UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 1-14788
-------
Capital Trust, Inc.
-------------------
(Exact name of registrant as specified in its charter)
Maryland 94-6181186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
605 Third Avenue, 26th Floor, New York, NY 10016
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 655-0220
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Class A Common Stock, New York Stock Exchange
$0.01 par value ("Class A Common Stock")
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of outstanding shares of the Registrant's Class A Common
Stock as of November 11, 1999 was 21,988,524.
<PAGE>
EXPLANATORY NOTE
- ----------------
Capital Trust, Inc., a Maryland corporation (the "Company"), is the successor to
Capital Trust, a California business trust (the "Predecessor"), following
consummation of the reorganization on January 28, 1999 whereby the Predecessor
ultimately merged with and into the Company. Unless the context otherwise
requires, references to the business, assets, liabilities, capital structure,
operations and affairs of the Company include those of the Predecessor prior to
the reorganization.
<PAGE>
CAPITAL TRUST, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
<S> <C> <C>
Item 1: Financial Statements 1
Consolidated Balance Sheets - September 30, 1999 (unaudited) and December 31, 1998
(audited) 1
Consolidated Statements of Income - Three and Nine months Ended September 30, 1999
and 1998 (unaudited) 2
Consolidated Statements of Changes in Stockholders' Equity - Nine months Ended
September 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows - Nine months Ended September 30, 1999 and 1998
(unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
Item 3: Quantitative and Qualitative Disclosures about Market Risk 21
Part II. Other Information
Item 1: Legal Proceedings 23
Item 2: Changes in Securities 23
Item 3: Defaults Upon Senior Securities 23
Item 4: Submission of Matters to a Vote of Security Holders 23
Item 5: Other Information 23
Item 6: Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
<PAGE>
Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- ------------------
Assets (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $ 16,837 $ 46,623
Other available-for-sale securities, at fair value - 3,355
Commercial mortgage-backed securities available-for-sale, at fair value 218,288 31,650
Certificated mezzanine investments available-for-sale, at fair value 44,743 45,480
Loans receivable, net of $6,575 and $4,017 reserve for possible credit losses at
September 30, 1999 and December 31, 1998, respectively 510,768 620,858
Excess of purchase price over net tangible assets acquired, net 291 308
Deposits and other receivables 722 401
Accrued interest receivable 7,537 8,041
Deferred income taxes 4,446 3,029
Prepaid and other assets 6,686 6,693
--------------- -------------------
Total assets $ 810,318 $ 766,438
=============== ===================
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 7,265 $12,356
Notes payable 3,445 4,247
Credit facilities 329,291 371,754
Term redeemable securities contract 128,786 -
Repurchase obligations 34,458 79,402
Deferred origination fees and other revenue 4,053 4,448
----------------- -----------------
Total liabilities 507,298 472,207
----------------- -----------------
Company-obligated, mandatorily redeemable, convertible preferred securities of CT
Convertible Trust I, holding solely 8.25% junior subordinated debentures of Capital
Trust, Inc. ("Convertible Trust Preferred Securities") 146,143 145,544
----------------- ---------------
Stockholders' equity:
Class A 9.5% cumulative convertible preferred stock, $0.01 par value, $0.26 cumulative
annual dividend, 100,000 shares authorized, 2,278 and 12,268 shares issued and
outstanding at September 30, 1999 and December 31, 1998, respectively (liquidation
preference of $6,127)("Class A Preferred Stock") 23 123
Class B 9.5% cumulative convertible non-voting preferred stock, $0.01 par value, $0.26
cumulative annual dividend, 100,000 shares authorized, 4,043 shares issued and
outstanding at September 30, 1999 (liquidation preference of $10,876)("Class B
Preferred Stock" and together with Class A Preferred Stock, "Preferred Stock") 40 -
Class A common stock, $0.01 par value, 100,000 shares authorized, 21,862 and
18,159 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 219 182
Class B common stock, $0.01 par value, 100,000 shares authorized, 2,294 shares issued and
outstanding at September 30, 1999 ("Class B Common Stock") 23 -
Restricted Class A Common Stock, $0.01 par value, 127 and 55 shares issued and
outstanding at September 30, 1999 and December 31, 1998, respectively ("Restricted
Class A Common Stock" and together with Class A Common Stock and Class B
Common Stock, "Common Stock") 1 1
