UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 20022003
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[ ] 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 1-14788
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Capital Trust, Inc.
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(Exact name of registrant as specified in its charter)
Maryland 94-6181186
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 Park Avenue, 14th Floor, New York, NY 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 655-0220
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Classclass A Common Stock,common stock, New York Stock Exchange
$0.01 par value ("Classclass A Common Stock"common stock")
Securities registered pursuant to Section 12(g) of the Act: None
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 the filing
requirements for at least the past 90 days.
Yes X No
__
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) 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 __ No X
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MARKET VALUE
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The aggregate market value of the outstanding Classclass A Common Stockcommon stock held by
non-affiliates of the registrant was approximately $46,051,000$74,318,000 as of June 28,
200230,
2003 (the last business day of the registrant's most recently completed second
fiscal quarter) based on the closing sale price on the New York Stock Exchange
on that date.
OUTSTANDING STOCK
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As of March 27, 20032, 2004 there were 16,278,5636,543,957 outstanding shares of Classclass A Common
Stock.common
stock. The Classclass A Common Stockcommon stock is listed on the New York Stock Exchange
(trading symbol "CT"). Trading is reported in many newspapers as "CapTr".
DOCUMENTS INCORPORATED BY REFERENCE
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Part III incorporates information by reference from the registrant's definitive
proxy statement to be filed with the Commission within 120 days after the close
of the registrant's fiscal year.
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CAPITAL TRUST, INC.
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PART I
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PAGE
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
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PART II
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Item 5. Market for the Registrant's Commoncommon Equity and
Related Security
HolderStockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 1823
Item 8. Financial Statements and Supplementary Data 1924
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 1924
Item 9A. Controls and Procedures 24
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PART III
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Item 10. Directors and Executive Officers of the Registrant 2025
Item 11. Executive Compensation 2025
Item 12. Security Ownership of Certain Beneficial Owners
and Management 2025
Item 13. Certain Relationships and Related Transactions 2025
Item 14. ControlsPrincipal Accountant Fees and Procedures 20Services 25
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PART IV
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Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 2126
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Signatures 25
Certifications 2630
Index to Consolidated Financial Statements F-1
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PART I
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Item 1. Business
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General
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Capital Trust, Inc. (the "Company") is an----------------------------------------------------------------
Overview
We are a finance and investment management and real estate
finance company that specializes in
providingoriginating and managing credit-sensitive structured capital solutions to
owner/operators offinancial products. Our
investment programs are executed directly for our own account and for
third-party funds that we manage. To date, our activities have been focused
exclusively in the commercial real estate. In December 2002, the Company's boardestate mezzanine market where we have
originated over $3.4 billion of directors authorized an electioninvestments since 1997 and established ourselves
as a leader in that sector. We are organized and conduct our operations to
be taxedqualify as a real estate investment trust, ("REIT")or REIT, for federal income tax
purposes and generally will not be subject to federal income tax if we comply
with the applicable income, asset, distribution and organizational requirements.
Developments During Fiscal Year 2003
During fiscal year 2003, we began to conduct our operations to qualify as a
REIT. We plan to elect REIT status when we file our federal tax year. The Company will continuereturn for 2003.
With our decision to make, for its
own account and as investment manager for the account of funds under management,
loans and debt-related investments in various types of commercial real estate
assets and operating companies.
Business and Investment Strategy
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The Company was created to take advantage of opportunities resulting from the
rapid evolution of the real estate capital markets. Since its inception in 1997,
the Company has designed and developed a fully integrated platform to provide
flexible, value-added financing for large single properties, multiple-asset
portfolios and real estate operating companies. The Company's current investment
program emphasizes senior and junior mortgage loans, mezzanine loans secured by
pledges of equity interests in the property owners, subordinated tranches of
commercial mortgage backed securities ("CMBS"), and preferred and other direct
equity investments. In general, the Company's investments are subordinate to
other third-party senior financing, but senior to the owner/operator's equity in
the property.
The Company is co-sponsor and exclusive investment manager of CT Mezzanine
Partners II LP ("Fund II"), which ultimately raised total equity commitments of
$845 million. The Company's business strategy is to continue to expand its
investment management business by sponsoring other real estate related
investment funds, and, following the investment period for Fund II, other
commercial real estate mezzanine investment funds. The Company believes that
these funds will generate additional investment management fees and incentive
compensation tied to the performance of their portfolios of investments. The
Company continues to manage its existing portfolio of balance sheet assets
originated prior to the commencement of its investment management business and
is positioned to selectively add to the Company's balance sheet investments by
investing in a diverse array of real estate and investment
management/finance-related assets and enterprises, including operating
companies.
The Company funds its business development and investment activities with cash
flow generated from operations and with borrowings obtained under credit
facilities or pursuant to other financing arrangements. The Company believes its
existing sources of funds are adequate to meet its equity commitments to Fund II
and to fund, as necessary, new balance sheet loan and investment activity. The
Company continues to explore alternative sources of capital to fund its business
and investment activities, including, but not limited to, other joint ventures,
strategic alliances and investment management ventures.
REIT Election
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The Company intends to make the necessary electionelect to be taxed as a REIT, we began paying dividends on
our class A common stock in the first quarter of 2003.
On January 31, 2003, we purchased from an affiliate of Citigroup Alternative
Investments its 75% interest in CT Mezzanine Partners I LLC, or Fund I, for a
purchase price of approximately $38.4 million, including the assumption of
liabilities, equal to the book value of the fund. In conjunction with the
purchase, we began consolidating the balance sheet and operations of Fund I in
our consolidated financial statements including four loans receivable totaling
$50.0 million and $24.1 million of borrowings under a credit facility.
On April 2, 2003, tax year. The Company will not undergo any fundamental changesour charter was amended and restated and then further amended
to eliminate from our authorized stock the entire 100,000,000 shares of our
authorized but unissued class B common stock and to effect a one (1) for three
(3) reverse stock split of our class A common stock. Fractional shares resulting
from the reverse stock split were settled in cash at a rate of $16.65 multiplied
by the percentage of a share owned after the split.
On April 9, 2003, CT Mezzanine Partners II L.P.'s, or Fund II, two-year
investment period expired. During its businessinvestment period, Fund II invested $1.2
billion in 40 separate transactions.
With the expiration of the Fund II investment period, we resumed our balance
sheet investment program. Since April 9, 2003, we have originated or purchased
nine new loans totaling $99.6 million and will continue to make, forhave purchased commercial
mortgage-backed securities, or CMBS, of $6.5 million.
On June 2, 2003, CT Mezzanine Partners III, Inc., or Fund III, effected its
own accountinitial closing on equity commitments and as investment
manager foron August 8, 2003, its final closing,
raising a total of $425.0 million in equity commitments. From the account of funds under management, loans and debt-relatedinitial
closing through December 31, 2003, we have made equity investments in Fund III
of $2,800,000 and have capitalized costs totaling $914,000, which are being
amortized over the remaining anticipated life of Fund III. As of December 31,
2003, Fund III had closed eight investments, totaling $212.6 million, of which
$182.3 million remains outstanding at December 31, 2003.
On June 18, 2003, we issued 1,075,000 shares of class A common stock in a
private placement to thirty-two separate investors, led by certain institutional
clients advised by Lend Lease Rosen Real Estate Securities, LLC. Net proceeds to
us were $17.1 million after payment of offering costs and fees to Conifer
Securities, LLC, our placement agent.
1
Platform
We are a fully integrated, self-managed company that has 25 full-time employees,
all based in New York City. Our senior management team has an average of 18
years of experience in the fields of real estate, credit, capital markets and
structured finance. Around this team of professionals, we have developed an
entire platform to originate and manage portfolios of credit-sensitive
structured products. Founded on our long-standing relationships with borrowers,
brokers and first mortgage providers, our extensive origination network produces
multiple investment opportunities from which we select only those transactions
that we believe exhibit a compelling risk/return profile. Once a transaction
that meets our parameters is identified, we apply a disciplined process founded
on four elements:
o intense credit underwriting,
o creative financial structuring,
o efficient use of leverage, and
o aggressive asset management.
The first element, and the foundation of our past and future success, is our
expertise in credit underwriting. For each prospective investment, an in-house
underwriting team is assigned to perform a ground-up analysis of all aspects of
credit risk and we reject any transaction that does not meet our standards. Our
rigorous underwriting process is embodied in our proprietary credit policies and
procedures that detail the due diligence steps from initial client contact
through closing. Input and approval is required from our finance, capital
markets, credit and legal teams, as well as from various typesthird-parties including
our credit providers.
Creative financial structuring is the second critical element in our process.
Based upon our underwriting, we strive to create a customized structure for each
investment that minimizes our downside risk while preserving the flexibility
needed by our borrower. Typical structural features in our real estate
investments include bankruptcy-remote vehicles, springing guarantees and cash
flow controls that are implemented when collateral performance drops below
certain levels.
The prudent use of leverage is the third integral element of our platform.
Leverage can increase returns on equity and portfolio diversification, but can
also increase risk. We control this financial risk by actively managing our
capital structure, seeking to match the duration and interest rate index of our
assets and liabilities and, where appropriate, employing hedging instruments
such as interest rate swaps, caps and other interest rate exchange agreements.
Our objective is to minimize interest rate risk and optimize the difference
between the yield on our assets and the cost of our liabilities to create net
interest spread. The final element of our platform is aggressive asset
management. We pride ourselves on our active style of managing our portfolios.
From closing an investment through its final repayment, our dedicated asset
management team is in constant contact with our borrowers, monitoring
performance of the collateral and enforcing our rights.
By adhering to these four key elements that define our platform, we have limited
the loss experience of our investment portfolios to less than 1.0% since 1997.
Business Model
Our business model is designed to produce a unique mix of net interest spread
from our balance sheet investments and fee income from our investment management
operations. Our goal is to deliver a stable, growing stream of earnings from
these two complementary activities.
Our current balance sheet investment program focuses on structured commercial
real estate debt investments, including B Notes, subordinate CMBS, and
related assets. Tosmall-balance (under $15 million) mezzanine loans. As of December 31, 2003, our
interest-earning balance sheet assets (excluding cash, fund investments and
other assets) total $358.6 million and had a weighted average unleveraged yield
of 9.9%. Our interest-bearing liabilities as of that date total $197.4 million
and had a weighted average interest rate cost of 3.3%.
2
We currently manage two private equity funds, Fund II, and CT Mezzanine Partners
III, Inc., or Fund III. Both funds were formed to specialize in making
large-balance commercial real estate mezzanine loans. Fund II made $1.2 billion
of investments in 40 separate transactions during its contractual investment
period that commenced in April 2001 and ended in April 2003. As of December 31,
2003, Fund II's remaining investments aggregate $517.6 million, all of which
were performing. Fund III held its initial closing in June 2003 and its final
closing in August 2003, ultimately raising $425 million of committed equity
capital. With leverage, we expect to make over $1 billion of investments during
Fund III's investment period, which expires in June of 2005. We have made
co-investments in Fund II and Fund III, and our wholly-owned taxable REIT
subsidiary, CT Investment Management Co., LLC, acts as the extent necessary,manager of both
funds. In addition to our pro-rata share of income as a co-investor, we earn
base management fees and performance-oriented incentive management fees from
each fund. Our investment management activities are described further under the
Company will modify its investment programcaption "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
Commencing in 2003, we are operating our business to originate or acquire loans andqualify as a REIT for
federal income tax purposes. Our primary objective in deciding to elect REIT
status is to pay dividends to our shareholders on a tax-efficient basis. We
manage our balance sheet investments to produce a portfolio that meets the asset
and income tests necessary to maintain the Company'sour REIT qualification as a
REIT. In order to accommodate the Company's REIT status, the legal structure of
future investment funds sponsored by the Company may be different from the legal
structure of the Company's existing investment funds.
1
One of the requirements to qualify as a REIT is the elimination of all of the
Company's accumulated "earnings and profits" from all non-REIT qualifying years
in which the Company operated as a regular corporation. The Company believes
that it eliminated all such earnings and profits by actions taken in December
2002. The Company did so by triggering losses through the settlement of certain
derivative hedging instruments, the disposition of a non-performing asset and
the write-down of another non-performing asset.
In order to qualify as a REIT, five or fewer individuals may own no more than
50% of the class A common stock, par value $0.01 per share ("Class A Common
Stock"), of the Company. As a means of facilitating compliance with such
qualification, stockholders controlled by John R. Klopp, the chief executive
officer and a director of the Company, Craig M. Hatkoff, a director of the
Company, and trusts for the benefit of the family of Samuel Zell, the chairman
of the board of directors of the Company, each sold 500,000 shares of Class A
Common Stock to Stichting Pensioenfonds ABP in a transaction that closed on
February 7, 2003. Following this transaction, the Company's largest five
individual stockholders own in the aggregate less than 50% of the Company's
Class A Common Stock. In connection with this transaction, the Company entered
into a registration rights agreement with Stichting Pensioenfonds ABP pursuant
to which the Company agreed to register for resale the purchaser's shares of
Class A Common Stock.
In connection with the intended REIT election, the Company has consolidated all
of its management activities, including theotherwise
conduct our investment management of Fund II and
future third-party funds and the ongoing management of the Company itself, into
its wholly ownedbusiness through our wholly-owned subsidiary,
CT Investment Management Co., LLC ("CTIMCO"), which will be operated as a taxable REIT subsidiary. The financial position and
operationsis subject to federal income tax.
Investment Strategies
Since 1997, our investment programs have focused on various strategies designed
to take advantage of CTIMCO will be consolidated into the financial position and
operations of the Company, but presented as a separate segment. CTIMCO will
serve as the Company's exclusive manager and all of the Company's employees will
be directly employed by CTIMCO. Subject to the supervision of the Company's
board of directors, CTIMCO will be responsible for the day-to-day operations
pursuant to a management agreement. The Company expects to base the
compensation, fees, expense reimbursements and other terms of the management
agreement with CTIMCO upon the terms containedinvestment opportunities that have developed in the management agreements
between externally managed publicly traded commercial mortgage REITs and their
outside managers. The Company believes that this will produce a management
agreement with terms comparable to those that could be obtained from unrelated
parties on an arm's length basis. The Company believes that this corporate
organizational structure will provide financial transparency for, and facilitate
the separate valuation of, the Company's two business segments (to be
established in 2003), which should provide the Company with more flexibility
should it decide to sell or spin off CTIMCO's investment management business in
the future. There are no present plans, proposals or understandings with respect
to a sale or spin-off of the management business.
Also in connection with the Company's intended REIT election, the Company and
affiliates of Citigroup Inc. modified their existing venture commenced in 2000
under which they co-sponsor and invest in a series of
commercial real estate mezzanine funds managedsector. These investment opportunities have
been created largely by the Company. In January 2003, the Company purchased
Citigroup's 75% interestevolution and growing importance of securitization
in CT Mezzanine Partners I LLC ("Fund I") for a
purchase price of approximately $38.4 million (including the assumption of
liabilities). The Company also purchased from Citigroup stock purchase warrants
exercisable for 8,528,467 shares of Class A Common Stock for a purchase price of
approximately $2.1 million. Finally, the Company and Citigroup have agreed to
amend the terms of the agreement governing their venture. Under the amended
agreement, the Company will earn 100% of the base management fees derived from
all funds under management and will receive 62 1/2% of the incentive management
interests in future mezzanine funds co-sponsored with Citigroup pursuant to the
amended venture agreement.
Developments During Fiscal Year 2002
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During fiscal year 2002, the Company continued to operate and develop the
investment management business. The Company continues to service loans and
investments for Fund I, a fund owned during fiscal year 2002 75% by affiliates
of Citigroup and 25% by the Company, and to make and service loans and
investments for Fund II. During 2002, Fund II added to its portfolio $549
million of loans and investments. As of December 31, 2002, Fund I held $50
million of loans in its portfolio, Fund II held $724 million of loans and
investments in its portfolio and all loans in both portfolios were performing in
accordance with the terms of their loan agreements. The Company earned
approximately $10.1 million of management and advisory fees from its management
of Fund I and Fund II during 2002. On January 1, 2003, the general
2
partners of Fund II (affiliates of the Company and Citigroup) voluntarily
reduced the management fees for the remainder of the investment period by 50%
due to a lower than expected level of deployment of the Fund's capital. The
Company expects approximately 40% of Fund II's committed capital to be invested
at the end of the investment period on April 9, 2003, further reducing
management fees from Fund II in 2003.
In December 2002, a Fund I loan for $26.0 million, which was in default and for
which the accrual of interest had been suspended, was written down and
distributed pro-rata to the Company and a Citigroup affiliate as the members of
Fund I. Upon receipt of its pro-rata share of the loan with a face amount of
$6,500,000, the Company disposed of the asset.
The Company's total asset base decreased from $678.8 million at December 31,
2001 to $385.0 million at December 31, 2002, primarily as a result of loan
repayments and sales of CMBS. The Company also sold other available-for-sale
securities, which had been purchased to maintain compliance with an exemption
from being treated as an investment company under the Investment Company Act of
1940 (the "1940-Act") and were no longer needed to maintain compliance. In 2003,
the Company does not expect a significant decrease in total assets as additional
reductions in loans and investments from satisfactions will require the Company
to purchase or originate additional 1940-Act qualifying assets.
Description of Business
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General
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The Company is an investment management and real estate finance company that
originates or acquires, for its own account and as investment manager for funds
under management, loans and debt-related investments in various types of
commercial real estate assets and operating companies. The Company believes that
its investment management business allows the Company to access the private
equity markets as a source of capital to fund its business and provides the
potential for significant operating leverage, allowing the Company to grow
earnings and to increase return on equity without simply incurring additional
financial risk. The Company's current lending and investment activities are
conducted principally through funds under management, although when consistent
with its obligations to funds under management, the Company will invest for its
own balance sheet.
Real Estate Lending and Investment Market
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The Company developed its current business to take advantage of opportunities
resulting from the rapid evolution of the real estate capital markets. The most
significant structural change is the continuing growth of the securitization of
commercial mortgage loans, which results in certain borrowers being unable or
unwilling to satisfy inflexible credit rating agency guidelines. The Company
believes that these significant fundamental and structural changes in theWith approximately $2 trillion outstanding,
U.S. commercial real estate capital markets are creatingdebt is a large and dynamic market that had
traditionally been dominated by institutional lenders such as banks, insurance
companies and thrifts making first mortgage loans for retention in their own
portfolios. Securitized debt has captured an increasing share of this market,
growing from less than 5% of the needtotal amount outstanding in 1990 to
approximately 20% by year-end 2002. More importantly, CMBS now accounts for
mezzanine
investment capital emphasizedroughly 40% of annual new originations with domestic CMBS issuance in 2003
expected to exceed $75 billion. In addition, many traditional lenders have
adopted CMBS standards in their portfolio lending programs, further extending
the influence of securitization in the Company'smarket. The essence of securitization is
risk segmentation, whereby whole mortgage loans (or pools of loans) are split
into multiple classes and sold to different buyers based on their risk tolerance
and return requirements. The most senior classes, which have the lowest risk and
therefore the lowest return, are rated investment program.
Investment Program
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Whether for funds under management or for its own account,grade (AAA through BBB-) by
the Company seeks to
generate returns from a portfolio of leveraged loans and investments.credit rating agencies. The Company's current investment program emphasizes, but is not limitedjunior classes, which are subordinate to the
following general categoriessenior debt but senior to the owner/operator's common equity investment, command
a higher yield. These "mezzanine" tranches may carry sub-investment grade
ratings or no rating at all.
Depending on our assessment of relative value, our real estate mezzanine
investments may take a variety of forms including:
o First Mortgage Loans - These are single-property secured loans
evidenced by a primary first mortgage and finance-related assets:
o Mortgage Loans. The Company originates or acquires senior to any mezzanine
financing and junior
mortgagethe owner's equity. These loans ("Mortgage Loans") to commercial real estate ownersare bridge loans for
equity holders who require interim financing until permanent
financing can be obtained. The Company's Mortgage LoansOur first mortgage loans are generally not
intended to be permanent in nature, but rather are intended to be of
a relatively short-term in duration, with extension options as deemed
appropriate, and typically require a balloon payment of principal at
maturity. The
CompanyWe may also originate and fund whole Mortgage Loanspermanent first mortgage
loans in which the
Company intendswe intend to sell the senior tranche, thereby creating
a property mezzanine loan (as defined below).
o Property Mezzanine Loan.
o Mezzanine Loans. The Company originates or acquires high-yieldingLoans - These are single-property secured loans
that are subordinate to a primary first lien mortgage loansloan, but senior to
the owner's equity. A mezzanine loan is evidenced by its own
promissory note and is typically made to the owner of the
property-owning entity (i.e. the senior loan borrower). It is not
secured by the first mortgage on commercial
real estate and are secured eitherthe property, but by a second lien mortgage or a pledge of all
of the mezzanine borrower's ownership interestsinterest in the borrowingproperty-owning
entity. Subject to negotiated contractual restrictions, the mezzanine
lender has the right, following
3
foreclosure, to become the sole indirect owner of the property
subject to the lien of the primary mortgage.
o B Notes - These are loans evidenced by a junior participation in a
first mortgage against a single property; the senior participation is
known as an A Note. Although a B Note may be evidenced by its own
promissory note, it shares a single borrower and mortgage with the A
Note and is secured by the same collateral. B Note lenders have the
same obligations, collateral and borrower as the A Note lender and in
most instances are contractually limited in rights and remedies in
the case of a default. The B Note is subordinate to the A Note by
virtue of a contractual arrangement between the A Note lender and the
B Note lender. For the B Note lender to actively pursue a full range
of remedies, it must, in most instances, purchase the A note.
o Subordinate CMBS - These commercial mortgage-backed securities are
the junior classes of securitized pools of first commercial mortgage
loans. Cash flows from the underlying mortgages are aggregated and
allocated to the different classes in accordance with their priority
ranking, typically ranging from the AAA rated through the unrated,
first-loss tranche. Administration and management of the pool are
performed by a trustee and servicers, who act on behalf of all
holders in accordance with contractual agreements. Our investments
generally represent the subordinated tranches ranging from the BBB
rated through the unrated class.
o Preferred Equity Interests - These are senior equity investments in
property-owning entities. Preferred equity holders have a first claim
on cash flow and/or capital event proceeds relative to the common
equity owner. Following an event of default, preferred equity holders
have the right to squeeze out the other equity holders to become the
primary owner ("Mezzanine Loans"). Typically,of the property subject to the lien of the first
mortgage. Like true owners, preferred equity investors have the
option to support the loan during temporary cash flow shortfalls.
o Corporate Mezzanine Loans provide the capital
representing the level
3
between 60% and 90% of property value. Generally, the Company's
Mezzanine Loans have a longer anticipated duration than its Mortgage
Loans,- These are not intended to serve as transitional mortgage financing
and can represent subordinated investments in or loans to real
estateestate-related operating companies, whichincluding REITs. Such investments
may take the form of secured or unsecured debt, preferred stock and other hybrid
instruments.
o Subordinated Interests.instruments such as convertible debt. Corporate mezzanine loans may
finance, among other things, operations, mergers and acquisitions,
management buy-outs, recapitalizations, start-ups and stock buy-backs
generally involving real estate and real estate-related entities.
We finance single properties, multiple property portfolios and operating
companies, with our investment typically representing the portion of the capital
structure ranging between 50% and 85% of underlying collateral value. Our
objective is to create portfolios which are diversified by investment format,
property type and geographic market. The Company acquires ratedfollowing charts illustrate the
diversification achieved to date in the origination of our investment
portfolios.
Geographic Location
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Northeast .................... 41%
West ......................... 19%
Diversified .................. 16%
Southeast .................... 13%
Southwest .................... 8%
Midwest ...................... 3%
4
Property Type
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Office ....................... 45%
Retail ....................... 19%
Mixed Use .................... 14%
Hotel ........................ 13%
Multifamily .................. 7%
Other ........................ 2%
Investment Type
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Property Mezzanine............ 51%
CMBS ......................... 17%
Corporate Mezzanine .......... 12%
First Mortgage ............... 11%
B Note ....................... 7%
Preferred Equity ............. 2%
If carefully underwritten and unratedstructured, we believe that portfolios of real
estate mezzanine investments in publiccan produce superior risk-adjusted returns when
compared to both senior debt and private subordinated tranches ("Subordinated
Interests") of commercial collateralized mortgage obligationsdirect equity ownership.
Business Plan
Our business plan is to grow our balance sheet investments and other CMBS. Subordinated Interests represent the junior, subordinated
classes of these securities, which typically have below investment
grade ratings of "BB" or "B" from the rating agencies or are the
unrated high-yielding credit support class.
o Other Investments. The Company remains positionedour third-party
assets under management. We intend to develop an
investment portfolio ofcontinue our commercial real estate
investment programs and investment
management/finance-related assets meeting the Company's target
risk/return profile. Except as limited by its role as investment
manager to funds under management and by the requirements to maintain
its qualification as a REIT, the Company is not limited in the kinds
of commercial real estate and investment management/finance-related
assets in which it can invest on balance sheet and believes that it is
positionedactively seek to expand opportunistically its business. The Companyour franchise by pursuing
complementary investment strategies involving other credit-sensitive structured
products that leverage our core skills in credit underwriting and financial
structuring. We may pursue investments in, among other assets, construction loans,
distressed mortgages, foreign real estate and finance-related assets,
operating companies, including investment managers and loan
origination and loan servicing companies, and fee interests in real
property (collectively, "Other Investments").
The Company's current investment program emphasizes floating rate loans and
investments that generally provide unleveraged investment yields within a target
range of 400 to 800 basis points above LIBOR. The Company may originate or
acquire fixed rate loans and may make investments with yields that fall outside
of the foregoing targeted investment yield range, but otherwise correspond to
the level of risk perceived by the Company to be associated with such loans and
investments. The Company has no predetermined limitations or targets for
concentration of asset type or geographic location. Instead of adhering to any
prescribed limits or targets, the Company makes acquisition decisionsexpand through asset and collateral analysis, evaluating investment risks on a case-by-case
basis.
Sources of Financing and Use of Leverage
- ----------------------------------------
The Company seeks to maximize yield through the use of leverage, consistent with
maintaining an acceptable level of risk, and therefore finances the loans and
investments it holds and manages. The Company leverages assets through, among
other things, borrowings under credit facilities, other secured and unsecured
borrowings, and financing obtained through repurchase obligations. When the
expected benefits outweigh the risks to the Company, such borrowings may have
recourse to the Companybusiness acquisitions or the fundrecruitment of
finance professionals with experience in the form of guarantees or other obligations. If changes in market conditions cause the cost of such financing to
increase relative to the income that can be derived from investments made with
the proceeds thereof, the Company may reduce the amount of leverage it utilizes.
Obtaining the leverage required to execute the current business plan requires
the Company to maintain interest coverage ratios and other covenants mandated by
current market underwriting standards. Sources of financing currently employed
by the Company include the following:
o Credit Facilities. The Company has a credit facility under which it
can borrow funds to finance its balance sheet loan and investment
assets. The $100 million credit facility provides the Company with
adequate liquidity for its short-term needs.
o Term Redeemable Securities Contract. In connection with the Company's
original purchase of a CMBS portfolio from a commercial lender, the
Company obtained financing for 70% of the purchase price, or $137.8
million, at a floating rate of LIBOR plus 50 basis points pursuant to
a term redeemable securities contract with an affiliate of the seller.
Upon maturity of this term redeemable securities contract in February
2002, the Company entered into a new term redeemable securities
contract with the same counterparty, which allows for a maximum
financing of $75 million. The new term redeemable securities contract
has a two-year term with an automatic one-year amortizing extension
option, if not otherwise extended, and is utilized to finance certain
loans held by the Company.
4
o Repurchase Obligations. At December 31, 2002, the Company had
repurchase obligations outstanding with two counterparties to finance
the available-for-sale securities and the assets remaining in the CMBS
portfolio discussed above. The Company may enter into other such
obligations under which the Company would sell assets to a third party
with the commitment that the Company repurchase such assets from the
purchaser at a fixed price on an agreed date. Repurchase obligations
may be characterized as loans to the Company from the other party,
with underlying assets securing them. The repurchase price reflects
the purchase price plus an agreed market rate of interest, which is
generally paid on a monthly basis.
Leverage creates an opportunity for increased income, but at the same time
creates special risks. For example, leverage magnifies changes in the net worth
of the Company or the funds that it manages. Although the amount owed will be
fixed, the assets may change in value during the time the debt is outstanding.
Leverage creates interest expense that can exceed the revenues from the
leveraged assets. To the extent the rate of return derived from assets acquired
with borrowed funds exceeds the rate of interest expense incurred, net income
will be greater than if borrowed funds had not been used. Conversely, if the
revenues from the assets acquired with borrowed fundsproducts.
Competition
We are not sufficient to
cover the cost of borrowing, net income will be less than if borrowed funds had
not been used.
The Company utilizes leverage to enhance yields for both its own account and as
investment manager for the account of funds under management. The Company
expects that future investment funds sponsored by the Company will utilize
leverage to enhance yields, although the extent to which leverage will be
utilized will depend on the investment parameters of the product offered to
investors. At December 31, 2002, the Company's debt-to-equity ratio (treating
the Convertible Trust Preferred Securities as a component of equity) was 1.16:1.
Interest Rate Management Techniques
- -----------------------------------
The Company has engaged in and will continue to engage in a variety of interest
rate management techniques for the purpose of managing the effective interest
rate and/or the value of its assets and/or liabilities. Any such transaction is
subject to risks and may limit the potential earnings on loans and real estate
investments. Such techniques include, but are not limited to, interest rate
swaps (the exchange of fixed-rate payments and floating-rate payments) and
interest rate caps. The Company employs the use of correlated hedging strategies
to limit the effects of changes in interest rates on its operations, including
engaging in interest rate swaps and interest rate caps to minimize its exposure
to changes in interest rates. The Company has adopted accounting policies under
which such derivatives will impact either or both shareholders' equity or net
income depending on the extent to which components of interest rate risk are
hedged. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Adoption of Statement of Financial Accounting Standards
No. 133."
Competition
- -----------
The Company is engaged in a highly competitive business. The Company competesWe compete for loan and
investment opportunities with numerous public and private real estate investment
vehicles, including financial institutions, mortgage banks, pension funds,
opportunity funds, REITs and other institutional investors, as well as
individuals. Many competitors are significantly larger than the Company,us, have
well establishedwell-established operating histories and may have access to greater capital and
other resources. In addition, the investment management industry is highly
competitive and there are numerous well-established competitors possessing
substantially greater financial, marketing, personnel and other resources than
the Company. The Company competesus. We compete with other investment management companies in attracting capital
for funds under management.
5
Government Regulation
- ---------------------
The Company'sOur activities, including the financing of itsour operations, are subject to a
variety of federal and state regulations such as those imposed by the
Federal Trade Commission and the Equal Credit Opportunity Act.regulations. In addition, a majority of states have
ceilings on interest rates chargeable to certain customers in financing
transactions.
Employees
- ---------
As of December 31, 2002, the Company employed 20 full-time professionals, one
part-time professional and six other2003, we had 25 full-time employees. None of the Company'sour employees
are covered by a collective bargaining agreement and management considers the
relationship with itsour employees to be good.
5
Code of Business Conduct and Ethics and Corporate Governance Documents
We have adopted a code of business conduct and ethics that applies to all of our
employees, including our principal executive officer, principal financial
officer and principal accounting officer. This code of business conduct and
ethics is designed to comply with SEC regulations and New York Stock Exchange
corporate governance rules rules related to codes of conduct and ethics and will
be posted on our corporate website at www.capitaltrust.com. A copy of our code
of business conduct and ethics is attached as Exhibit 14 to this Form 10-K and
is available free of charge, upon request directed to Investor Relations,
Capital Trust, Inc., 410 Park Avenue, 14th Floor, New York, NY 10022.
Our board of directors has created, revised the charter for and/or reconstituted
the membership of the audit, compensation and corporate governance committees of
the board to be effective immediately following our annual meeting of
shareholders that will be called and convened later this year. Our corporate
governance guidelines and the committee charters will be posted on our corporate
website at www.capitaltrust.com.
6
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 2. Properties
- -------------------------------------------------------------------------------
The Company's----------------------------------------------------------------
Our principal executive and administrative offices are located in approximately
11,885 square feet of office space leased at 410 Park Avenue, 14th Floor, New
York, New York 10022 and itsour telephone number is (212) 655-0220. The lease for
such space expires in June 2008. The Company believesWe believe that this office space is suitable
for itsour current operations for the foreseeable future.
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 3. Legal Proceedings
- -------------------------------------------------------------------------------
The Company is----------------------------------------------------------------
We are not a party to any material litigation or legal proceedings, or to the best
of itsour knowledge, any threatened litigation or legal proceedings, which, in theour
opinion, of management, individually or in the aggregate, would have a material adverse effect
on itsour results of operations or financial condition.
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------------------------
The Company----------------------------------------------------------------
We did not submit any matters to a vote of security holders during the fourth
quarter.
7
PART II
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 5. Market for the Registrant's Commoncommon Equity and Related
Security
HolderStockholder Matters
- -------------------------------------------------------------------------------
The Company's----------------------------------------------------------------
Our class A common stock par value $0.01 per share ("Class A Common
Stock") is listed for trading on the New York Stock Exchange
("NYSE"). The tradingunder the symbol for the Class A Common Stock is "CT". The Company had 1407
stockholders-of-record at March 28, 2003."CT." The table below sets forth, for the calendar quarters
indicated, the reported high and low sale prices offor the Classclass A Common Stockcommon stock as
reported on the NYSE basedcomposite transaction tape and the per share cash dividends
paid on published financial sources.
High Low
2000
First Quarter...................................$4.875 $3.5625
Second Quarter.................................. 4.125 3.25
Third Quarter................................... 4.6875 3.75
Fourth Quarter.................................. 4.9375 4.00
2001
First Quarter................................... 4.85 4.10
Second Quarter.................................. 6.50 4.11
Third Quarter................................... 6.50 5.00
Fourth Quarter.................................. 5.76 4.70
2002
First Quarter................................... 5.75 5.00
Second Quarter.................................. 5.20 4.70
Third Quarter................................... 5.25 4.45
Fourth Quarter.................................. 5.31 4.24the class A common stock. No dividends were paid on the Classclass A Common Stockcommon
stock in 2000, 20012002 or 2002.2001. With its electionour decision to becomeelect to be taxed as a REIT, the Company expects to declare and paywe
began paying dividends on its Classour class A Common Stock beginningcommon stock in the first quarter of 2003.
