("CSFB"),
the initial purchaser of the notes, and Credit Suisse First Boston, Cayman
Islands Branch, purchaser of the notes. Under the terms of the agreement, the
Company authorized the issue and sale of $3,700,000 aggregate principal amount
of its floating rate senior notes due October 15, 2006. At December 31, 2003,
the outstanding note balance was $3,100,000, as the first principal payment was
made on October 15, 2003. Set forth in the terms of the agreement, the Company
is required to prepay the remaining principal of the notes in the following
principal amounts:
PAYMENT DATE PRINCIPAL AMOUNT
------------------------- ---------------------------
April 15, 2004 $600,000
October 15, 2004 $600,000
April 15, 2005 $600,000
October 15, 2005 $600,000
April 15, 2006 $600,000
October 15, 2006 $100,000
To secure timely payment of all obligations and the performance of the all
obligations, CSFB requires that the collateral management fee related to Issuer
II, the limited partnership interests of the Company, FSI, and REXI in the
Issuer, the interest collection account of the Issuer, and all proceeds of the
foregoing are pledged as security interests.
Trapeza Capital Management, LLC
Notes to Unaudited Financial Statements (continued)
4. NOTE PURCHASE AND SECURITY AGREEMENT (CONTINUED)
If any optional redemption or other redemption of the notes issued occurs prior
to the final payment date, the Company shall on the date of such redemption
prepay the outstanding principal amount of the notes plus all accrued and unpaid
interest thereon, any additional amounts and all other obligations outstanding.
The Company may opt to prepay at any time all, or from time to time any part of,
the notes, in an amount not less than 50% of the aggregate principal amount of
the notes then outstanding in the case of a partial prepayment, at 100% of the
principal amount. Each prepayment shall be in an amount of $100,000 or an
integral multiple thereof.
Interest on the principal amount of the notes is required to be paid to the
holder of the notes on each payment date, or early payment date, if applicable.
Computed interest shall equal the sum of the product of libor plus 1%, the sum
of the aggregate outstanding principal balance of the notes, any past due
interest and any additional amounts due and payable, on such payment date. For
the year ended December 31, 2003, interest expense attributable to the repayment
of the notes is $65,697, as reflected in the statement of operations.
5. TRUSTEE FEES PAYABLE
The Company maintains a cash account restricted for future payment of trustee
fees deposited from the closing of specific collateral. Depending upon the
contractual terms, the trustee fees will be paid to the Bank of New York or
Deutsche Bank annually over the next four years on the anniversary date of each
specific collateral involved. An initial trustee fee was paid to the Bank of New
York or Deutsche Bank at the time of the closing of the collateral.
6. CONTRIBUTIONS, WITHDRAWALS AND DISTRIBUTIONS
As of December 31, 2003, the Company has 100 membership units issued and
outstanding. No member shall be required to make any additional contributions
beyond their initial contribution. If the Board of Managers unanimously
determines that the Company requires additional funds, any member may, but is
not obligated to, advance such funds.
No member shall have the right to withdraw any of its capital contribution,
except upon dissolution and liquidation of the Company. For the period ended
December 31, 2003, the Company made distributions of $509,783 to the members.
Trapeza Capital Management, LLC
Notes to Unaudited Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS
Pursuant to the collateral management agreements with Issuers I, II, III, and
IV, the Collateral Manager is entitled to a semiannual fee, payable in arrears
on the distribution dates of the issuers, equal to 0.10% per annum of the
semi-annual asset amount ("Base Collateral Management Fee"), of the net
outstanding portfolio collateral. After certain expenses have been paid, the
Collateral Manager is entitled to an additional semiannual fee equal to 0.15%
per annum, calculated in the same manner as the Base Collateral Management Fee.
For year ended December 31, 2003, total collateral management fees for Issuer I
was $829,243. For the period ended December 31, 2003, total collateral
management fees were $805,788, $389,633, and $194,548 for Issuer II, Issuer III,
and Issuer IV, respectively.
Pursuant to the collateral management agreement with Issuer V, the Collateral
Manager is entitled to a semiannual fee, payable in arrears on the distribution
dates, equal to 0.10% per annum of the semi-annual asset amount ("Base
Collateral Management Fee"), of the net outstanding portfolio collateral, as
defined in the indenture. After certain expenses have been paid, the Collateral
Manager is entitled to an additional semiannual fee equal to 0.20% per annum,
calculated in the same manner as the Base Collateral Management Fee. The
Collateral Manager is entitled to additional incentive fees of 0.05%, 0.10%, and
0.25% per annum in arrears dependent upon the target returns reached on the
preference shares as defined in the indenture. For the period ended December 31,
2003, total collateral management fees were $37,943.
3. EXHIBITS
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of Resource
America. (1)
3.2 Amended and Restated Bylaws of Resource America,
Inc. (1)
10.1 Master Separation and Distribution Agreement between
Atlas America, Inc. and Resource America, Inc. dated
May 14, 2004. (2)
10.2 Registration Rights Agreement between Atlas America,
Inc. and Resource America, Inc. dated May 14,
2004. (2)
10.3 Tax Matters Agreement between Atlas America, Inc.
and Resource America, Inc. dated May 14, 2004. (2)
10.4 Transition Services Agreement between Atlas America,
Inc. and Resource America, Inc. dated May 14,
2004. (2)
10.5 Employment Agreement for Edward E. Cohen dated May
14, 2004. (2)
10.6(a) Fourth Modification, dated June 30, 2005, of
Revolving Credit Agreement, Revolving Credit Loan
and Security Agreement dated July 27, 1999 by and
between Resource Properties, Inc., Resource
Properties 53, Inc., Resource Properties XXIV, Inc.