Additional paid-in capital 189,456 188,816
Unearned compensation (515) (418)
Accumulated other comprehensive income/(loss) (5,317) (4,665)
Accumulated deficit (27,053) (35,352)
---------------- ---------------
Total stockholders' equity 156,877 148,687
---------------- ---------------
Total liabilities and stockholders' equity $ 810,318 $ 766,438
================ ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 1 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Income
Three and Nine months Ended September 30, 1999 and 1998
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
------------------------------- --------------------------------
1999 1998 1999 1998
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Income from loans and other investments:
Interest and related income $ 22,230 $ 20,782 $ 64,971 $ 42,825
Less: Interest and related expenses 10,701 8,714 28,443 18,311
----------- -------------- --------------- --------------
Income from loans and other investments, net 11,529 12,068 36,528 24,514
------------ --------------- --------------- --------------
Other revenues:
Advisory and investment banking fees 1,970 829 7,144 9,479
Other interest income 138 261 983 941
Gain on sale of investments - - 35 -
------------ --------------- --------------- --------------
Total other revenues 2,108 1,090 8,162 10,420
------------ --------------- --------------- -------------
Other expenses:
General and administrative 3,341 4,482 12,202 11,743
Other interest expense 89 98 290 309
Depreciation and amortization 89 63 264 171
Provision for possible credit losses 1,040 1,119 3,073 2,359
------------ ---------------- --------------- --------------
Total other expenses 4,559 5,762 15,829 14,582
------------ ---------------- --------------- --------------
Income before income taxes and distributions and amortization on
Convertible Trust Preferred Securities
9,078 7,396 28,861 20,352
Provision for income taxes 4,287 3,053 13,770 8,312
------------ ---------------- --------------- --------------
Income before distributions and amortization on Convertible
Trust Preferred Securities 4,791 4,343 15,091 12,040
Distributions and amortization on Convertible Trust
Preferred Securities, net of income tax benefit of
$1,552, $1,069, $4,656 and $1,069, respectively
1,741 1,199 5,224 1,199
----------- ---------------- --------------- --------------
Net income 3,050 3,144 9,867 10,841
Less: Preferred Stock dividend and dividend requirement
403 783 1,971 2,351
----------- --------------- --------------- --------------
Net income allocable to shares of Common Stock $ 2,647 $ 2,361 $ 7,896 $ 8,490
=========== ================ =============== ==============
Per share information: Net income per share of Common Stock:
Basic $ 0.11 $ 0.13 $ 0.39 $ 0.47
=========== ================ =============== =============
Diluted $ 0.10 0.10 $ 0.32 $ 0.35
=========== ================ =============== =============
Weighted average shares of Common Stock
outstanding:
Basic 24,287,254 18,217,186 20,340,982 18,218,279
=========== ================ =============== ==============
Diluted 30,908,087 30,612,406 30,904,582 30,705,867
============ ================ =============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 2 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Nine months Ended September 30, 1999 and 1998
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Restricted
Class A Class B Class A Class B Class A
Comprehensive Preferred Preferred Common Common Common
Income/(loss) Stock Stock Stock Stock Stock
---------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended September 30, 1998
- --------------------------------------
Balance at December 31, 1997 $ - $ 123 $ - $ 182 $ - $ -
Net income 10,841 - - - - -
Change in unrealized gain (loss) on
available-for-sale securities (2,693) - - - - -
Issuance of Class A Common Stock
under stock option plan - - - - - -
Issuance of restricted
Class A Common Stock - - - - - 1
Cancellation of previously issued
restricted Class A Common Stock - - - - - -
Restricted Class A Common Stock earned - - - - - -
Dividends paid on Preferred Stock - - - - - -
--------------- ---------------------------------------------------------------
Balance at September 30, 1998 $ 8,148 $ 123 $ - $ 182 $ - $ 1
=============== ===============================================================
Nine months ended September 30, 1999
- --------------------------------------
Balance at December 31, 1998 $ - $ 123 $ - $ 182 $ - $ 1
Net income 9,867 - - - - -
Change in unrealized loss on
available-for-sale securities (652) - - - - -
Conversion of Class A Common and
Preferred Stock to Class B - (40) 4 (23) 23 -
Conversion of Class A Preferred Stock to
Class A Common Stock - (60) - 60 - -
Issuance of Class A Common Stock
unit awards - - - - - -
Cancellation of previously issued
