-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SQ1b7wnRSdc/RVJU/sw23JZ4UGKKyfqcDiOLFmxy2UwwcuVQ6fFtNZQvWUUpnQEb gvkeM6LklFqaUnx7QDR9/A== 0000950116-06-000886.txt : 20060327 0000950116-06-000886.hdr.sgml : 20060327 20060327151646 ACCESSION NUMBER: 0000950116-06-000886 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20060327 DATE AS OF CHANGE: 20060327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE AMERICA INC CENTRAL INDEX KEY: 0000083402 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 720654145 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-04408 FILM NUMBER: 06711841 BUSINESS ADDRESS: STREET 1: 1845 WALNUT STREET STREET 2: SUITE 1000 CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 215-546-5005 MAIL ADDRESS: STREET 1: 1845 WALNUT STREET STREET 2: SUITE 1000 CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCE EXPLORATION INC DATE OF NAME CHANGE: 19890214 FORMER COMPANY: FORMER CONFORMED NAME: SMTR CORP DATE OF NAME CHANGE: 19700522 10-K/A 1 tenka.txt 10-K/A 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 - ------------------------- KENNETH A. KIND /s/ John S. White Director March 27, 2006 - ------------------------- JOHN S. WHITE /s/ Steven J. Kessler Executive Vice President March 27, 2006 - ------------------------- and Chief Financial Officer STEVEN J. KESSLER 103 EX-10 2 ex10-12.txt EXHIBIT 10.12 EX. 10.12 GRANT OF INCENTIVE STOCK OPTION PURSUANT TO THE RESOURCE AMERICA, INC. 2005 OMNIBUS EQUITY COMPENSATION PLAN THIS AGREEMENT, made as of this ____ day of _____________, 2005 ("Date of Grant") by and between _______________ ("Grantee") and RESOURCE AMERICA, INC. (together with its successors or assigns hereinafter referred to as the "Company"). WHEREAS, the Company's 2005 Omnibus Equity Compensation Plan (the "Plan") provides for the granting of incentive stock options by the Compensation Committee of the Board of Directors of the Company (the "Committee") to eligible employees of the Company, or its parent or subsidiaries, to purchase, or to exercise certain rights with respect to, shares of common stock of the Company, par value $.01 per share (the "Shares"), in accordance with the terms and provisions thereof; and WHEREAS, the Committee considers the Grantee to be a person who is eligible for a grant of incentive stock options under the Plan, and has determined that it would be in the best interest of the Company to grant the incentive stock options on the terms and conditions hereinafter set forth. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Committee, hereby grants to the Grantee, an option to purchase up to __________ Shares at a price of $ ______ per share. Such option is hereinafter referred to as the "Option" and the shares of stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." The Option is intended by the parties hereto to be, and shall be treated as, an incentive stock option (as such term is defined under Section 422 of the Internal Revenue code of 1986). 2. INSTALLMENT EXERCISE. Subject to such further limitations as are provided herein, the Option shall become exercisable in four (4) installments, the Grantee having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion: (i) on and after the first anniversary of the Date of Grant, up to 25% (ignoring fractional shares) of the total number of Option Shares; 1 (ii) on and after the second anniversary of the Date of Grant, up to an additional 25% (ignoring fractional shares) of the total number of Option Shares; and (iii) on and after the third anniversary of the Date of Grant, up to an additional 25% (ignoring fractional shares) of the total number of Option Shares; and (iv) on and after the fourth anniversary of the Date of Grant, the remaining Option Shares. 3. TERMINATION OF OPTION. (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ten years from the Date of Grant (the "Option Term"). (b) Upon the termination of Grantee's employment by the Company for any reason (such event being a "termination of the Grantee's employment"), the Option, to the extent not previously exercised, shall immediately terminate and become null and void, except in a case where the termination of the Grantee's employment is by reason of retirement, disability or death. Upon a termination of the Grantee's employment by reason of retirement, disability or death, the Option may be exercised during the following periods, but only to the extent that the Option was outstanding and exercisable on any such date of retirement, disability or death: (i) the six-month period following the date of such termination of the Grantee's employment in the case of a disability (within the meaning of Section 22(e)(3) of the Code), (ii) the six-month period following the date of issuance of letters testamentary or letters of administration to the executor or administrator of a deceased Grantee, in the case of the Grantee's death during his employment by the Employer, but not later than one year after the Grantee's death, and (iii) the three-month period following the date of such termination in the case of retirement on or after attainment of age 65, or in the case of disability other than as described in (i) above. In no event, however, shall any such period extend beyond the Option Term. (c) In the event of the death of