Resource Properties XL, Inc. and Sovereign Bank. (2)
10.6(b) Fifth Modification, dated September 29, 2005, of
Revolving Credit Loan and Security Agreement dated
July 27, 1999 by and between Resource Properties,
Inc. Resource Properties 53, Inc. Resource
Properties XXIV, Inc., Resource Properties XL, Inc.
and Sovereign Bank.
10.7(a) Fourth Amendment, dated December 19, 2003, to
Revolving Credit Agreement and Assignment dated June
11, 2002, between LEAF Financial Corporation and
National City Bank, and related guaranty of Resource
America, Inc. (4)
10.7(b) Sixth Amendment, dated June 20, 2004, to Revolving
Credit Agreement and Assignment dated June 11, 2002,
between LEAF Financial Corporation and National City
Bank, and related guaranty of Resource America,
Inc. (2)
10.7(c) Seventh Amendment, dated March 18, 2005, to
Revolving Credit Agreement and Assignment dated June
11, 2002, between LEAF Financial Corporation and
National City Bank, and related guaranty of Resource
America, Inc. (3)
101
10.7(d) Eighth Amendment, dated June 29, 2005, to Revolving
Credit Agreement and Assignment dated June 11, 2002,
between LEAF Financial Corporation and National City
Bank, and related guaranty of Resource America,
Inc. (3)
10.7(e) Ninth Amendment, dated July 28, 2005, to Revolving
Credit Agreement and Assignment dated June 11, 2002,
between LEAF Financial Corporation and National City
Bank, and related guaranty of Resource America, Inc.
10.7(f) Tenth Amendment, dated September 14, 2005, to
Revolving Credit Agreement and Assignment dated June
11, 2002, between LEAF Financial Corporation and
National City Bank, and related guaranty of Resource
America, Inc.
10.7(g) Eleventh Amendment, dated September 16, 2005, to
Revolving Credit Agreement and Assignment dated June
11, 2002, between LEAF Financial Corporation and
National City Bank, and related guaranty of Resource
America, Inc.
10.7(h) First Amendment to Guaranty of Payment dated June
20, 2004 between Resource America, Inc. and National
City Bank. (2)
10.7(i) Second Amendment to Guaranty of Payment dated March
2005 between Resource America, Inc. and National
City Bank. (3)
10.7(j) Third Amendment to Guaranty of Payment dated July
28, 2005 between Resource America, Inc. and National
City Bank.
10.7(k) Fourth Amendment to Guaranty of Payment dated
September 14, 2005 between Resource America, Inc.
and National City Bank.
10.8(a) First Amendment, dated December 19, 2003, to
Revolving Credit Agreement and Assignment dated May
28, 2003 among LEAF Financial Corporation, Lease
Equity Appreciation Fund I, L.P., LEAF Funding, Inc.
and Commerce Bank, National Association. (4)
10.8(b) Third Amendment, dated June 18, 2004, to Revolving
Credit Agreement and Assignment dated May 28, 2003
among LEAF Financial Corporation, Lease Equity
Appreciation Fund I, L.P., LEAF Funding, Inc. and
Commerce Bank, National Association. (2)
10.8(c) First Amendment to Guaranty of Payment dated June
18, 2004 between Resource America, Inc. and Commerce
Bank, National Association. (2)
10.9 Revolving Credit Agreement and Assignment dated as
of May 27, 2004 among Lease Equity Appreciation Fund
I, L.P., LEAF Financial Corporation and Sovereign
Bank. (2)
10.10 Pooling and Servicing Agreement, dated July 13,
2005, among LEAF Funding, Inc., LEAF Financial
Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and The Bank of New York.
10.11 2005 Equity Compensation Plan (5)
10.12 Grant of Incentive Stock Option Pursuant to the
Resource America, Inc. 2005 Omnibus Equity
Compensation Plan.
10.13 Grant of Non-Qualified Stock Option Pursuant to the
Resource America, Inc. 2005 Omnibus Equity
Compensation Plan.
21.1 Subsidiaries of Resource America, Inc.
23.1 Consent of Grant Thornton LLP
23.2 Consent of Ernst & Young LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 Section 1350 Certification
32.2 Section 1350 Certification
- ----------------
(1) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 and by this reference incorporated herein.
(2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 and by this reference incorporated herein.
(3) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005 and by this reference incorporated herein.
(4) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003 and by this reference incorporated herein.
(5) Filed previously as an exhibit to our Report on Form 8-K filed May 13, 2005
and by this reference incorporated herein.
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RESOURCE AMERICA, INC. (Registrant)
March 27, 2006 By: /s/ Jonathan Z. Cohen
-------------------------------------
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Edward E. Cohen Chairman of the Board March 27, 2006
- -------------------------
EDWARD E. COHEN
/s/ Jonathan Z. Cohen Director, President March 27, 2006
- ------------------------- and Chief Executive Officer
JONATHAN Z. COHEN
/s/ Carlos C. Campbell Director March 27, 2006
- -------------------------
CARLOS C. CAMPBELL
/s/ Andrew M. Lubin Director March 27, 2006
- -------------------------
ANDREW M. LUBIN
/s/ Michael J. Bradley Director March 27, 2006
- -------------------------
MICHAEL J. BRADLEY
/s/ Kenneth A. Kind Director March 27, 2006
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KENNETH A. KIND
/s/ John S. White Director March 27, 2006
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JOHN S. WHITE
/s/ Steven J. Kessler Executive Vice President March 27, 2006
- ------------------------- and Chief Financial Officer
STEVEN J. KESSLER
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