High Low Dividend
---- --- --------
2003
First Quarter.................................. $ 18.75 $ 13.35 $ 0.45
Second Quarter................................. 19.62 14.49 0.45
Third Quarter.................................. 20.99 18.60 0.45
Fourth Quarter................................. 23.40 19.71 0.45
2002
First Quarter.................................. 17.25 15.00 --
Second Quarter................................. 15.60 14.10 --
Third Quarter.................................. 15.75 13.35 --
Fourth Quarter................................. 15.93 12.72 --
2001
First Quarter.................................. 14.55 12.30 --
Second Quarter................................. 19.50 12.33 --
Third Quarter.................................. 19.50 15.00 --
Fourth Quarter................................. 17.28 14.10 --
The Company's policy with respectlast reported sale price of the class A common stock on March 2, 2004 as
reported on the NYSE composite transaction tape was $25.18. As of March 2, 2004,
there were 311 holders of record of the class A common stock. By including
persons holding shares in broker accounts under street names, however, we
estimate our shareholder base to dividends for 2003 is to distribute at least
90%be approximately 1,350 as of its taxable earnings to its stockholders.March 2, 2004.
8
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 6. Selected Financial Data
- -----------------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth selected consolidated financial data, has beenwhich was
derived from the Company'sour historical consolidated financial statements as of andincluded in our
Annual Reports on Form 10-K for the years ended December 31, 2002,
2001, 2000, 1999, and 1998.then ended.
Prior to March 8, 2000, the Companywe did not serve as investment manager for any funds
under management and only the Company'sour historical financial information,data as of and for the years
ended after December 31, 2002, 2001 and 2000 reflect any1999 reflects the operating results from itsour investment
management business.
For these reasons, the Company believes that, except for the
information for the years ended December 31, 2002, 2001 and 2000,You should read the following information is not indicativetogether with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's current business.consolidated financial statements and the notes thereto included in "Item 8.
Financial Statements and Supplementary Data".
Years Ended December 31,
--------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
1998
--------- --------- --------- -------- -----------------
STATEMENT OF OPERATIONS DATA: (in thousands, except for per share data)
REVENUES:
STATEMENT OF OPERATIONS DATA:
REVENUES:
Interest and investment income.......... $38,299 $47,207 $67,728 $88,433 $89,839 $63,954
Income / (loss) from equity investments
in affiliated Funds......................Funds................... 1,526 (2,534) 2,991 1,530 -- --
Advisory and investment banking fees.... -- 2,207 277 3,920 17,772 10,311
Management and advisory fees from Funds. 8,020 10,123 7,664 373 --
--
--------- --------- --------- --------------------- --------
Total revenues........................ 47,845 57,003 78,660 94,256 107,611
74,265
--------- --------- --------- --------------------- --------
OPERATING EXPENSES:
Interest expense........................ 9,845 17,992 26,348 36,931 39,791
27,665
General and administrative expenses..... 13,320 13,996 15,382 15,439 17,345
17,045
Depreciation and amortization........... 1,057 992 909 902 345 249
Net unrealized (gain) / loss on derivative
securities and corresponding hedged risk
on CMBS Securities....................CMBS............................... -- (21,134) 542 -- -- --
Net realized (gain) / loss on sale of fixed
assets, investments and settlement of
derivative securities................. -- 28,715 -- 64 (35) --
Provision for / (recapture of) allowance
for possible credit losseslosses............ -- (4,713) 748 5,478 4,103
3,555
--------- --------- --------- ----------- ------------------- --------
Total operating expenses.............. 24,222 35,848 43,929 58,814 61,549
48,514
--------- --------- --------- ----------- ------------------- --------
Income / (loss) before income tax expense
and distributions and amortization on
Convertibleconvertible Trust Preferred
Securities............Securities............................ 23,623 21,155 34,731 35,442 46,062
25,751
Income tax expense...................... 646 22,438 16,882 17,760 22,020
9,367
--------- --------- --------- --------------------- --------
Income / (loss) before distributions
and amortization on Convertible Trust
Preferred Securities..................convertible trust
preferred securities.................. 22,977 (1,283) 17,849 17,682 24,042
16,384
Distributions and amortization on
Convertible Trust
Preferred Securities,convertible trust preferred securities,
net of income tax benefit...............................benefit............. 9,452 8,455 8,479 7,921 6,966
2,941
--------- --------- --------- --------------------- --------
NET INCOME / (LOSS)..................... 13,525 (9,738) 9,370 9,761 17,076 13,443
Less: Preferred Stock dividend and
dividend requirement.................. -- -- 606 1,615 2,375
3,135
--------- --------- --------- --------------------- --------
Net income / (loss) allocable to Common
Stockcommon
stock ................................ $13,525 $(9,738) $8,764$ 8,764 $8,146 $14,701 $10,308
========= ========= ========= ===================== ========
PER SHARE INFORMATION:
Net income / (loss) per share of Common
Stock:common
stock:
Basic............................... $ (0.54)2.27 $ 0.43(1.62) $ 0.351.30 $ 0.691.05 $ 0.572.07
========= ========= ========= ===================== ========
Diluted............................. $ (0.54)2.23 $ 0.37(1.62) $ 0.331.12 $ 0.550.99 $ 0.441.65
========= ========= ========= ===================== ========
Dividends declared per share of common
stock................................. $ 1.80 $ -- $ -- $ -- $ --
========= ========= ========= ========== ========
Weighted average shares of Common
Stockcommon stock
outstanding:
Basic............................... 18,026 20,166 23,171 21,334 18,2095,947 6,009 6,722 7,724 7,111
========= ========= ========= ===================== ========
Diluted............................. 18,026 36,124 29,692 43,725 30,62510,288 6,009 12,041 9,897 14,575
========= ========= ========= ===================== ========
As of December 31,
--------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
1998
--------- --------- --------- ---------- ----------------- -------
BALANCE SHEET DATA:
Total assets............................ $384,976$397,144 $ 384,976 $678,800 $644,392 $827,808
$766,438
Total liabilities....................... 211,661 211,932 428,231 338,584 522,925
472,207
Convertible Trust Preferred Securities..trust preferred securities.. 89,466 88,988 147,941 147,142 146,343
145,544
Stockholders' equity.................... 96,017 84,056 102,628 158,666 158,540 148,687
9
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- ----------------------------------------------------------------------------------------------------------------------------------------------
Introduction
- -----------
The Company is anWe are a fully integrated, self-managed finance and investment management
company that specializes in credit-sensitive structured financial products. To
date, our investment programs have focused on loans and securities backed by
income-producing commercial real estate assets. Since we commenced our finance company that
operated principally as a balance sheet lender until the commencement of its
investment management
business in March 2000. The results for the years ended
December 31, 2002, 2001 and 2000 reflect both balance sheet lending and the
investment management business.1997, we have completed $3.4 billion of real estate-related
investments in 117 separate transactions. In December 2002, the Company'sour board of
directors authorized an election to be taxed as a REIT for the 2003 tax year.
The Company will continue toCurrently, we make balance sheet investments for itsour own account and manage a
series of private equity funds on behalf of institutional and individual
investors. Our investment management business commenced in March 2000. Pursuant
to a venture agreement, we have co-sponsored three funds with Citigroup
Alternative Investments LLC: CT Mezzanine Partners I LLC, CT Mezzanine Partners
II LP and CT Mezzanine Partners III, Inc., which we refer to as investment managerFund I, Fund II
and Fund III, respectively.
Balance Sheet Overview
At December 31, 2003, we had four investments in Federal Home Loan Mortgage
Corporation Gold securities with a face value of $19,146,000. The securities
bear interest at a fixed rate of 6.5% of the face value. We purchased the
securities at a net premium and have $145,000 of the premium remaining to be
amortized over the remaining lives of the securities. After premium
amortization, the securities bore interest at a blended rate of 6.07% as of
December 31, 2003. As of December 31, 2003, the securities were carried at a
market value of $20,052,000, an $761,000 unrealized gain to their amortized
cost.
We held eighteen investments in twelve separate issues of commercial
mortgage-backed securities with an aggregate face value of $215,512,000 at
December 31, 2003. $5,000,000 face value of the commercial mortgage-backed
securities earn interest at a variable rate which averages the London Interbank
Offered Rate, or LIBOR, plus 2.95% (4.11% at December 31, 2003). The remaining
$210,512,000 face value of the commercial mortgage-backed securities earn
interest at fixed rates averaging 7.70% of the face value. We purchased the
fixed rate commercial mortgage-backed securities at discounts. As of December
31, 2003, the remaining discount to be amortized into income over the remaining
lives of the securities was $22,567,000. After discount amortization, the fixed
rate securities earn interest at a blended rate of 11.88% as of December 31,
2003. As of December 31, 2003, the securities were carried at market value of
$158,136,000, reflecting a $34,809,000 unrealized loss to their amortized cost.
On January 31, 2003, we purchased Citigroup Alternative Investments' 75%
interest in Fund I for a purchase price of approximately $38.4 million,
including the assumption of liabilities, equal to the book value of the fund. In
conjunction with the purchase, we began consolidating the balance sheet and
operations of Fund I in our consolidated financial statements including four
loans receivable totaling $50.0 million and $24.1 million of borrowings under a
credit facility.
In addition to those acquired with the purchase of Citigroup Alternative
Investments' interest in Fund I, we have originated or purchased nine new loans
since December 31, 2002 totaling $99.6 million and have no future commitments
under any existing loans. We have received full satisfaction of four loans
totaling $68.8 million and partial repayments on eight loans totaling $18.4
million in the year ended December 31, 2003. At December 31, 2003, we had
outstanding loans receivable totaling approximately $183.7 million.
At December 31, 2003, we had fourteen performing loans receivable with a current
carrying value of $180,452,000. Two of the loans, totaling $61,046,000, bear
interest at a fixed blended rate of interest of 11.94%. The twelve remaining
loans, totaling $119,406,000, bear interest at a variable rate of interest
averaging LIBOR plus 5.94% (7.34% at December 31, 2003 including LIBOR floors).
One mortgage loan receivable with an original principal balance of $8,000,000
reached maturity on July 15, 2001 and has not
10
been repaid with respect to principal and interest. In December 2002, the loan
was written down to $4,000,000 through a charge to the allowance for possible
credit losses. During the year ended December 31, 2003, we received proceeds of
$731,000 reducing the carrying value of the loan to $3,269,000. In accordance
with our policy for revenue recognition, income recognition has been suspended
on this loan and for the accountyear ended December 31, 2003, $912,000 of potential
interest income has not been recorded. All other loans are performing in
accordance with their terms.
At December 31, 2003, we had investments in funds of $21,988,000, including
$6,571,000 of unamortized costs that were capitalized in connection with
entering into the venture agreement and related fund business. These costs are
being amortized over the lives of the funds and the related venture agreement
and are reflected as a reduction in income/(loss) from equity investments in
funds.
We utilize borrowings under management,a committed credit facility and a term redeemable
securities contract, along with repurchase obligations, to finance our balance
sheet assets.
At December 31, 2003, after assumption of the debt in conjunction with the
purchase of Citigroup Alternative Investments' interest in Fund I, we were party
to two credit facilities with a commercial lender that provided for a total of
$150 million of credit. On June 27, 2003, we formally combined under one
facility the outstanding borrowings under the two facilities and extended the
maturity of the combined $150 million credit facility for two additional years
to July 16, 2005 on substantially the same terms. At December 31, 2003, we had
outstanding borrowings under the credit facility of $38,868,000, and had unused
potential credit of $111,132,000, an amount of available credit that we believe
provides us with adequate liquidity for our short-term needs. The credit
facility provides for advances to fund lender-approved loans and debt-related investments
made by us. Borrowings under the credit facility are secured by pledges of
assets owned by us. Borrowings under the credit facility bear interest at
specified rates over LIBOR, which rates may fluctuate, based upon the perceived
risk of the pledged assets. The credit facility provides for margin calls on
asset-specific borrowings in various typesthe event of asset quality and/or market value
deterioration as determined under the credit facility. The credit facility
contains customary representations and warranties, covenants and conditions and
events of default. Based upon borrowings in place at December 31, 2003, the
effective rate on the credit facility was LIBOR plus 1.50% (2.62% at December
31, 2003). As of December 31, 2003, we had capitalized costs of $1,190,000 that
are being amortized over the remaining life of the facility (18.5 months at
December 31, 2003). After amortizing these costs to interest expense, the all-in
effective borrowing cost on the facility as of December 31, 2003 was 4.58% based
upon the amount currently outstanding on the credit facility.
On December 31, 2003, we were party to a term redeemable securities contract
which provides for $75 million of financing for portfolio assets. The term
redeemable securities contract has a two-year term, maturing in February 2004,
with an automatic one-year amortizing extension option, if not otherwise
extended. We had borrowings against the term redeemable securities contract of
$11,651,000 at December 31, 2003. We pay interest on the term redeemable
securities contract at specified rates over LIBOR based upon each asset financed
by the term redeemable securities contract. Based upon borrowings in place at
December 31, 2003, the blended rate on the term redeemable securities contract
is LIBOR plus 1.91% (3.06% at December 31, 2003). As of December 31, 2003, we
had capitalized costs of $64,000 that are being amortized over the remaining
life of the term redeemable securities contract (2 months at December 31, 2003).
After amortizing these costs to interest expense, the all-in effective borrowing
cost on the facility as of December 31, 2003 was 6.41% based upon the amount
currently outstanding on the term redeemable securities contract.
In May 2003, we entered into a new master repurchase agreement with a securities
dealer that provided for $50,000,000 of financing, which was increased to
$100,000,000 in August 2003. As of December 31, 2003, we had utilized the master
repurchase agreement to finance the purchase of five loans.
In the third quarter of 2003, we entered into another repurchase obligation in
connection with the purchase of a loan and commercial real estatemortgage-backed
securities. The repurchase agreements are matched to the term of the underlying
loan and commercial mortgage-backed securities that mature between August 2004
and January 2005 and bear interest at specified rates over LIBOR based upon each
asset included in the obligation.
11
In the fourth quarter of 2003, we entered another repurchase obligation in
connection with the purchase of a loan. This repurchase agreement comes due
monthly and has a current maturity date in March 2004.
At December 31, 2003, we had total outstanding repurchase obligations of
$146,894,000. Based upon advances in place at December 31, 2003, the blended
rate on the repurchase obligations is LIBOR plus 0.99% (2.15% at December 31,
2003). We had capitalized costs of $312,000 as of December 31, 2003, which are
being amortized over the remaining life of the repurchase obligations. After
amortizing these costs to interest expense based upon the amount currently
outstanding on the repurchase obligations, the all-in effective borrowing cost
on the repurchase obligations as of December 31, 2003 was 2.66%. We expect to
enter into new repurchase obligations at their maturity.
We were party to two cash flow interest rate swaps with a total notional value
of $109 million as of December 31, 2003. These cash flow interest rate swaps
effectively convert floating rate debt to fixed rate debt, which is utilized to
finance assets that earn interest at fixed rates. We received a rate equal to
LIBOR (1.12% at December 31, 2003) and pay an average rate of 4.24%. The market
value of the swaps at December 31, 2003 was an asset of $168,000, which is
recorded as interest rate hedge assets and operating companies.
Prioras an offset to July 1997,accumulated other
comprehensive loss, net on our balance sheet.
We currently have $89,742,000 aggregate liquidation amount of variable step up
convertible trust preferred securities outstanding that were issued by our
consolidated statutory trust subsidiary, CT Convertible Trust I. The convertible
trust preferred securities represent an undivided beneficial interest in the
Companyassets of the trust that consists solely of the $92,524,000 aggregate principal
amount of our outstanding 8.25% step up convertible junior subordinated
debentures. The terms of the securities mirror the interest, redemption and
conversion terms of the convertible debentures held by the trust. The
convertible trust preferred securities are convertible into shares of class A
common stock, in increments of $1,000 in liquidation amount, at a conversion
price of $21.00 per share and are redeemable by us, in whole or in part, on or
after September 30, 2004.
Distributions on the outstanding convertible trust preferred securities are
payable quarterly in arrears on each calendar quarter-end and correspond to the
payments of interest made on the debentures, the sole assets of the trust.
Distributions are payable only to the extent payments are made in respect to the
debentures. The convertible trust preferred securities bear interest at 10%
through September 30, 2004. The interest rate increases by 0.75% on October 1,
2004 and on each October 1 thereafter. If the quarterly dividend paid on a share
of our class A common stock multiplied by four and divided by $21.00 is in
excess of the interest rate in effect at that time, then the holders are
entitled to be paid additional interest at that rate.
On September 30, 2002, we redeemed $60,258,000 aggregate liquidation amount of
the convertible trust preferred securities that bore a coupon rate of 13.00% per
annum through the date of redemption.
In 2000, we announced an open market share repurchase program under which we may
purchase, from time to time, up to 666,667 shares of our class A common stock.
Since that time the authorization has been increased by the board of directors
to purchase cumulatively up to 2,366,923 shares of class A common stock.
In March 2003, we repurchased 66,427 shares of class A common stock under the
open market share repurchase program from a former employee at a price of $14.25
per share. After the repurchase, we had purchased and retired, pursuant to the
program, 1,700,584 shares of class A common stock at an average price of $13.13,
including commissions and had 666,339 shares remaining authorized for repurchase
under the program.
In 2001 and 2002, in connection with the organization of Fund I and Fund II, we
issued to affiliates of Citigroup Alternative Investments warrants to purchase
2,842,822 shares of class A common stock. At December 31, 2002, all such
warrants were exercisable at $15.00 per share exercise price until March 8,
2005. In January 2003, we purchased all of the warrants outstanding for $2.1
million.
On June 18, 2003, we issued 1,075,000 shares of class A common stock in a
private placement to thirty-two separate investors, led by certain institutional
clients advised by Lend Lease Rosen Real Estate Securities,
12
LLC. Net proceeds to us were $17.1 million after payment of offering costs and
fees to Conifer Securities, LLC, our placement agent.
At December 31, 2003, we had 6,536,345 shares of our class A common stock
outstanding.
Investment Management Overview
We operated principally as a REIT, originating, acquiring,
operating and holding income-producing real property and mortgage-related
investments. The Company isbalance sheet investor until the successor to Capital Trust, a Californiastart of our
investment management business trust, following consummation of the reorganization on January 28,
1999, pursuant to which the predecessor ultimately merged with and into the
Company, which thereafter continued as the surviving Maryland corporation with a
capital structure that closely mirrored the capital structure of the
predecessor. Unless the context otherwise requires, hereinafter references to
the business, assets, liabilities, capital structure, operations and affairs of
the Company include those of the predecessor prior to the reorganization.
Onin March 8, 2000 the Companywhen we entered into a venture with
affiliates of Citigroup Alternative Investments to co-sponsor commit toand invest capital
in and manage high-yielda series of commercial real estate mezzanine investment funds.funds managed by us.
Pursuant to the venture agreement, the
Company andwe have co-sponsored with Citigroup
co-sponsoredAlternative Investments Fund I, Fund II and Fund III. We have capitalized costs
of $6,571,000, net, from the formation of the venture and the Funds that are
being amortized over the remaining anticipated lives of the Funds and the
related venture agreement.
Fund I commenced its investment operations in May 2000 with equity capital
supplied solely by Citigroup Alternative Investments (75%) and us (25%). From
May 11, 2000 to April 8, 2001, the investment period for the fund, Fund I
completed $330 million of total investments in 12 transactions. On January 31,
2003, we purchased from an affiliate of Citigroup Alternative Investments its
75% interest in Fund I for $38.4 million, including the assumption of
liabilities. As of January 31, 2003, we began consolidating the operations of
Fund I in our consolidated financial statements.
Fund II whichhad its initial closing on equity commitments on April 9, 2001 and its
final closing on August 7, 2001, ultimately raisedraising $845.2 million of total
equity commitments, of $845.2including $49.7 million including equity commitments of
$49.7 million(5.9%) and $198.9 million (23.5%)
from the Companyus and Citigroup Alternative Investments, respectively. The Company earned $9.6 millionThird-party private
equity investors, including public and corporate pension plans, endowment funds,
financial institutions and high net worth individuals, made the balance of basic management and advisory fees fromthe
equity commitments. During its management oftwo-year investment period, which expired on
April 9, 2003, Fund II invested $1.2 billion in 2002.40 separate transactions. Fund
II utilizes leverage to increase its return on equity, with a target
debt-to-equity ratio of 2:1. Total capital calls during the investment period
were $329.0 million. On January 1, 2003, the general partnerspartner of Fund II, (affiliateswhich
is owned by affiliates of the Companyus and Citigroup)Citigroup Alternative Investments, voluntarily
reduced the management fees for the remainder of the investment period by 50%
due to a lower than expected level of deployment of the Fund's capital. The Company expects
approximately 40% of Fund II's committed capitalcapital. CT
Investment Management Co. LLC, our wholly-owned taxable REIT subsidiary, acts as
the investment manager to be invested atFund II and receives 100% of the base management fees
paid by the fund. As of April 9, 2003, the end of the Fund II investment period,
on April 9, 2003, further reducingCT Investment Management Co. began earning annual base management fees fromof 1.287%
of invested capital. Based upon Fund II in 2003. The CompanyII's invested capital at December 31, 2003,
the date upon which the calculation for the next quarter is based, CT Investment
Management Co. will earn base management fees of $574,000 for the quarter ending
March 31, 2004.
Citigroup Alternative Investments and us, through our collective ownership of
the general partner, are also entitled to receive incentive paymentsmanagement fees from
Fund II if the return on invested equity is in excess of 10%. after all invested
capital has been returned. The amountFund II incentive management fees are split
equally between Citigroup Alternative Investments and us. We intend to pay 25%
of anyour share of the Fund II incentive management fees as long-term incentive
compensation to our employees. No such payments is not determinableincentive fees have been earned at
December 31, 20022003 and as such, no amount has been accrued as income for such
potential paymentsfees in our financial statements. The amount of incentive fees to be
received in the financial
statements.future will depend upon a number of factors, including the level
of interest rates and the fund's ability to generate returns in excess of 10%,
which is in turn impacted by the duration and ultimate performance of the fund's
assets. Potential incentive paymentsfees received as Fund II winds down could result in
significant additional income from operations in certain periods during which
such payments can be recorded as income. In 2001If Fund II's assets were sold and
2002 in connection withliabilities were settled on January 1, 2004 at the organizationrecorded book value, net of
Fund Ithe allowance for possible credit losses, and Fund II, the Company issued to affiliatesfund equity and income were
distributed, we would record approximately $5.3 million of Citigroup warrants to purchase 8,528,467 shares
of Class A Common Stock. Atincentive income.
Since December 31, 2002, all such warrants had a $5.00 per
share exercise price, were exercisable and were to expire on March 8, 2005. In
January 2003, the Company purchased all of the warrants outstanding from the
affiliates of Citigroup for $2.1 million.
The Company's current lending and investment activities are conducted
principally through funds under management. Until the end of the investment
period for Fund II on April 9, 2003, the Company generally will not originate or
acquire loans or CMBS directly for its own balance sheet portfolio. After the
investment period for Fund II, the Company plans to originate loans or purchase
investments for its own account as permitted by future funds under management.
The Company will also use its available working capital to make contributions to
Fund II or any other funds as and when required by the capital commitments to
such funds. As a result, if the amount of the Company's maturing loans and
investments increases significantly before excess capital is invested in Fund II
or other funds, or otherwise accretively deployed, the Company may experience
shortfalls in revenues and lower earnings until offsetting revenues are derived
from funds under management or other sources. In 2003, the Company does not
expect a significant decrease in total assets as additional reductions in loans
and investments from satisfactions will require the Company to purchase or
originate additional 1940-Act qualifying assets.
10
Developments with and Contributions to Funds
- --------------------------------------------
The Company's investment in Fund I at December 31, 2002 is $10.0 million. Since
December 31, 2001, the Company has not made any equity contributions to Fund I
and has received $10.1 million as a return of equity. As of December 31, 2002,
Fund I has outstanding loans and investments totaling $50.2 million, all of
which are performing in accordance with the terms of their agreements. One loan
for $26.0 million, which was in default and for which the accrual of interest
had been suspended, was written and distributed pro-rata to the members in
December 2002. Upon receipt of its pro-rata share of the loan with a face amount
of $6,500,000, the Company disposed of the asset.
Since December 31, 2001, the Company haswe have made equity contributions to Fund II of $5.2$5.5
million and equity contributions to Fund II's general partner of $823,000.
The Company's remaining$757,000. We do
not anticipate making any additional equity commitmentcontributions to Fund II andor its
general partner is
$39.9 million. The Company'spartner. Our net investment in Fund II and its general partner at
December 31, 2002 is $18.92003 was $12.7 million. As of December 31, 2002,2003, Fund II hashad 24
outstanding loans and
13
investments totaling $723.5$517.6 million, all of which arewere performing in accordance
with the terms of their agreements.
The Company hasOn June 2, 2003, Fund III effected its initial closing on equity commitments and
on August 8, 2003, its final closing, raising a total of $425.0 million in
equity commitments. Our equity commitment was $20.0 million (4.7%) and Citigroup
Alternative Investments equity commitment was $80.0 million (18.8%), with the
balance made by third-party private equity investors. From the initial closing
through December 31, 2003, we have made equity investments in Fund III of
$2,800,000 and have capitalized costs of $8,528,000 thattotaling $914,000, which are being
amortized over the remaining anticipated liveslife of Fund III. As of December 31,
2003, Fund III had closed eight investments, totaling $212.6 million, of which
$182.3 million remains outstanding at December 31, 2003.
CT Investment Management Co. receives 100% of the Funds.
Resultsbase management fees from Fund
III calculated at a rate equal to 1.42% per annum of Operations forcommitted capital during
Fund III's two-year investment period, which expires June 2, 2005, and 1.42% of
invested capital thereafter. Based upon Fund III's $425.0 million of total
equity commitments, CT Investment Management Co. will earn annual base
management fees of $6.0 million during the Yearsinvestment period. We and Citigroup
Alternative Investments are also entitled to receive incentive management fees
from Fund III if the return on invested equity is in excess of 10% after all
invested capital has been returned. We will receive 62.5% and Citigroup
Alternative Investments will receive 37.5% of the total incentive management
fees. We expect to distribute a portion of our share of the Fund III incentive
management fees as long-term incentive compensation to our employees.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
We reported net income of $13,525,000 for the year ended December 31, 2003, an
increase of $23,263,000 from the net loss of $9,738,000 for the year ended
December 31, 2002. This increase was primarily the result of certain
transactions in 2002 which reduced net income, including the settlement of three
cash flow hedges resulting in a $6.7 million charge to earnings, the write-down
of deferred tax assets as a result of our decision to elect REIT status for
2003, the write-down of a loan in Fund I which caused a loss from equity
investments in funds and the inability to utilize capital losses generated in
2002 to reduce current taxes. Also contributing to the increase in net income
was the reduction in income taxes in 2003 in connection with our decision to
elect REIT status. These increases were partially offset by a recapture of the
allowance for possible credit losses in 2002.
Interest and related income from loans and other investments amounted to
$38,246,000 for the year ended December 31, 2003, a decrease of $8,833,000 from
the $47,079,000 amount for the year ended December 31, 2002. Average
interest-earning assets decreased from approximately $473.7 million for the year
ended December 31, 2002 to approximately $356.8 million for the year ended
December 31, 2003. The average interest rate earned on such assets increased
from 9.9% in 2002 to 10.7% in 2003. During the year ended December 31, 2003 and
December 31, 2002, the Company recognized $2.8 million and $4.8 million,
respectively, in additional income on the early repayment of loans and
investments. Without this additional interest income, the earning rate for the
2003 period would have been 9.9% versus 9.6% for the 2002 period. LIBOR rates
averaged 1.2% for the year ended December 31, 2003 and 1.8% for the year ended
December 31, 2002, a decrease of 0.6%. The portion of our average assets that
earn interest at fixed-rates did not decrease proportionately to the decrease in
assets that earn interest at variable rates in 2003, which served to offset the
decrease in earnings from the decrease in the average LIBOR rate.
We utilize our existing credit facility, the term redeemable securities
contract, and repurchase obligations to finance our interest-earning assets.
Interest and related expenses amounted to $9,845,000 for the year ended December
31, 2003, a decrease of $8,124,000 from the $17,969,000 amount for the year
ended December 31, 2002. The decrease in expense was due to a decrease in the
amount of average interest-bearing liabilities outstanding from approximately
$260.0 million for the year ended December 31, 2002 to approximately $193.8
million for the year ended December 31, 2003, and a decrease in the average rate
on interest-bearing liabilities from 6.9% to 5.1% for the same periods. The
decrease in the average rate is substantially due to the decrease in swap levels
and rates and the increased use of repurchase agreements as a percentage of
total debt in the 2003 period at lower spreads to LIBOR than the credit
facilities utilized in the 2002 period.
14
We also utilize the capital provided by the outstanding convertible trust
preferred securities to finance our interest-earning assets. During the year
ended December 31, 2003 and 2002, we recognized $9,452,000 and $8,455,000,
respectively, of net expenses related to its outstanding convertible trust
preferred securities. This amount consisted of distributions to the holders
totaling $8,974,000 and $14,439,000, respectively, and amortization of discount
and origination costs totaling $478,000 and $1,305,000, respectively, during the
year ended December 31, 2003 and 2002. In the 2002 period, this total was
partially offset by a tax benefit of $7,289,000. Due to our decision to elect to
be taxed as a REIT, there is no tax benefit for the expense in the 2003 period.
The decrease in the distribution amount and amortization of discount and
origination costs resulted from the elimination of the distributions and
discount and fees on the $60.3 million non-convertible amount of the convertible
trust preferred securities, which was redeemed on September 30, 2002.
Other revenues decreased $325,000 from $9,924,000 for the year ended December
31, 2002 to $9,599,000 for the year ended December 31, 2003. In 2002, Fund I
increased its allowance for possible credit losses by establishing a specific
reserve for the single non-performing loan it was carrying. The loss from equity
investments in Funds during the year ended December 31, 2002 was primarily due
to this additional expense. On January 31, 2003, we purchased from affiliates of
Citigroup Alternative Investments their 75% interest in Fund I and began
consolidating the operations of Fund I in our consolidated financial statements,
which further reduced earnings from equity investments in Funds. On January 1,
2003, the general partner of Fund II (owned by affiliates of us and Citigroup
Alternative Investments) voluntarily reduced by 50% the management fees charged
to Fund II for the remainder of the investment period due to a lower than
expected level of deployment of the Fund's capital. This, along with the
reduction in income when we began charging management fees on invested capital
for Fund II, partially offset by the management fees charged to Fund III,
reduced our management and advisory fees from Funds by $2.1 million for the
period. Also in 2002, we earned a $2.0 million fee from our final advisory
assignment.
General and administrative expenses decreased $676,000 to $13,320,000 for the
year ended December 31, 2003 from $13,996,000 for the year ended December 31,
2002. The decrease in general and administrative expenses was primarily due to
reduced employee compensation. We employed an average of 25 employees during the
year ended December 31, 2003 and 27 during the year ended December 31, 2002. We
had 25 full-time employees at December 31, 2003.
During the year ended December 31, 2002, we recaptured $4,713,000 of our
previously established allowance for possible credit losses. We deemed this
recapture necessary due to the substantial reduction in the loan portfolio and a
general reduction in the default risk of the loans remaining based upon current
conditions. At December 31, 2003, we believe that the reserve of $6,672,000 is
adequate based on the existing loans in our balance sheet portfolio.
We intend to make an election to be taxed as a REIT under Section 856(c) of the
Internal Revenue Code of 1986, as amended, commencing with the tax year ending
December 31, 2003. As a REIT, we generally are not subject to federal income
tax. To maintain qualification as a REIT, we must distribute at least 90% of our
REIT taxable income to our shareholders and meet certain other requirements. If
we fail to qualify as a REIT in any taxable year, we will be subject to federal
income tax on our taxable income at regular corporate rates. We may also be
subject to certain state and local taxes on our income and property. Under
certain circumstances, federal income and excise taxes may be due on our
undistributed taxable income. At December 31, 2003, we were in compliance with
all REIT requirements and as such, have only provided for income tax expense on
taxable income attributed to our taxable REIT subsidiaries in 2003.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
- --------------------------------------------------------------------
The CompanyWe reported a net loss allocable to shares of Common Stockclass A common stock of $9,738,000
for the year ended December 31, 2002, a decrease of $18,502,000 from theour net
income allocable to shares of Common Stockclass A common stock of $8,764,000 for the year
ended December 31, 2001. This decrease was primarily the result of the inability
to utilize capital losses generated in 2002 to reduce current taxes, the
write-down of deferred tax assets as a result of theour decision to elect REIT
status for 2003, the settlement of three cash flow hedges resulting in a $6.7
million charge to earnings, the write-down of a loan in Fund I which caused a
loss from equity investments in Fundsfunds and decreased net interest income from
loans and other investments. These decreases were partially offset by increased
advisory and investment management fees, a recapture of the allowance for
possible credit losses and the elimination of the Preferred Stockpreferred stock dividend.
The Company expects
additional reductions in interest and related income due to declining interest
earning assets that may not be offset by increased income from investment
management operations.15
Interest and related income from loans and other investments amounted to
$47,079,000 for the year ended December 31, 2002, a decrease of $20,254,000 from
the $67,333,000 amount for the year ended December 31, 2001. Average interest
earning assets decreased from approximately $570.6 million for the year ended
December 31, 2001 to approximately $473.7 million for the year ended December
31, 2002. The average interest rate earned on such assets decreased from 11.8%
in 2001 to 9.9% in 2002. During the year ended December 31, 2002, the Companywe recognized
$1.6 million in additional income on the early repayment of loans, while during
the year ended December 31, 2001, the Companywe recognized $4.8 million in additional
income on the early repayment of loans. Without this additional interest income,
the earning rate for the year ended December 31, 2002 would have been 9.6%
versus 11.0% for the year ended December 31, 2001. LIBOR rates averaged 1.8% for
the year ended December 31, 2002 and 3.9% for the year ended December 31, 2001,
a decrease of 2.1%. Since substantial portions of the Company'sour assets earnearned interest at
fixed-rates, the decrease in the average earning rate did not correspond to the
full decrease in the average LIBOR rate.
Interest and related expenses amounted to $17,969,000 for the year ended
December 31, 2002, a decrease of $8,269,000 from the $26,238,000 amount for the
year ended December 31, 2001. The decrease in expense was due to a decrease in
the amount of average interest bearing liabilities outstanding from
approximately $321.8 million for the year ended December 31, 2001 to
approximately $260.0 million for the year ended December 31, 2002 and a decrease
in the average rate paid on interest bearing liabilities from 8.2% to 6.9% for
the same periods. The decrease in the average rate iswas substantially due to the
increased use of repurchase agreements asobligations for debt financing in the year ended
December 31, 2002 at lower spreads to LIBOR than those obtainable under the
credit facilities utilized in the year ended December 31, 2001 and the decrease
in the average LIBOR rate. Due to the decrease in total debt, the percentage of
debt that has beenwas swapped to fixed rates in the year ended December 31, 2002
increased, partially offsetting the previously discussed decreases in floating
rates.