the Grantee, the Option may be exercised by the Grantee's legal representative(s), but only to the extent that the Option would otherwise have been exercisable by the Grantee. (d) A transfer of the Grantee's employment between Company and any subsidiary of Company, or between any subsidiaries of Company, shall not be deemed to be a termination of the Grantee's employment. (e) Notwithstanding any other provisions set forth herein or in the Plan, if the Grantee shall (i) commit any act of malfeasance or wrongdoing affecting the Company or any subsidiary of Company, (ii) breach any covenant not to compete, or employment contract, with Company or any subsidiary of Company, or (iii) engage in conduct that would warrant the Grantee's discharge for cause (excluding general dissatisfaction with the performance of the Grantee's duties, but including any act of disloyalty or any conduct clearly tending to bring discredit upon the Company or any subsidiary of the Company), any unexercised portion of the Option shall immediately terminate and become null and void. 2 4. EXERCISE OF OPTIONS. (a) The Grantee may exercise the Option with respect to all or any part of the number of Option Shares then exercisable hereunder by giving the Secretary of Company written notice of intent to exercise in the form attached hereto ("Notice of Exercise"). The Notice of Exercise shall specify the number of Option Shares as to which the Option is to be exercised and the date of exercise thereof, which date shall be at least five days after the giving of such notice unless an earlier time shall have been mutually agreed upon. (b) Full payment (in U.S. dollars) by the Grantee of the option price for the Option Shares purchased shall be made on or before the exercise date specified in the Notice of Exercise in cash, or, as and to the extent permitted under the Plan, in whole or in part through the surrender of previously acquired Shares at their fair market value on the exercise date. On the exercise date specified in the Notice of Exercise or as soon thereafter as is practicable, Company shall cause to be delivered to the Grantee, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Shares or reacquired Shares, as Company may elect) upon full payment for such Option Shares. The obligation of Company to deliver Shares shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the Option or the Option Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of Shares thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. (c) If the Grantee fails to pay for any of the Option Shares specified in the Notice of Exercise or fails to accept delivery thereof, the Grantee's right to purchase such Option Shares may be terminated by Company. The date specified in the Notice of Exercise as the date of exercise shall be deemed to be the date of exercise of the Option, provided that payment in full for the Option Shares to be purchased upon such exercise shall have been received by such date. 3 5. ADJUSTMENT OF AND CHANGES IN SHARES OF COMPANY. In the event of a reorganization, recapitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or shares of common stock of Company, the Committee shall make such adjustment as it deems appropriate in the number and kind of Shares subject to the Option or in the option price; provided, however, that no such adjustment shall give the Grantee any additional benefits under the Option. 6. FAIR MARKET VALUE. As used herein, the "fair market value" of a Share shall be the closing sale price for the Shares reported by the Nasdaq Stock Market (or any stock exchange on which the Shares are listed) on a given day or, if there is no sale on such day, then the closing sale price on the last previous date on which a sale is reported. 7. NO RIGHTS OF STOCKHOLDERS. Neither the Grantee nor any personal representative shall be, or shall have any of the rights and privileges of, a stockholder of Company with respect to any Shares purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 8. NON-TRANSFERABILITY OF OPTION. During the Grantee's lifetime, the Option hereunder shall be exercisable only by the Grantee or any guardian or legal representative of the Grantee, and the Option shall not be transferable except, in the case of the death of the Grantee, by will or the laws of descent and distribution, nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by the Grantee to alienate, assign, pledge, hypothecate or otherwise dispose of the Option, except as provided for herein, or (b) the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, Company may terminate the Option by notice to the Grantee and it shall thereupon become null and void. 9. EMPLOYMENT NOT AFFECTED. The granting of the Option nor its exercise shall not be construed as granting to the Grantee any right with respect to continuance of employment of the Company. Except as may otherwise be limited by a written agreement between the Company and the Grantee, the right of the Company and any employing subsidiary to terminate at will the Grantee's employment by the Company or any employing subsidiary at any time (whether by dismissal, discharge, retirement or otherwise) is specifically reserved by Company, or the employing subsidiary (whichever the case may be), and acknowledged by the Grantee. 