restricted Class A Common Stock - - - - - (1)
Issuance of restricted
Class A Common Stock - - - - - 1
Restricted Class A Common Stock earned - - - - - -
Dividends paid on Preferred Stock - - - - - -
--------------- ---------------------------------------------------------------
Balance at September 30, 1999 $ 9,215 $ 23 $ 4 $ 219 $ 23 $ 1
=============== ===============================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-In Unearned Comprehensive Accumulated
Capital Compensation Income Deficit Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nine months ended September 30, 1998
- -----------------------------------------------
Balance at December 31, 1997 $ 188,257 $ - $ 387 $ (45,660) $ 143,289
Net income - - - 10,841 10,841
Change in unrealized gain (loss) on
available-for-sale securities - - (2,693) - (2,693)
Issuance of Class A Common Stock
under stock option plan 10 - - - 10
Issuance of restricted
Class A Common Stock 720 (725) - - -
Cancellation of previously issued restricted
Class A Common Stock (174) 156 - - (18)
Restricted Class A Common Stock earned - 115 - - 115
Dividends paid on Preferred Stock - - - (1,568) (1,568)
--------------------------------------------------------------------------------
Balance at September 30, 1998 $ 188,817 $ (454) $ (2,306) $ (36,387) $ 149,976
================================================================================
Nine months ended September 30, 1999
- -----------------------------------------------
Balance at December 31, 1998 $ 188,816 $ (418) $ (4,665) $ (35,352) $ 148,687
Net income - - - 9,867 9,867
Change in unrealized loss on
available-for-sale securities - - (652) - (652)
Conversion of Class A Common and Preferred
Stock to Class B - - - - -
Conversion of Class A Preferred Stock to
Class A Common Stock - - - - -
Issuance of Class A Common Stock unit
awards 312 - - - 312
Cancellation of previously issued restricted
Class A Common Stock (271) 180 - - (92)
Issuance of restricted
Class A Common Stock 599 (600) - - -
Restricted Class A Common Stock earned - 323 - - 323
Dividends paid on Preferred Stock - - - (1,568) (1,568)
--------------------------------------------------------------------------------
Balance at September 30, 1999 $ 189,456 $ (515) $ (5,317) $ (27,053) $ 156,877
================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 3 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998
(in thousands) (unaudited)
<TABLE>
<CAPTION>
1999 1998
-------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,867 $ 10,841
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes (1,417) -
Provision for credit losses 3,073 2,359
Depreciation and amortization 264 171
Restricted Class A Common Stock earned 323 115
Net amortization of premiums and accretion of discounts on loans and investments
(624) 1,025
Accretion of discounts on term redeemable securities contract 1,901 137
Net accretion of discounts and fees on Convertible Trust Preferred Securities
599 -
Expenses reversed on cancellation of restricted stock previously issued (92) (18)
Gain on sale of investments (35) (100)
Changes in assets and liabilities:
Deposits and other receivables (321) (47)
Accrued interest receivable 504 (7,431)
Prepaid and other assets (182) (4,095)
Deferred origination fees and other revenue (395) 4,685
Accounts payable and accrued expenses (4,779) 2,063
-------------- -----------------
Net cash provided by operating activities 8,686 9,705
-------------- -----------------
Cash flows from investing activities:
Purchases of commercial mortgage-backed securities (185,947) (36,335)
Principal collections on and proceeds from sale of commercial mortgage-backed
securities - 49,591
Purchase of certificated mezzanine investments - (21,583)
Principal collections on certificated mezzanine investments 737 328
Origination and purchase of loans receivable (102,593) (500,981)
Principal collections on and proceeds from sale of loans receivable 208,937 50,901
Purchases of equipment and leasehold improvements (58) (345)
Principal collections and proceeds from sales of available-for-sale
securities 3,344 5,841
-------------- -----------------
Net cash used in investing activities (75,580) (452,583)
-------------- -----------------
Cash flows from financing activities:
Proceeds from repurchase obligations 3,929 41,837
Repayment of repurchase obligations (48,873) (43,590)
Proceeds from credit facilities 200,026 564,646
Repayment of credit facilities (242,489) (295,730)
Proceeds from notes payable 224 10,000
Repayment of notes payable (1,026) (10,772)
Net proceeds from issuance of Convertible Trust Preferred Securities - 145,197
Dividends paid on Class A Preferred Stock (1,568) (1,568)
Net proceeds from issuance of shares of Class A Common Stock under
stock option plan - 10
Net proceeds from issuance of term redeemable
securities contract 126,885 -