The Company also utilized proceeds from the $150.0 million of Convertible Trust
Preferred Securities, which were issued on July 28, 1998 to finance its
interest-earning assets. During the years ended
11
December 31, 2002 and 2001, the Companywe recognized $8,455,000 and
$8,479,000, respectively, of net expenses related to itsour outstanding Convertible Trust
Preferred Securities.convertible
trust preferred securities. This amount consisted of distributions to the
holders totaling $14,439,000 and $15,237,000, respectively, and amortization of
discount and origination costs totaling $1,305,000 and $799,000, respectively,
during the years ended December 31, 2002 and 2001. This was partially offset by
a tax benefit of $7,289,000 and $7,557,000 during the years ended December 31,
2002 and 2001, respectively. On April 1, 2002, in accordance with the terms of
the securities, the blended rate on such securities increased from 10.16% to
11.21%. On October 1, 2002, after repaymentredemption of the Non-Convertible Amount (as discussed
below),non-convertible amount of
the convertible trust preferred securities, the rate on such securities iswas
10.00%. The increase in the amortization of discount and origination costs
resulted from the recognition of the unamortized discount and fees on the
Non-Convertible Amountnon-convertible amount expensed upon repaymentredemption of the Non-Convertible Amountnon-convertible amount on
September 30, 2002.
During the year ended December 31, 2002, other revenues decreased $1,403,000 to
$9,924,000 from $11,327,000 in the same period ofyear ended December 31, 2001. During the
second quarter of 2001, Fund II commenced operations, which accounted for
approximately $2.6 million of additional management and advisory fees in the
year ended December 31, 2002. The CompanyWe also recognized $2.0 million from the Company'sour final
investment bankingadvisory assignment. These increases were offset by the write-down of a $26
million loaninvestment in Fund I, which decreased our income from equity investments
in funds by approximately $6 million.
General and administrative expenses decreased $1,386,000 to $13,996,000 for the
year ended December 31, 2002 from $15,382,000 for year ended December 31, 2001.
The decrease in general and administrative expenses was primarily due to reduced
executive compensation. The CompanyWe employed an average of 27 employees during both the
year ended December 31, 2002 and the year ended December 31, 2001. The
CompanyWe had 26
full-time employees and one part-time employee at December 31, 2002.
During the year ended December 31, 2002, the Companywe recaptured $4,713,000 of itsour
previously established allowance for possible credit losses. The CompanyWe deemed this
recapture necessary due to the substantial reduction in the loan portfolio and a
general reduction in the default risk of the loans remaining based upon current
conditions.
After the recapture, the Company believes that
the reserve is adequate based on the existing loans in the balance sheet
portfolio.
For the year ended December 31, 2002 and 2001, the Companywe accrued income tax expense of
$22,438,000 and $16,882,000, respectively, for federal, state and local income
taxes. The increase (fromfrom 48.6% to 106.1%) in
16
the effective tax rate was primarily due to capital losses being generated in
2002 that were not deductible for tax purposes in the currentthat year and the reduction in
deferred tax assets due to the uncertainty of use in the future. In December
2002, when the decisionwe decided to elect REIT status for 2003, was complete, the Companywe wrote down itsour deferred
tax asset to $1.6 million, due to theour inability of the Company to utilize the recorded tax
benefits in the future. The remaining $1.6 million deferred tax asset relates to
future reversals of taxable income in subsidiaries which will be taxable REIT
subsidiaries.
The preferred stock dividend and dividend requirement arose from previously
issued and outstanding shares of Classclass A Preferred Stock.preferred stock. Dividends accrued on
these shares at a rate of 9.5% per annum on a per share price of $2.69.$8.07. In the third quarter of
2000, 5,946,8251999,
1,982,275 shares of Classclass A Preferred Stockpreferred stock were converted into an equal number
of shares of Classclass A Common Stockcommon stock thereby reducing the number of outstanding
shares of Preferred Stockclass A preferred stock to 6,320,8332,106,944 and the dividend requirement to
$1,615,000 per annum. In 2001, the remaining shares of Preferred Stock were
repurchased thereby eliminating the dividend requirement.
Results of Operations for the Years Ended December 31, 2001 and 2000
- --------------------------------------------------------------------
The Company reported net income allocable to shares of Common Stock of
$8,764,000 for the year ended December 31, 2001, an increase of $618,000 from
the net income allocable to shares of Common Stock of $8,146,000 for the year
ended December 31, 2000. This increase was primarily the result of increased
income from equity investments in the Funds and related investment management
and consulting fees, reduced Preferred Stock dividends and a reduction in the
provision for possible credit losses offset by decreased advisory and investment
banking fees and decreased net interest income from loans and other investments.
Interest and related income from loans and other investments amounted to
$67,333,000 for the year ended
12
December 31, 2001, a decrease of $20,352,000 from the $87,685,000 amount for the
year ended December 31, 2000. Average interest earning assets decreased from
approximately $681.5 million for the year ended December 31, 2000 to
approximately $570.6 million for the year ended December 31, 2001. The average
interest rate earned on such assets decreased from 12.8% in 2000 to 11.8% in
2001. During the year ended December 31, 2001, the Company recognized a $4.8
million in additional interest income on the early repayment of loans, while
during the year ended December 31, 2000, the Company recognized $4.7 million in
additional interest income on the early repayment of loans. Without this
additional interest income and after adjustment of the 2000 rates for the effect
of recognizing net swap payments in interest expense rather than interest
income, the earning rate for 2001 would have been 11.0% versus 12.2% for 2000.
The decrease in such core-earning rate is due to a decrease in the average LIBOR
rate from 6.41% for 2000 to 3.88% for 2001 for the assets earning interest based
upon a variable rate.
Interest and related expenses amounted to $26,238,000 for the year ended
December 31, 2001, a decrease of $10,474,000 from the $36,712,000 amount for the
year ended December 31, 2000. The decrease in expense was due to a decrease in
the amount of average interest bearing liabilities outstanding from
approximately $393.2 million for the year ended December 31, 2000 to
approximately $321.8 million for the year ended December 31, 2001, and a
decrease in the average rate paid on interest bearing liabilities from 9.2% to
8.2% for the same periods, after adjustment of the 2000 rates for the effect of
recognizing net swap payments in interest expense rather than interest income.
The decrease in the average rate is not consistent with the decrease in the
average LIBOR rate for the same periods due to a change in the mix of interest
bearing liabilities. In 2001, a higher percentage of the interest bearing
liabilities are at a fixed rate, after adjusting for interest rate swaps, which,
in the current low LIBOR rate environment, are at higher rates than that for
variable rate interest-bearing liabilities.
During the years ended December 31, 2001 and 2000, the Company recognized
$8,479,000 and $7,921,000, respectively, of net expenses related to its
outstanding Convertible Trust Preferred Securities. This amount consisted of
distributions to the holders totaling $15,237,000 and $14,246,000, respectively,
and amortization of discount and origination costs totaling $799,000 and
$799,000, respectively, during the years ended December 31, 2001 and 2000. This
was partially offset by a tax benefit of $7,557,000 and $7,124,000 during the
years ended December 31, 2001 and 2000, respectively. The terms of the
Convertible Trust Preferred Securities were modified effective May 10, 2000
which resulted in the blended rate on such securities increasing from 8.25% to
10.16% on that date, accounting for the increase in expense in 2001.
During the year ended December 31, 2001, other revenues increased $4,756,000 to
$11,327,000 from $6,571,000 in the same period of 2000. During the second
quarter of 2000, Fund I commenced operations and during the second quarter of
2001, Fund II commenced operations. This increase in other revenue is due to
increased revenue from the Funds (management and advisory income in addition to
the return on investment in the funds) offset by a reduction in advisory and
investment banking fees.
Investment management and consulting fees from funds under management has
increased significantly since the closing of Fund II. The Company earned
$5,884,000 of investment management fees from Fund II and $1,015,000 of
consulting fees from the general partner of Fund II in 2001. These additional
fees account for the majority of the increase in investment management and
consulting fees from 2000 to 2001.
For the year ended December 31, 2001 and 2000, the Company had earned $2,991,000
and $1,530,000 respectively, on its equity investment in the Funds. The increase
in income in 2001 versus 2000 was due primarily to the increased level of
investment in the Funds offset by the suspension of interest on a Fund I asset.
General and administrative expenses remained relatively consistent amounting to
$15,382,000 for the year ended December 31, 2001 versus $15,439,000 for year
ended December 31, 2000. In 2000, as the Company transitioned to its new
investment management business, it incurred one-time expenses of $2.1 million
that were included in general and administrative expenses. The Company employed
an average of 27 employees during the year ended December 31, 2001 verses an
average of 24 employees during the year ended December 31, 2000. The Company had
28 full-time employees and one part-time employee at December 31, 2001.
The decrease in the provision for possible credit losses from $5,478,000 for the
year ended December 31, 2000 to $748,000 for the year ended December 31, 2001
was due to the decrease in average earning assets as previously described. The
Company did not add to the reserve for possible credit losses
13
during the second, third or fourth quarter of 2001 as the Company believed that
the reserve was adequate based on the existing loans and investments in the
balance sheet portfolio.
For the year ended December 31, 2001 and 2000, the Company accrued income tax
expense of $16,882,000 and $17,760,000, respectively, for federal, state and
local income taxes. The decrease (from 50.1% to 48.6%) in the effective tax rate
was primarily due to higher levels of compensation in excess of deductible
limits in the prior year.
Theclass A preferred stock dividend and dividend requirement arose from previously
issued shares of Class A Preferred Stock. Dividends accrued on these shares at a
rate of 9.5% per annum on a per share price of $2.69. In the third quarter of
1999, 5,946,825 shares of Class A Preferred Stock were converted into an equal
number of shares of Class A Common Stock thereby reducing the number of
outstanding shares of Preferred Stock to 6,320,833 and the dividend requirement
to $1,615,000 per annum. In 2001, the remaining shares of Preferred Stock
were repurchased thereby eliminating the dividend requirement.
Liquidity and Capital Resources
- --------------------------------
At December 31, 2002, the Company2003, we had $10,186,000$8,738,000 in cash. TheOur primary sources of
liquidity for the Company for 2003 will2004 are expected to be cash on hand, cash generated from
operations, principal and interest payments received on loans and investments,
and additional borrowings under our credit facility and repurchase obligations and
proceeds from the Company's credit facilities. The Company
believessale of securities. We believe these sources of capital will adequatelyare
adequate to meet future cash requirements.
The Company expectsrequirements during 2004. We expect that during
2003, it2004, we will use a significant amount of itsour available capital resources to
satisfy its capital contributions required in
connection with its remainingpursuant to our equity commitmentcommitments to
Fund IIIII and future funds. The
Company intendsto originate new loans and investments for our balance sheet. We
intend to continue to employ leverage on its existingour balance sheet assets to enhance itsour
return on equity.
The CompanyWe experienced a net decrease in cash of $1,448,000 for the year ended December
31, 2003, compared to a net decrease of $1,465,000 for the year ended December
31, 2002, compared to the net increase of $263,000 for the year ended
December 31, 2001.2002. Cash usedprovided by operating activities during the year ended December
31, 20022003 was $23,988,000,$13,532,000, compared to $12,769,000 provided$23,988,000 used during the same period of
2001.2002 as we generated a net loss of $9.7 million and used $23.6 million of cash
to settle a fair value hedge in 2002. For the year ended December 31, 2002,2003, cash
provided by investing activities was $301,336,000,$5,716,000, compared to $40,034,000 used in investing
activities$301,336,000 during
the same period in 20012002 as the Companywe experienced significantlower levels of loan and investment
repayments in both years but purchased significant levels of
available-for-sale securitiesthe year ended December 31, 2003 than in 2001. The Companythe year ended December
31, 2002 and we began making new loans and investments for our balance sheet in
the year ended December 31, 2003. We utilized the cash received on loan
repayments in both yearsperiods to reduce borrowings under itsour credit facilities and
entered into repurchase obligations to financeour term redeemable securities contract that along with the purchaseproceeds from the
private placement of available-for-sale securities1,075,000 shares of class A common stock in 2001 whichJune 2003
accounted for the majoritysubstantially all of the change in the net cash provided by financing activities from $27,528,000 in 2001
to the $278,813,000 of cash used in financing
activities from $278,813,000 in the same period of
2002.
Sinceyear ended December 31, 2001,2002 to $20,696,000
in the Companyyear ended December 31, 2003.
During the investment periods for Fund I and Fund II, we generally did not
originate or acquire loans or commercial mortgage-backed securities directly for
our own balance sheet portfolio. Now that the Fund II investment period has
not originated or purchased any newended, we are originating loans and has no futureinvestments for our own account as permitted
by the provisions of Fund III. We expect to use our available working capital to
make contributions to Fund III or any other funds sponsored by us as and when
required by the equity commitments under any existing loans. The Company
received full satisfaction of three loans totaling $90.0 million and partial
repayments on five loans totaling $46.2 million in 2002.made by us to such funds.
At December 31, 2002,
the Company had outstanding loans totaling approximately $116.3 million and held
CMBS and other available-for-sale securities of $155.8 million and $65.2
million, respectively.
In 2000, the Company announced an open market share repurchase program under
which the Company may purchase, from time to time, up to two million shares of
the Company's Class A Common Stock. Since that time the authorization has been
increased by the board of directors to purchase cumulatively up to 7,100,770
shares of Class A Common Stock. As of December 31, 2002, the Company had
purchased and retired, pursuant to the program, 4,902,470 shares of Class A
Common Stock at an average price of $4.36 per share (including commissions).
Also, during fiscal year 2001, the Company repurchased 830,701 shares of Class A
Common Stock, all 2,755,186 outstanding shares of Class B Common Stock and all
6,320,833 outstanding shares of Preferred Stock in three privately negotiated
transactions outside the open market share repurchase program. The Company has
and will continue to fund share repurchases with available cash.
At December 31, 2002, the Company was party to a credit facility with a
commercial lender that provides for a total of $100 million of credit. The
facility matures in July 2003, with an automatic nine-month amortizing extension
option, if not otherwise extended. At December 31, 2002, the Companywe had outstanding borrowings under theour credit facility of
$40,000,000, and had unused
potential credit of $60,000,000. The credit facility provides the Company with
adequate liquidity for its short-term needs.
14
The credit facility provides for advances to fund lender-approved loans and
investments made by the Company. The obligations of the Company under the credit
facility are required to be secured by pledges of the assets originated or
acquired by the Company with advances under the credit facility. Borrowings
under the credit facility bear interest at specified rates over LIBOR, which
rates may fluctuate, based upon the credit quality of the pledged assets. Future
repayments and redrawdowns of amounts previously subject to the drawdown fee
will not require the Company to pay any additional fees. The credit facility
provides for margin calls$38,868,000, outstanding borrowings on asset-specific borrowings in the event of asset
quality and/or market value deterioration as determined under the credit
facility. The credit facility contains customary representations and warranties,
covenants and conditions and events of default.
On February 28, 2002, the Company's then existing $355 million credit facility
matured and the term redeemable securities contract
became dueof $11,651,000 and settled, upon
which eventsoutstanding repurchase obligations totaling $146,894,000. The
terms of these agreements are described above under the Company entered into a new term redeemable securities contract
and two new repurchase obligations. The new term redeemable securities contract,
with the same counterparty, allows for a maximum financing of $75 million. The
new term redeemable securities contract has a two-year term with an automatic
one-year amortizing extension option, if not otherwise extended. The Company has
no borrowings against the term redeemable securities contract at December 31,
2002.caption "Balance Sheet
Overview". At December 31, 2002,2003, we had pledged assets that enable us to borrow
an additional $43.1 million and had $326.0 million of credit available for the
Company also has outstanding repurchasefinancing of new and existing unpledged assets pursuant to these sources of
financing.
17
The following table sets forth information about our contractual obligations as
of $160,056,000. TheDecember 31, 2003:
Payments due by period
-------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
--------- --------- --------- --------- --------
(in thousands)
Long-Term Debt Obligations
Credit Facility $ 38,868 $ -- $ 38,868 $ -- $ --
Repurchase Obligations 146,894 142,644 4,250 -- --
Term redeemable securities contract 11,651 11,651 -- -- --
Convertible trust preferred 89,742 -- -- -- 89,742
securities
Operating Lease Obligations 4,338 971 1,924 1,443 --
Commitment to Fund III (1) 17,200 17,200 -- -- --
--------- --------- --------- --------- --------
Total $308,693 $172,466 $ 45,042 $ 1,443 $ 89,742
========= ========= ========= ========= ========
- ---------------------
(1) Fund III's investment period continues until June 2005 at which time our
equity commitment to the fund expires. While we do not believe that all of the
equity commitment will be called by December 31, 2004, we have presented it as
such as it could be called by then.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Impact of Inflation
Our operating results depend in part on the difference between the interest
income earned on our interest-earning assets and the interest expense incurred
in connection with our interest-bearing liabilities. Changes in the general
level of interest rates prevailing in the economy in response to changes in the
rate of inflation or otherwise can affect our income by affecting the spread
between our interest-earning assets and interest-bearing liabilities, as well
as, among other things, the value of our interest-earning assets and our ability
to realize gains from the sale of assets and the average life of our
interest-earning assets. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international
economic and political considerations, and other factors beyond our control. We
employ the use of correlated hedging strategies to limit the effects of changes
in interest rates on our operations, including engaging in interest rate swaps
and interest rate caps to minimize our exposure to changes in interest rates.
There can be no assurance that we will be able to adequately protect against the
foregoing risks or that we will ultimately realize an economic benefit from any
hedging contract into which we enter.
Critical Accounting Policies
Changes in management judgment, estimates and assumptions could have a material
effect on our consolidated financial statements. Management has the obligation
to ensure that its policies and methodologies are in accordance with generally
accepted accounting principles. During 2003, management reviewed and evaluated
its critical accounting policies and believes them to be appropriate. Our
accounting policies are described in Note 4 to our consolidated financial
statements. The following is a summary of our accounting policies that we
believe are the most affected by management judgments, estimates and
assumptions:
Securities Available-for-sale
We have designated our investments in commercial mortgage-backed securities and
certain other securities as available-for-sale. Available-for-sale securities
are carried at estimated fair value with the net unrealized gains or losses
reported as a component of accumulated other comprehensive income/(loss) in
shareholders' equity. Many of these investments are relatively illiquid and
their values must be estimated by management. In making these estimates,
management utilizes market prices provided by dealers who make markets in these
securities, but may, under certain circumstances, adjust these valuations based
on management's judgment. Changes in the valuations do not affect our reported
income or cash flows, but impact shareholders' equity and, accordingly, book
value per share.
18
Management must also assess whether unrealized losses on securities reflect a
decline in value that is other than temporary, and, accordingly, write the
impaired security down to its fair value, through a charge to earnings. We have
assessed our securities to first determine whether there is an indication of
possible other than temporary impairment and then where an indication exists to
determine if other than temporary impairment did in fact exist. We expect a full
recovery from our securities and did not recognize any other than temporary
impairment. Significant judgment of management is required in this analysis that
includes, but is not limited to, making assumptions regarding the collectibility
of the principal and interest, net of related expenses, on the underlying loans.
Income on these securities available-for-sale is recognized based upon a number
of assumptions that are subject to uncertainties and contingencies. Examples of
these include, among other things, the rate and timing of expected principal
payments, including prepayments, repurchases, defaults and liquidations, the
pass-through or coupon rate and interest rate fluctuations. Additional factors
that may affect our reported interest income on our mortgage-backed securities
include interest payment shortfalls due to delinquencies on the underlying
mortgage loans and the timing and magnitude of credit losses on the mortgage
loans underlying the securities that are a result of the general condition of
the real estate market, including competition for tenants and their related
credit quality, and changes in market rental rates. These uncertainties and
contingencies are difficult to predict and are subject to future events which
may alter the repurchase obligations
outstandingassumptions.
We adopted Emerging Issues Task Force 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" on January 1, 2001. In accordance with this guidance, on a
quarterly basis, when significant changes in estimated cash flows from the cash
flows previously estimated occur due to actual prepayment and credit loss
experience, we calculate a revised yield based on the current amortized cost of
the investment, including any other than temporary impairments recognized to
date, and the revised cash flows. The revised yield is then applied
prospectively to recognize interest income.
Prior to January 1, 2001, we recognized income from these beneficial interests
using the effective interest method, based on an anticipated yield over the
projected life of the security. Changes in the anticipated yields were
calculated due to revisions in our estimates of future and actual credit losses
and prepayments. Changes in anticipated yields resulting from credit loss and
prepayment revisions were recognized through a cumulative catch-up adjustment at
December 31, 2002 was 1.90%. The Company expects to enter into
new repurchase obligations at their maturity.
In July 1998, the Company issued $150 million aggregate liquidation amount
Convertible Trust Preferred Securitiesdate of the change which reflected the change in income from the security
from the date of purchase through the Company's consolidated
statutory trust subsidiary, CT Convertible Trust I (the "Trust"), which were and
originally represented an undivided beneficial interestdate of change in the assetsanticipated yield.
The new yield was then used prospectively to account for interest income.
Changes in yields from reduced estimates of the
Trustlosses were recognized
prospectively.
Loans Receivable
We purchase and originate commercial mortgage and mezzanine loans to be held as
long-term investments. Management must periodically evaluate each of these loans
for possible impairment. Impairment is indicated when it is deemed probable that
consisted solely of the Company's $154,650,000 aggregate principal
amount 8.25% step up convertible junior subordinated debentures that were
concurrently issued and soldwe will not be able to collect all amounts due according to the Trust. The Convertible Trust Preferred
Securities were modified in May 2000 in a transaction pursuant to which the
outstanding securities were canceled and new variable step up Convertible Trust
Preferred Securities with an aggregate liquidation amount of $150 million
("Convertible Trust Preferred Securities") were issued to the holders of the
canceled securities in exchange therefore, and the original underlying
convertible debentures were canceled and new 8.25% step up convertible junior
subordinated debentures in the aggregate principal amount of $92,524,000 (the
"Convertible Debentures") and new 13% step up non-convertible junior
subordinated debentures in the aggregate principal amount of $62,126,000 (the
"Non-Convertible Debentures" and together with the Convertible Debentures, the
"Debentures") were issued to the Trust, as the holder of the canceled bonds, in
exchange therefore. The liquidation amount of the Convertible Trust Preferred
Securities is divided into $89,742,000 of convertible amount (the "Convertible
Amount") and $60,258,000 of non-convertible amount (the "Non-Convertible
Amount"), the distribution, redemption and, as applicable, conversion terms of
which, mirror the interest, redemption and, as applicable, the conversioncontractual
terms of the Convertible Debenturesloan. If a loan is determined to be permanently impaired, we would
write down the loan through a charge to the reserve for possible credit losses.
Given the nature of our loan portfolio and the Non-Convertible Debentures, respectively,
held byunderlying commercial real estate
collateral, significant judgment of management is required in determining
permanent impairment and the Trust.
Distributions on the Convertible Trust Preferred Securities are payable
quarterly in arrears on each calendar quarter-end and correspondresulting charge to the payments
of interest made onreserve which includes but
is not limited to making assumptions regarding the Debentures, the sole assetsvalue of the Trust. Distributions
are payable onlyreal estate
which secures the mortgage loan.
Impairment of Securities
In accordance with Statement of Financial Accounting Standards No. 115, when the
estimated fair value of a security classified as available-for-sale has been
below amortized cost for a significant period of time and we conclude that we no
longer have the ability or intent to hold the extent payments are madesecurity for the period of time
over which we expect the values to recover to amortized cost, the investment is
written down to its fair value. The resulting charge is included in respectincome, and
a new cost basis established. Additionally, under Emerging Issues Task Force
99-20, when significant changes in estimated cash flows from the cash flows
previously estimated occur due to actual prepayment and credit loss experience
and the Debentures.
The Convertible Trust Preferred Securities initially bore a blended coupon rate
of 10.16% per annum which rate varies as the proportionpresent value of the outstanding
Convertible Amountrevised cash flows using the current expected yield
is less than the present value of the previously estimated remaining cash flows,
adjusted for cash receipts during the intervening period, an other than
temporary
19
impairment is deemed to have occurred. Accordingly, the outstanding Non-Convertible Amount changes and steps
up in accordancesecurity is written down
to fair value with the coupon rate step up termsresulting change being included in income and a new cost
basis established. In both instances, the original discount or premium is
written off when the new cost basis is established.
After taking into account the effect of the impairment charge, income is
recognized under Emerging Issues Task Force 99-20 or Statement of Financial
Accounting Standards No. 91, as applicable, using the market yield for the
security used in establishing the write-down.
Revenue Recognition
The most significant sources of our revenue come from our lending operations.
For our lending operations, we reflect income using the effective yield method,
which recognizes periodic income over the expected term of the investment on a
constant yield basis. Management believes our revenue recognition policies are
appropriate to reflect the Convertible Amountsubstance of the underlying transactions.
Provision For Loan Losses
Our accounting policies require that an allowance for estimated credit losses be
reflected in our financial statements based upon an evaluation of known and
inherent risks in our mortgage and mezzanine loans. While we have experienced
minimal actual losses on our lending investments, management considers it
prudent to reflect provisions for loan losses on a portfolio basis based upon
our assessment of general market conditions, our internal risk management
policies and credit risk rating system, industry loss experience, our assessment
of the likelihood of delinquencies or defaults, and the Non-Convertible Amount.
The Convertible Amount borevalue of the collateral
underlying our investments. Actual losses, if any, could ultimately differ from
these estimates.
Risk Management And Financial Instruments
We utilize derivative financial instruments as a couponmeans to help to manage our
interest rate of 8.25% per annum through March 31,
2002 and increased on April 1, 2002 to the greater of (i) 10.00% per annum,
increasing by 0.75% on October 1, 2004 and on each October 1 thereafter or (ii)
a percentage per annum equal to the quarterly dividend paidrisk exposure on a common share
multipliedportion of our variable-rate debt obligations,
through the use of cash flow hedges. The instruments utilized are generally
either pay-fixed swaps or LIBOR-based interest rate caps, which are widely used
in the industry and typically entered into with major financial institutions.
Our accounting policies generally reflect these instruments at their fair value
with unrealized changes in fair value reflected in "Accumulated other
comprehensive income" on our consolidated balance sheets. Realized effects on
cash flows are generally recognized currently in income.
Income Taxes
Our financial results generally do not reflect provisions for current or
deferred income taxes on our REIT taxable income. Management believes that we
have and intend to continue to operate in a manner that will continue to allow
us to be taxed as a REIT and, as a result, do not expect to pay substantial
corporate-level taxes (other than taxes payable by fourour taxable REIT
subsidiaries). Many of these requirements, however, are highly technical and
divided by $7.00. The Convertible Amountcomplex. If we were to fail to meet these requirements, we would be subject to
Federal income tax.
New Accounting Standards
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This statement is
convertibleapplicable for transfers of assets and extinguishments of liabilities occurring
after June 30, 2001. We adopted the provisions of this statement as required for
all transactions entered into shares of Class A Common Stock, in increments of $1,000 in liquidation
amount, at a conversion price of $7.00 per share. The Convertible Amount is
redeemable by the Company, in whole or in part, on or after September 30, 2004.
The Non-Convertible Amount bore a coupon rate of 13.00% per annum through
September 30, 2002, when the Company redeemed the entire Non-Convertible Amount.
In December 2002, in order to reduce interest rate derivatives to proper levels
based on expected debt levels for 2003, the Company settled all of its then
outstanding derivative securities. The Company also entered
15
into two new interest rate cash flow swaps with a notional value of $109
million. These cash flow interest rate swaps effectively convert floating rate
debt to fixed rate debt, which is utilized to finance assets which earn interest
at fixed rates.
Investment Company Act of 1940
- ------------------------------
In the quarter ended March 31, 2002, to remain in compliance with 1940-Act, the
Company purchased $40.0 million of Federal Home Loan Mortgage Corporation Gold
fixed rate whole pool mortgage-backed securities. To finance this purchase, the
Company entered into a repurchase obligation that currently matures in April
2003 and is expected to be extended monthly thereafter. In total, the Company
sold four Federal Home Loan Mortgage Corporation Gold fixed rate securities with
a market value of $65.2 million at December 31, 2002 and the Company has a
liability, representing the obligation to repurchase these assets, for $63.1
million.
The Company continuously analyzes its investments and will adjust levels of
1940-Act qualified assets when and if required for compliance purposes. As a
result of this analysis and due to favorable market conditions, in June 2002,
the Company sold three Federal Home Loan Mortgage Corporation Gold fixed rate
whole pool mortgage-backed securities due SeptemberJanuary 1, 2031 with an amortized
cost of $75,006,000 and completed three sales of CMBS in two issues with a basis
of $31,012,000. The Company recognized a net realized gain of $711,000 in
conjunction with these sales. The Company also received full payment on three
other CMBS issues that it held with a face value of $36.5 million.
Adoption2001. Our adoption of
Statement of Financial Accounting Standards No. 133
- ---------------------------------------------------------------140 did not have a significant
impact on us.
On January 1, 2001, the Companywe adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFASStatement of Financial Accounting Standards No. 137 and Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." SFASStatement of Financial Accounting
Standards No. 133, as amended, establishes accounting and reporting standards
for derivative instruments. Specifically SFASStatement of Financial Accounting
Standards No. 133 requires an entity to recognize all
20
derivatives as either assets or liabilities in the consolidated balance sheets
and to measure those instruments at fair value. Additionally, the fair value
adjustments will affect either shareholders' equity or net income depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and, if so, the nature of the hedging activity. As of January 1, 2001, the
adoption of the new standard resultsresulted in an adjustment of $574,000 to
accumulated other comprehensive loss.
In the case of the fair value hedge, we hedged the component of interest rate
risk that can be directly controlled by the hedging instrument, and it is this
portion of the hedge assets that was being recognized in earnings. Mark to
market on non-hedged available for sale securities and non-hedged aspect of CMBS
are reported in accumulated in other comprehensive income. Financial reporting
for hedges characterized as fair value hedges and cash flow hedges are
different. For those hedges characterized as a fair value hedge, the changes in
fair value of the hedge and the hedged item are reflected in earnings each
quarter. In the case of the fair value hedge, the Company is hedgingwe hedged the component of
interest rate risk that can be directly controlled by the hedging instrument,
and it iswas this portion of the hedged assets that is recognized in earnings. The
non-hedged balance is classified as an available-for-sale security consistent
with SFASStatement of Financial Accounting Standards No. 115, and iswas reported in
accumulated other comprehensive income. For those hedges characterized as cash
flow hedges, the unrealized gains/losses in the fair value of these hedges arewere
reported on the balance sheet with a corresponding adjustment to either
accumulated other comprehensive income or into earnings, depending on the type of
hedging relationship. We discontinued our fair value hedge transaction in 2002.
In accordance with SFASStatement of Financial Accounting Standards No. 133, on
December 31, 2002,2003, the derivative financial instruments were reported at their
fair value as interest rate hedge liabilitiesassets of $1,822,000.
The Company is$168,000.
We are exposed to credit loss in the event of non-performance by the
counterparties to the interest rate swap and cap agreements, although it doeswe do not
anticipate such non-performance. The counterparties would bear the interest rate
risk of such transactions as market interest rates increase.
16
ImpactIn July 2001, the SEC released Staff Accounting Bulletin No. 102, "Selected Loan
Loss Allowance and Documentation Issues." Staff Accounting Bulletin 102
summarizes certain of Inflation
- -------------------
The Company's operating results depend in partthe SEC's views on the difference betweendevelopment, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses. Our adoption of Staff Accounting Bulletin 102 did not have a
significant impact on us.
In July 2001, the interest income earnedFinancial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Statement of Financial Accounting Standards No. 141 requires the purchase method
of accounting to be used for all business combinations initiated after June 30,
2001. Statement of Financial Accounting Standards No. 141 also addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in business combinations and requires intangible assets to be
recognized apart from goodwill if certain tests are met. Statement of Financial
Accounting Standards No. 142 requires that goodwill not be amortized but instead
be measured for impairment at least annually, or when events indicate that there
may be an impairment. We adopted the provisions of both statements, as required,
on its interest-earningJanuary 1, 2002 which did not have a significant impact on us.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Statement of Financial Accounting Standards No.
144 provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of, and also broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. Statement of Financial
Accounting Standards No. 144 requires that current operations prior to the
disposition of corporate tenant lease assets and prior period results of such
operations be presented in discontinued operations in our consolidated
statements of operations. The provisions of Statement of Financial Accounting
Standards No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and must be applied at the interest expense
incurred in connection with its interest-bearing liabilities. Changes inbeginning of a
fiscal year. We adopted the general levelprovisions of interest rates prevailing inthis statement on January 1, 2002, as
required, which did not have a significant financial impact on us.
21
In November 2002, the economy in response to changes
inFinancial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," an interpretation of Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies," Statement of Financial Accounting Standards No. 57, "Related
Party Disclosures," Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" and a rescission of
Financial Accounting Standards Board Interpretation No. 34, "Disclosure of
Indirect Guarantees of Indebtedness of Others, an Interpretation of Statement of
Financial Accounting Standards No. 5." It requires that upon issuance of a
guarantee, the rate of inflation or otherwise can affectguarantor must recognize a liability for the Company's income by
affecting the spread between the Company's interest-earning assets and
interest-bearing liabilities, as well as, among other things, thefair value of the
Company's interest-earning assetsobligation it assumes under that guarantee regardless of whether the guarantor
receives separately identifiable consideration, such as a premium. The new
disclosure requirements are effective December 31, 2002. Our adoption of
Interpretation No. 45 did not have a material impact on our consolidated
financial statements, nor is it expected to have a material impact in the
future.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin 51. Interpretation No. 46 provides guidance on
identifying entities for which control is achieved through means other than
through voting rights, and its abilityhow to realize gains fromdetermine when and which business enterprise
should consolidate a variable interest entity. In addition, Interpretation No.
46 requires that both the saleprimary beneficiary and all other enterprises with a
significant variable interest in a variable interest entity make additional
disclosures. The transitional disclosure requirements took effect almost
immediately and are required for all financial statements initially issued after
January 31, 2003. In December 2003, the Financial Accounting Standards Board
issued a revision of assetsInterpretation No. 46, Interpretation No. 46R, to clarify
the provisions of Interpretation No. 46. The application of Interpretation No.