4 10. AMENDMENT OF OPTION. The Option may be amended by the Board or the Committee at any time (i) if the Board or the Committee determines, in its sole discretion, that amendment is necessary or advisable in the light of any addition to or change in the Internal Revenue Code of 1986 or in the regulations issued thereunder, or any federal or state securities law or other law or regulation, which change occurs after the Date of Grant and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of the Grantee. 11. NOTICE. Any notice to Company provided for in this instrument shall be addressed to it in care of its Secretary at its offices at 1845 Walnut Street, 10th Floor, Philadelphia, PA 19103 or at such other address as to which the Company shall have notified Grantee in writing, and any notice to the Grantee shall be addressed to the Grantee at the current address shown on the payroll records of the Employer. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 12. INCORPORATION OF PLAN BY REFERENCE. The Option is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Committee shall interpret and construe the Plan and this instrument, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. 13. GOVERNING LAW. The validity, constructions, interpretation and effect of this instrument shall exclusively be governed by and determined in accordance with the law of the Commonwealth of Pennsylvania, except to the extent preempted by federal law, which shall to the extent govern. 5 IN WITNESS WHEREOF, Company has caused its duly authorized officers to execute and attest this Grant of Incentive Stock Option, and to apply the corporate seal hereto, and the Grantee has placed his or her signature hereon, effective as of the Date of Grant. RESOURCE AMERICA, INC. By:________________________________ ACCEPTED AND AGREED TO: By:________________________________ , Grantee NOTICE OF EXERCISE Date:_____________, ____ The undersigned hereby irrevocably elects to exercise on ________________, ____ the Incentive Stock Option granted on ______________ by Resource America, Inc. to the undersigned to the extent of purchasing ____________ shares of Resource America, Inc. Common Shares and hereby makes payment of $____________________ in payment of the actual exercise price thereof. _______________________ INSTRUCTIONS FOR REGISTRATION OF STOCK _______________________ Name: ____________________________________________________________ (Please typewrite or print in block letters) Address: _________________________________________________________ Signature: _______________________________________________________ 7 EX-10 3 ex10-13.txt EXHIBIT 10.13 EX. 10.13 GRANT OF NON-QUALIFIED STOCK OPTION PURSUANT TO RESOURCE AMERICA, INC. 2005 OMNIBUS EQUITY COMPENSATION PLAN THIS AGREEMENT, made as of this ___ day of ___________________, 2005 (the "Date of Grant") by and between __________________, ("Grantee") and RESOURCE AMERICA, INC. (together with its successors and assigns hereinafter referred to as, the "Company"). WHEREAS, the Company's Stock Incentive Plan (the "Plan") provides for the granting of non-qualified stock options by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"), or the entire Board, to purchase, or to exercise certain rights with respect to, shares of common stock of the Company, par value $.01 per share (the "Shares"), in accordance with the terms and provisions thereof; and WHEREAS, the Committee considers the Grantee to be a person who is eligible for a grant of non-qualified stock options under the Plan, and has determined that it would be in the best interest of the Company to grant the non-qualified stock options on the terms and conditions hereinafter set forth. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Committee, hereby grants to the Grantee, an option to purchase up to _______ Shares at a price of $______ per share. Such option is hereinafter referred to as the "Option" and the shares of stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." 2. INSTALLMENT EXERCISE. Subject to such further limitations as are provided herein, the Option shall become exercisable in four (4) installments, the Grantee having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion: (i) on and after the first anniversary of the Date of Grant, up to 25% (ignoring fractional shares) of the total number of Option Shares; (ii) on and after the second anniversary of the Date of Grant, up to an additional 25% (ignoring fractional shares) of the total number of Option Shares; and 1 (iii) on and after the third anniversary of the Date of Grant, up to an additional 25% (ignoring fractional shares) of the total number of Option Shares; and (iv) on and after the fourth anniversary of the Date of Grant, the remaining Option Shares. 