-------------- -----------------
Net cash provided by financing activities 37,108 410,030
-------------- -----------------
Net decrease in cash and cash equivalents (29,786) (32,848)
Cash and cash equivalents at beginning of year 46,623 49,268
-------------- -----------------
Cash and cash equivalents at end of period $ 16,837 $ 16,420
============== =================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 4 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
(unaudited)
1. Presentation of Financial Information
The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited consolidated interim financial
statements should be read in conjunction with the financial statements and the
related management's discussion and analysis of financial condition and results
of operations filed with the Annual Report on Form 10-K of Capital Trust, Inc.
and Subsidiaries (collectively, the "Company") for the fiscal year ended
December 31, 1998. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. The results of operations for the nine months ended
September 30, 1999, are not necessarily indicative of results that may be
expected for the entire year ending December 31, 1999.
The accompanying unaudited consolidated interim financial statements of the
Company include the accounts of the Company, VIC, Inc., a wholly owned
subsidiary that serves as the general partner for Victor Capital Group, L.P.
("Victor Capital"), other wholly-owned subsidiaries of Victor Capital, Natrest
Funding I, Inc. (a single purpose entity holding one Mortgage Loan), CT
Convertible Trust I (a statutory trust which issued the Convertible Trust
Preferred Securities) and CT-BB Funding Corp. (a single purpose entity holding
fifteen commercial mortgage-backed securities ("CMBS")). All significant
intercompany balances and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform in all material
respects to generally accepted accounting principles. Certain prior period
amounts have been reclassified to conform to current period classifications.
2. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
- 5 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
3. Earnings Per Share of Class A Common Stock
Earnings per share of Common Stock is presented based on the requirements of
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). Basic EPS
is computed based on the income applicable to Common Stock (which is net income
reduced by the dividends on the Preferred Stock) divided by the weighted-average
number of shares of Common Stock outstanding during the period. Diluted EPS is
based on the net earnings applicable to Common Stock plus dividends on the
Preferred Stock, divided by the weighted average number of shares of Common
Stock and potentially dilutive shares of Common Stock that were outstanding
during the period. At September 30, 1999, potentially dilutive shares of Common
Stock include the shares issuable pursuant to convertible Preferred Stock and
dilutive Common Stock unit awards. At September 30, 1998, potentially dilutive
shares of Common Stock include shares issuable pursuant to the convertible
Preferred Stock and dilutive Common Stock options. The options outstanding
during the period ended September 30, 1999 were not dilutive.
4. Supplemental Disclosures for Consolidated Statements of Cash Flows
Interest paid on the Company's outstanding debt during the nine months ended
September 30, 1999 and 1998 was $36,362,000 and $18,007,000, respectively.
Income taxes paid by the Company during the nine months ended September 30, 1999
and 1998 were $13,528,000 and $7,741,000, respectively.
5. Commercial Mortgage-Backed Securities ("CMBS")
On March 3, 1999, the Company, through its then newly formed wholly-owned
subsidiary, CT-BB Funding Corp., acquired a portfolio of fixed-rate "BB" rated
CMBS (the "BB CMBS Portfolio") from an affiliate of the Company's credit
provider under the First Credit Facility (as hereinafter defined). 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 six-year term financing for
70% of the purchase price at a floating rate above the London Interbank Offered
Rate ("LIBOR") and entered into an interest rate swap with the Company for the
full duration of the BB CMBS Portfolio securities thereby providing a hedge for
interest rate risk. The financing was provided at a rate which was below the
current market for similar financings and, as such, the carrying amount of the
assets and the debt were reduced by $10.9 million to adjust the yield on the
debt to current market terms. The BB CMBS Portfolio securities bear interest at
fixed rates that average 7.74% on the face amount and mature at various dates
from March 2005 to December 2014. After giving effect to the discounted purchase
price 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 at
September 30, 1999 is 11.16%.