46R is effective for public companies, other than small business issuers, after
March 15, 2004. We have evaluated all of our investments and other interests in
entities that may be deemed variable interest entities under the average lifeprovisions of
Interpretation No. 46. We have concluded that no additional entities need to be
consolidated. Commencing with financial statements for periods ending after
March 15, 2004, we will deconsolidate CT Convertible Trust I. The
deconsolidation should not result in a significant impact to us.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
statement is effective for financial instruments entered into and modified after
May 31, 2003 and otherwise is effective at the beginning of the Company's interest-earning assets.
Interest rates are highly sensitivefirst interim
period beginning after June 15, 2003. It is to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations, and other factors beyondbe implemented by reporting the
controlcumulative effect of a change in an accounting principle of financial
instruments created before the issuance date of the Company. The Company
employsstatement and still existing
at the use of correlated hedging strategies to limit the effects of changes
in interest rates on its operations, including engaging in interest rate swaps
and interest rate caps to minimize its exposure to changes in interest rates.
There can be no assurance that the Company will be able to adequately protect
against the foregoing risks or that the Company will ultimately realize an
economic benefit from any hedging contract into which it enters.
Note on Forward-Looking Statements
- ----------------------------------
Except for historical information contained herein, this annual report on Form
10-K contains forward-looking statements within the meaningbeginning of the Section 21Einterim period of adoption. The implementation of the
Securities and Exchange Act of 1934, as amended, which involve certain
risks and uncertainties. Forward-looking statements are included with respect
to, among other things,statement did not have a material impact on the Company's current business plan, business and
investment strategy and portfolio management. These forward-looking statements
are identified by their use of such terms and phrases as "intends," "intend,"
"intended," "goal," "estimate," "estimates," "expects," "expect," "expected,"
"project," "projected," "projections," "plans," "anticipates," "anticipated,"
"should," "designed to," "foreseeable future," "believe," "believes" and
"scheduled" and similar expressions. The Company's actual results or outcomes
may differ materially from those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Important factors that the Company believes might cause actual results to differ
from any results expressed or implied by these forward-looking statements are
discussed in the cautionary statements contained in Exhibit 99.1 to this Form
10-K which are incorporated herein by reference. In assessing forward-looking
statements contained herein, readers are urged to read carefully all cautionary
statements contained in this Form 10-K.
17Company.
22
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
- -----------------------------------------------------------------------------------------------------------------------------------------------
The principal objective of the Company'sour asset/liability management activities is to
maximize net interest income, while minimizing levels of interest rate risk. Net
interest income and interest expense are subject to the risk of interest rate
fluctuations. To mitigate the impact of fluctuations in interest rates, the Company useswe use
interest rate swaps to effectively convert fixed rate assets to variable rate
assets for proper matching with variable rate liabilities and variable rate
liabilities to fixed rate liabilities for proper matching with fixed rate
assets. Each derivative used as a hedge is matched with an asset or liability
with which it has a high correlation. The swap agreements are generally
held-to-maturity and the Company doeswe do not use derivative financial instruments for trading
purposes. The Company usesWe use interest rate swaps to effectively convert variable rate debt
to fixed rate debt for the financed portion of fixed rate assets. The
differential to be paid or received on these agreements is recognized as an
adjustment to the interest expense related to debt and is recognized on the
accrual basis.
The following table provides information about the Company'sour financial instruments that
are sensitive to changes in interest rates at December 31, 2002.2003. For financial
assets and debt obligations, the table presents cash flows to the expected
maturity and weighted-averageweighted average interest rates based upon the current carrying
values. For interest rate swaps, the table presents notional amounts and
weighted-averageweighted average fixed pay and variable receive interest rates by contractual
maturity dates. Notional amounts are used to calculate the contractual cash
flows to be exchanged under the contract. Weighted-averageWeighted average variable rates are
based on rates in effect as of the reporting date.
Expected Maturity Dates
----------------------------------------------------------------------
2003-----------------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(dollars in thousands)
Assets:
Available-for saleAvailable-for-sale
securities
Fixed Rate $ 24,5666,969 $ 20,1474,637 $ 9,7842,876 $ 4,4231,782 $ 1,9971,104 $ 1,638 $ 62,555 $65,2331,778 $19,146 $20,052
Average interest rate 6.07% 6.07% 6.07% 6.07% 6.07% 6.07% 6.07%
CMBS
Fixed Rate -- -- -- $ 7,811 $ 135 $201,024 $208,970 $155,780$ 1,420 $201,146 $210,512 $153,136
Average interest rate -- -- -- 10.03% 8.38%9.97% 9.80% 9.78% 11.99% 11.91%
Loans receivable
Fixed Rate -- -- -- -- $39,382 $ 49,331 $ 88,713 $ 96,794
Average interest rate -- -- -- -- 11.30% 11.99% 11.68%
Variable Rate $ 19,727 $ 4,667 $ 667 $ 667 $ 667 $ 5,888 $ 32,283 $ 30,555
Average interest rate 11.51% 1.00% 6.97% 6.97% 6.97% 6.97% 8.88%
Liabilities:
Credit Facilities
Variable Rate5,000 -- $40,000 -- -- -- -- $ 40,0005,000 $ 40,0005,000
Average interest rate -- 4.72% -- -- -- -- 4.72%
Repurchase obligations
Variable Rate $160,0564.11% -- -- -- -- -- $160,056 $160,056
Average interest rate 2.03%4.11%
Loans receivable
Fixed Rate $ 12,042 -- -- -- -- -- 2.03%
Convertible Trust
Preferred Securities
Fixed Rate$ 49,004 $ 61,046 $ 69,235
Average interest rate 11.78% -- -- -- $89,742 -- --11.98% 11.94%
Variable Rate $ 89,742 $88,9886,193 $ 22,694 $ 915 $ 14,452 $ 60,159 $ 18,300 $122,713 $122,160
Average interest rate -- -- -- 10.00% -- -- 10.00%3.37% 6.54% 6.64% 8.94% 6.92% 8.54% 7.15%
Interest rate swaps
Notional amounts -- -- -- -- -- $109,000 $109,000 $(1,822)$ 168
Average fixed pay rate -- -- -- -- -- 4.24% 4.24%
Average variable
receive rate -- -- -- -- -- 1.42% 1.42%1.17% 1.17%
Liabilities:
Credit Facility
Variable Rate -- $ 38,868 -- -- -- -- $ 38,868 $ 38,868
Average interest rate -- 4.58% -- -- -- -- 4.58%
Term redeemable
securities contract
Variable Rate $ 11,651 -- -- -- -- -- $ 11,651 $ 11,651
Average interest rate 6.41% -- -- -- -- -- 6.41%
Repurchase obligations
Variable Rate $ 54,279 $ 92,615 -- -- -- -- $146,894 $146,894
Average interest rate 3.30% 2.28% -- -- -- -- 2.65%
Convertible trust
preferred securities
Fixed Rate -- -- -- $89,742 -- -- $89,742 $ 94,874
Average interest rate -- -- -- 10.00% -- -- 10.00%
1823
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------------------------------------------------------------------------------------------------
The financial statements required by this item and the reports of the
independent accountants thereon required by Item 14(a)(2) appear on pages F-2 to
F-37.F-42. See accompanying Index to the Consolidated Financial Statements on page
F-1. The supplementary financial data required by Item 302 of Regulation S-K
appears in Note 2423 to the consolidated financial statements.
------------------------------------------------------------------------------- ----------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
- -----------------------------------------------------------------------------------------------------------------------------------------------
None
19- ----------------------------------------------------------------
Item 9A. Controls and Procedures
- ----------------------------------------------------------------
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this annual report on Form 10-K was made under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer. Based upon this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (a) are effective to ensure that information required to be disclosed
by us in reports filed or submitted under the Securities Exchange Act is timely
recorded, processed, summarized and reported and (b) include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in reports filed or submitted under the Securities
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls
There have been no significant changes in our "internal control over financial
reporting" (as defined in rule 13a-15(f)) that occurred during the period
covered by this report that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
24
PART III
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------------------------------------------------------------------------------------------
The information required by Items 401 and 405 of Regulation S-K is
incorporated herein by reference to the Company's definitive proxy statement to
be filed not later than April 30, 2003,29, 2004 with the Securities and Exchange
Commission pursuant to Regulation 14A under the Exchange Act.
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 11. Executive Compensation
- -----------------------------------------------------------------------------------------------------------------------------------------------
The information required by Item 402 of Regulation S-K is incorporated
herein by reference to the Company's definitive proxy statement to be filed not
later than April 30, 2003,29, 2004 with the Securities and Exchange Commission pursuant
to Regulation 14A under the Exchange Act.
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and
Management
- -----------------------------------------------------------------------------------------------------------------------------------------------
The information required by Items 201(a) and 403 of Regulation S-K is
incorporated herein by reference to the Company's definitive proxy statement to
be filed not later than April 30, 2003,29, 2004 with the Securities and Exchange
Commission pursuant to Regulation 14A under the Exchange Act.
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
- -----------------------------------------------------------------------------------------------------------------------------------------------
The information required by Item 404 of Regulation S-K is incorporated
herein by reference to the Company's definitive proxy statement to be filed not
later than April 30, 2003,29, 2004 with the Securities and Exchange Commission pursuant
to Regulation 14A under the Exchange Act.
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 14. ControlsPrincipal Accounting Fees and ProceduresServices
- -------------------------------------------------------------------------------
Evaluation----------------------------------------------------------------
The information required by Item 9(e) of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation ofSchedule 14A is incorporated
herein by reference to the Company's "disclosure controls and procedures" (as defined in Rule 13a-14(c) underdefinitive proxy statement to be filed not
later than April 29, 2004 with the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out within 90 days priorCommission pursuant
to the filing of this annual report. This evaluation
was made under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer.
Based upon this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures (a) are effective to ensure that information required to be disclosed
by the Company in reports filed or submittedRegulation 14A under the Exchange Act is timely
recorded, processed, summarized and reported and (b) include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in reports filed or submitted under the Exchange
Act is accumulated and communicated to the Company's management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the Company's evaluation.
20Act.
25
PART IV
- -----------------------------------------------------------------------------------------------------------------------------------------------
Item 14.15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
- -----------------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------------------
(a) (1) Financial Statements
- -------
--------------------
See the accompanying Index to Financial Statement Schedule on
page F-1.
(a) (2) Consolidated Financial Statement Schedules
- -------
------------------------------------------
None.
All schedules have been omitted because they are not applicable or because
the required information is shown in the consolidated financial statements or
notes thereto.
(a) (3) Exhibits
- ------- --------
EXHIBIT INDEX
Exhibit
Number Description
-------- -------- -----------
2.1 Agreement and Plan of Merger, by and among Capital Trust, Capital
Trust, Inc. and the Captrust Limited Partnership, dated as of
November 12, 1998 (filed as Exhibit 2.1 to Capital Trust, Inc.'s
Current Report on Form 8-K (File No. 1-14788) filed on January 29,
1999 and incorporated herein by reference).
3.1 Charter of the Capital Trust, Inc. (filed as Exhibit 3.13.1.a to
Capital Trust, Inc.'s Registration StatementCurrent Report on Form S-38-K (File No. 333-103662)1-14788)
filed on March 7,April 2, 2003 and incorporated herein by reference).
3.2 Amended and Restated By-Laws of Capital Trust, Inc. (filed as
Exhibit 3.2 to Capital Trust, Inc.'s Current Report on Form 8-K
(File No. 1-14788) filed on January 29, 1999 and incorporated herein
by reference).
+10.1 Capital Trust, Inc. Amended and Restated 1997 Long-Term Incentive
Stock Plan ("Incentive Stock Plan") (filed as Exhibit 10.1 to
Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788)
filed on January 29, 1999 and incorporated herein by reference) as
amended by Amendment No. 1 to Incentive Stock Plan (filed as Exhibit
10.3.b to Capital Trust, Inc.'s Annual Report on Form 10-K (File No.
1-14788) filed on April 2, 2001 and incorporated herein by
reference).
+10.2 Capital Trust, Inc. Amended and Restated 1997 Non-Employee Director
Stock Plan (filed as Exhibit 10.2 to Capital Trust, Inc.'s Current
Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and
incorporated herein by reference).
+10.3 Capital Trust, Inc. 1998 Employee Stock Purchase Plan (filed as
Exhibit 10.3 to Capital Trust, Inc.'s Current Report on Form 8-K
(File No. 1-14788) filed on January 29, 1999 and incorporated herein
by reference).
+10.4 Capital Trust, Inc. 1998 Non-Employee Stock Purchase Plan (filed as
Exhibit 10.4 to Capital Trust, Inc.'s Current Report on Form 8-K
(File No. 1-14788) filed on January 29, 1999 and incorporated herein
by reference).
2126
Exhibit
Number Description
-------- -------- -----------
+10.5 Employment Agreement, dated as of July 15, 1997, by and between
Capital Trust and John R. Klopp (filed as Exhibit 10.5 to Capital
Trust's Registration Statement on Form S-1 (File No. 333-37271)
filed on October 6, 1997 and incorporated herein by reference).
+10.6 Termination Agreement, dated as of December 29, 2000, by and between
Capital Trust, Inc. and Craig M. Hatkoff (filed as Exhibit 10.9 to
Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788)
filed on April 2, 2001 and incorporated herein by reference).
+10.7 Consulting Services Agreement, dated as of January 1, 2001,2003, by and
between Capital Trust, Inc.CT Investment Management Co., LLC and Craig M. HatkoffHatkoff.
(filed as Exhibit 10.1010.1 to Capital Trust, Inc.'s AnnualQuarterly Report on
Form 10-K10-Q (File No. 1-14788) filed on April 2, 2001November 6, 2003 and
incorporated herein by reference).
10.8 Agreement of Lease dated as of May 3, 2000, between 410 Park Avenue
Associates, L.P., owner, and Capital Trust, Inc., tenant (filed as
Exhibit 10.11 to Capital Trust, Inc.'s Annual Report on Form 10-K
(File No. 1-14788) filed on April 2, 2001 and incorporated herein by
reference).
10.9.a10.9 Amended and Restated Master Loan and Security Agreement, dated as of
February 8, 2001,June 27, 2003, between Capital Trust, Inc., CT Mezzanine Partners I
LLC and Morgan Stanley
Dean Witter Mortgage Capital Inc. (filed as Exhibit 10.1410.4
to Capital Trust, Inc.'s AnnualQuarterly Report on Form 10-K10-Q (File No.
1-14788) filed on April 2, 2001 and incorporated herein by reference) as amended by
the First Amendment to Amended and Restated Master Loan and Security
Agreement, dated as of July 16, 2001, between Capital Trust, Inc.
and Morgan Stanley Dean Witter Mortgage Capital Inc. (filed as
Exhibit 10.14.b to Capital Trust, Inc.'s Annual Report on Form 10-K
(File No. 1-14788) filed on April 1, 2002November 6, 2003 and incorporated herein by
reference).
o10.9.b Second Amendment to Amended and Restated10.10.a Master Loan and SecurityRepurchase Agreement, dated as of July 16, 2002,May 28, 2003, between
Goldman Sachs Mortgage Company and Capital Trust, Inc. (filed as
Exhibit 10.2 to Capital Trust, Inc.'s Quarterly Report on Form 10-Q
(File No. 1-14788) filed on November 6, 2003 and Morgan Stanley Dean Witter Mortgage Capital Inc.
o10.9.c Thirdincorporated herein
by reference).
10.10.b First Amendment to Amended and Restatedthe Master Loan and SecurityRepurchase Agreement, dated as of
August 9, 2002,26, 2003, between Goldman Sachs Mortgage Company and Capital
Trust, Inc. and Morgan Stanley Dean Witter Mortgage Capital Inc.
10.10.a Amended and Restated CMBS Loan Agreement, dated as of February 8,
2001, between Capital Trust, Inc. and Morgan Stanley & Co.
International Limited (filed as Exhibit 10.1510.3 to Capital Trust, Inc.'s
AnnualQuarterly Report on Form 10-K10-Q (File No. 1-14788) filed on April
2, 2001November
6, 2003 and incorporated herein by reference) as amended by the
First Amendment to Amended and Restated CMBS Loan Agreement, dated
as of July 16, 2001, between Capital Trust, Inc. and Morgan Stanley
& Co. International Limited (filed as Exhibit 10.15.b to Capital
Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on
April 1, 2002 and incorporated herein by reference).
o10.10.b Second Amendment to Amended and Restated CMBS Loan Agreement, dated
as of July 16, 2002, between Capital Trust, Inc. and Morgan Stanley
& Co. International Limited.
o10.10.c Third Amendment to Amended and Restated CMBS Loan Agreement, dated
as of August 9, 2002, between Capital Trust, Inc. and Morgan Stanley
& Co. International Limited.
10.11 Limited Liability Company Agreement of CT MP II LLC, by and among
Travelers General Real Estate Mezzanine Investments II, LLC and
CT-F2-GP, LLC, dated as of March 8, 2000 (filed as Exhibit 10.3 to
the Company's Current Report on Form 8-K (File No. 1-14788) filed on
March 23, 2000 and incorporated herein by reference).
10.12 Venture Agreement amongst Travelers Limited Real Estate Mezzanine
Investments I, LLC, Travelers General Real Estate Mezzanine
Investments II, LLC, Travelers Limited Real Estate Mezzanine
Investments II, LLC, CT-F1, LLC, CT-F2-GP, LLC, CT-F2-LP, LLC, CT
Investment Management Co., LLC and Capital Trust, Inc., dated as of
March 8, 2000 (filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K (File No. 1-14788) filed on March 23, 2000 and
incorporated herein by reference).
22
Exhibit
Number Description
------- -----------
10.13 Guaranty of Payment, by Capital Trust, Inc. in favor of Travelers
Limited Real Estate Mezzanine Investments I, LLC, Travelers General
Real Estate Mezzanine Investments II, LLC and Travelers Limited Real
Estate Mezzanine Investments II, LLC, dated as of March 8, 2000
(filed as Exhibit 10.6 to the Company's Current Report on Form 8-K
(File No. 1-14788) filed on March 23, 2000 and incorporated herein
by reference).
10.14 Guaranty of Payment, by The Travelers Insurance Company in favor of
Capital Trust, Inc., CT-F1, LLC, CT-F2-GP, LLC, CT-F2-LP, LLC and CT
Investment Management Co., LLC, dated as of March 8, 2000 (filed as
Exhibit 10.8 to the Company's Current Report on Form 8-K (File No.
1-14788) filed on March 23, 2000 and incorporated herein by
reference).
27
Exhibit
Number Description
- -------- -----------
10.15 Investment Management Agreement, by and among CT Investment
Management Co., LLC, CT MP II LLC and CT Mezzanine Partners II L.P.,
dated as of March 8, 2000 (filed as Exhibit 10.9 to the Company's
Current Report on Form 8-K (File No. 1-14788) filed on March 23,
2000 and incorporated herein by reference).
10.16 Modification Agreement, dated as of May 10, 2000, by and among
Capital Trust, Inc., John R. Klopp and Sheli Z. Rosenberg, as
Regular Trustees for CT Convertibleconvertible Trust I, Vornado Realty L.P.,
Vornado Realty Trust, EOP Operating Limited Partnership, Equity
Office Properties Trust, and State Street Bank and Trust Company, as
trustee for General Motors EmployeesEmployes Global Group Pension Trust
(filed as Exhibit 10.2 to the Company's Current Report on Form 8-K
(File No. 1-14788) filed on May 18, 2000 and incorporated herein by
reference).
10.17 Certificate of Trust of CT Convertible Trust I (filed as Exhibit 4.1
to Capital Trust's Current Report on Form 8-K (File No. 1-8063)
filed on August 6, 1998 and incorporated herein by reference).
10.18 Amended and Restated Indenture, dated as of May 10, 2000, between
Capital Trust, Inc. and Wilmington Trust Company (filed as Exhibit
10.3 to the Company's Current Report on Form 8-K (File No. 1-14788)
filed on May 18, 2000 and incorporated herein by reference).
10.19 Amended and Restated Declaration of Trust, dated and effective as of
May 10, 2000, by the Trustees (as defined therein), the Sponsor (as
defined therein) and by the holders, from time to time, of undivided
beneficial interests in the Trust (filed as Exhibit 10.4 to the
Company's Current Report on Form 8-K (File No. 1-14788) filed on May
18, 2000 and incorporated herein by reference).
10.20 Amended and Restated Preferred Securities Guarantee Agreement, dated
as of May 10, 2000, by Capital Trust, Inc. and Wilmington Trust
Company, as trustee, for the benefit of the Holders (as defined
therein) from time to time of the Preferred Securities (as defined
therein) of CT Convertibleconvertible Trust I (filed as Exhibit 10.5 to the
Company's Current Report on Form 8-K (File No. 1-14788) filed on May
18, 2000 and incorporated herein by reference).
10.21 Guarantee Agreement, dated as of May 10, 2000, executed and
delivered by Capital Trust, Inc., for the benefit of the Holders (as
defined therein) from time to time of the Commoncommon Securities (as
defined therein) of CT Convertible Trust I (filed as Exhibit 10.6 to
the Company's Current Report on Form 8-K (File No. 1-14788) filed on
May 18, 2000 and incorporated herein by reference).
10.22 Registration Rights Agreement, dated as of July 28, 1998, among
Capital Trust, Vornado Realty L.P., EOP Limited Partnership, Mellon
Bank N.A., as trustee for General Motors Hourly-Rate Employes
Pension Trust, and Mellon Bank N.A., as trustee for General Motors
Salaried Employes Pension Trust (filed as Exhibit 10.2 to Capital
Trust's Current Report on Form 8-K (File No. 1-8063) filed on August
6, 1998 and incorporated herein by reference).
23
Exhibit
Number Description
------- -----------
o10.2310.23 Warrant Purchase Agreement, dated as of January 29, 2003, by and
between Travelers Insurance Company, Citigroup Alternative
Investments GP, LLC Citigroup Alternative Investments General Real
Estate Mezzanine Investments II, LLC and Capital Trust, Inc. o10.24(filed
as Exhibit 10.23 to Capital Trust, Inc.'s Annual Report on Form 10-K
(File No. 1-14788) filed on March 28, 2003 and incorporated herein
by reference).
10.24 Registration Rights Agreement, dated as of February 7, 2003, by and
between Capital Trust, Inc. and Stichting Pensioenfonds ABP.ABP (filed
as Exhibit 10.24 to Capital Trust, Inc.'s Annual Report on Form 10-K
(File No. 1-14788) filed on March 28, 2003 and incorporated herein
by reference).
11.1 Statements regarding Computation of Earnings per Share (Data
required by Statement of Financial Accounting Standard No. 128,
Earnings per Share, is provided in Note 13 to the consolidated
financial statements contained in this report).
28
Exhibit
Number Description
- -------- -----------
o14.1 Capital Trust, Inc. Code of Business Conduct and Ethics.
o21.1 Subsidiaries of Capital Trust, Inc.
o23.1 Consent of Ernst & Young LLP
o99.1 Risk Factors
*99.2o31.1 Certification of John R. Klopp, Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
o31.2 Certification of Brian H. Oswald, Chief Financial Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
o32.1 Certification of John R. Klopp, Chief Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*99.3o32.2 Certification of Brian H. Oswald, Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
________________o99.1 Risk Factors
- -------------
+ Represents a management contract or compensatory plan or
arrangement.
o Filed herewith.
* Pursuant to Commission Release No. 33-8212, this certification will be
treated as "accompanying" this Annual Report on Form 10-K and not
"filed" as part of such report for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of Section 18 of
the Exchange Act, and such certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of
1933, as amended, or the Exchange Act, except to the extent the
registrant specifically incorporates it by reference.
(a)(4) Report on Form 8-K
------- ------- ------------------
During the fiscal quarter ended December 31, 2002,2003, the Registrant filed the
following Current Report on Form 8-K:
None
24(1) Current Report on Form 8-K, dated November 13, 2003, as filed with
the Commission on November 13, 2003, reporting under Item 12
"Results of Operations and Financial Condition" the Company's
issuance of a press release reporting the Company's financial
results for its fiscal quarter ended September 30, 2003.
29
SIGNATURES
----------
Pursuant to the requirements of Section 13 or Section 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.
March 28, 20033, 2004 /s/ John R. Klopp
- ---------------------- -----------------
Date John R. Klopp
Vice Chairman and Chief Executive
Officer
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.
March 28, 20033, 2004 /s/ Samuel Zell
- ----------------------- --------------------------------------- ---------------
Date Samuel Zell
Chairman of the Board of Directors
March 28, 20033, 2004 /s/ John R. Klopp
- --------------------------------------------- -----------------
Date John R. Klopp
Vice Chairman and Chief Executive Officer
and Director
March 28, 20033, 2004 /s/ Brian H. Oswald
- ----------------------------------------------- -------------------
Date Brian H. Oswald
Chief Financial Officer
March 28, 20033, 2004 /s/ Jeffrey A. Altman
- ----------------------------------------------- ---------------------
Date Jeffrey A. Altman, Director
March 28, 20033, 2004 /s/ Thomas E. Dobrowski
- ----------------------------------------------- -----------------------
Date Thomas E. Dobrowski, Director
March 28, 20033, 2004 /s/ Martin L. Edelman
- ----------------------------------------------- ---------------------
Date Martin L. Edelman, Director
March 28, 20033, 2004 /s/ Gary R. Garrabrant
- ----------------------------------------------- ----------------------
Date Gary R. Garrabrant, Director
March 28, 20033, 2004 /s/ Craig M. Hatkoff
- ----------------------------------------------- --------------------
Date Craig M. Hatkoff, Director
March 28, 20033, 2004 /s/ Susan W. LewisHenry N. Nassau
- ------------------------ ----------------------------------------- -------------------
Date Susan W. Lewis,Henry N. Nassau, Director
-
March 28, 20033, 2004 /s/ Sheli Z. Rosenberg
- ----------------------------------------------- ----------------------
Date Sheli Z. Rosenberg, Director
March 28, 20033, 2004 /s/ Steven Roth
- ----------------------------------------------- ----------------------
Date Steven Roth, Director
March 28, 20033, 2004 /s/ Lynne B. Sagalyn
- ----------------------------------------------- ----------------------
Date Lynne B. Sagalyn, Director
March 28, 2003 /s/ Michael D. Watson
- ------------------------ ---------------------
Date Michael Watson, Director
25
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Klopp, certify that:
1. I have reviewed this annual report on Form 10-K of Capital Trust, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures 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 annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 28, 2003
/s/ John R. Klopp
- -----------------
John R. Klopp
Chief Executive Officer
26
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian H. Oswald, certify that:
1. I have reviewed this annual report on Form 10-K of Capital Trust, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures 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 annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 28, 2003
/s/ Brian H. Oswald
- -------------------
Brian H. Oswald
Chief Financial Officer
2730
Index to Consolidated Financial Statements
Report of Independent Auditors..............................................F-2Auditors...............................................F-2
Audited Financial Statements
Consolidated Balance Sheets as of December 31, 20022003 and 2001................F-32002.................F-3
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 2001 and 2000............................................F-42001.............................................F-4
Consolidated Statements of Changes in Stockholders'Shareholders' Equity
for the years ended December 31, 2003, 2002 2001 and 2000........................F-52001.........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 2001 and 2000............................................F-62001.............................................F-6
Notes to Consolidated Financial Statements..................................F-7Statements...................................F-7
F-1
Report of Independent Auditors
The Board of Directors
Capital Trust, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Capital Trust,
Inc. and Subsidiaries (the "Company") as of December 31, 20022003 and 2001,2002, and the
related consolidated statements of operations, stockholders'shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2002.2003. 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as 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 consolidated financial position of the Company at
December 31, 20022003 and 2001,2002, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2002,2003, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
New York, New York
February 14, 200317, 2004
F-2
Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2003 and 2002 and 2001
(in thousands, except per share data)
2003 2002 2001
---------------- ----------------
Assets
Cash and cash equivalents $ 10,1868,738 $ 11,65110,186
Available-for-sale securities, at fair value 20,052 65,233 152,789
Commercial mortgage-backed securities available-for-sale, at fair value 158,136 155,780 210,268
Loans receivable, net of $4,982$6,672 and $13,695$4,982 reserve for possible credit losses at
December 31, 20022003 and December 31, 2001,2002, respectively 177,049 116,347 248,088
Equity investment in CT Mezzanine Partners I LLC ("Fund I"), CT Mezzanine
Partners II LP ("Fund II") and, CT MP II LLC ("Fund II GP") and CT Mezzanine
Partners III, Inc. ("Fund III") (together "Funds") 21,988 28,974 38,229
Deposits and other receivables 345 431 1,192
Accrued interest receivable 3,834 4,422
4,614Interest rate hedge assets 168 --
Deferred income taxes 3,369 1,585 9,763
Prepaid and other assets 3,465 2,018 2,206
---------------- ----------------
Total assets $ 384,976397,144 $ 678,800384,976
================ ================
Liabilities and Stockholders'Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 9,06711,041 $ 9,842
Notes payable -- 9779,067
Credit facilities 38,868 40,000 121,211
Term redeemable securities contract 11,651 -- 137,132
Repurchase obligations 146,894 160,056 147,880
Deferred origination fees and other revenue 3,207 987 1,202
Interest rate hedge liabilities -- 1,822 9,987
---------------- ----------------
Total liabilities 211,661 211,932 428,231
---------------- ----------------
Company-obligated, mandatory redeemable, convertible trust preferred securities of CT
Convertibleconvertible Trust I, holding $89,742 of convertible 8.25% junior subordinated
debentures at December 31, 2003 and 2002 and 2001
and $60,258 of non-convertible 13.00% junior
subordinated debentures of Capital Trust, Inc. at December 31,
2001 ("Convertible Trust Preferred Securities"convertible trust preferred securities") 89,466 88,988 147,941
---------------- ----------------
Stockholders'Shareholders' equity:
Class A 9.5% cumulative convertible preferred stock, $0.01 par value, $0.26 cumulative
annual dividend, no shares authorized, issued or outstanding at December 31, 2003 and
2002 and 2001 ("Classclass A Preferred Stock"preferred stock") -- --
Class B 9.5% cumulative convertible non-voting preferred stock, $0.01 par value, $0.26
cumulative annual dividend, no shares authorized, issued or outstanding at
December 31, 2003 and 2002 and 2001 ("Classclass B Preferred Stock"preferred stock" and together with Classclass A
Preferred Stock,
"Preferred Stock"preferred stock, "preferred stock") -- --
Class A common stock, $0.01 par value, 100,000 shares authorized, 16,2166,502 and 18,3325,405
shares issued and outstanding at December 31, 2003 and 2002, and 2001, respectively 162 183("class
A common stock") 65 54
Class B common stock, $0.01 par value, 100,000 shares authorized, no shares issued and
outstanding at December 31, 2003 and 2002 and 2001
("Classclass B Common Stock"common stock") -- --
Restricted Classclass A Common Stock,common stock, $0.01 par value, 30034 and 396100 shares issued and
outstanding at December 31, 20022003 and December 31, 2001,2002, respectively ("Restricted Classrestricted
class A Common Stock"common stock" and together with Classclass A Common Stockcommon stock and Classclass B Common Stock, "Common Stock"common
stock, "common stock") 3 4-- 1
Additional paid-in capital 126,809 136,805141,402 126,919
Unearned compensation (247) (320) (583)
Accumulated other comprehensive loss (33,880) (28,988) (29,909)
Accumulated deficit (11,323) (13,610) (3,872)
---------------- ----------------
Total stockholders'shareholders' equity 96,017 84,056 102,628
---------------- ----------------
Total liabilities and stockholders'shareholders' equity $ 384,976397,144 $ 678,800384,976
================ ================
See accompanying notes to consolidated financial statements.