3. TERMINATION OF OPTION. (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ten years from the Date of Grant (the "Option Term"). (b) Upon the termination of Grantee's employment by the Company for any reason (such event being a "termination of the Grantee's employment"), the Option, to the extent not previously exercised, shall immediately terminate and become null and void, except in a case where the termination of the Grantee's employment is by reason of retirement, permanent disability or death. Upon a termination of the Grantee's employment by reason of retirement, disability or death, the Option may be exercised during the following periods but only to the extent the option was outstanding and exercisable upon such termination of the Grantee's employment: (i) the six-month period following the date of such termination of the Grantee's employment in the case of a permanent disability (as determined by the Committee); and (ii) the one year period following the date of death, in the case of Grantee's death during his employment by the Company, but not later than the end of the Option Term. (c) In the event of the death of Grantee, the Option may be exercised by the Grantee's legal representative(s), but only to the extent that the Option was outstanding and exercisable on the date of death. (d) A transfer of the Grantee's employment between the Company and any subsidiary of the Company, or between any subsidiaries of the Company, shall not be deemed to be a termination of the Grantee's employment. (e) Notwithstanding any other provisions set forth herein or in the Plan, if the Grantee shall (i) commit any act of malfeasance or wrongdoing affecting the Company or any subsidiary of Company, (ii) breach any covenant not to compete, or employment contract, with Company or any subsidiary of Company, or (iii) engage in conduct that would warrant the Grantee's discharge for cause (excluding general dissatisfaction with the performance of the Grantee's duties, but including any act of disloyalty or any conduct clearly tending to bring discredit upon the Company or any subsidiary of the Company), any unexercised portion of the Option shall immediately terminate and become null and void. 2 4. EXERCISE OF OPTION. (a) The Grantee may exercise the Option with respect to all or any part of the number of Option Shares granted hereunder by giving the Secretary of the Company written notice of intent to exercise, in the form attached hereto (the "Notice of Exercise"). The Notice of Exercise shall specify the number of Option Shares as to which the Option is to be exercised and the date of exercise thereof, which date shall be at least five days after the giving of such notice unless an earlier time shall have been mutually agreed upon. (b) Full payment (in U.S. dollars) by the Grantee of the option price for the Option Shares purchased shall be made on or before the exercise date specified in the Notice of Exercise in cash, or, as and to the extent permitted under the Plan, in whole or in part through the surrender of previously acquired Shares at their fair market value on the exercise date. On the exercise date specified in the Notice of Exercise or as soon thereafter as is practicable, the Company shall cause to be delivered to the Grantee, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Shares or reacquired Shares, as the Company may elect) upon full payment for such Option Shares. The obligation of the Company to deliver Shares shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of Shares thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. (c) If the Grantee fails to pay for any of the Option Shares specified in the Notice of Exercise or fails to accept delivery thereof, the Grantee's right to purchase such Option Shares may be terminated by the Company. The date specified in the Notice of Exercise as the date of exercise shall be deemed to be the date of exercise of the Option, provided that payment in full for the Option Shares to be purchased upon such exercise shall have been received by such date. 5. ADJUSTMENT OF AND CHANGES IN SHARES OF THE COMPANY. In the event of a reorganization, recapitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or shares of common stock of the Company, the Committee shall make such adjustment as it deems appropriate in the number and kind of Shares subject to the Option or in the option price; provided, however, that no such adjustment shall give the Grantee any additional benefits under the Option. 3 6. FAIR MARKET VALUE. As used herein, the "fair market value" of a Share shall be the closing sale price for the Shares reported by the Nasdaq Stock Market (or any stock exchange on which the Shares are listed) on a given day or, if there is no sale on such day, then the closing sale price on the last previous date on which a sale is reported. 7. NO RIGHTS AS SHAREHOLDER. Neither the Grantee nor any personal representative shall be, or shall have any of the rights and privileges of, a shareholder of the Company with respect to any Shares purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 8. NON-TRANSFERABILITY OF THE OPTION. During the Grantee's lifetime, the Option shall be exercisable only by the Grantee or any guardian or legal representative of the Grantee, and the Option shall not be transferable except, in the case of death of the Grantee, by will or the laws of descent and distribution, nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by the Grantee to alienate, assign, pledge, hypothecate or otherwise dispose of the Option, except as provided for herein, or (b) the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Grantee and it shall thereupon become null and void. 9. EMPLOYMENT NOT AFFECTED. Neither the granting of the Option nor its exercise shall be construed as granting to the Grantee any right with respect to the continuance of employment by the Company. Except as may otherwise be limited by a written agreement between the Company and the Grantee, the right of the Company and any employing subsidiary to terminate at will the Grantee's employment by the Company or any employing subsidiary at any time (whether by dismissal, discharge, retirement or otherwise) is specifically reserved by the Company, or the employing subsidiary (whichever the case may be), and acknowledged by the Grantee. 