- 6 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
6. Loans receivable
At September 30, 1999 and December 31, 1998, the Company's loans receivable
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------- ----------------------
<S> <C> <C>
(1) Mortgage Loans $ 270,108 $ 305,578
(2) Mezzanine Loans 192,752 317,278
(3) Other loans receivable 54,483 2,019
---------------------- ----------------------
517,343 624,875
Less: reserve for possible credit losses (6,575) (4,017)
---------------------- ----------------------
Total loans $ 510,768 $ 620,858
====================== ======================
</TABLE>
At September 30, 1999, the weighted average interest rate in effect, after
giving effect to interest rate swaps and including amortization of fees and
premiums, for the Company's loans receivable was as follows:
(1) Mortgage Loans 10.87%
(2) Mezzanine Loans 11.33%
(3) Other loans receivable 12.08%
Total Loans 11.17%
At September 30, 1999, $388,404,000 (or approximately 75%) of the aforementioned
loans bear interest at floating rates ranging from LIBOR plus 320 basis points
to LIBOR plus 1000 basis points. The remaining $128,939,000 (or approximately
25%) of loans were financed at fixed rates ranging from 9.50% to 12.50%.
Since December 31, 1998, the Company originated three Mortgage Loans totaling
$45.0 million, one other loan for $52.5 million and funded $5.1 million of
commitments under four existing loans. The Company received full satisfaction of
seven loans totaling $190.5 million and recorded a write-down of one loan asset
by $500,000 and subsequently sold it for $9.5 million, at net book value, during
the period. The Company also received $9.0 million of partial repayments on
eight loans.
At September 30, 1999, the Company had additional commitments for fundings on
outstanding loans and certificated mezzanine investments of approximately $32.9
million and had no other letters of intent outstanding for lending transactions.
- 7 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
7. Long-Term Debt
Credit Facilities
At December 31, 1998, the Company was party to a credit agreement with a
commercial lender that provided for a three-year $355 million line of credit
(the "First Credit Facility"). Effective February 26, 1999, pursuant to an
amended and restated credit agreement, the Company extended the expiration of
such credit facility from December 2001 to February 2002 with an automatic
one-year amortizing extension option, if not otherwise extended.
At December 31, 1998, the Company was party to an additional credit agreement
with another commercial lender that provided for a $300 million line of credit
scheduled to expire in December 1999 (the "Second Credit Facility" together with
the First Credit Facility, the "Credit Facilities"). Effective March 30, 1999,
pursuant to an amended and restated credit agreement, the Company extended the
expiration of such credit facility from December 1999 to June 2000 with an
automatic nine-month amortizing extension option, if not otherwise extended.
Term Redeemable Securities Contract
In connection with the purchase of the BB CMBS Portfolio described in Note 5, 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 had
the effect of adjusting the yield to current market terms. The debt has a
three-year term that expires in February 2002.
An affiliate of the seller also entered into an interest rate swap with the
Company for the full duration of the BB CMBS Portfolio securities thereby
providing a hedge for interest rate risk. The notional values of the swaps were
tied to the amount of debt for the term of the debt and then to the assets for
the remaining terms of the assets. The market value of the swap at September 30,
1999 was $10,569,000.
By entering into the interest rate swap, the Company has effectively converted
the term redeemable securities contract to a fixed interest rate of 6.55%. After
adjusting the carrying amount and yield to current market terms, the term
redeemable securities contract bears interest at a fixed interest rate of 9.73%.