F-3
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2003, 2002 and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
2003 2002 2001
2000
------------- --------------------------- -------------- --------------
Income from loans and other investments:
Interest and related income $ 38,246 $ 47,079 $ 67,333 $ 87,685
Less: Interest and related expenses (9,845) (17,969) (26,238)
(36,712)
------------- --------------------------- -------------- --------------
Income from loans and other investments, net 28,401 29,110 41,095
50,973
------------- --------------------------- -------------- --------------
Other revenues:
Management and advisory fees from affiliated Funds managed 8,020 10,123 7,664
373
Income / Income/(loss) from equity investments in Funds 1,526 (2,534) 2,991 1,530
Advisory and investment banking fees -- 2,207 277 3,920
Other interest income 53 128 395
748
------------- --------------------------- -------------- --------------
Total other revenues 9,599 9,924 11,327
6,571
------------- --------------------------- -------------- --------------
Other expenses:
General and administrative 13,320 13,996 15,382 15,439
Other interest expense -- 23 110 219
Depreciation and amortization 1,057 992 909 902
Net unrealized (gain)/loss on derivative securities and corresponding
hedged risk on CMBS securities -- (21,134) 542 --
Net realized loss on sale of fixed assets, investments and settlement
of derivative securities -- 28,715 --
64
Provision for / (recapturefor/(recapture of) allowance for possible credit losses -- (4,713) 748
5,478
------------- --------------------------- -------------- --------------
Total other expenses 14,377 17,879 17,691
22,102
------------- --------------------------- -------------- --------------
Income before income taxes and distributions and amortization on
Convertible Trust Preferred
Securitiesconvertible trust preferred securities 23,623 21,155 34,731 35,442
Provision for income taxes 646 22,438 16,882
17,760
------------- ------------- -------------- Income / -------------- --------------
Income/(loss) before distributions and amortization on Convertible Trust Preferred
Securitiesconvertible
trust preferred securities 22,977 (1,283) 17,849 17,682
Distributions and amortization on Convertible
Trust Preferred Securities,convertible trust preferred
securities, net of income tax benefit of $7,289 $7,557 and $7,124$7,557 for the
years ended December 31, 2002 and 2001, and 2000,
respectively 9,452 8,455 8,479
7,921
------------- --------------------------- -------------- --------------
Net income / income/(loss) 13,525 (9,738) 9,370
9,761
Less: Preferred Stockstock dividend -- -- 606
1,615
------------- --------------------------- -------------- --------------
Net income / income/(loss) allocable to Common Stockcommon stock $ 13,525 $ (9,738) $ 8,764
$ 8,146
============= =========================== ============== ==============
Per share information:
Net earnings / earnings/(loss) per share of Common Stockcommon stock
Basic $ (0.54)2.27 $ 0.43(1.62) $ 0.35
============= =============1.30
============== ============== ==============
Diluted $ (0.54)2.23 $ 0.37(1.62) $ 0.33
============= =============1.12
============== ============== ==============
Dividends declared per share of common stock $ 1.80 $ -- $ --
============== ============== ==============
Weighted average shares of Common Stockcommon stock outstanding
Basic 18,026,192 20,166,319 23,171,057
============= =============5,946,718 6,008,731 6,722,106
============== ============== ==============
Diluted 18,026,192 36,124,105 29,691,927
============= =============10,287,721 6,008,731 12,041,368
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-4
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2003, 2002 and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands)
Restricted
Class A Class B Class A Class B Class A
Comprehensive Preferred Preferred Common Common Common
Income/(Loss) Stock Stock Stock Stock Stock
-------------- -------------------------------------------------------------------------------------- ---------------------------------------------------------------------------
Balance at January 1, 20002001 $ 238 $ 4013 $ 21963 $ 239 $ 1
Net income $ 9,761 -- -- -- -- --
Change in unrealized loss on
available-for-sale securities,
net of related income taxes 12 -- -- -- -- --
Conversion of Class A Common Stock
to Class B Common Stock -- -- -- (5) 5 --
Issuance of warrants to purchase
shares of Class A Common Stock -- -- -- -- -- --
Issuance of Class A Common
Stock unit awards -- -- -- 1 -- --
Cancellation of previously issued
restricted Class A Common Stock -- -- -- -- -- (1)
Issuance of restricted Class A
Common Stock -- -- -- -- -- 3
Restricted Class A Common Stock
which vested and was issued as
unrestricted Class A Common Stock -- -- -- -- -- --
Restricted Class A Common Stock
earned -- -- -- -- -- --
Dividends paid on Preferred Stock -- -- -- -- -- --
Repurchase and retirement of shares
of Class A Common Stock
previously outstanding -- -- -- (25) -- --
-------------- ---------------------------------------------------------------------
Balance at December 31, 2000 $ 9,773 23 40 190 28 3
==============
Net income $ 9,370 -- -- -- -- --
Transition adjustment for
recognition of derivative
financial instruments -- -- -- -- -- --
Unrealized loss on derivative
financial instruments, net of
related income taxes (2,963) -- -- -- -- --
Unrealized loss on
available-for-sale securities,
net of related income taxes (16,220) -- -- -- -- --
Issuance of warrants to purchase
shares of Classclass A Common Stockcommon stock -- -- -- -- -- --
Issuance of Classclass A Common
Stockcommon
stock unit awards -- -- -- 1-- -- --
Issuance of restricted Classclass A
Common Stockcommon stock -- -- -- -- -- 21
Restricted Classclass A Common Stockcommon stock
earned -- -- -- -- -- --
Vesting of restricted Classclass A
Common Stockcommon stock
to unrestricted Classclass A Common Stockcommon
stock -- -- -- 1 -- (1)
Dividends paid on Preferred Stockpreferred stock -- -- -- -- -- --
Repurchase and retirement of shares
of Stockstock previously outstanding -- (23) (40)(8) (13) (3) (9) (28) --
-------------- -------------------------------------------------------------------------------------- ---------------------------------------------------------------------------
Balance at December 31, 2001 $ (9,813) -- -- 18361 -- 4
==============1
=================
Net loss $ (9,738) -- -- -- -- --
Unrealized gain on derivative
financial instruments, net of
related income taxes 1,715 -- -- -- -- --
Unrealized loss on
available-for-sale securities,
net of related income taxes (794) -- -- -- -- --
Issuance of Classclass A Common
Stockcommon
stock unit awards -- -- -- 1-- -- --
Issuance of restricted Classclass A
Common Stockcommon stock -- -- -- -- -- 1
Restricted Classclass A Common Stockcommon stock
earned -- -- -- -- -- --
Vesting of restricted Classclass A
Common Stockcommon stock
to unrestricted Classclass A Common Stockcommon
stock -- -- -- 21 -- (2)(1)
Repurchase and retirement of shares
of Classclass A Common Stockcommon stock
previously outstanding -- -- -- (24)(8) -- --
-------------- -------------------------------------------------------------------------------------- ---------------------------------------------------------------------------
Balance at December 31, 2002 $ (8,817) -- -- 54 -- 1
=================
Net income $ 13,525 -- -- -- -- --
Unrealized gain on derivative
financial instruments, net of
related income taxes 1,990 -- -- -- -- --
Unrealized loss on
available-for-sale securities,
net of related income taxes (6,882) -- -- -- -- --
Issuance of restricted class A
common stock -- -- -- -- -- --
Restricted class A common stock
earned -- -- -- -- -- --
Sale of shares of class A
common stock under stock
option agreement -- -- -- -- -- --
Cancellation of restricted class A
common stock -- -- -- -- -- --
Vesting of restricted class A
common stock
to unrestricted class A common
stock -- -- -- 1 -- (1)
Repurchase and retirement of shares
of class A common stock
previously outstanding -- -- -- (1) -- --
Repurchase of warrants to
purchase shares of class A
common stock -- -- -- -- -- --
Dividends declared on class A
common stock -- -- -- -- -- --
Shares redeemed in one for three
reverse stock split -- -- -- -- -- --
Shares of class A common stock
issued in private offering -- -- -- 11 -- --
----------------- ---------------------------------------------------------------------------
Balance at December 31, 2003 $ 8,633 $ -- $ -- $ 16265 $ -- $ 3
============== =====================================================================
--
================= ===========================================================================
Accumulated
Additional Other
Paid-In Unearned Comprehensive Accumulated
Capital Compensation Income/(Loss) Deficit Total
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 20002001 $ 189,456181,697 $ (407)(468) $(10,152) $ (10,164)(12,505) $ (20,651) $158,540
Net income -- -- -- 9,761 9,761
Change in unrealized loss on
available-for-sale securities,
net of related income taxes -- -- 12 -- 12
Conversion of Class A Common Stock
to Class B Common Stock -- -- -- -- --
Issuance of warrants to purchase
shares of Class A Common Stock 1,360 -- -- -- 1,360
Issuance of Class A Common
Stock unit awards 624 -- -- -- 625
Cancellation of previously issued
restricted Class A Common Stock (279) 182 -- -- (98)
Issuance of restricted Class A
Common Stock 947 (950) -- -- --
Restricted Class A Common Stock
which vested and was issued as
unrestricted Class A Common Stock -- -- -- -- --
Restricted Class A Common Stock
earned -- 707 -- -- 707
Dividends paid on Preferred Stock -- -- -- (1,615) (1,615)
Repurchase and retirement of shares
of Class A Common Stock
previously outstanding (10,601) -- -- -- (10,626)
-------------------------------------------------------------------------
Balance at December 31, 2000 181,507 (468) (10,152) (12,505) 158,666
Net income -- -- -- 9,370 9,370
Transition adjustment for
recognition of derivative
financial instruments -- -- (574) -- (574)
Unrealized loss on derivative
financial instruments, net of
related income taxes -- -- (2,963) -- (2,963)
Unrealized loss on
available-for-sale securities,
net of related income taxes -- -- (16,220) -- (16,220)
Issuance of warrants to purchase
shares of Classclass A Common Stockcommon stock 3,276 -- -- -- 3,276
Issuance of Classclass A Common
Stockcommon
stock unit awards 624625 -- -- -- 625
Issuance of restricted Classclass A
Common Stock 1,023common stock 1,024 (1,025) -- -- --
Restricted Classclass A Common Stockcommon stock
earned -- 910 -- -- 910
Vesting of restricted Classclass A
Common Stockcommon stock
to unrestricted Classclass A Common
Stockcommon
stock -- -- -- -- --
Dividends paid on Preferred Stockpreferred stock -- -- -- (737) (737)
Repurchase and retirement of shares
of Stockstock previously outstanding (49,625)(49,692) -- -- -- (49,725)
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 136,805136,930 (583) (29,909) (3,872) 102,628
Net loss -- -- -- (9,738) (9,738)
Unrealized gain on derivative
financial instruments, net of
related income taxes -- -- 1,715 -- 1,715
Unrealized loss on
available-for-sale securities,
net of related income taxes -- -- (794) -- (794)
Issuance of Classclass A Common
Stockcommon
stock unit awards 312313 -- -- -- 313
Issuance of restricted Classclass A
Common Stockcommon stock 399 (400) -- -- --
Restricted Classclass A Common Stockcommon stock
earned -- 663 -- -- 663
Vesting of restricted Classclass A
Common Stockcommon stock
to unrestricted Classclass A Common Stockcommon
stock -- -- -- -- --
Repurchase and retirement of shares
of Classclass A Common Stockcommon stock
previously outstanding (10,707)(10,723) -- -- -- (10,731)
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 126,919 (320) (28,988) (13,610) 84,056
Net income -- -- -- 13,525 13,525
Unrealized gain on derivative
financial instruments, net of
related income taxes -- -- 1,990 -- 1,990
Unrealized loss on
available-for-sale securities,
net of related income taxes -- -- (6,882) -- (6,882)
Issuance of restricted class A
common stock 356 (356) -- -- --
Restricted class A common stock
earned -- 237 -- -- 237
Sale of shares of class A
common stock under stock
option agreement 281 -- -- -- 281
Cancellation of restricted class A
common stock (192) 192 -- -- --
Vesting of restricted class A
common stock
to unrestricted class A common
stock -- -- -- -- --
Repurchase and retirement of shares
of class A common stock
previously outstanding (946) -- -- -- (947)
Repurchase of warrants to
purchase shares of class A
common stock (2,132) -- -- -- (2,132)
Dividends declared on class A
common stock -- -- -- (11,238) (11,238)
Shares redeemed in one for three
reverse stock split (8) -- -- -- (8)
Shares of class A common stock
issued in private offering 17,124 -- -- -- 17,135
----------------------------------------------------------------------------------
Balance at December 31, 2003 $ 126,809141,402 $ (320) $(28,988)(247) $(33,880) $ (13,610)(11,323) $ 84,056
=========================================================================96,017
===================================================================================
See accompanying notes to consolidated financial statements.
F-5
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands)
2003 2002 2001 and 2000
(in thousands)
2002 2001 2000
------------- ------------- -------------
Cash flows from operating activities:
Net income / income/(loss) $ 13,525 $ (9,738) $ 9,370
$ 9,761
Adjustments to reconcile net income / income/(loss) to net
cash provided by operating activities:
Deferred income taxes (1,784) 8,178 (1,044)
(3,351)
Provision for / (recapturefor/(recapture of) provision for
possible credit losses -- (4,713) 748
5,478
Depreciation and amortitionamortization 1,057 992 909
902
Loss / Loss/(income) from equity investments in Funds (1,526) 2,534 (2,991) (1,530)
Net gain on sales of CMBS and available-for-sale
securities -- (711) -- --
Cash paid on settlement of fair value hedge -- (23,624) -- --
Unrealized loss on hedged and derivative
securities -- 2,561 542
--
Restricted Classclass A Common Stockcommon stock earned 237 663 910 707
Amortization of premiums and accretion of
discounts on loans and investments, net (1,277) (2,365) (2,853) (2,683)
Accretion of discount on term redeemable
securities contract -- 680 3,897 3,593
Accretion of discounts and fees on Convertible
Trust Preferred Securities,convertible
trust preferred securities, net 478 1,305 799 799
Loss on sale of fixed assets -- -- 64
Expenses reversed on cancellation of restricted
stock previously issued -- -- (98)
Changes in assets and liabilities:
Deposits and other receivables 86 761 (981) 322
Accrued interest receivable 3,126 192 2,627 2,287
Prepaid and other assets (1,471) (26) 1,659 353
Deferred origination fees and other revenue 2,165 (462) (961) (1,248)
Accounts payable and accrued expenses (1,084) (215) 138 (3,478)
------------- ------------- -------------
Net cash provided by / (usedby/(used in) operating activities 13,532 (23,988) 12,769 11,878
------------- ------------- -------------
Cash flows from investing activities:
Purchases of available-for-sale securities -- (39,999) (257,877) --
Principal collections on and proceeds from sales
of available-for-sale securities 43,409 131,347 103,038
--
Cash received on commercial
mortgage-backed securities recorded as
discountPurchases of CMBS (6,157) -- -- 1,446
Principal collections on and proceeds from sale
of CMBS -- 67,880 -- --
Principal collections on certificated mezzanine
investments -- -- 22,379 23,053
Origination and purchase of loans receivable (99,600) -- (13,319) (14,192)
Principal collections on loans receivable 87,210 136,246 112,585 169,227
Equity investments in Funds (9,931) (5,973) (35,599) (36,606)
Return of capital from Funds 10,758 11,840 28,942 13,107
Purchases of equipment and leasehold improvements (26) (5) (183)
(495)
Proceeds from salePurchase of equipmentremaining interest in Fund I (19,947) -- -- 12
------------- ------------- -------------
Net cash provided by / (usedby/(used in) investing activities 5,716 301,336 (40,034) 155,552
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from repurchase obligations 55,672 179,861 251,503 --
Repayment of repurchase obligations (68,834) (167,685) (120,192) (12,134)
Proceeds from credit facilities 104,015 118,500 191,870 56,000
Repayment of credit facilities (129,232) (199,711) (244,300) (225,622)
Repayment of notes payable -- (977) (891)
(827)
Repayment of Convertible Trust Preferred
Securitiesconvertible trust preferred
securities -- (60,258) -- --
Proceeds from term redeemable securities contract 20,000 35,816 -- --
Repayment of term redeemable securities contract (8,349) (173,628) --
Sale of shares of class A common stock under
stock option agreement 281 -- --
Dividends paid on Classclass A Preferred Stockpreferred stock -- -- (737)
(1,615)Dividends paid on class A common stock (8,297) -- --
Repurchase of warrants to purchase shares of
class A common stock (2,132) -- --
Proceeds from sale of shares of class A common
stock 17,135 -- --
Repurchase and retirement of shares of Commoncommon
and Preferred Stock previously outstanding (955) (10,731) (49,725) (10,626)
------------- ------------- -------------
Net cash provided by / (usedby/(used in) financing activities (20,696) (278,813) 27,528 (194,824)
------------- ------------- -------------
Net increase / increase/(decrease) in cash and cash equivalents (1,448) (1,465) 263 (27,394)
Cash and cash equivalents at beginning of year 10,186 11,651 11,388 38,782
------------- ------------- -------------
Cash and cash equivalents at end of year $ 8,738 $ 10,186 $ 11,651 $ 11,388
============= ============= =============
See accompanying notes to consolidated financial statements.
F-6
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000(continued)
1. Organization
References herein to "we," "us" or "our" refer to Capital Trust, Inc. (the "Company") is anand its
subsidiaries unless the context specifically requires otherwise.
We are a finance and investment management and real estate
finance company that specializes in
providingoriginating and managing credit sensitive structured capital solutions to
owner/operators of commercial real estate. In December 2002, the Company's board
of directors authorized an election to be taxed as a real estate investment
trust ("REIT") for the 2003 tax year. The Companyfinancial products. We will
continue to make, for itsour own account and as investment manager for the account
of funds under management, loans and debt-related investments in various types
of commercial real estate assets and operating companies.
The Company's business strategy isOn April 2, 2003, our charter was amended and restated and then further amended
to expand its
investment management businesseliminate from our authorized stock the entire 100,000,000 shares of our
authorized but unissued class B common stock and to effect a one (1) for three
(3) reverse stock split of our class A common stock. Fractional shares resulting
from the reverse stock split were settled in cash at a rate of $16.65 multiplied
by sponsoring additionalthe percentage of a share owned after the split.
All per share information concerning the computation of earnings per share,
dividends per share, authorized stock, and per share conversion and exercise
prices reported in the accompanying consolidated interim financial statements
and these notes to consolidated financial statements have been adjusted as if
the amendments to our charter were in effect for all fiscal periods and as of
all balance sheet dates presented.
2. REIT Election
In December 2002, our board of directors authorized our election to be taxed as
a real estate investment trust ("REIT") for the 2003 tax year. We will continue
to make, for our own account and as investment manager for the account of funds
under management, credit sensitive structured financial products including loans
and expandingdebt-related investments in various types of commercial real estate.
In view of our election to be taxed as a REIT, we have tailored our balance
sheet investment program to originate or acquire loans and investments to
produce a portfolio that meets the scopeasset and income tests necessary to maintain
qualification as a REIT. In order to accommodate our REIT status, the legal
structure of its products.
The Company isfuture investment funds we sponsor may be different from the successorlegal
structure of our existing investment funds.
In order to Capital Trust,qualify as a California business trust,
following consummationREIT, five or fewer individuals may own no more than
50% of our common stock. As a means of facilitating compliance with such
qualification, shareholders controlled by John R. Klopp and Craig M. Hatkoff and
trusts for the benefit of the reorganization on January 28, 1999, pursuant to
which the predecessor ultimately merged with and into the Company, which
thereafter continued as the surviving Maryland corporation. Each outstanding
predecessor class A common sharefamily of beneficial interest was converted into one
shareSamuel Zell each sold 166,666 shares of
class A common stock par value $0.01 per share ("Class A Common
Stock"), and each outstanding predecessor class A 9.5% cumulative convertible
preferred shareto an institutional investor in a transaction that closed
on February 7, 2003. Following this transaction, our largest five individual
shareholders own in the aggregate less than 50% of beneficial interest was converted into one share of class A
9.5% cumulative convertible preferred stock, par value $0.01 per share ("Class A
Preferred Stock"), of the Company. As a result, all of the predecessor's
previously issued class A common shares of beneficial interest have been
reclassified as shares of Class A Common Stock and all of the predecessor's
previously issued class A preferred shares of beneficial interest have been
reclassified as shares of Class A Preferred Stock. Unless the context otherwise
requires, hereinafter references to the business, assets, liabilities, capital
structure, operations and affairs of the Company include those of the
predecessor prior to the reorganization.
2.stock.
3. Venture with Citigroup Alternative Investments Inc.LLC
On March 8, 2000, the Companywe entered into a venture with affiliates of Citigroup
Alternative Investments Inc. (collectively "Citigroup")LLC pursuant to which they agreed, among other things,
to co-sponsor and invest capital in a series of commercial real estate mezzanine
private equityinvestment funds managed by the
Company.us. Pursuant to the governing venture agreement, the Company andwhich was
amended in 2003, we have co-sponsored three funds with Citigroup formedAlternative
Investments; CT Mezzanine Partners I LLC, ("CT Mezzanine Partners II LP and CT
Mezzanine Partners III, Inc., which we refer to as Fund I")I, Fund II and Fund III,
respectively.
F-7
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Venture with Citigroup Alternative Investments LLC, continued
Fund I was formed in March 2000, to which a2000. An affiliate of Citigroup affiliateAlternative
Investments and aour wholly owned subsidiary, of the Company, as members thereof, made capital
commitments of up to $150 million and $50 million, respectively. PursuantDuring its
investment period, Fund I made approximately $330 million of investments. In
January 2003, we purchased the 75% interest in Fund I held by an affiliate of
Citigroup Alternative Investments for a purchase price of approximately $38.4
million (including the assumption of liabilities), equal to the venture agreement,book value of
the Companyfund. On January 31, 2003, we began consolidating the balance sheet and
Citigroup co-sponsored the
second commercial real estate mezzanine investment fund, CT Mezzanine Partnersoperations of Fund I in our consolidated financial statements.
Fund II LP ("was formed in April 2001. Fund II"), whichII effected its final closing on
third partythird-party investor equity commitments in August 2001. Fund II hashad total equity
commitments of $845.2 million including $49.7 million made by us and $198.9
million made by affiliates of Citigroup Alternative Investments. Third-party
private equity investors made the Companyremaining equity commitments. During its
investment period (April 9, 2001 to April 9, 2003), Fund II made approximately
$1.2 billion of investments.
Fund III was formed in June 2003. Fund III effected its final closing on
third-party investor equity commitments in August 2003. Fund III has total
equity commitments of $425 million including $20 million made by us and $80
million made by affiliates of Citigroup respectively. AAlternative Investments. Third-party
private equity investors made the remaining equity commitments. Through December
31, 2003, Fund III made approximately $213 million of investments.
Our wholly owned subsidiary, of the Company, CT Investment Management Co., LLC, ("CTIMCO"), serves as the
exclusive investment manager to Fund I, Fund II and Fund II.
Based upon the $845.2 million aggregate capital commitments made at the initial
and subsequent closings, the Company earned approximately $9.6 million of
management and advisory fees in 2002 from its management of Fund II. In November
2002, the general partner announced its intention to voluntarily reduce the
management fees charged to partners by 50% effective January 1, 2003.
F-7
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Venture with Citigroup Investments Inc., continuedIII.
In connection with entering into the organizationventure agreement and formation of Fund I,
the Companywe issued a warrant to affiliates of Citigroup Alternative Investments warrants to
purchase 4.25 million1,416,667 shares of Classclass A Common Stock.common stock. In connection with the
closings on third-party investor equity commitments to Fund II, the Company hadwe issued to
affiliates of Citigroup Alternative Investments warrants to purchase 4,278,4671,426,155
shares of its Classour class A Common
Stock.common stock. In total, the Companywe had issued to Citigroup four warrants to purchase
8,528,4672,842,822 shares of its Classour class A Common Stock whichcommon stock. The warrants had a $5.00$15.00 per
share exercise price and were exercisable and were to expireuntil expiration on March 8, 2005. The
CompanyWe
capitalized such costs thatthe value of the warrants at issuance and they are being amortized
over the anticipated lives of the Funds. The Company hasIn January 2003, we purchased all of
the outstanding warrants for $2.1 million. We had no further obligations to
issue additional warrants to Citigroup at December 31, 2002. In January 2003, the Company
purchased all of the outstanding warrants for $2.1 million.
3.2003.
4. Summary of Significant Accounting Policies
Principles of Consolidation
TheOur consolidated financial statements of the Company include our accounts and the accounts of
the
Company and itsour wholly owned subsidiaries, CTIMCOCT Investment Management Co. (as described in
Note 2)3), CT-F1, LLC (direct member and equity owner of Fund I), CT-F2-LP, LLC
(limited partner of Fund II), CT-F2-GP, LLC (direct member and equity owner of
Fund II GP), CT-BB Funding Corp. (financing(finance subsidiary for three mezzanine loans),
CT Convertible Trust I (as described in Note 13), CT LF Funding Corp. LLC
(financing(finance
subsidiary for all of the Company'sour CMBS securities), CT BSI Funding Corp. LLC and VIC, Inc.,
which together with the Companyus wholly owns Victor Capital Group, L.P. ("Victor Capital") and VCG Montreal
Management, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation.
F-8
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Summary of Significant Accounting Policies, continued
Revenue Recognition
Interest income for the Company's mortgage and otherour loans and investments is recognized over the life of the
investment using the effective interest method and recognized on the accrual
basis.
Fees received in connection with loan commitments, net of direct expenses, are
deferred until the loan is advanced and are then recognized over the term of the
loan as an adjustment to yield. Fees on commitments that expire unused are
recognized at expiration. Exit fees are also recognized over the estimated term
of the loan as an adjustment to yield.
Income recognition is generally suspended for loans at the earlier of the date
at which payments become 90 days past due or when, in the opinion of management,
a full recovery of income and principal becomes doubtful. Income recognition is
resumed when the loan becomes contractually current and performance is
demonstrated to be resumed.
Fees from investment management services are recognized when earned on an
accrual basis. Fees from professional advisory services are generally recognized
at the point at which all Company services have been performed and no
significant contingencies exist with respect to entitlement to payment. Fees
from asset management services are recognized as services are rendered.
Cash and Cash Equivalents
The Company classifiesWe classify highly liquid investments with original maturities of three months
or less from the date of purchase as cash equivalents. At December 31, 20022003 and
2001,2002, a majority of the cash and cash equivalents consisted of overnight
investments in JP Morgan commercial paper. The CompanyWe had no bank balances in excess of federally
insured amounts at December 31, 20022003 and 2001.
The Company has2002. We have not experienced any
losses on itsour demand deposits, commercial paper or money market investments.
F-8Available-for-Sale Securities and Commercial Mortgage-Backed Securities ("CMBS")
We have designated our investments in commercial mortgage-backed securities and
certain other securities as available-for-sale. Available-for-sale securities
are carried at estimated fair value with the net unrealized gains or losses
reported as a component of accumulated other comprehensive income/(loss) in
shareholders' equity. Many of these investments are relatively illiquid and
management must estimate their values. In making these estimates, management
utilizes market prices provided by dealers who make markets in these securities,
but may, under certain circumstances, adjust these valuations based on
management's judgment. Changes in the valuations do not affect our reported
income or cash flows, but impact shareholders' equity and, accordingly, book
value per share.
Management must also assess whether unrealized losses on securities reflect a
decline in value that is other than temporary, and, accordingly, write the
impaired security down to its fair value, through a charge to earnings. We have
assessed our securities to first determine whether there is an indication of
possible other than temporary impairment and then where an indication exists to
determine if other than temporary impairment did in fact exist. We expect a full
recovery from our securities and did not recognize any other than temporary
impairment. Significant judgment of management is required in this analysis that
includes, but is not limited to, making assumptions regarding the collectibility
of the principal and interest, net of related expenses, on the underlying loans.
F-9
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3.4. Summary of Significant Accounting Policies, continued
Available-for-Sale Securities
Available-for-saleIncome on these available-for-sale securities are reported on the consolidated balance sheet at
fair value with any corresponding temporary change in value reported as an
unrealized gain or loss (if assessed to be temporary), as a component of
comprehensive income in stockholders' equity, net of related income taxes.
Commercial Mortgage-Backed Securities ("CMBS")
Commercial mortgage-backed securities available-for-sale are reported on the
consolidated balance sheet at fair value with any corresponding temporary change
in value resulting in an unrealized gain/(loss) being reported as a component of
accumulated other comprehensive income/(loss) in the stockholders' equity
section of the balance sheet, net of related income taxes.
Income from CMBS is recognized based upon a number
of assumptions that are subject to uncertainties and contingencies. Examples of
these include, among other things, the rate and timing of principal payments,
including prepayments, repurchases, defaults and liquidations, the pass-through
or coupon rate and interest rate fluctuations. Additional factors that may
affect our reported interest income on our mortgage-backed securities include
interest payment shortfalls due to delinquencies on the effective interest method usingunderlying mortgage
loans and the anticipated yield overtiming and magnitude of credit losses on the expected lifemortgage loans
underlying the securities that are a result of the investments. Changes in yield
resulting from prepayments are recognized over the remaining lifegeneral condition of the investment. The Company recognizes impairmentreal
estate market, including competition for tenants and their related credit
quality, and changes in market rental rates. These uncertainties and
contingencies are difficult to predict and are subject to future events that may
alter the assumptions.
We adopted Emerging Issues Task Force 99-20, "Recognition of Interest Income and
Impairment on its CMBS whenever it determines
thatPurchased and Retained Beneficial Interests in Securitized
Financial Assets" on January 1, 2001. In accordance with this guidance, on a
quarterly basis, when significant changes in estimated cash flows from the impact of expected futurecash
flows previously estimated occur due to actual prepayment and credit losses, as currently projected,
exceedsloss
experience, we calculate a revised yield based on the impactcurrent amortized cost of
the expected future credit losses as originally projected.investment, including any other-than-temporary impairments recognized to
date, and the revised cash flows. The revised yield is then applied
prospectively to recognize interest income.
Impairment losses are determined by comparingof Available-for-Sale Securities and CMBS
In accordance with Statement of Financial Accounting Standards No. 115, when the
currentestimated fair value of a CMBSsecurity classified as available-for-sale has been
below amortized cost for a significant period of time and we conclude that we no
longer have the ability or intent to hold the security for the period of time
over which we expect the values to recover to amortized cost, the investment is
written down to its existing carrying amount,fair value. The resulting charge is included in income, and
a new cost basis established. Additionally, under Emerging Issues Task Force
99-20, when significant changes in estimated cash flows from the difference being recognized as acash flows
previously estimated occur due to actual prepayment and credit loss inexperience
and the present value of the revised cash flows using the current period inexpected yield
is less than the consolidated statements of operationspresent value of the previously estimated remaining cash flows,
adjusted for cash receipts during the intervening period, an
other-than-temporary impairment is deemed to have occurred. Accordingly, the
security is written down to fair value with the resulting change being included
in whichincome and a new cost basis established. In both instances, the lossoriginal
discount or premium is identified. Reduced estimates of credit losses are recognized
as an adjustment to yield overwritten off when the remaining lifenew cost basis is established.
After taking into account the effect of the portfolio.impairment charge, income is
recognized under Emerging Issues Task Force 99-20 or Statement of Financial
Accounting Standards No. 91, as applicable, using the market yield for the
security used in establishing the write-down.
Loans Receivable and Reserve for Possible Credit Losses
Loans receivable are reported on the consolidated balance sheet at the lowerWe purchase and originate commercial mortgage and mezzanine loans to be held as
long-term investments. Management must periodically evaluate each of cost or market. The provisionthese loans
for possible credit losses on loans receivableimpairment. Impairment is indicated when it is deemed probable that
we will not be able to collect all amounts due according to the contractual
terms of the loan. If a loan were determined to be permanently impaired, we
would write down the loan through a charge to income to increase the reserve for possible credit
losseslosses. Given the nature of our loan portfolio and the underlying commercial
real estate collateral, significant judgment of management is required in
determining permanent impairment and the resulting charge to the levelreserve, which
includes but is not limited to making assumptions regarding the value of the
real estate that secures the mortgage loan.
F-10
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Summary of Significant Accounting Policies, continued
Our accounting policies require that an allowance for estimated credit losses be
reflected in our financial statements based upon an evaluation of known and
inherent risks in our mortgage and mezzanine loans. While we have experienced
minimal actual losses on our lending investments, management estimatesconsiders it
prudent to be adequate considering delinquencies,reflect provisions for loan losses on a portfolio basis based upon
our assessment of general market conditions, our internal risk management
policies and credit risk rating system, industry loss experience, and collateral quality. Other factors considered relate to geographic
trends and product diversification, the sizeour assessment
of the portfoliolikelihood of delinquencies or defaults, and current
economic conditions. Based upon these factors, the Company establishes the
provision for possible credit losses by category of asset. When it is probable
that the Company will be unable to collect all amounts contractually due, the
account is considered impaired. Where impairment is indicated, a valuation
write-down or write-off is measured based upon the excess of the recorded
investment amount over the net fair value of the collateral
as reduced by
selling costs. Any deficiency between the carrying amount of an asset and the
net sales price of repossessed collateral is charged to the reserve for credit
losses.underlying our investments. Actual losses, if any, could ultimately differ from
these estimates.
Sales of Real Estate
The Company compliesWe comply with the provisions of the FASB's Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate." Accordingly, the
recognition of gains is deferred until such transactions have complied with the
criteria for full profit recognition under the statement.
Equity investmentinvestments in CT Mezzanine PartnersFund I, LLC ("Fund I"), CT Mezzanine
Partners II, LP ("Fund II") and CT MP II LLC ("(which we refer to as Fund
II GP") (together "Funds")GP) and Fund III (which together we refer to as Funds)
As the Funds are not majority owned or controlled by the Company, the Company
doesus, we do not consolidate
the Funds in itsour consolidated financial statements. The
Company accountsWe account for itsour interest
in the Funds on the equity method of accounting. As such, the Company reportswe report a percentage
of the earnings of the Funds equal to itsour ownership percentage on a single line
item in the consolidated statement of operations as income from equity
investments in the Funds.
F-9
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies, continued
Derivative Financial Instruments
In the normal course of business, the Company useswe use a variety of derivative financial
instruments to manage, or hedge, interest rate risk. The Company
requiresThese derivative financial
instruments tomust be effective in reducing its interest rate risk exposure. This effectiveness is essential for qualifyingexposure in
order to qualify for hedge accounting. When the terms of an underlying
transaction are modified, or when the underlying hedged item ceases to exist,
all changes in the fair value of the instrument are marked-to-market with
changes in value included in net income each period until the derivative
instrument matures or is settled. Any derivative instrument used for risk
management that does not meet the hedging criteria is marked-to-market with the
changes in value included in net income.
The Company usesWe use interest rate swaps to effectively convert variable rate debt to fixed
rate debt for the financed portion of fixed rate assets. The differential to be
paid or received on these agreements is recognized as an adjustment to the
interest expense related to debt and is recognized on the accrual basis.
The CompanyWe have also usesused interest rate caps to reduce itsour exposure to interest rate
changes on investments. The Company will receiveWe would have received payments on an interest rate cap
shouldif the variable rate for which the cap was purchased exceed a specified
threshold level and will bewould have recorded as an adjustment to the interest income
related to the related earning asset. We had no interest rate caps in place at
December 31, 2003.
To determine the fair values of derivative instruments, the Company useswe use a variety of
methods and assumptions that are based on market conditions and risks existing
at each balance sheet date. For the majority of financial instruments including
most derivatives, long-term investments and long-term debt, standard market
conventions and techniques such as discounted cash flow analysis, option pricing
models, replacement cost, and termination cost are used to determine fair value.
All methods of assessing fair value result in a general approximation of value,
and such value may never actually be realized.
The swap and cap agreements are generally held-to-maturity and the Company doeswe do not use
derivative financial instruments for trading purposes.
F-11
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Summary of Significant Accounting Policies, continued
Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements, net, are stated at original cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method based on the estimated lives of the depreciable assets.
Amortization is computed over the remaining terms of the related leases.
Expenditures for maintenance and repairs are charged directly to expense at the
time incurred. Expenditures determined to represent additions and betterments
are capitalized. Cost of assets sold or retired and the related amounts of
accumulated depreciation are eliminated from the accounts in the year of sale or
retirement. Any resulting profit or loss is reflected in the consolidated
statement of operations.
Deferred Debt IssuanceFinancing Costs
The Company capitalizesdeferred financing costs incurredwhich are included in other assets on our
consolidated balance sheets include issuance costs related to the issuance of long-term
debt. These costs are deferred and reported on balance sheet in the caption
deferred origination fees and other revenueour debt and are
amortized on a straight-line
basis overusing the lifestraight line method which is similar to the results of the
related debt, which approximateseffective interest method.
Accounting for Stock-Based Compensation
We comply with the level-yieldprovisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Statement of Financial Accounting Standards No. 123 encourages
the adoption of a new fair-value based accounting method for employee
stock-based compensation plans. Statement of Financial Accounting Standards No.
123 also permits companies to continue accounting for stock-based compensation
plans as prescribed by Accounting Principles Board Opinion No. 25. However,
companies electing to continue accounting for stock-based compensation plans
under Accounting Principles Board Opinion No. 25, must make pro forma
disclosures as if we adopted the cost recognition requirements under Statement
of Financial Accounting Standards No. 123. We have continued to account for
stock-based compensation under Accounting Principles Board Opinion No. 25.