10. AMENDMENT OF OPTION. The Option may be amended by the Board or the Committee at any time (i) if the Board or the Committee determines, in its sole discretion, that amendment is necessary or advisable in light of any addition to or change in the Internal Revenue Code 1986 or in the regulations issued thereunder, or any federal or state securities law or other law or regulation, which change occurs after the Date of Grant and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of the Grantee. 4 11. NOTICE. Any notice to the Company provided for in this instrument shall be addressed to it in care of its Secretary at its executive offices at 1845 Walnut Street, 10th Floor, Philadelphia, Pennsylvania 19103 or at such other address as to which the Company shall have notified Grantee in writing and any notice to the Grantee shall be addressed to the Grantee at the current address shown on the payroll records of the Company. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 12. INCORPORATION OF PLAN BY REFERENCE. The Option is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Committee shall interpret and construe the Plan and this instrument, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. 13. GOVERNING LAW. The validity, constructions, interpretations and effect of this instrument shall exclusively be governed by and determined in accordance with the laws of the Commonwealth of Pennsylvania, except to the extent preempted by federal law, which shall apply to the extent it governs. 5 IN WITNESS WHEREOF, the Company has caused its duly authorized officers to execute and attest to this Grant of Non-Qualified Stock Option, and to apply the corporate seal hereto, and the Grantee has placed his or her signature hereon, effective as of the date hereof. RESOURCE AMERICA, INC. By:_______________________________ ACCEPTED AND AGREED TO: By:_______________________________ 6 NOTICE OF EXERCISE Date:_____________, ____ The undersigned hereby irrevocably elects to exercise on ________________, ____ the Non-Qualified Stock Option granted on ______________ by Resource America, Inc. to the undersigned to the extent of purchasing ____________ Shares of Resource America, Inc. and hereby makes payment of $____________________ in payment of the actual exercise price thereof. _______________________ INSTRUCTIONS FOR REGISTRATION OF SHARES _______________________ Name: ____________________________________________________________ (Please typewrite or print in block letters) Address: _________________________________________________________ Signature: _______________________________________________________ 7 EX-23 4 ex23-2.txt EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-126344) pertaining to the 2005 Omnibus Equity Compensation Plan of Resource America, Inc. and the use of our reports dated January 27, 2006, included in the Annual Report on Form 10-K/A of Resource America, Inc. for the year ended September 30, 2005, with respect to the financial statements of Trapeza Capital Management LLC and Trapeza Management Group LLC. ERNST & YOUNG LLP Philadelphia, Pennsylvania March 24, 2006 EX-31 5 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Jonathan Z. Cohen, certify that: 1) I have reviewed this annual report on Form 10-K/A for the fiscal year ended September 30, 2005 of Resource America, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Jonathan Z. Cohen ---------------------------------------------- Jonathan Z. Cohen Chief Executive Officer March 27, 2006 EX-31 6 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Steven J. Kessler, certify that: 1) I have reviewed this annual report on Form 10-K/A for the fiscal year ended September 30, 2005 of Resource America, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Steven J. Kessler ---------------------------------------------------- Steven J. Kessler Executive Vice President and Chief Financial Officer March 27, 2006 EX-32 7 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Resource America, Inc. (the "Company") on Form 10-K/A for the fiscal year ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jonathan Z. Cohen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jonathan Z. Cohen ----------------------------------------- Jonathan Z. Cohen Chief Executive Officer March 27, 2006 EX-32 8 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Resource America, Inc. (the "Company") on Form 10-K/A for the fiscal year ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven J. Kessler, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven J. Kessler ---------------------------------------------------- Steven J. Kessler Executive Vice President and Chief Financial Officer March 27, 2006 -----END PRIVACY-ENHANCED MESSAGE-----