- 8 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
8. Stockholders' Equity
Prior to August 10, 1999 (the "Conversion Date"), the Company's principal
stockholder, Veqtor Finance Company, L.L.C. ("Veqtor"), owned 6,959,593 (or
approximately 38%) of the outstanding shares of Class A Common Stock and all
12,267,658 of the outstanding shares of Class A Preferred Stock. Veqtor is
controlled by the chairman of the board, the vice chairman and chief executive
officer and the vice chairman and chairman of the executive committee of the
board of directors of the Company in their capacities as the persons controlling
the common members of Veqtor. Prior to Conversion Date, the common members owned
approximately 48% and three commercial banks, as preferred members of Veqtor,
owned approximately 52% of the equity ownership of Veqtor.
On the Conversion Date, in accordance with a commitment made by Veqtor and its
common members, Veqtor redeemed the outstanding preferred units in Veqtor held
by its preferred members in exchange for their pro rata portion of the Company's
stock owned by Veqtor. Due to the regulatory status of the redeemed preferred
members as bank holding companies or affiliates thereof, prior to effecting the
transfer of stock upon the redemption, Veqtor was obligated to convert 2,293,784
shares of Class A Common Stock into an equal number of shares of Class B Common
Stock and 4,043,248 shares of Class A Preferred Stock into an equal number of
shares of Class B Preferred Stock. Pursuant to charter provisions relating to
compliance with the Bank Holding Company Act of 1956, as amended ("BHCA"), bank
holding companies or their affiliates can own no more than 4.9% of the voting
stock of the Company. Therefore, in connection with the redemption, the redeemed
preferred members received 1,292,103 shares of Class A Common Stock, 2,293,784
shares of non-voting Class B Common Stock, 2,277,585 shares of Class A Preferred
Stock and 4,043,248 shares of non-voting Class B Preferred Stock. The Class B
Common Stock and the Class B Preferred Stock are identical and have the same
rights as the Class A Common Stock and the Class B Preferred Stock,
respectively, except that neither the Class B Common Stock nor the Class B
Preferred Stock have voting rights except as provided by law, and, subject to
compliance with the BHCA, the Class B Common Stock and the Class B Preferred
Stock are convertible on a one share for one share basis into Class A Common
Stock and Class A Preferred Stock, respectively. After the Conversion Date, the
common members of Veqtor own 100% of the equity ownership of Veqtor.
On September 30, 1999, in accordance with a commitment made by Veqtor and its
common members, all 5,946,825 shares of Class A Preferred Stock were, upon
exercise of existing conversion rights, converted into an equal number of shares
of Class A Common Stock. As a result of this conversion, the Company's annual
dividend on Preferred Stock has been reduced from $3,135,000 to $1,615,000.
As a result of the foregoing redemption and subsequent conversion transactions,
as of September 30, 1999, Veqtor continued to own 9,320,531 (or approximately
42.4%) of the outstanding shares of Class A Common Stock.
- 9 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
9. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
The provision for income taxes for the nine months ended September 30, 1999 and
1998, is comprised as follows (in thousands):
1999 1998
------------------ -----------------
Current
Federal $ 9,030 $ 4,516
State 3,236 1,995
Local 2,921 1,801
Deferred
Federal (856) -
State (295) -
Local (266) -
------------------ -----------------
Provision for income taxes $ 13,770 $ 8,312
================== =================
The Company has federal net operating loss carryforwards ("NOLs") as of
September 30, 1999 of approximately $11.9 million. Such NOLs expire through
2012. The Company also has a federal capital loss carryover of approximately
$1.6 million that can be used to offset future capital gains. Due to CalREIT
Investors Limited Partnership's ("CRIL") purchase of 6,959,593 Common Shares
from the Company's former parent in January 1997 and another prior ownership
change, a substantial portion of the NOLs 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 reconciliation of income tax computed at the U.S. federal statutory tax rate
(35%) to the effective income tax rate for the nine months ended September 30,
1999 and 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------- --------------------------------
$ % $ %
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Federal income tax at statutory rate $ 10,101 35.0% $ 7,123 35.0%
State and local taxes, net of federal
tax benefit 3,623 12.6% 2,505 12.3%
Utilization of net operating loss
carryforwards (368) (1.3)% (1,275) (6.3)%
Compensation in excess of
deductible limits 362 1.2% - - %
Other 52 0.2% (41) (0.2)%
=============== =============== ================================
$ 13,770 47.7% $ 8,312 40.8%
=============== =============== ================================
</TABLE>
- 10 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
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.