Accordingly, no compensation cost has been recognized for the incentive stock
plan or the director stock plan in the accompanying consolidated statements of
operations as the exercise price of the stock options granted thereunder equaled
the market price of the underlying stock on the date of the grant.
Pro forma information regarding net income and recognized asnet earnings per common share has
been estimated at the date of the grant using the Black-Scholes option-pricing
model based on the following assumptions for the years ended December 31, 2002
and 2001 (no options were granted during the year ended December 31, 2003):
2002 2001
---------------- ---------------
Risk-free interest rate 4.30% 4.75%
Volatility 25.0% 25.0%
Dividend yield 0.0% 0.0%
Expected life (years) 5.0 5.0
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in our opinion, the existing
models do not necessarily provide a componentreliable single measure of interest expense.
F-10the fair value of
our employee stock options. Weighted average fair value of each stock option
granted during the years ended December 31, 2002 and 2001 were $1.64 and $1.47,
respectively.
F-12
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3.4. Summary of Significant Accounting Policies, continued
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Our pro forma
information for the years ended December 31, 2003, 2002 and 2001 is as follows
(in thousands, except for net earnings (loss) per share of common stock):
2003 2002 2001
---------------------------------------------------------------
As As As
reported Pro forma reported Pro forma reported Pro forma
--------- ---------- --------- ---------- ---------- ----------
Net income $13,525 $13,280 $(9,738) $(10,038) $ 9,370 $ 9,043
Net earnings per share
of common stock:
Basic $ 2.27 $ 2.23 $ (0.54) $ (0.56) $ 0.43 $ 0.42
Diluted $ 2.23 $ 2.21 $ (0.54) $ (0.56) $ 0.37 $ 0.36
The pro forma information presented above is not representative of the effect
stock options will have on pro forma net income or earnings per share for future
years.
Income Taxes
The Company records its income taxes in accordance with the FASB's Statement of
Financial Accounting Standards No. 109, "AccountingOur financial results generally do not reflect provisions for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109,current or
deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying statutory tax rates for
future yearson our REIT taxable income. Management believes that we
have and intend to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Deferred tax assets are
recognized for temporary differencescontinue to operate in a manner that will result in deductible amounts in
future years and for carryforwards that are useable in future years. A valuation
allowance is recognized if it is more likely than not that some portion of the
deferred asset will notcontinue to allow
us to be recognized. When evaluating whether a valuation
allowance is appropriate, SFAS No. 109 requires a company to consider such
factors as previous operating results, future earning potential, tax planning
strategies and future reversals of existing temporary differences. The valuation
allowance is increased or decreased in future years based on changes in these
criteria.
Amortization of the Excess of Purchase Price Over Net Tangible Assets Acquired
The Company recognized the excess of purchase price over net tangible assets
acquired in a business combination accounted fortaxed as a purchase transactionREIT and, is amortizing it onas a straight-line basis over a periodresult, do not expect to pay substantial
corporate-level taxes (other than taxes payable by our taxable REIT
subsidiaries). Many of 15 years. The
carrying value of the excess of purchase price over net tangible assets acquired
was analyzed quarterly by the Company based upon the expected revenuethese requirements, however, are highly technical and
profitability levels of the acquired enterprisecomplex. If we were to determine whether the value
and future benefit may indicate a decline in value. The Company determined that
there had been a decline in the value of the acquired enterprise and wrote down
the value of the excess of purchase price over net tangible assets acquiredfail to the revised fair value in 2000.meet these requirements, we would be subject to
Federal income tax.
Comprehensive Income
Effective January 1, 1998, the Companywe adopted the FASB's Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
The statement changes the reporting of certain items currently reported in the
stockholders'shareholders' equity section of the balance sheet and establishes standards for
reporting of comprehensive income and its components in a full set of
general-purpose financial statements. Total comprehensive income/(loss) was
$8,633,000, ($8,817,000), and ($9,813,000) and $9,773,000 for the years ended December 31, 2003,
2002 2001 and 2000,2001, respectively. The primary component of comprehensive income other
than net income was the unrealized gain/(loss) on derivative financial
instruments and available-for-sale securities, net of related income taxes. At
December 31, 2002,2003, accumulated other comprehensive loss is comprised of
unrealized losses on CMBS of $29,402,000$34,809,000 and unrealized lossesgains on cash flow swaps
of $1,822,000$168,000 offset by unrealized gains on available-for saleavailable-for-sale securities of
$2,236,000$761,000 netting to a total of $28,988,000.$33,880,000.
F-13
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Summary of Significant Accounting Policies, continued
Earnings per Share of Common Stock
Earnings per share of Common Stockcommon stock are presented based on the requirements of
the FASB's Statement of Accounting Standards No. 128 ("SFAS No. 128"). Basic EPS
is computed based on the income applicable to Common Stockcommon stock (which is net income
or loss reduced by the dividends on the Preferred Stock)preferred stock) divided by the weighted
average number of shares of Common Stockcommon stock outstanding during the period. Diluted
EPS is based on the net earnings applicable to Common Stockcommon stock plus, if dilutive,
dividends on the Preferred Stockpreferred stock and interest paid on Convertible Trust
Preferred Securities,convertible trust
preferred securities, net of tax benefit, divided by the weighted average number of
shares of Common Stockcommon stock and potentially dilutive shares of Common Stockcommon stock that were
outstanding during the period. At December 31, 2003, potentially dilutive shares
of common stock include convertible trust preferred securities, dilutive common
stock options. At December 31, 2002, potentially dilutive shares of Common Stockcommon stock
include convertible trust preferred securities, dilutive Common Stockcommon stock warrants
and options and future commitments for stock unit awards. At December 31, 2001,
potentially dilutive shares of Common Stockcommon stock include the convertible Preferred
Stock, convertible trust preferred securities, dilutive Common Stockcommon stock warrants
and options and future commitments for stock unit awards. At December 31, 2000, potentially dilutive shares of Common Stock
include the convertible Preferred Stock, Convertible Trust Preferred Securities
and future commitments for stock unit awards.
F-11
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. 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 and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in the presentation of the 20012002 and
20002001 consolidated financial statements to conform to the 20022003 presentation.
Segment Reporting
AsWe have established two reportable segments beginning January 1, 2003. We have
an internal information system that produces performance and asset data for its
two segments along service lines.
The Balance Sheet Investment segment includes all of our activities related to
direct loan and investment activities (including direct investments in Funds)
and the Company managesfinancing thereof.
The Investment Management segment includes all of our activities related to
investment management services provided to us and funds under management and
includes our taxable REIT subsidiary, CT Investment Management Co., and its
subsidiaries.
Prior to January 1, 2003, we managed our operations as one segment, therefore
separate segment reporting is not presented for 2002 2001 and 2000,2001, as the financial
information for that segment is the same as the information in the consolidated
financial statements.
F-14
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Summary of Significant Accounting Policies, continued
New Accounting PronouncementPronouncements
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This statement is
applicable for transfers of assets and extinguishments of liabilities occurring
after June 30, 2001. We adopted the provisions of this statement as required for
all transactions entered into on or after January 1, 2001. Our adoption of
Statement of Financial Accounting Standards No. 140 did not have a significant
impact on us.
On January 1, 2001, we adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by Statement of Financial Accounting Standards No. 137 and Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." Statement of Financial Accounting
Standards No. 133, as amended, establishes accounting and reporting standards
for derivative instruments. Specifically Statement of Financial Accounting
Standards No. 133 requires an entity to recognize all derivatives as either
assets or liabilities in the consolidated balance sheets and to measure those
instruments at fair value. Additionally, the fair value adjustments will affect
either shareholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes and, if so, the nature
of the hedging activity. As of January 1, 2001, the adoption of the new standard
resulted in an adjustment of $574,000 to accumulated other comprehensive loss.
In the case of the fair value hedge, we hedged the component of interest rate
risk that can be directly controlled by the hedging instrument, and it is this
portion of the hedge assets that was being recognized in earnings. Mark to
market on non-hedged available for sale securities and non-hedged aspect of CMBS
are reported in accumulated in other comprehensive income. Financial reporting
for hedges characterized as fair value hedges and cash flow hedges are
different. For those hedges characterized as a fair value hedge, the changes in
fair value of the hedge and the hedged item are reflected in earnings each
quarter. In the case of the fair value hedge, we hedged the component of
interest rate risk that can be directly controlled by the hedging instrument,
and it was this portion of the hedged assets that is recognized in earnings. The
non-hedged balance is classified as an available-for-sale security consistent
with Statement of Financial Accounting Standards No. 115, and was reported in
accumulated other comprehensive income. For those hedges characterized as cash
flow hedges, the unrealized gains/losses in the fair value of these hedges were
reported on the balance sheet with a corresponding adjustment to either
accumulated other comprehensive income or to earnings, depending on the type of
hedging relationship. We discontinued our fair value hedge transaction in 2002.
In accordance with Statement of Financial Accounting Standards No. 133, on
December 31, 2003, the derivative financial instruments were reported at their
fair value as interest rate hedge assets of $168,000.
We are exposed to credit loss in the event of non-performance by the
counterparties to the interest rate swap and cap agreements, although we do not
anticipate such non-performance. The counterparties would bear the interest rate
risk of such transactions as market interest rates increase.
In July 2001, the SEC released Staff Accounting Bulletin No. 102, "Selected Loan
Loss Allowance and Documentation Issues." Staff Accounting Bulletin No. 102
summarizes certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses. Our adoption of Staff Accounting Bulletin No. 102 did not have a
significant impact on us.
F-15
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Summary of Significant Accounting Policies, continued
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Statement of Financial Accounting Standards No. 141 requires the purchase method
of accounting to be used for all business combinations initiated after June 30,
2001. Statement of Financial Accounting Standards No. 141 also addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in business combinations and requires intangible assets to be
recognized apart from goodwill if certain tests are met. Statement of Financial
Accounting Standards No. 142 requires that goodwill not be amortized but instead
be measured for impairment at least annually, or when events indicate that there
may be an impairment. We adopted the provisions of both statements, as required,
on January 1, 2002, which did not have a significant impact on us.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Statement of Financial Accounting Standards No.
144 provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of, and also broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. Statement of Financial
Accounting Standards No. 144 requires that current operations prior to the
disposition of corporate tenant lease assets and prior period results of such
operations be presented in discontinued operations in our consolidated
statements of operations. The provisions of Statement of Financial Accounting
Standards No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and must be applied at the beginning of a
fiscal year. We adopted the provisions of this statement on January 1, 2002, as
required, which did not have a significant financial impact on us.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," an interpretation of
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 5, "Accounting for Contingencies," Statement of Financial Accounting
Standards No. 57, "Related Party Disclosures," Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments" and
rescission of Financial Accounting Standards Board Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others, an Interpretation
of Statement of Financial Accounting Standards No. 5." It requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee regardless of whether
the guarantor receives separately identifiable consideration, such as a premium.
The new disclosure requirements are effective December 31, 2002. Our adoption of
Interpretation No. 45 did not have a material impact on our consolidated
financial statements, nor is it expected to have a material impact in the
future.
F-16
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Summary of Significant Accounting Policies, continued
In January 2003, the FASBFinancial Accounting Standards Board issued Interpretation
No. 46,"Consolidation "Consolidation of Variable Interest Entities" (the "Interpretation"),Entities," an interpretation of
Accounting Research Bulletin 51. Interpretation No. 46 provides guidance on
identifying entities for which provides new criteriacontrol is achieved through means other than
through voting rights, and how to determine when and which business enterprise
should consolidate a variable interest entity. In addition, Interpretation No.
46 requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a variable interest entity make additional
disclosures. The transitional disclosure requirements took effect almost
immediately and are required for determining whether or not consolidation accounting is required.all financial statements initially issued after
January 31, 2003. In December 2003, the Financial Accounting Standards Board
issued a revision of Interpretation No. 46, Interpretation No. 46R, to clarify
the provisions of Interpretation No. 46. The application of Interpretation may require the Company to consolidate financial information for
certain of its investments/managed entities. This Interpretation generallyNo.
46R is effective for entities with variablepublic companies, other than small business issuers, after
March 15, 2004. We have evaluated all of our investments and other interests in
entities that may be deemed variable interest entities createdunder the provisions of
Interpretation No. 46. We have concluded that no additional entities need to be
consolidated. Commencing with financial statements for periods ending after
January 31, 2003; otherwise, it is applicableMarch 15, 2004, we will deconsolidate CT Convertible Trust I. The
deconsolidation should not result in a significant impact to us.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
statement is effective for financial instruments entered into and modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim or annual reporting
period beginning after June 15, 2003. If applicable,It is to be implemented by reporting the
Interpretation would require consolidationcumulative effect of a change in an investee's/managed entity's
assetsaccounting principle of financial
instruments created before the issuance date of the statement and liabilities and resultsstill existing
at the beginning of operations, with minority interest
recorded for the ownership share applicable to other investors. Where
consolidation isinterim period of adoption. The implementation of the
statement did not required, additional disclosures may be required.
4.have a material impact on the Company.
5. Available-for-Sale Securities
At December 31, 2002, the Company's2003, our available-for-sale securities consisted of the
following (in thousands):
Gross
Amortized Unrealized Estimated
---------------------------------
Cost Gains Losses Fair Value
---------------------------------------
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 1, 2031 $ 2,368 $ 89 $ -- $ 2,457
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 1, 2031 8,418 269 -- 8,687
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 1, 2031 721 28 -- 749
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due April 1, 2032 7,784 375 -- 8,159
---------------------------------------
$ 19,291 $ 761 $ -- $ 20,052
=======================================
We purchased the securities due September 1, 2031 on September 28, 2001 at a
premium to yield 6.07% with an anticipated average life of 5.15 years with
financing provided by the seller through a repurchase agreement.
F-17
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Available-for-Sale Securities, continued
We purchased the security due April 1, 2032 in March 2002 at a discount with
seller provided financing through a repurchase agreement.
At December 31, 2002, our available-for-sale securities consisted of the
following (in thousands):
Gross
Amortized Unrealized Estimated
----------------
Cost Gains Losses Fair Value
---------------------------------------
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 1, 2031 $ 6,513 $ 213 $ -- $ 6,726
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 1, 2031 31,017 936 -- 31,953
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 1, 2031 1,770 60 -- 1,830
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due April 1, 2032 23,698 1,026 -- 24,724
---------------------------------------
$ 62,998 $ 2,235 $ -- $65,233$ 65,233
=======================================
The Company purchased the security due April 1, 2032 in March 2002 at a discount
with seller provided financing through a repurchase agreement.
The CompanyWe sold three securities due September 1, 2031 in June 2002 with an amortized
cost of $75,006,000 for $75,358,000 resulting in a total gain of $352,000.
F-12
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Available-for-Sale Securities, continued
At December 31, 2001, the Company's available-for-sale securities consisted of
the following (in thousands):
Gross
Amortized Unrealized Estimated
-----------------
Cost Gains Losses Fair Value
---------------------------------------
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September $ 9,309 $-- $ 107 $ 9,202
1, 2031
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 59,574 -- 733 58,841
1, 2031
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 8,086 -- 93 7,993
1, 2031
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 19,014 -- 220 18,794
1, 2031
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 56,570 -- 659 55,911
1, 2031
Federal Home Loan Mortgage Corporation Gold,
fixed rate interest at 6.50%, due September 2,072 -- 24 2,048
1, 2031
---------------------------------------
$154,625 $-- $1,836 $152,789
=======================================
The Company purchased these securities on September 28, 2001 at a premium to
yield 6.07% with an anticipated average life of 5.15 years with financing
provided by the seller through a repurchase agreement.
During the year ended December 31, 2000, the Company sold its then entire
portfolio of available-for sale securities at a gain of $35,000 over their
amortized cost. The cost of securities sold was determined using the specific
identification method.
5.6. Commercial Mortgage-Backed Securities
The Company pursuesWe acquire rated and unrated subordinated investments in public and private subordinated interests ("Subordinated Interests") in CMBS.CMBS
issues.
Because of a decision to sell a held-to-maturity security in 1998, the Companywe
transferred all of itsour investments in commercial mortgage-backed securities from
held-to-maturity securities to available-for-sale and continuescontinue to classify the
CMBS as such.
During the year ended December 31, 1998, the Companywe purchased $36,509,000 face amount of
interests in three subordinated CMBS issued by a financial asset securitization investment
trust for $36,335,000. In April 2001, the Companywe received $1.4 million of additional
discount from the issuer of the securities in settlement of a dispute with the
issuer. In May 2002, the Companywe received full satisfaction of $36,509,000 face amount of interests in three subordinated
CMBS issued by a financial asset securitization investment trust.$36,509,000. In connection
with the early payoff, the Companywe recognized an additional $370,000 of unamortized
discount as additional interest income in 2002.
F-13
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Commercial Mortgage-Backed Securities, continued
On March 3, 1999, the Company, through itsour then newly formed wholly owned subsidiary, CT-BB
Funding Corp., we acquired a portfolio of fixed-rate "BB" rated CMBS (the "BB CMBS Portfolio") from an
affiliate of ana then existing credit facility lender. The portfolio, which is
comprised of 11 separate issues with an aggregate face amount of $246.0 million,
was purchased for $196.9 million. In connection with the transaction, an
affiliate of the seller provided three-year term financing for 70% of the
purchase price at a floating rate above the London Interbank Offered Rate, ("LIBOR")or
LIBOR, and entered into an interest rate swap with the
Company for the full duration of the
BB CMBS Portfolioportfolio securities thereby providing a hedge for interest rate risk. The
financing was provided at a rate that was below the current market for similar
financings and, as such, we reduced the carrying amountamounts of the assets and the
debt were reduced by $10.9 million to adjust the yield on the debt to current market terms.
In June 2002, three sales of CMBS in two issues were completed. The securities,
which had a basis of $31,012,000 including amortization of discounts, were sold
for $31,371,000 resulting in a net gain of $359,000.
The remaining BBDuring the year ended December 31, 2003, we purchased $6,542,000 face amount of
interests in two CMBS Portfolio securities bearissues for $6,157,000.
F-18
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Commercial Mortgage-Backed Securities, continued
At December 31, 2003, ten CMBS issues with an aggregate market value of $128.9
million and unrealized losses of $35.0 million have been in an unrealized loss
position for greater than twelve months. We believe that these market value
losses are temporary. We do not expect any actual losses in the classes of the
bonds that we hold and expect the value of the individual bonds will increase as
currently delinquent loans are resolved and the bonds approach maturity.
At December 31, 2003, we have CMBS totaling $158,136,000 of which $153,136,000
earn interest (including the accretion of the discounted purchase price) at
fixed rates that
have an average face rateaveraging 11.88% of 7.63% on the face amountbook value and $5,000,000 earn interest at
variable rates averaging LIBOR plus 2.95% (4.11% at December 31, 2003). The CMBS
mature at various dates from February 2006August 2004 to March 2015.December 2014. At December 31, 2002,2003,
the expected average life for the CMBS portfolio is 9.17.8 years.
After giving effect to the
discounted purchase price, the fair value adjustment and the adjustment of the
carrying amount of the assets to bring the debt to current market terms, the
weighted average interest rate in effect for the BB CMBS Portfolio at December
31, 2002 was 13.66%.
6.7. Loans Receivable
The Company currently pursues lending opportunities designed to capitalize on
inefficiencies in the real estate capital, mortgage and finance markets. The
Company hasWe have classified itsour loans receivable into the following general categories:
o First Mortgage Loans. The Company originates or acquiresLoans - These are single-property secured loans
evidenced by a primary first mortgage and senior to any mezzanine
financing and junior
mortgagethe owner's equity. These loans ("Mortgage Loans") to commercial real estate owners and
property developersare bridge loans for
equity holders who require interim financing until permanent
financing can be obtained. The Company's Mortgage LoansOur first mortgage loans are generally
not intended to be permanent in nature, but rather are intended to
be of a relatively short-term duration, with extension options as
deemed appropriate, and typically require a balloon payment of
principal at maturity. The CompanyWe may also originate and fund permanent
Mortgage
Loansfirst mortgage loans in which the Company intendswe intend to sell the senior
tranche, thereby creating a Mezzanine Loanproperty mezzanine loan (as defined
below).
o Property Mezzanine Loans. The Company originates or acquires high-yieldingLoans - These are single-property secured loans
thatwhich are subordinate to a primary first lien mortgage loansloan, but senior
to the owner's equity. A mezzanine loan is evidenced by its own
promissory note and is typically made to the owner of the
property-owning entity (i.e. the senior loan borrower). It is not
secured by the first mortgage on commercial
real estate and are secured eitherthe property, but by a second lien mortgage or a pledge of
all of the mezzanine borrower's ownership interestsinterest in the
borrowingproperty-owning entity. Subject to negotiated contractual
restrictions, the mezzanine lender has the right, following
foreclosure, to become the sole indirect owner of the property
owner
("Mezzanine Loans"). Generally,subject to the Company'slien of the primary mortgage.
o B Notes - These are loans evidenced by a junior participation in a
first mortgage against a single property; the senior participation
is known as an A Note. Although a B Note may be evidenced by its
own promissory note, it shares a single borrower and mortgage with
the A Note and is secured by the same collateral. B Note lenders
have the same obligations, collateral and borrower as the A Note
lender and in most instances are contractually limited in rights
and remedies in the case of a default. The B Note is subordinate
to the A Note by virtue of a contractual arrangement between the A
Note lender and the B Note lender. For the B Note lender to
actively pursue a full range of remedies, it must, in most
instances, purchase the A note.
o Corporate Mezzanine Loans have a
longer anticipated duration than its Mortgage Loans,- These are not intended
to serve as transitional mortgage financing and can represent
subordinated investments in or loans to
real estateestate-related operating companies, which mayincluding REITs. Such
loan investments take the form of secured or unsecured debt preferredand may finance,
among other things, operations, mergers and acquisitions,
management buy-outs, recapitalizations, start-ups and stock
buy-backs generally involving real estate and other
hybrid instruments.
o Other Loans Receivable. This classification includes other loans not
meeting the above criteria.
At December 31, 2002 and 2001, the Company's loans receivable consisted of the
following (in thousands):
2002 2001
---------------- ---------------
Mortgage Loans $ 15,202 $ 69,998
Mezzanine Loans 98,268 142,160
Other loans receivable 7,859 49,625
---------------- ---------------
121,329 261,783
Less: reserve for possible credit losses (4,982) (13,695)
---------------- ---------------
Total loans $ 116,347 $ 248,088
================ ===============
F-14real estate-related
entities.
F-19
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6.7. Loans Receivable, continued
At December 31, 2003 and 2002, our loans receivable consisted of the following
(in thousands):
2003 2002
---------------- ---------------
First mortgage loans $ 12,672 $ 15,202
Property mezzanine loans 106,449 98,268
B Notes 64,600 --
Corporate mezzanine loans -- 7,859
---------------- ---------------
183,721 121,329
Less: reserve for possible credit losses (6,672) (4,982)
---------------- ---------------
Total loans $ 177,049 $ 116,347
================ ===============
In connection with our purchase of the Fund I interest held by an affiliate of
Citigroup Alternative Investments in January 2003, we recorded additional loans
receivable of $50,034,000 and recorded a $1,690,000 increase to the reserve for
possible credit losses on the acquisition date. The assets were recorded at
their carrying value from Fund I, which approximated the market value on the
acquisition date.
One Mortgage Loan receivablefirst mortgage loan with an original principal balance of $8,000,000 reached
maturity on July 15, 2001 and has not been repaid with respect to principal and
interest. In December 2002, the loan was written down to $4,000,000 through a
charge to the allowance for possible credit losses. During the year ended
December 31, 2003, we received proceeds of $731,000 reducing the carrying value
of the loan to $3,269,000. In accordance with the Company'sour policy for revenue
recognition, income recognition has been suspended on this loan and for the
years ended December 31, 2003, 2002 and 2001, $912,000, $958,000 and 2000, $958,000, $1,144,000, and $791,000,
respectively, of potential interest income has not been recorded.
During the year ended December 31, 2000,2003, we purchased or originated three
property mezzanine loans for $35,000,000 and six B Notes for $64,600,000,
received partial repayments on eight mortgage and property mezzanine loans
totaling $18,449,000 and received three property mezzanine loans satisfactions
and one other loan receivable, originated
by the former management of the Company's predecessor REIT operations, with a
net investment of $136,000, was past-due more than 90 days and was written-off.
The net investment prior to the write-off included the loan balance of $915,000
offset by $779,000 of non-recourse financing of the asset. After the write-off,
both the loan receivable and the non-recourse financing were carried at $779,000
until the non-recourse note payable was foreclosed upon on January 17, 2001. The
loan was originated during the Company's prior operations as a REIT to
facilitate the disposal of a previously foreclosed-upon asset. In accordance
with the Company's policy for revenue recognition, income recognition was
suspended on this loan and for the year ended December 31, 2000, $76,000 of
potential interest income was not recorded.
During the year ended December 31, 2002, the Company provided no additional
fundings on loans originated in prior periods and hassatisfaction totaling $68,761,000. We have no outstanding
loan commitments at December 31, 2002.2003.
At December 31, 2002,2003, the weighted average interest rate in effect, including
amortization of fees and premiums, for the Company'sour performing loans receivable waswere as
follows:
Mortgage Loans 10.27%
Mezzanine Loans 11.23%
OtherFirst mortgage loan 10.51%
Property mezzanine loans receivable 13.66%10.14%
B Notes 6.62%
Total Loans 11.31%8.90%
At December 31, 2002, $28,283,000 (24%2003, $119,405,000 (66%) of the aforementioned performing loans
bear interest at floating rates ranging from LIBOR plus 525235 basis points to
LIBOR plus 875900 basis points. The remaining $89,046,000 (76%$61,046,000 (34%) of loans bear
interest at fixed rates ranging from 11.62% to 12.00%11.67%.
The range of maturity dates and weighted average maturity at December 31, 20022003
of the Company'sour performing loans receivable was as follows:
Weighted
Average
Range of Maturity Dates Maturity
---------------------------------------------------------------- ------------
Mortgage LoansFirst mortgage loans December 20032004 11 Months
Mezzanine Loans May 2007Property mezzanine loans July 2005 to July 2009 6855 Months
Other loans receivableB Notes January 2006 to August 2003 72008 47 Months
Total Loans August 2003December 2004 to July 2009 5850 Months
F-20
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Loans Receivable, continued
At December 31, 2002,2003, there are two loans secured by office buildings in New
York City to a related group of borrowers totaling $73.8$61.0 million or
approximately 19.2%15.4% of total assets. For the year ended December 31, 2002,2003, total
gross revenues, total operating expenses and net income before capital
improvements on the twothree buildings total $46.6$61.1 million, $8.7$25.5 million and $4.6$35.6
million, respectively (unaudited). There are no other loans to a single borrower
or to related groups of borrowers that exceed ten percent of total assets.
Approximately 85%48% of all performing loans are secured by properties in New York.
Approximately 76%45% of all performing loans are secured by office buildings. These
credit concentrations are adequately collateralized as of December 31, 2002.
F-15
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Loans Receivable, continued2003.
In connection with the aforementioned loans, at December 31, 2003 and 2002, and 2001, the
Company haswe
have deferred origination fees, net of direct costs of $160,000$828,000 and $1,202,000,$160,000,
respectively, that are being amortized into income over the life of the loan. At
December 31, 2003 and 2002, and 2001, the Company haswe have also recorded $1,694,000$86,000 and $372,000,$1,694,000,
respectively, of exit fees, which will be collected at the loan pay-off. These
fees are recorded as interest income on a basis to realize a level yield over
the life of the loans.
As of December 31, 2002,2003, performing loans totaling $117,329,000$170,451,000 are pledged as
collateral for borrowings on the Company'sour credit facility, repurchase agreements and term
redeemable securities contract.
The Company hasWe have established a reserve for possible credit losses on loans receivable as
follows (in thousands):
2002 2001 2000
------------ ------------ -----------
2003 2002 2001
------------ ------------ ------------
Beginning balance $13,695 $12,947 $ 7,605
Provision for (recapture of)
allowance for possible credit losses (4,713) 748 5,478
Amounts charged against reserve for
possible credit losses (4,000) -- (136)
------------ ------------ -----------
Ending balance $ 4,982 $13,695 $12,947
Provision for (recapture of) allowance
for possible credit losses -- (4,713) 748
Additional reserve established with
Fund I purchase 1,690 -- --
Amounts charged against reserve for
possible credit losses -- (4,000) --
------------ ------------ ------------
Ending balance $ 6,672 $ 4,982 $13,695
============ ============ ============
===========
7.
8. Equity investmentInvestment in Funds
CT Mezzanine Partners LLC ("Fund I")I
As part of the venture with Citigroup Alternative Investments, as described in
Note 2, the Company3, we held an equity investment in Fund I during the years ended December
31, 2003, 2002 2001
and 2000.2001. The activity for theour equity investment in Fund I for
the years ended December 31, 2003, 2002 2001 and 20002001 is as follows (in thousands):
2002 2001 2000
------------ ------------ ------------
Beginning balance $24,983 $26,011 $ --
Capital contributions to Fund I -- 25,331 33,214
Company portion of Fund I income /
(loss) (4,345) 2,934 1,530
Costs capitalized for investment
in Fund I -- -- 4,752
Amortization of capitalized costs (476) (477) (378)
Distributions from Fund I (10,133) (28,816) (13,107)
------------ ------------ ------------
Ending balance $10,029 $24,983 $26,011
2003 2002 2001
------------ ------------ ------------
Beginning balance $ 6,609 $21,087 $21,638
Capital contributions to Fund I -- -- 25,331
Company portion of Fund I income / (loss) 143 (4,345) 2,934
Distributions from Fund I -- (10,133) (28,816)
Purchase of remaining fund equity (6,752) -- --
------------ ------------ ------------
Ending balance $ -- $ 6,609 $21,087
============ ============ ============
As of December 31, 2002, Fund I hashad loans outstanding totaling $50,237,000, all
of which arewere performing in accordance with the terms of the loan agreements.
One loan for $26.0 million, which was in default and for which the accrual of
interest had been suspended, was written down to $212,000 and distributed
pro-rata to the members in December 2002. Upon receipt of our share of the loan
with a face amount of $6,500,000, the Companywe disposed of the asset.
For the years ended December 31, 2002, 2001F-21
Capital Trust, Inc. and 2000, the Company received
$530,000, $765,000 and $373,000, respectively, of fees for management of Fund I.Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Equity investment in Funds, continued
On January 31, 2003, the Companywe purchased from affiliatesan affiliate of Citigroup theirAlternative
Investments its 75% interestsinterest in Fund I for $38.4 million (including the
assumption of liabilities). As of January 31, 2003, the Company will consolidatewe began consolidating the
operations of Fund I in itsour consolidated financial statements.
F-16
Capital Trust, Inc.For the years ended December 31, 2003, 2002 and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Equity investment in Funds, continued
CT Mezzanine Partners2001, we received $17,000,
$530,000 and $765,000, respectively, of fees for management of Fund I.
Fund II
LP ("Fund II")
The CompanyWe had equity investments in Fund II during the years ended December 31, 2003,
2002 and 2001. The Company accountsWe account for Fund II on the equity method of accounting as the Company haswe
have a 50% ownership interest in the general partner of Fund II. The activity
for theour equity investment in Fund II for the years ended December 31, 2003, 2002
and 2001 is as follows (in thousands):
2002 2001
------------ ------------
Beginning balance $10,571 $ --
Capital contributions to Fund II 5,150 7,097
Company portion of Fund II income 1,810 54
Costs capitalized for investment in
Fund II -- 3,776
Amortization of capitalized costs (378) (229)
Distributions from Fund II (1,707) (127)
------------ ------------
Ending balance $15,446 $10,571
2003 2002 2001
------------ ------------ ------------
Beginning balance $12,277 $ 7,024 $ --
Capital contributions to Fund II 5,459 5,150 7,097
Company portion of Fund II income 2,144 1,810 54
Distributions from Fund II (10,671) (1,707) (127)
------------ ------------ ------------
Ending balance $ 9,209 $12,277 $ 7,024
============ ============ ============
As of December 31, 2002,2003, Fund II has loans and investments outstanding totaling
$723,525,000,$517,591,000, all of which are performing in accordance with the terms of the
loan agreements.
For the years ended December 31, 2003, 2002 and 2001, the Companywe received $3,904,000,
$8,089,000 and $5,884,000, respectively, of fees for management of Fund II.
CT MP II LLC ("Fund II GP")
CT MP II LLC ("GP
Fund II GP")GP serves as the general partner for Fund II. Fund II GP is owned 50% by
the Companyus and 50% by Citigroup.
The CompanyWe had equity investments in Fund II GP during the years ended December 31,
2003, 2002 and 2001. The activity for theour equity investment in Fund II GP is as
follows (in thousands):
2003 2002 2001
------------ ------------ ------------
Beginning balance $ 2,675 $ --
Capital contributions to Fund II GP 823 2,671
Company portion of Fund II GP income 1 4
Distributions from Fund II GP -- --
------------ ------------
Ending balance $ 3,499 $ 2,675 $ --
Capital contributions to Fund II GP 757 823 2,671
Company portion of Fund II GP income (786) 1 4
Distributions from Fund II GP -- -- --
------------ ------------ ------------
Ending balance $ 3,470 $ 3,499 $ 2,675
============ ============ ============
In addition, the Companywe earned $600,000, $1,505,000 and $1,015,000 of consulting fees
from Fund II GP during the years ended December 31, 2003, 2002 and 2001,
respectively. At December 31, 2002 and 2001, the Companywe had receivables of $380,000 and
$1,015,000, respectively, from Fund II GP, which is included in prepaid and
other assets.
In accordance with the amended and restatedlimited partnership agreement of limited partnership of
CT Mezzanine PartnersFund II, LP, Fund II GP may
earn incentive compensation when certain returns are achieved for the limited
partners of Fund II, which will be accrued if and when earned.
F-17F-22
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. ExcessEquity investment in Funds, continued
Fund III
On June 2, 2003, Fund III, our third commercial real estate mezzanine investment
fund co-sponsored with affiliates of Purchase Price Over Net Tangible Assets Acquired
OnCitigroup Alternative Investments, effected
its initial closing. Fund III commenced its investment operations immediately
following the initial closing and on June 27, 2003, July 15, 1997,17, 2003 and August 8,
2003, respectively, Fund III effected its second, third and final closings
resulting in total equity commitments in Fund III of $425.0 million. The equity
commitments made to Fund III by us and affiliates of Citigroup Alternative
Investments are $20.0 million and $80.0 million, respectively.
The activity for our equity investment in Fund III is as follows (in thousands):
2003
------------
Beginning balance $ --
Capital invested 2,800
Costs capitalized 914
Company portion of Fund III income 25
Amortization of capitalized costs (88)
Dividends received from Fund III (88)
------------
Ending balance $ 3,563
============
As of December 31, 2003, Fund III has loans and investments outstanding totaling
$182,315,000, all of which are performing in accordance with the Company consummated the acquisitionterms of the
real estateloan agreements.
Based upon the $425.0 million aggregate equity commitments made at the initial
and subsequent closings, during the investment banking, advisory and asset management businesses of Victor Capital
Group, L.P. and certain affiliated entities. The acquisition had been accounted
for under the purchase method of accounting. The excess of the purchase price of
the acquisition in excess of net tangible assets acquired approximated $342,000.
The Company recognized the excess of purchase price over net tangible assets
acquired in a business combination accounted for as a purchase transaction and
had been amortizing it on a straight-line basis over a period of 15 years. The
carrying value of the excess of purchase price over net tangible assets acquired
was analyzed quarterly by the Company based upon the expected revenue and
profitability levels of the acquired enterprise to determine whether the value
and future benefit may indicate a decline in value.
In April 2000, the Company increased its level of resources devoted to its newFund III, we will earn
annual investment management business and reduced resources devotedfees of $6.0 million through the service of our
subsidiary, CT Investment Management Co., as investment manager to its investment
banking and advisory operations. As a result, the Company determined that there
has been a decline in the value of the acquired enterprise and the Company wrote
off the remaining value of the excess of purchase price over net tangible assets
acquired. This additional $275,000 write-off was recorded as additional
amortization expense inFund III.
During the year ended December 31, 2000.2003, we received $3,500,000 of fees for
management of Fund III.
Investment Costs Capitalized
In connection with entering into the venture agreement and related fund
business, we capitalized certain costs, including the cost of warrants issued
and legal costs incurred in negotiating and concluding the venture agreement
with Citigroup Alternative Investments. These costs are being amortized over the
expected life of the fund business and related venture agreement (10 years). The
activity for these investment costs for the years ended December 31, 2003, 2002
and 2001 is as follows (in thousands):
2003 2002 2001
------------ ------------ ------------
Beginning balance $ 6,589 $ 7,443 $ 4,373
Costs capitalized -- -- 3,776
Amortization of capitalized costs (844) (854) (706)
------------ ------------ ------------
Ending balance $ 5,745 $ 6,589 $ 7,443
============ ============ ============
F-23
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Equipment and Leasehold Improvements
At December 31, 20022003 and 2001,2002, equipment and leasehold improvements, net, are
summarized as follows (in thousands):
Period of
Depreciation or
Amortization 2002 2001
------------------- ---------- ----------
Office and computer equipment 1 to 3 years $ 554 $ 568
Furniture and fixtures 5 years 146 146
Leasehold improvements Term of leases 388 385
----------- -----------
1,088 1,099
Less: accumulated depreciation (698) (576)
-----------
Period of
Depreciation or
Amortization 2003 2002
--------------------- ----------- ------------
Office and computer equipment 1 to 3 years $ 566 $ 554
Furniture and fixtures 5 years 146 146
Leasehold improvements Term of leases 388 388
----------- ------------
1,100 1,088
Less: accumulated depreciation (808) (698)
----------- ------------
$ 292 $ 390 $ 523
===========
=========== ============
Depreciation and amortization expense on equipment and leasehold improvements,
which are computed on a straight-line basis totaled $124,000, $138,000 $203,000 and
$238,000$203,000 for the years ended December 31, 2003, 2002 2001 and 2000,2001, respectively.
Equipment and leasehold improvements are included at their depreciated cost in
prepaid and other assets in the consolidated balance sheets.
F-18
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Notes Payable
At December 31, 2002, the Company has no notes payable and at December 31, 2001,
the Company had notes payable aggregating $977,000.
In connection with the acquisition of Victor Capital Group, L.P. and affiliated
entities, the Company issued $5.0 million of non-interest bearing unsecured
notes ("Acquisition Notes") to the sellers, both of whom are directors of the
Company and one of whom serves as the chief executive officer of the Company.
The notes were payable in ten semi-annual payments of $500,000. The Acquisition
Notes were originally discounted to $3,908,000 based on an imputed interest rate
of 9.5%. At December 31, 2002, the Acquisition Notes have been repaid.
11. Long-Term Debt
Credit FacilitiesFacility
Effective September 30, 1997, the CompanyJune 27, 2003, we entered into a new credit agreement with a
commercial lender thatwho has been providing credit to us since June 8, 1998.
The credit facility in effect for the year ended December 31, 2002, provided for
a three-year $150$100 million line of credit. EffectiveIn connection with the Company's purchase of the
Fund I interest held by affiliates of Citigroup Alternative Investments in
January 1, 1998, pursuant to an amended and restated credit agreement,2003, the Company increasedassumed the available credit under this facility to $250 million
and subsequently further amended the credit agreement to increase the facility
to $300 million effective June 22, 1998 and $355 million effective July 23,
1998. The Company incurred an initial commitment fee upon the signing of the
credit agreement and the credit agreement called for additional commitment fees
when the total borrowingobligations under the credit facility
exceeded $75 million,entered into by Fund I. There were outstanding borrowings of $24,084,000 on the
date of acquisition. The lender for the Fund I credit facility was the same as
the lender for our outstanding credit facility and thus the two facilities were
combined for reporting purposes with the line of credit being increased to $150
million.
On June 27, 2003, we formally combined under one facility the outstanding
borrowings of the two facilities and extended the maturity of the $150 million
$250 million and $300 million. Effective February 26, 1999, pursuant to
an amended and restated credit agreement, the Company extended the expiration of
such credit facility from December 2001for two additional years to February 2002July 16, 2005, with an automatic
one-yearnine month amortizing extension option, if not otherwise extended. On February 28,
2002, the Company's $355 million credit facility matured and was settled and was
replaced with the repurchase obligations discussed below.
On June 8, 1998, the Company entered into a second credit agreement with another
commercial lender that provides for a $300 million line of credit with an
original expiration date in December 1999. The CompanyWe incurred
an initial commitment fee of $1,425,000 upon the signing of this credit facility.new agreement
which is being amortized over the remaining term of the agreement.
The Company
subsequently extended the expiration of such credit facility from December 1999
to June 2000 and from June 2000 to June 2001 with an automatic nine-month
amortizing extension option, if not otherwise extended. Effective July 16, 2001,
pursuant to an amended and restated credit agreement, the Company reduced the
amount of credit under this credit facility to $100 million and extended the
expiration of such credit facility from September 2001 to July 2002 with an
automatic nine-month amortizing extension option, if not otherwise extended.
Effective July 16, 2002, pursuant to an amended and restated credit agreement,
the Company extended the expiration of such credit facility from July 2002 to
July 2003 with an automatic nine-month amortizing extension option, if not
otherwise extended.
The credit facilities provideprovides for advances to fund lender-approved loans and
investments made by the Company ("Funded Portfolio Assets")us, which we refer to as "funded portfolio assets". TheOur
obligations of
the Company under the credit facilitiesfacility are secured by pledges of the Funded
Portfolio Assetsfunded
portfolio assets acquired with advances under the credit facilities.
F-19
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Long-Term Debt, continued
Borrowings under the credit facilities bearfacility bears interest at specified rates over
LIBOR, which rates may fluctuate, based upon the credit quality of the Funded
Portfolio Assets. Future repayments and redrawdowns of amounts previouslyfunded
portfolio assets. This facility is also subject to the drawdowna minimum usage fee will not require the Company to pay any additional
fees.if
average borrowings for a quarter are less than a threshold amount. The credit
facilities providefacility provides for margin calls on asset-specific borrowings in the event of
asset quality and/or market value deterioration as determined under the credit
facilities.facility. The credit facilities containfacility contains customary representations and warranties,
covenants and conditions and events of default. The credit facilities also
contain a covenant obligating the Companyus to avoid undergoing an ownership change that
results in Craig M. Hatkoff, John R. Klopp or Samuel Zell no longer retaining their senior offices
and directorships with the Companyus and practical control of the Company'sour business and operations.
The
providers of the credit facilities have notified the Company that the
resignation of Craig M. Hatkoff as an officer of the Company on December 29,
2000 is not an event of non-compliance with the foregoing covenant.F-24
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Long-Term Debt, continued
At December 31, 2002,2003, we have borrowed $38,868,000 under the Company has borrowed $40,000,000 against the $100
million credit facility at
an average borrowinginterest rate (including amortization of fees incurred and capitalized) of 4.72%LIBOR plus 1.50% (2.62% at December 31, 2003). The Company has pledged assets of
$81,666,000 as collateral for the borrowing against such credit facility. On
December 31, 2002,2003, the unused amount of potential credit under the remaining
credit facility was $60,000,000.$111,132,000. Assuming no additional utilization under the
credit facility and including the amortization of fees paid and capitalized over
the term of the credit facility, the all-in effective borrowing cost was 4.58%
at December 31, 2003. We have pledged assets of $78,022,000 as collateral for
the borrowing against such credit facility.
Term Redeemable Securities Contract
In connection with the purchase of theour BB CMBS Portfolioportfolio as previously described
in Note 5,6, an affiliate of the seller provided financing for 70% of the purchase
price, or $137.8 million, at a floating rate of LIBOR plus 50 basis points
pursuant to a term redeemable securities contract. This rate was below the
market rate for similar financings, and, as such, a discount on the term
redeemable securities contract was recorded to reduce the carrying amount by
$10.9 million (which has been amortized to $679,000), which had the effect of
adjusting the yield to current market terms. The debt had a three-year term that
expired in February 2002.
On February 28, 2002, when the Company's $355 million credit facility matured
and the term redeemable securities contract became due and settled, the Companywe entered into a new term redeemable securities contract and two new repurchase
obligations.contract.
The newcurrent term redeemable securities contract was utilized to finance certain
of the assets that were previously financed with thea maturing credit facility and
term redeemable securities contract. The new term redeemable securities contract,
which allows for a maximum financing of $75 million, is recourse to the Company. The new term redeemable securities contractus and has a
two-year term with an automatic one-year amortizing extension option, if not
otherwise extended. The CompanyWe incurred an initial commitment fee of $750,000 upon the
signing of the new term redeemable securities contract and the Company payswe pay interest at
specified rates over LIBOR. The new term redeemable securities contract contains
customary representations and warranties, covenants and conditions and events of
default. The Company has no outstanding borrowings
againstThis term redeemable securities contract expired on February 28, 2004
and was repaid with the newfinanced assets being financed under the credit
facility.
At December 31, 2003, we have borrowed $11,651,000 under the term redeemable
securities contract at an average interest rate of LIBOR plus 1.91% (3.06% at
December 31, 2002.2003). On December 31, 2003, the unused amount of potential credit
under the term redeemable securities contract was $63,349,000. Assuming no
additional utilization under the term redeemable securities contract and
including the amortization of fees paid and capitalized over the term of the
term redeemable securities contract, the all-in effective borrowing cost was
6.41% at December 31, 2003. We have pledged assets of $17,957,000 as collateral
for the borrowing against such term redeemable securities contract.
Repurchase Obligations
At December 31, 2002, the Company was2003, we were obligated to twofive counterparties under repurchase
agreements.
The repurchase obligation with the first counterparty, an affiliate of a
securities dealer, was utilized to finance CMBS securities that were previously
financed with the credit facility and original term redeemable securities
contract.securities. At December 31,
2002, the Company2003, we have sold CMBS assets with a book and market value of $155,780,000$151,964,000 and
hashave a liability to repurchase these assets for $97,000,000$88,365,000 that is non-recourse
to the Company.us. This repurchase obligation has
ahad an original one-year term that expired in
February 2003 and was subsequently extended twice to February 2004.2005. The liability balance
bears interest at specified rates over LIBOR based upon each asset included in
the obligation.
F-20The repurchase obligation with the second counterparty, a securities dealer,
arose in connection with the purchase of Federal Home Loan Mortgage Corporation
Gold available-for-sale securities. At December 31, 2003, we have sold such
assets with a book and market value of $20,052,000 and have a liability to
repurchase these assets for $19,461,000. This repurchase agreement comes due
monthly and has a current maturity date in March 2004. The liability balance
bears interest at LIBOR.
F-25
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11.10. Long-Term Debt, continued
The other repurchase obligation with the otherthird counterparty, a securities dealer, arosewas
entered into on May 28, 2003 pursuant to the terms of a master repurchase
agreement and provides us with the right to finance up to $50,000,000, which was
upsized to $100,000,000 in August 2003, by selling specific assets to the
counterparty. To December 31, 2003, the master repurchase agreement has been
utilized in connection with the purchase of available-for-sale securities.five loans during 2003. At December
31, 2002, the Company has2003, we have sold such assetsloans with a book and market value of $65,233,000$53,197,000 and
hashave a liability to repurchase these assets for $63,056,000.$16,982,000. The master
repurchase agreement terminates on June 1, 2004, with an automatic nine-month
amortizing extension option, if not otherwise extended, and bears interest at
specified rates over LIBOR based upon each asset included in the obligation.
The repurchase obligations with the fourth counterparty, a securities dealer,
were entered into during the third quarter of 2003 in connection with the
purchase of a loan and CMBS securities. At December 31, 2003, we have sold a
loan and CMBS with a book and market value of $9,950,000 and have a liability to
repurchase these assets for $8,210,000. The repurchase agreements are matched to
the term of the underlying loan and CMBS that mature between August 2004 and
January 2005 and bear interest at specified rates over LIBOR based upon each
asset included in the obligation.
The repurchase obligation with the fifth counterparty, a securities dealer, was
entered into during 2003 in connection with the purchase of a loan. At December
31, 2003, we have sold a loan with a book and market value of $16,325,000 and
have a liability to repurchase this asset for $13,876,000. This repurchase
agreement comes due monthly and has a current maturity date in March 2003.2004.
The liability balance bears interest at LIBOR.
The interestaverage borrowing rate in effect for all the repurchase obligations
outstanding at December 31, 20022003 was 1.90% and the interest rate in effect forLIBOR plus 0.99% (2.15% at December 31,
2003). Assuming no additional utilization under the repurchase obligations outstandingand
including the amortization of fees paid and capitalized over the term of the
repurchase obligations, the all-in effective borrowing cost was 2.65% at
December 31, 2001 was 2.03%.
12.2003.
11. Derivative Financial Instruments
On January 1, 2001, the Companywe adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFASStatement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." SFASStatement of Financial
Accounting Standards No. 133, as amended, establishes accounting and reporting
standards for derivative instruments. Specifically SFASStatement of Financial
Accounting Standards No. 133 requires an entity to recognize all derivatives as
either assets or liabilities in the consolidated balance sheets and to measure
those instruments at fair value. Additionally, the fair value adjustments will
affect either shareholders' equity or net income depending on whether the
derivative instrument qualifies as a hedge for accounting purposes and, if so,
the nature of the hedging activity. As of January 1, 2001, the adoption of the
new standard resulted in an adjustment of $574,000 to accumulated other
comprehensive loss and other liabilities.
In the normal course of business, the Company iswe are exposed to the effect of interest rate
changes. The Company limitsWe limit these risks by following established risk management policies
and procedures including those for the use of derivatives. For interest rate
exposures, derivatives are used primarily to align rate movements between
interest rates associated with the Company'sour loans and other financial assets with
interest rates on related debt financing, and manage the cost of borrowing
obligations.
The Company doesWe do not use derivatives for trading or speculative purposes. Further, the Company haswe have
a policy of only entering into contracts with major financial institutions based
upon their credit ratings and other factors. When viewed in conjunction with the
underlying and offsetting exposure that the derivatives are designed to hedge,
the Company haswe have not sustained a material loss from those instruments, nor does itdo we
anticipate any material adverse effect on itsour net income or financial position
in the future from the use of derivatives.
F-26
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Derivative Financial Instruments, continued
To manage interest rate risk, the Companywe may employ options, forwards, interest rate
swaps, caps and floors or a combination thereof depending on the underlying
exposure. To reduce overall interest cost, the Company useswe use interest rate instruments,
typically interest rate swaps, to convert a portion of itsour variable rate debt to
fixed rate debt. Interest rate differentials that arise under these swap
contracts are recognized as interest expense over the life of the contracts.
Financial reporting for hedges characterized as fair value hedges and cash flow
hedges are different. For those hedges characterized as a fair value hedge, the
changes in fair value of the hedge and the hedged item are reflected in earnings
each quarter. In the case of the fair value hedge listed above, the Company ishedges, we are hedging the component
of interest rate risk that can be directly controlled by the hedging instrument,
and it is this portion of the hedged assets that is recognized in earnings. The
non-hedged balance is classified as an available-for-sale security consistent
with SFASStatement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and is reported in
accumulated other comprehensive income. For those hedges characterized as cash
flow hedges, the unrealized gains/losses in the fair value of these hedges are
reported on the balance sheet with a corresponding adjustment to either
accumulated other comprehensive income or into earnings, depending on the type of
hedging relationship.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Derivative Financial Instruments, continued
TheWe undertook the fair value hedge was undertaken by the Company to sustain the value of itsour CMBS holdings.
This fair value hedge, when viewed in conjunction with the fair value of the
securities, is sustainingwas intended to sustain the value of those securities as interest
rates rise and fall. During the twelve months ended December 31, 2001, the
Companywe
recognized a loss of $5,479,000 for the decrease in the value of the swap which
was substantially offset by a gain of $4,890,000 for the change in the fair
value of the securities attributed to the hedged risk resulting in a $589,000
charge to unrealized loss on derivative securities on the consolidated statement
of operations. During the period from January 1, 2002 to December 20, 2002, the Companywe
recognized a loss of $16,234,000 for the decrease in the value of the swap which
was substantially offset by a gain of $15,924,000 for the change in the fair
value of the securities attributed to the hedged risk resulting in a $310,000
charge to unrealized loss on derivative securities on the consolidated statement
of operations. In conjunction with the sale of the CMBS previously discussed in
Note 5, in order to maintain the effectiveness of the hedge, the Companywe reduced the
maturity of the fair value hedge from December 2014 to November 2009 and
recognized a realized gain for the payments received totaling $940,000. On
December 23, 2002, in order to eliminate accumulated earnings and profits in
anticipation of the Company'sour election of REIT status for tax purposes, the fair value
hedge was settled resulting in a realized loss of $23.6 million.
The Company utilizesWe utilize cash flow hedges in order to better control interest costs on
variable rate debt transactions. Interest rate swaps that convert variable
payments to fixed payments, interest rate caps, floors, collars, and forwards
are considered cash flow hedges. During the period from January 1, 2002 to
December 20, 2002 and during the year ended December 31, 2001, the fair value of
the cash flow swaps decreased by $3.3 million and $2.9 million, respectively,
which was deferred into other comprehensive loss until the cash flow hedges were
settled on December 23, 2002 and the settlement amount of $6.7 million was
recorded as a charge to earnings.
During the period from January 1, 2002 to December 20, 2002 and during the year
ended December 31, 2001, the Companywe recognized a loss of $62,000 and a gain of $47,000,
respectively for the change in time value for qualifying interest rate hedges.
The time value is a component of fair value that must be recognized in earnings,
and is shown in the consolidated statement of operations as unrealized loss on
derivative securities. When the interest rate cap was settled on December 23,
2002, the Companywe recognized a realized loss of $51,000 on the consolidated statement of
operations.
F-27
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Derivative Financial Instruments, continued
In December 2002, the Companywe entered into two new cash flow hedge contracts. The
following table summarizes the notional value and fair value of the
Company'sour derivative
financial instruments at December 31, 2002.
Notional Interest
Hedge Type Value Rate Maturity Fair Value
- ------- ---------------- ------------- ----------- -------- ------------
Swap Cash Flow Hedge $85,000,000 4.2425% 2015 $(1,435,000)
Swap Cash Flow Hedge 24,000,000 4.2325% 2015 (387,000)2003.
Interest
Hedge Type Notional Value Rate Maturity Fair Value
- --------- ---------------- ----------------- ------------ --------- -------------
Swap Cash Flow Hedge $85,000,000 4.2425% 2015 $ 118,000
Swap Cash Flow Hedge 24,000,000 4.2325% 2015 50,000
On December 31, 2002,2003, the derivative financial instruments were reported at
their fair value as interest rate hedge liabilitiesassets and the decreaseincrease in the fair
value of the cash flow swaps of $1.8 million$168,000 was deferred into other comprehensive
loss and will be released to earnings over the remaining lives of the swaps. The
amount of the hedges' ineffectiveness is immaterial and reported as a component
of interest expense.
Over time, the unrealized gains and losses held in accumulated other
comprehensive income will be reclassified to earnings. This reclassification is
consistent with the timing of when the hedged items are also recognized in
earnings. Within the next twelve months, the Company estimateswe estimate that $3.1million$3.1 million currently
held in accumulated other comprehensive incomeloss will be reclassified to earnings,
with regard to the cash flow hedges.
F-22
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13.12. Convertible Trust Preferred Securities
On July 28, 1998, the Companywe privately placed originally issued 150,000 8.25% step up
Convertible Trust Preferred Securitiesconvertible trust preferred securities (liquidation amount $1,000 per security)
with an aggregate liquidation amount of $150 million.
The Convertible Trust Preferred Securitiesconvertible trust preferred securities were originally issued by the
Company'sour
consolidated statutory trust subsidiary, CT Convertible Trust I, (thereferred to as
the "Trust"), and represented an undivided beneficial interest in the assets of
the Trust that consisted solely of the Company'sour 8.25% step up convertible junior
subordinated debentures in the aggregate principal amount of $154,650,000 that
were concurrently sold and originally issued to the Trust. Distributions on the
Convertible Trust Preferred Securitiesconvertible trust preferred securities were payable quarterly in arrears on each
calendar quarter-end and correspond to the payments of interest made on the
convertible debentures, the sole assets of the Trust. Distributions were payable
only to the extent payments were made in respect to the convertible debentures.
The CompanyWe received $145,207,000 in net proceeds, after original issue discount of 3%
from the liquidation amount of the Convertible Trust Preferred Securitiesconvertible trust preferred securities and
transaction expenses, pursuant to the above transactions, which were used to pay
down the Company'sour credit facilities. The Convertible Trust Preferred
Securitiesconvertible trust preferred securities were
convertible into shares of Classclass A Common Stockcommon stock at an initial rate of 85.47
shares of Classclass A Common Stockcommon stock per $1,000 principal amount of the convertible
debentures held by the Trust (which iswas equivalent to a conversion price of
$11.70$35.10 per share of Classclass A Common Stock)common stock).
F-28
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Convertible Trust Preferred Securities, continued
On May 10, 2000, the Companywe modified the terms of the $150 million aggregate liquidation
amount Convertible Trust Preferred Securities.convertible trust preferred securities. In connection with the
modification, the then outstanding Convertible Trust Preferred Securitiesconvertible trust preferred securities were
canceled and new variable step up Convertible Trust Preferred Securitiesconvertible trust preferred securities with an
aggregate liquidation amount of $150,000,000 were issued to the holders of the
canceled securities in exchange therefore, and the original underlying
convertible debentures were canceled and new 8.25% step up convertible junior
subordinated debentures in the aggregate principal amount of $92,524,000 and new
13% step up non-convertible junior subordinated debentures in the aggregate
principal amount of $62,126,000 were issued to the Trust, as the holder of the
canceled bonds, in exchange therefore. The liquidation amount of the new
Convertible Trust Preferred Securitiesconvertible trust preferred securities was divided into $89,742,000 of
convertible amount (the "Convertible Amount") and $60,258,000 of non-convertible amount, (the "Non-Convertible Amount"), the distribution,
redemption and, as applicable, conversion terms of which, mirrored the interest,
redemption and, as applicable, conversion terms of the new convertible
debentures and the new non-convertible debentures, respectively, held by the
Trust.
Distributions on the new Convertible Trust Preferred Securitiesconvertible trust preferred securities are payable
quarterly in arrears on each calendar quarter-end and correspond to the payments
of interest made on the new debentures, the sole assets of the Trust.
Distributions are payable only to the extent payments are made in respect to the
new debentures. The new Convertible Trust Preferred Securitiesconvertible trust preferred securities initially bore a
blended coupon rate of 10.16% per annum which rate variedwas to vary as the proportion
of outstanding Convertible Amountconvertible amount to the outstanding Non-Convertible Amountnon-convertible amount
changes and were to step up in accordance with the coupon rate step up terms applicable
to the Convertible Amountconvertible amount and the Non-Convertible Amount.
F-23
13. Convertible Trust Preferred Securities, continuednon-convertible amount.
The Convertible Amountconvertible amount bore a coupon rate of 8.25% per annum through March 31,
2002 and increased on April 1, 2002 to the greater of (i) 10.00% per annum,
increasing by 0.75% on October 1, 2004 and on each October 1 thereafter or (ii)
a percentage per annum equal to the quarterly dividend paid on a share of common
stock multiplied by four and divided by $7.00.$21.00. The Convertible Amountconvertible amount is
convertible into shares of Classclass A Common Stock,common stock, in increments of $1,000 in
liquidation amount, at a conversion price of $7.00$21.00 per share. The Convertible
Amountconvertible
amount is redeemable by the Company,us, in whole or in part, on or after September 30, 2004.
Prior to redemption, the Non-Convertible Amountnon-convertible amount bore a coupon rate of 13.00% per
annum. On September 30, 2002, the Non-Convertible Debenturesnon-convertible debentures were redeemed in
full, utilizing additional borrowings on the credit facility and repurchase
agreements, resulting in a corresponding redemption in full of the related
Non-Convertible Amount.non-convertible amount of convertible trust preferred securities. In connection
with the redemption transaction, the
Companywe expensed the remaining unamortized discount
and fees on the redeemed Non-Convertible Amountnon-convertible amount resulting in $586,000 of
additional expense for the quarteryear ended September 30,December 31, 2002.
For financial reporting purposes, the Trust is treated as aour subsidiary of the
Company and,
accordingly, the accounts of the Trust are included in theour consolidated
financial statements of the Company.statements. Intercompany transactions between the Trust and the Company,us,
including the original convertible and new debentures, have been eliminated in
theour consolidated financial statements of the
Company.statements. The original Convertible Trust Preferred Securitiesconvertible trust preferred
securities and the new Convertible Trust Preferred Securitiesconvertible trust preferred securities are presented as a
separate caption between liabilities and stockholders'shareholders' equity ("Convertible Trust Preferred
Securities"convertible
trust preferred securities") in theour consolidated balance sheet of the Company.sheet. Distributions on
the original Convertible Trust Preferred Securitiesconvertible trust preferred securities and the new Convertible
Trust Preferred Securitiesconvertible
trust preferred securities are recorded, net of the tax benefit, in a separate
caption immediately following the provision for income taxes in theon our consolidated
statements of operations.
In accordance with Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities," beginning January 1, 2004 we will no longer consolidate the
operations of the Company.
14. Stockholders'trust on our financial statements.
F-29
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Shareholders' Equity
Authorized Capital
Upon consummation of the reorganization (see Note 1), each outstanding
predecessor class A common share of beneficial interest was converted into one
share of Class A Common Stock, and each outstanding predecessor class A
preferred share of beneficial interest was converted into one share of Class A
Preferred Stock. As a result, all of the predecessor's previously issued class A
common sharesWe have been reclassified as shares of Class A Common Stock and all
of the predecessor's previously issued class A preferred shares had been
reclassified as shares of Class A Preferred Stock.
The Company has the authority to issue up to 300,000,000200,000,000 shares of stock, consisting of
(i) 100,000,000 shares of Classclass A Common Stock, (ii) 100,000,000
shares of class B common stock par value $0.01 per share ("Class B Common
Stock"), and (iii)(ii) 100,000,000 shares of
preferred stock. The board of directors is generally authorized to issue
additional shares of authorized stock without stockholders'shareholder approval.
F-24
14. Stockholders' Equity, continued
Common Stock
Except as described herein or as required by law, all shares of Class A Common
Stock and shares of Class B Common Stock are identical and entitled to the same
dividend, distribution, liquidation and other rights. The Class A Common Stockcommon stock are voting shares entitled to vote on all matters presented
to a vote of stockholders,shareholders, except as provided by law or subject to the voting
rights of any outstanding preferred stock. The shares of Class B Common Stock do not have
voting rights and are not counted in determining the presence of a quorum for
the transaction of business at any meeting of the stockholders of the Company.
Holders of record of shares of Classclass
A Common Stock and shares of Class B Common
Stockcommon stock on the record date fixed by the Company'sour board of directors are entitled
to receive such dividends as may be declared by the board of directors subject
to the rights of the holders of any outstanding preferred stock.
Each share of Class A Common Stock is convertible at the option of the holder
thereof into one share of Class B Common Stock and, subject to certain
conditions; each share of Class B Common Stock is convertible at the option of
the holder thereof into one share of Class A Common Stock.
Preferred Stock
In connection with the reorganization, the Company created2001, we had outstanding two classes of Preferred Stock, Classpreferred stock, class A Preferred9.5%
cumulative convertible voting preferred Stock and the class B 9.5% cumulative
convertible non-voting preferred stock ("Class B Preferred Stock"). As described
above, upon consummation of the reorganization, the predecessor's outstanding
class A preferred shares of beneficial interest were converted into shares of
Class A Preferred Stock. Following the reorganization, certain shares of Class A
Preferred Stock were converted into shares of Class B Preferred Stock and
certain shares of Class A Common Stock were converted into shares of Class B
Common Stock.stock. In December 2001, following the
repurchase of all of the outstanding shares of Preferred Stockpreferred stock (as discussed
below), the Companywe amended itsour charter to eliminate from authorized capital the
previously designated Classclass A Preferred Stockpreferred stock and Classclass B Preferred Stockpreferred stock and
increase the authorized shares of preferred stock to 100,000,000.
Common and Preferred Stock Transactions
DuringIn March 2000, the Companywe commenced an open market stock repurchase program under which
the Company waswe were initially authorized to purchase, from time to time, up to 2,000,000666,667
shares of Classclass A Common Stock.common stock. Since that time the authorization has been
increased by the board of directors to purchase up to 7,100,7702,366,934 shares of Classclass
A Common Stock.common stock. As of December 31, 2002, the Company2003, we had purchased and retired, pursuant
to the program, 4,902,4701,700,584 shares of Classclass A Common Stockcommon stock at an average price of
$4.36$13.13 per share (including commissions).
The Company hasWe have no further obligations to issue additional warrants to affiliates of
Citigroup Alternative Investments at December 31, 2002.2003. The value of the
warrants at the issuance dates, $4,636,000, was capitalized and is being
amortized over the anticipated lives of the Funds.fund business venture with
affiliates of Citigroup Alternative Investments. On January 31, 2003, the Companywe
purchased all of the outstanding warrants to purchase 8,528,4672,842,822 shares of Classclass
A Common Stockcommon stock for $2,132,000.
In two privately negotiated transactions closed in April 2001, the Companywe repurchased
for $29,138,000, 630,701210,234 shares of Classclass A Common Stock, 1,520,831common stock, 506,944 shares of Class
B Common Stock, 1,518,390common stock, 506,130 shares of Classclass A Preferred Stock and 2,274,110758,037 shares of
Class B Preferred Stock. In addition, in a privately negotiated transaction
closed in August 2001, the Companywe repurchased for $20,896,000, 200,00066,667 shares of Classclass A
Common Stock, 1,234,355common stock, 411,451 shares of Class B Common Stock, 759,195common stock, 253,065 shares of Classclass A
Preferred Stock and 1,769,138589,713 shares of Class B Preferred Stock. The Company hasWe have
repurchased all of itsour previously outstanding Preferred Stock and eliminated the
related dividend.
F-25On June 18, 2003, we issued 1,075,000 shares of class A common stock in a
private placement. Thirty-two separate investors, led by certain institutional
clients advised by Lend Lease Rosen Real Estate Securities, LLC, purchased the
shares. We received net proceeds of $17.1 million after payment of offering
expenses and fees to Conifer Securities, LLC, our placement agent.
F-30
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Stockholders' Equity, continued
Earnings per Share
The following table sets forth the calculation of Basic and Diluted EPS for the
years ended December 31, 20022003 and 2001:2002:
Year Ended December 31, 20022003 Year Ended December 31, 2001
-------------------------------------- ------------------------------------2002
------------------------------------- -----------------------------------
Per Share Per Share
Net LossIncome Shares Amount Net IncomeLoss Shares Amount
------------- ------------- ------------------- ------------- ---------- ---------------------
Basic EPS:
Net earnings / (loss)
allocable to Common
Stockcommon stock $13,525,000 5,946,718 $ 2.27 $(9,738,000) 18,026,1926,008,731 $ (0.54) $8,764,000 20,166,319 $ 0.43
========== ===========(1.62)
========= =========
Effect of Dilutive
Securities:
Options outstanding for
the purchase of Common
Stockcommon stock -- 67,581 -- --
-- 96,432
Warrants outstanding for
the purchase of Common
Stock -- -- -- 420,947
Future commitments for
stock unit awards for
the issuance of Common
Stock -- -- -- 50,000
Convertible Trust
Preferred Securitiestrust
preferred securities
exchangeable for
shares of Common Stockcommon stock 9,452,000 4,273,422 -- --
4,120,000 12,820,513
Convertible Preferred
Stock -- -- 606,000 2,569,894
------------- ------------- ---------- ------------- ------------------------ -----------
Diluted EPS:
Net earnings / (loss)
per share of Common
Stockcommon
stock and Assumed
Conversionsassumed
conversions $22,977,000 10,287,721 $ 2.23 $(9,738,000) 18,026,1926,008,731 $ (0.54) $13,490,000 36,124,105 $ 0.37(1.62)
============= ============= ========== ============= ========== =================== ============== ============ =========
The following table sets forth the calculation of Basic and Diluted EPS for the
year ended December 31, 2000:2001:
Year Ended December 31, 20002001
-------------------------------------
Per Share
Net Income Shares Per Share Amount
------------- ------------- ---------
Basic EPS:
Net earnings allocable
to Common Stock $8,146,000 23,171,057common stock $8,764,000 6,722,106 $ 0.351.30
=========
Effect of Dilutive
Securities:
Options outstanding for
the purchase of Common Stockcommon -- 3732,144
stock
Warrants outstanding for
the purchase of common -- 140,316
stock
Future commitments for
stock unit awards for
the issuance of Common Stockcommon -- 200,00016,667
stock
Convertible Trust
Preferred Securitiestrust
preferred securities
exchangeable for 4,120,000 4,273,504
shares of Common Stock -- --common stock
Convertible Preferred Stock 1,615,000 6,320,833preferred 606,000 856,631
stock
------------- -------------
Diluted EPS:
Net earnings per share
of Common Stockcommon stock and
Assumed Conversions $9,761,000 29,691,927assumed conversions $13,490,000 12,041,368 $ 0.331.12
============= ============= =========
F-26F-31
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15.14. General and Administrative Expenses
General and administrative expenses for the years ended December 31, 2003, 2002
2001
and 20002001 consist of (in thousands):
2003 2002 2001 2000
---------------- --------------- ---------------
Salaries and benefits $ 8,306 $ 9,276 $ 11,082
$ 11,280
Professional services 2,127 1,806 1,545
1,170
Other 2,887 2,914 2,755 2,989
---------------- --------------- ---------------
Total $ 13,320 $ 13,996 $ 15,382
$ 15,439
================ =============== ===============
16.15. Income Taxes
The Company intends to make an election to be taxed as a REIT under Section
856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax
year ending December 31, 2003. As a REIT, we generally are not subject to
federal income tax. To maintain qualification as a REIT, we must distribute at
least 90% of our REIT taxable income to our stockholders and its subsidiaries filemeet certain other
requirements. If we fail to qualify as a consolidatedREIT in any taxable year, we will be
subject to federal income tax return.
The provision foron our taxable income at regular corporate rates.
We may also be subject to certain state and local taxes foron our income and
property. Under certain circumstances, federal income and excise taxes may be
due on our undistributed taxable income. At December 31, 2003, we were in
compliance with all REIT requirements.
During the yearsyear ended December 31, 2002, 2001 and
2000 is comprised as follows (in thousands):
2002 2001 2000
------------ ------------- -------------
Current
Federal $ 8,752 $10,642 $12,561
State 2,654 3,811 4,493
Local 2,802 3,473 4,057
Deferred
Federal 5,152 (732) (2,025)
State 1,483 (72) (697)
Local 1,595 (240) (629)
------------ ------------- -------------
Provision for income taxes $22,438 $16,882 $17,760
============ ============= =============
The reconciliation2003, we recorded $646,000 of income tax
computed atexpense for income that was attributable to taxable REIT subsidiaries. Our
effective tax rate for the year ended December 31, 2003 attributable to our
taxable REIT subsidiaries was 107.9%. The difference between the U.S. federal
statutory tax rate (35%) toof 35% and the effective income tax rate for the years ended December 31, 2002,
2001 and 2000 are as follows (in thousands):
2002 2001 2000
---------------- ---------------- ----------------
$ % $ % $ %
-------- ------- -------- ------- -------- -------
Federal income tax at
statutory rate $ 7,404 35.0% $12,156 35.0% $12,405 35.0%
Statewas primarily state and
local taxes, net of federal tax benefit, 5,547 26.2% 4,532 13.1% 4,696 13.3%
Utilization of net
operating loss
carryforwards (490) (2.3)% (490) (1.4)% (490) (1.4)%
Capital loss
carryforwards not
recognized due to
uncertainty of
utilization 10,304 48.7% -- --% -- --%
Compensationand compensation in excess of
deductible limits 502 2.4% 642 1.8% 851 2.4%
Reduction of net
deferred tax
liabilities (2,783) (13.1)% -- --% -- --%
Other 1,954 9.2% 42 0.1% 298 0.8%
--------- ------- -------- ------- -------- -------
$22,438 106.1% $16,882 48.6% $17,760 50.1%
========= ======= ======== ======= ======== =======
F-27
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Income Taxes, continued
The Company haslimits.
We have federal net operating loss carryforwards ("NOLs") as of December 31, 20022003 of
approximately $13.9$12.4 million. Such NOLsnet operating loss carryforwards expire
through 2021. Due to an ownership change in January 1997 and another prior
ownership change, a substantial portion of the NOLsnet operating loss carryforwards
are limited for federal income tax purposes to approximately $1.4 million
annually. Any unused portion of such annual limitation can be carried forward to
future periods. The CompanyWe also hashave federal capital loss carryforwards as of December
31, 20022003 of approximately $29.4 million that expire in 2007. The utilization of
these carryforwards would not reduce federal income taxes but would reduce
required distributions to maintain REIT status.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax reporting purposes.
As discussed in Note 1, the board of directors has authorized the election to be
taxed as a REIT beginning in 2003. Management intends to operate the Companywe are operating in a manner to meet the qualifications to be taxed as a REIT
for federal income tax purposes during the 2003 tax year. Management doesyear, we do not expect the Companywe
will be liable for income taxes or taxes on "built-in gain" on itsour assets at the
federal level or in most states in future years, other than on the Company'sour taxable REIT
subsidiary. Accordingly, the Companywe eliminated substantially all of itsour deferred tax
liabilities other than that related to itsour taxable REIT subsidiary at December
31, 2002. The amounts for 2003 relate only to differences related to taxable
earnings of our taxable REIT subsidiaries.
F-32
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Income Taxes, continued
The components of the net deferred tax assets are as follows (in thousands):
December 31,
---------------------------
2003 2002 2001
------------ -------------
Net operating loss carryforward $ 4,849 $ 5,394
Capital loss carryforward 13,573 --
Reserves on other assets and for possible credit
losses 2,689 6,340
Other (2,858) 2,434
------------ -------------
Deferred tax assets 18,253 14,168
Valuation allowance (16,668) (4,405)
------------ -------------
Fund II incentive management fees recognized for tax
purposes not recorded for book $ 3,230 $ --
Net operating loss carryforward -- 4,849
Capital loss carryforward -- 13,573
Reserves on other assets and for possible credit losses -- 2,689
Other 279 (2,858)
------------ -------------
Deferred tax assets 3,509 18,253
Valuation allowance (140) (16,668)
------------ -------------
$ 3,369 $ 1,585 $ 9,763
============ =============
The Company
We recorded a valuation allowance to reserve a portion of itsour net deferred
assets in accordance with SFASStatement of Financial Accounting Standards No. 109.
Under SFASStatement of Financial Accounting Standards No. 109, this valuation
allowance will be adjusted in future years, as appropriate. However, the timing
and extent of such future adjustments cannot presently be determined.
17.Prior to 2003, we filed a consolidated federal income tax return as a
C-corporation. The provision for income taxes for the years ended December 31,
2002 and 2001 is comprised as follows (in thousands):
2002 2001
------------- -------------
Current
Federal $ 8,752 $10,642
State 2,654 3,811
Local 2,802 3,473
Deferred
Federal 5,152 (732)
State 1,483 (72)
Local 1,595 (240)
------------- -------------
Provision for income taxes $22,438 $16,882
============= =============
The reconciliation of income tax computed at the U.S. federal statutory tax rate
(35%) to the effective income tax rate for the years ended December 31, 2002 and
2001 are as follows (in thousands):
2002 2001
------------------- --------------------
$ % $ %
--------- --------- --------- ----------
Federal income tax at statutory rate $ 7,404 35.0% $12,156 35.0%
State and local taxes, net of federal tax
benefit 5,547 26.2% 4,532 13.1%
Utilization of net operating loss
carryforwards (490) (2.3)% (490) (1.4)%
Capital loss carryforwards not recognized
due to uncertainty of utilization 10,304 48.7% -- -- %
Compensation in excess of deductible
limits 502 2.4% 642 1.8%
Reduction of net deferred tax liabilities (2,783) (13.1)% -- -- %
Other 1,954 9.2% 42 0.1%
--------- --------- --------------------
$22,438 106.1% $16,882 48.6%
========= ========= ====================
F-33
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Employee Benefit Plans
Employee 401(k) and Profit Sharing Plan
In 1999, the Companywe instituted a 401(k) and profit sharing plan that allows eligible
employees to contribute up to 15% of their salary into the plan on a pre-tax
basis, subject to annual limits. The Company hasWe have committed to make contributions to the
plan equal to 3% of all eligible employees' compensation subject to annual
limits and may make additional contributions based upon earnings. The Company'sOur
contribution expense for the years ended December 31, 2003, 2002 and 2001, was
$103,000, $110,000 and 2000, was $110,000, $196,000, and $187,000, respectively.
F-28
17. Employee Benefit Plans, continued
1997 Long-Term Incentive Stock Plan
The Company'sOur 1997 Amendedamended and Restated Long-Term Incentive Stock Plan (the
"Incentive Stock Plan")restated long-term incentive stock plan permits the grant
of nonqualified stock option, ("NQSO"),
incentive stock option, ("ISO"), restricted stock, stock
appreciation right,
("SAR"), performance unit, performance stock and stock unit awards. A
maximum of 882,896147,001 shares of Classclass A Common Stockcommon stock may be issued during the
fiscal year 20032004 pursuant to awards under the Incentive Stock Planincentive stock plan and the
Director Stock Plandirector stock plan (as defineddiscussed below) in addition to the shares subject to
awards outstanding under the two plans at December 31, 2002.2003. The maximum number
of shares that may be subject to awards to any employee during the term of the
plan may not exceed 1,000,000333,334 shares and the maximum amount payable in cash to any
employee with respect to any performance period pursuant to any performance unit
or performance stock award is $1.0 million.
The ISOsIncentive stock options shall be exercisable no more than ten years after their
date of grant and five years after the grant in the case of a 10% stockholder
and vest over a period of three years with one-third vesting at each anniversary
date. Payment of an option may be made with cash, with previously owned Classclass A
Common Stock,common stock, by foregoing compensation in accordance with performance
compensation committee or compensation committee rules or by a combination of
these.
Restricted stock may be granted under the Incentive Stock Planlong-term incentive stock plan with
performance goals and periods of restriction as the board of directors may
designate. The performance goals may be based on the attainment of certain
objective and/or subjective measures. In 2003, 2002 and 2001, and 2000, the Companywe issued 75,47217,500
shares, 227,78025,125 shares and 230,30475,927 shares, respectively, of restricted stock.
62,37412,707 shares were canceled in 20012003 and 32,50020,791 shares were canceled in 20002001 upon
the resignation of employees prior to vesting. The shares of restricted stock
issued in 2003 vest one-third on each of the following dates: February 1, 2004,
February 1, 2005 and February 1, 2006. The shares of restricted stock issued in
2002 vest one-third on each of the following dates: February 1, 2003, February
1, 2004 and February 1, 2005. The shares of restricted stock issued in 2001 vest
one-third on each of the following dates: February 1, 2002, February 1, 2003 and
February 1, 2004. The shares of restricted stock issued in 2000 vest
one-third on each of the following dates: February 1, 2001, February 1, 2002 and
February 1, 2003. The CompanyWe also granted 52,08317,361 shares of performance based restricted
stock in 1999, which were canceled in 2002.
The Incentive Stock Planlong-term incentive stock plan also authorizes the grant of stock units at
any time and from time to time on such terms as shall be determined by the board
of directors or administering compensation committee. Stock units shall be
payable in Classclass A Common Stockcommon stock upon the occurrence of certain trigger events.
The terms and conditions of the trigger events may vary by stock unit award, by
the participant, or both.
F-34
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Employee Benefit Plans
The following table summarizes the activity under the Incentive Stock Planlong-term incentive stock
plan for the years ended December 31, 2003, 2002 2001 and 2000:2001:
Weighted
Options Exercise Price Average Exercise
Outstanding per Share Exercise Price per Share
------------ --------------------- ----------------
Outstanding at January 1, 2000 1,233,917 $6.002001 473,016 $12.375 - $10.00 7.89
Granted in 2000 467,250 $4.125 - $6.00 4.94
Canceled in 2000 (281,667) $4.125 - $10.00 7.34
------------ ----------------
Outstanding at December 31, 2000 1,419,500 $4.125 - $10.00 7.04$30.00 21.11
Granted in 2001 454,500 $4.50151,512 $13.50 - $5.50 4.62$16.50 13.85
Canceled in 2001 (142,333) $4.125(47,446) $12.375 - $10.00 6.83$30.00 20.50
------------ ----------------
Outstanding at December 31, 2001 1,731,667 $4.125577,082 $12.375 - $10.00$30.00 $ 6.4219.26
Granted in 2002 292,500 $5.30 5.3097,340 $15.90 15.90
Canceled in 2002 (52,000) $4.125(17,172) $12.375 - $6.00 4.99$18.00 13.79
------------ ----------------
Outstanding at December 31, 2002 1,971,667 $4.125657,250 $12.375 - $10.00$30.00 $ 6.2918.51
Exercised in 2003 (18,445) $12.375 - $18.00 15.20
Canceled in 2003 (121,337) $12.375 - $30.00 18.51
------------ ----------------
Outstanding at December 31, 2003 517,468 $12.375 - $30.00 $ 19.09
============ ================
F-29
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Employee Benefit Plans, continued
At December 31, 2003, 2002 and 2001, options to purchase 417,730, 435,669 and
2000, 1,306,987, 1,011,824 and 745,505,337,225 shares, respectively, of the options were exercisable. At December 31, 2002,2003, the
outstanding options have various remaining contractual lives ranging from 3.002.00
to 9.098.09 years with a weighted average life of 6.545.59 years. The following table
presents the options outstanding and exercisable at December 31, 2003 within
price ranges:
Range for Total Total
Exercise Prices Options Options
per Share Outstanding Exercisable
------------------------- --------------- ---------------
$12.375 - $15.00 142,788 105,613
$15.01 - $18.00 249,122 186,559
$18.01 - $21.00 -- --
$21.01 - $24.00 -- --
$24.01 - $27.00 33,334 33,334
$27.01 - $30.00 92,224 92,224
--------------- ---------------
Total 517,468 417,730
=============== ===============
1997 Non-Employee Director Stock Plan
The Company'sdirector stock plan
Our 1997 Amendedamended and Restated Long-Term Director Stock Plan (the
"Director Stock Plan")restated non-employee director stock plan permits the grant
of NQSO,nonqualified stock option, restricted stock, SAR,stock appreciation right,
performance unit, performance stock and stock unit awards. A maximum of 882,896147,001
shares of Classclass A Common Stockcommon stock may be issued during the fiscal year 20022004
pursuant to awards under the Director Stock Plandirector stock plan and the Incentive Stock Plan,long-term incentive
stock plan, in addition to the shares subject to awards outstanding under the
two plans at December 31, 2002.2003.
F-35
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Employee Benefit Plans, continued
The board of directors shall determine the purchase price per share of Classclass A
Common Stockcommon stock covered by a NQSOnonqualified stock options granted under the Director Stock Plan.director
stock plan. Payment of a NQSOnonqualified stock options may be made with cash, with
previously owned shares of Classclass A Common
Stock,common stock, by foregoing compensation in
accordance with board rules or by a combination of these payment methods. SARsStock
appreciation rights may be granted under the plan in lieu of NQSOs,nonqualified stock
options, in addition to NQSOs,nonqualified stock options, independent of NQSOsnonqualified
stock options or as a combination of the foregoing. A holder of a SARstock
appreciation rights is entitled upon exercise to receive shares of Classclass A
Common Stock,common stock, or cash or a combination of both, as the board of directors may
determine, equal in value on the date of exercise to the amount by which the
fair market value of one share of Classclass A Common Stockcommon stock on the date of exercise
exceeds the exercise price fixed by the board on the date of grant (which price
shall not be less than 100% of the market price of a share of Classclass A Common Stockcommon
stock on the date of grant) multiplied by the number of shares in respect to
which the SARsstock appreciation rights are exercised.
Restricted stock may be granted under the Director Stock Plandirector stock plan with performance
goals and periods of restriction as the board of directors may designate. The
performance goals may be based on the attainment of certain objective and/or
subjective measures. The Director Stock Plandirector stock plan also authorizes the grant of stock
units at any time and from time to time on such terms as shall be determined by
the board of directors. Stock units shall be payable in shares of Classclass A Common
Stockcommon
stock upon the occurrence of certain trigger events. The terms and conditions of
the trigger events may vary by stock unit award, by the participant, or both.
The following table summarizes the activity under the Director Stock Plandirector stock plan for
the years ended December 31, 2003, 2002 2001 and 2000:2001:
Weighted
Options Exercise Price Average Exercise
Outstanding per Share Exercise Price per Share
------------ --------------------- ----------------
Outstanding at January 1, 2000 255,000 $6.00-2001 85,002 $18.00-$10.00 9.22
Granted in 2000 -- $ -- --
------------ ----------------
Outstanding at December 31, 2000 255,000 $6.00-$10.00 9.2230.00 27.65
Granted in 2001 -- $ -- --
------------ ----------------
Outstanding at December 31, 2001 255,000 $6.00-85,002 $18.00-$10.00 9.2230.00 27.65
Granted in 2002 -- $ -- --
------------ ----------------
Outstanding at December 31, 2002 255,000 $6.00-85,002 $18.00-$10.0030.00 27.65
Granted in 2003 -- $ 9.22-- --
------------ ----------------
Outstanding at December 31, 2003 85,002 $18.00-$30.00 $ 27.65
============ ================
At December 31, 2003, 2002 and 2001, and 2000, 255,000, 255,000 and 186,668, respectively,all of the options outstanding were
exercisable. At December 31, 2002,2003, the outstanding options have a remaining
contractual life of 4.543.54 years to 5.084.08 years with a weighted average life of
4.983.98 years. F-3016,668 of the options are priced at $18.00 and the remaining 68,334
are priced at $30.00.
F-36
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Employee Benefit Plans, continued
Accounting for Stock-Based Compensation
The Company complies with the provisions of the FASB's Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). SFAS No. 123 encourages the adoption of a new fair-value based
accounting method for employee stock-based compensation plans. SFAS No. 123 also
permits companies to continue accounting for stock-based compensation plans as
prescribed by APB Opinion No. 25. However, companies electing to continue
accounting for stock-based compensation plans under APB Opinion No. 25, must
make pro forma disclosures as if the Company adopted the cost recognition
requirements under SFAS No. 123. The Company has continued to account for
stock-based compensation under APB Opinion No. 25. Accordingly, no compensation
cost has been recognized for the Incentive Stock Plan or the Director Stock Plan
in the accompanying consolidated statements of operations as the exercise price
of the stock options granted thereunder equaled the market price of the
underlying stock on the date of the grant.
Pro forma information regarding net income and net earnings per common share has
been estimated at the date of the grant using the Black-Scholes option-pricing
model based on the following assumptions:
2002 2001 2000
---------------- --------------- -------------
Risk-free interest rate 4.30% 4.75% 6.65%
Volatility 25.0% 25.0% 40.0%
Dividend yield 0.0% 0.0% 0.0%
Expected life (years) 5.0 5.0 5.0
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
Company's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The weighted
average fair value of each stock option granted during the years ended December
31, 2002, 2001 and 2000 were $1.64, $1.47 and $1.58, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for the years ended December 31, 2002, 2001 and 2000 is as
follows (in thousands, except for net earnings (loss) per share of common
stock):
2002 2001 2000
--------------------- -------------------- --------------------
As As As
reported Pro forma reported Pro forma reported Pro forma
--------- ---------- --------- --------- -------- ---------
Net income $(9,738) $(10,038) $ 9,370 $ 9,043 $ 9,761 $ 9,287
Net earnings per share
of common stock:
Basic $ (0.54) $ (0.56) $ 0.43 $ 0.42 $ 0.35 $ 0.33
Diluted $ (0.54) $ (0.56) $ 0.37 $ 0.36 $ 0.33 $ 0.31
The pro forma information presented above is not representative of the effect
stock options will have on pro forma net income or earnings per share for future
years.
F-31
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Fair Values of Financial Instruments
The FASB'sFinancial Accounting Standards Board's Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments," ("SFAS No. 107")
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based upon estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFASStatement of Financial Accounting
Standards No. 107 excludes certain financial instruments and all non-financial
instruments from itsour disclosure requirements. Accordingly, the aggregate fair
value amounts do not represent the underlying value of the Company.we.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: The carrying amount of cash on hand and money
market funds is considered to be a reasonable estimate of fair value.
Available-for-sale securities: The fair value was determined based upon the
market value of the securities.
Commercial mortgage-backed securities: The fair value was obtained by
obtaining quotes from a market maker in the security.
Loans receivable, net: The fair values were estimated by using current
institutional purchaser yield requirements for loans with similar credit
characteristics.
Interest rate cap agreement: The fair value was estimated based upon the
amount at which similar financial instruments would be valued.
Credit facilities:facility: The credit facilities are at floating rates of interest for
which the spread over LIBOR is at rates that are similar to those in the
market currently. Therefore, the carrying value is a reasonable estimate of
fair value.
Repurchase obligations: The repurchase obligations, which are generally
short-term in nature, bear interest at a floating rate and the book value is a
reasonable estimate of fair value.
Term redeemable securities contract: The fair value was estimated based upon
the amount at which similar privately placed financial instruments would be
valued.
Convertible Trust Preferred Securities:trust preferred securities: The fair value was estimated based
upon the amount at which similar privately placed financial instruments would
be valued.
Interest rate swap agreements: The fair values were estimated based upon the
amount at which similar financial instruments would be valued.
F-32F-37
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18.17. Fair Values of Financial Instruments, continued
The carrying amounts of all assets and liabilities approximate the fair value
except as follows (in thousands):
December 31, 20022003 December 31, 20012002
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ----------- ----------
Financial Assets:
Loans receivable net $ 116,347183,721 $ 122,366191,395 $ 248,088121,329 $ 247,127
Available-for-sale127,348
Convertible trust preferred securities 65,233 65,233 152,789 152,789
CMBS 155,780 155,780 210,268 210,268
Interest rate hedge liabilities (1,822) (1,822) (9,987) (9,987)
Interest rate cap agreement -- -- 82 8289,466 94,874 88,988 88,988
19.18. Supplemental Schedule of Non-Cash and Financing Activities
Interest paid on the Company'sour outstanding debt for 2003, 2002 and 2001 was $18,980,000,
$32,293,000 and 2000 was
$32,293,000, $38,290,000, and $48,531,000, respectively. Income taxes paid by the
Companyus in 2003, 2002
and 2001 were $2,454,000, $8,275,000 and 2000 were $8,275,000, $11,583,000, and $15,612,000,
respectively.
20.19. Transactions with Related Parties
The CompanyWe entered into a consulting agreement, dated as of January 1, 1998, with a directorone of
the Company.our directors. The consulting agreement had an initial term of one year, which
was subsequently extended to December 31, 2002.2002 and then allowed to expire.
Pursuant to the agreement, the director provided consulting services for the Companyus
including new business identification, strategic planning and identifying and
negotiating mergers, acquisitions, joint ventures and strategic alliances.
During each of the years ended December 31, 2002 and 2001, and 2000, the Companywe incurred expenses
of $96,000 in connection with this agreement.
Effective January 1, 2001, the Company2000, we entered into a consulting agreement with aanother
director. The consulting agreement hashad an initial term of two years that expired
on December 31, 2002. Under thethis agreement, the consultant was paid $15,000 per
month for which the consultant provided services for the Companyus including serving on the
management committees for Fund I and Fund II and any other tasks and assignments
requested by the chief executive officer. Effective January 1, 2003, we entered
into a new consulting agreement with the director with a term of two years that
expires on December 31, 2004. Under the new agreement, the consultant is paid
$10,000 per month for which the consultant provides services for us including
serving on the management committees for Fund I and Fund II, serving on the
board of directors of Fund III, and any other tasks and assignments requested by
the chief executive officer. During the years ended December 31, 2003, 2002 and
2001, the Companywe incurred expenses of $120,000, $180,000 and $180,000, respectively in
connection with this agreement.
The Company paysthese agreements.
We pay Equity Group Investments, L.L.C. and Equity Risk Services, Inc.,
affiliates under common control of the chairman of the board of directors, for
certain corporate services provided to the Company.us. These services include consulting on
insurance matters, legal matters, tax matters, risk management, and investor relations. During the years
ended December 31, 2003, 2002 and 2001, we incurred $48,000, $57,000 and
2000,
the Company incurred $57,000, $100,000, and $85,000, respectively, of expenses in connection with these services.
We pay Global Realty Outsourcing, Inc., a company in which we have an equity
investment and on whose board of directors our president and chief executive
officer serves, for consulting services relating to monitoring assets and
evaluating potential investments. During the yearyears ended December 31, 2000, the Company, through two2003, 2002
and 2001, we incurred $147,000, $13,000 and $30,000, respectively, of its
acquired subsidiaries, earned asset management fees pursuant to agreementsexpenses
in connection with entities in which two of the executive officers and directors of the Company
have an equity interest and serve as officers, members or as a general partner
thereof. During the year ended December 31, 2000, the Company earned $16,000
from such agreements, which have been included in the consolidated statements of
operations.
F-33these services.
F-38
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
21.20. Commitments and Contingencies
Leases
The Company leasesWe lease premises and equipment under operating leases with various expiration
dates. Minimum annual rental payments at December 31, 20022003 are as follows (in
thousands):
Years ending December 31:
- -------------------------
20032004 $ 844
2004 923971
2005 914962
2006 914962
2007 914962
2008 481
Thereafter 457--
-------------
$ 4,9664,338
=============
Rent expense for office space and equipment amounted to $902,000, $899,000 $852,000 and
$1,017,000$852,000 for the years ended December 31, 2003, 2002 2001 and 2000,2001, respectively.
Litigation
In the normal course of business, the Company iswe are subject to various legal proceedings
and claims, the resolution of which, in management's opinion, will not have a
material adverse effect on theour consolidated financial position or theour results of
operations of the Company.operations.
Employment Agreements
The Company hasWe have an employment agreement with itsour chief executive officer that provided
for an initial five-year term of employment that ended July 15, 2002. The
agreement has been automatically extended twice for a one-year renewal term endingterms, and
currently ends on July 15, 20032004, and contains extension options that extend the
agreement for additional one-year terms automatically unless terminated by
either party by April 17, 2003.2004. The employment agreement currently provides for
aan annual base annual salary of $600,000, subject to calendar year cost of living
increases at the discretion of the board of directors. The chief executive
officer is also entitled to annual incentive cash bonuses to be determined by
the board of directors based on individual performance and theour profitability of the Company and
is a participant in the Incentive Stock Planour long-term incentive stock plan and other employee
benefit plansplans.
21. Segment Reporting
We have established two reportable segments beginning January 1, 2003. We have
an internal information system that produces performance and asset data for our
two segments along service lines.
The Balance Sheet Investment segment includes all of our activities related to
direct loan and investment activities (including direct investments in Funds)
and the financing thereof.
The Investment Management segment includes all of our activities related to
investment management services provided us and third-party funds under
management and includes our taxable REIT subsidiary, CT Investment Management
Co., and its subsidiaries.
F-39
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
21. Segment Reporting, continued
The following table details each segment's contribution to the Company's overall
profitability and the identified assets attributable to each such segment for
the year ended and as of December 31, 2003, respectively (in thousands):
Balance Sheet Investment Inter-Segment
Investment Management Activities Total
--------------- --------------- --------------- ---------------
Income from loans and other investments:
Interest and related income $ 38,246 $ -- $ -- $ 38,246
Less: Interest and related expenses (9,845) -- -- (9,845)
--------------- --------------- --------------- ---------------
Income from loans and other
investments, net 28,401 -- -- 28,401
--------------- --------------- --------------- ---------------
Other revenues:
Management and advisory fees -- 11,259 (3,239) 8,020
Income/(loss) from equity investments in
Funds 2,312 (786) -- 1,526
Other interest income 29 185 (161) 53
--------------- --------------- --------------- ---------------
Total other revenues 2,341 10,658 (3,400) 9,599
--------------- --------------- --------------- ---------------
Other expenses:
General and administrative 3,214 10,106 -- 13,320
Management fees paid 3,239 -- (3,239) --
Other interest expense 161 -- (161) --
Depreciation and amortization 845 212 -- 1,057
--------------- --------------- --------------- ---------------
Total other expenses 7,459 10,318 (3,400) 14,377
--------------- --------------- --------------- ---------------
Income before income taxes and distributions
and amortization on convertible trust
preferred securities 23,283 340 -- 23,623
Provision for income taxes -- 646 -- 646
--------------- --------------- --------------- ---------------
Income before distributions and amortization
on convertible trust preferred securities 23,283 (306) -- 22,977
Distributions and amortization on convertible
trust preferred securities 9,452 -- -- 9,452
--------------- --------------- --------------- ---------------
Net income allocable to class A common stock $ 13,831 $ (306) $ -- $ 13,525
=============== =============== =============== ===============
Total Assets $ 387,727 $ 24,151 $ (14,734) $ 397,144
=============== =============== =============== ===============
All revenues were generated from external sources within the United States. The
Investment Management segment earned fees of $3,239,000 for management of the
Company.
22. Segment Reporting
AsBalance Sheet Investment segment for the Company manages itsyear ended December 31, 2003, which is
reflected as offsetting adjustments to other revenues and other expenses in the
Inter-Segment Activities column in the tables above.
Prior to January 1, 2003, we managed our operations as one segment,segment; therefore
separate segment reporting is not presented for 2002 2001 and 20002001, as the financial
information for that segment is the same as the information in the consolidated
financial statements.
F-34F-40
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
23.22. Risk Factors
The Company'sOur assets are subject to various risks that can affect results, including the
level and volatility of prevailing interest rates and credit spreads, adverse
changes in general economic conditions and real estate markets, the
deterioration of credit quality of borrowers and the risks associated with the
ownership and operation of real estate. Any significant compression of the
spreads of the interest rates earned on interest-earning assets over the
interest rates paid on interest-bearing liabilities could have a material
adverse effect on the Company'sour operating results as could adverse developments in the
availability of desirable loan and investment opportunities and the ability to
obtain and maintain targeted levels of leverage and borrowing costs. Adverse
changes in national and regional economic conditions, including acts of
terrorism, can have an effect on real estate values increasing the risk of
undercollateralization to the extent that the fair market value of properties
serving as collateral security for the Company'sour assets are reduced. Numerous factors,
such as adverse changes in local market conditions, competition, increases in
operating expenses and uninsured losses, can affect a property owner's ability
to maintain or increase revenues to cover operating expenses and the debt
service on the property's financing and, consequently, lead to a deterioration
in credit quality or a loan default and reduce the value of the
Company'sour assets. In
addition, the yield to maturity on the Company'sour CMBS assets are subject to the default
and loss experience on the underlying mortgage loans, as well as by the rate and
timing of payments of principal. If there are realized losses on the underlying
loans, the Companywe may not recover the full amount, or possibly, any of itsour initial
investment in the affected CMBS asset. To the extent there are prepayments on
the underlying mortgage loans as a result of refinancing at lower rates, the Company'sour
CMBS assets may be retired substantially earlier than their stated maturities
leading to reinvestment in lower yielding assets. There can be no assurance that
the Company'sour assets will not experience any of the foregoing risks or that, as a result
of any such experience, the Companywe will not suffer a reduced return on investment or an
investment loss.
F-35F-41
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
24.23. Summary of Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2003, 2002 2001 and 20002001 (in thousands except per share
data):
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
2003
- ----
Revenues $11,139 $10,652 $14,517 $ 11,537
Net income $ 2,545 $ 2,586 $ 4,786 $ 3,608
Net income per share of
common stock:
Basic $ 0.46 $ 0.46 $ 0.74 $ 0.55
Diluted $ 0.46 $ 0.46 $ 0.66 $ 0.54
2002
- ----
Revenues $13,886 $16,579 $16,843 $ 9,695
Net income / (loss) $ 1,573 $ 1,117 $ 1,553 $(13,981)
Net income / (loss) per share of
Common Stock:common stock:
Basic $ 0.080.25 $ 0.060.18 $ 0.090.26 $ (0.84)(2.53)
Diluted $ 0.080.24 $ 0.060.18 $ 0.080.25 $ (0.84)(2.53)
2001
- ----
Revenues $19,180 $19,849 $20,824 $18,807$ 18,807
Net income $ 1,724 $ 2,675 $ 2,899 $ 2,072
Preferred Stockstock dividends $ 404 $ 125 $ 77 $ --
Net income per share of
Common Stock:common stock:
Basic $ 0.060.18 $ 0.130.38 $ 0.150.44 $ 0.110.33
Diluted $ 0.060.18 $ 0.100.30 $ 0.110.34 $ 0.10
2000
- ----
Revenues $24,220 $23,722 $22,617 $23,697
Net income $ 2,919 $ 1,154 $ 2,417 $ 3,271
Preferred Stock dividends $ 404 $ 404 $ 404 $ 403
Net income per share of
Common Stock:
Basic $ 0.10 $ 0.03 $ 0.09 $ 0.13
Diluted $ 0.09 $ 0.03 $ 0.08 $ 0.100.29
F-36
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
25. Subsequent Events
In December 2002, the Company's board of directors authorized the Company's
election to be taxed as a REIT for the 2003 tax year. The Company will continue
to make, for its own account and as investment manager for the account of funds
under management, loans and debt-related investments in various types of
commercial real estate and related assets.
In view of the Company's election to be taxed as a REIT, the Company will tailor
the its balance sheet investment program to originate or acquire loans and
investments to produce a portfolio that meets the asset and income tests
necessary to maintain the Company's qualification as a REIT. In order to
accommodate the Company's REIT status, the legal structure of future investment
funds the Company sponsors may be different from the legal structure of the
Company's existing investment funds.
In order to qualify as a REIT, five or fewer individuals may own no more than
50% of the Company's Common Stock. As a means of facilitating compliance with
such qualification, stockholders controlled by John R. Klopp and Craig M.
Hatkoff and trusts for the benefit of the family of Samuel Zell each sold
500,000 shares of Class A Common Stock to an institutional investor in a
transaction that closed on February 7, 2003. Following this transaction, the
Company's largest five individual stockholders own in the aggregate less than
50% of the Company's Class A Common Stock.
In connection with the organization of Fund I and Fund II and in accordance with
the venture agreement, in 2001 and 2002, the Company issued to affiliates of
Citigroup a warrant to purchase 8,528,467 shares of Class A Common Stock. At
December 31, 2002, all such warrants had a $5.00 per share exercise price, were
exercisable and were to expire on March 8, 2005. In January 2003, the Company
purchased all of the outstanding warrants for $2.1 million.
In January 2003, the Company purchased Citigroup's 75% interest in Fund I for a
purchase price of approximately $38.4 million (including the assumption of
liabilities). As of January 31, 2003, the Company will consolidate the
operations of Fund I in its consolidated financial statements.
On January 31, 2003, Edward L. Shugrue III, the Company's chief financial
officer, resigned and was replaced by Brian H. Oswald. Prior to his appointment
as chief financial officer, Mr. Oswald had been the Company's director of
finance and accounting and chief accounting officer since 1997. In connection
with Mr. Shugrue's resignation, the Company purchased 199,282 shares of Class A
Common Stock from Mr. Shugrue for $947,000.
F-37F-42