The components of the net deferred tax assets as of September 30, 1999 and
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------------- -----------------------
<S> <C> <C>
Net operating loss carryforward $ 4,191 $ 4,559
Reserves on other assets and
for possible credit losses 6,069 4,621
Other 88 119
----------------------- -----------------------
Deferred tax assets 10,348 9,299
Valuation allowance (5,902) (6,270)
----------------------- -----------------------
$ 4,446 $ 3,029
======================= =======================
</TABLE>
The Company recorded a valuation allowance to reserve a portion of its net
deferred tax assets in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS
No. 109, this valuation allowance will be adjusted in future years, as
appropriate. However, the timing and extent of such future adjustments can not
presently be determined.
- 11 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
10. Employee Benefit Plans
1997 Long-Term Incentive Stock Plan
During the nine months ended September 30, 1999, the Company issued an aggregate
of 352,000 options to acquire shares of Class A Common Stock with an exercise
price of $6.00 per share (a price higher than the fair market value based on
reported trading prices on the dates of the grant).
The Company also issued 104,167 restricted shares of Class A Common Stock which
vest one third on each of the following dates: January 30, 2000, January 30,
2001 and January 30, 2002. The Company also reserved for issuance 52,083
performance based restricted shares of Class A Common Stock which will be issued
upon the achievement of stock price performance goals and thereafter will vest
over specified vesting periods.
The following table summarizes the option activity under the incentive stock
plan for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Options Exercise Price Per Share
Outstanding per Share
--------------------- ------------------------------ ----------------------
<S> <C> <C> <C>
Outstanding at January 1, 1999 1,269,084 $6.00 - $11.38 $ 8.46
Granted in 1999 352,000 $6.00 6.00
Exercised in 1999 - - -
Canceled in 1999 (318,334) $6.00 - $11.38 8.47
--------------------- ----------------------
Outstanding at September 30, 1999 1,302,750 $6.00 - $10.00 $ 7.80
===================== ======================
</TABLE>
At September 30, 1999, 499,405 of the options are exercisable. At September 30,
1999, the outstanding options have various remaining contractual exercise
periods ranging from 7.75 to 9.50 years with a weighted average life of 8.50
years.
11. Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting Standards No. 131
Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131). SFAS No. 131 is based on reporting information the way that management
organizes its segments within the Company for making operating decisions and
assessing performance.
During the first quarter of 1999, the Company reorganized the structure of its
internal organization by merging its Lending/Investment and Advisory segments
and thereby no longer managing its operations as separate segments. Previously,
the Company operated as two segments: Lending/Investment and Advisory.
Restatement of prior periods is not presented as the Company did not apply SFAS
No. 131 to interim financial statements in the initial year of its application.
- 12 -
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-Q. Historical results set forth are not necessarily indicative of the
future financial position and results of operations of the Company.
Recent Ownership and Capital Stock Changes
- ------------------------------------------
Prior to August 10, 1999 (the "Conversion Date"), the Company's
principal stockholder, Veqtor Finance Company, L.L.C. ("Veqtor"), owned
6,959,593 (or approximately 38%) of the outstanding shares of Class A Common
Stock and all 12,267,658 of the outstanding shares of Class A Preferred Stock.
Veqtor is controlled by the chairman of the board, the vice chairman and chief
executive officer and the vice chairman and chairman of the executive committee
of the board of directors of the Company in their capacities as the persons
controlling the common members of Veqtor. Prior to Conversion Date, the common
members owned approximately 48% and three commercial banks, as preferred members
of Veqtor, owned approximately 52% of the equity ownership of Veqtor.
On the Conversion Date, in accordance with a commitment made by
Veqtor and its common members, Veqtor redeemed the outstanding preferred units
in Veqtor held by its preferred members in exchange for their pro rata portion
of the Company's stock owned by Veqtor. Due to the regulatory status of the
redeemed preferred members as bank holding companies or affiliates thereof,
prior to effecting the transfer of stock upon the redemption, Veqtor was
obligated to convert 2,293,784 shares of Class A Common Stock into an equal
number of shares of Class B Common Stock and 4,043,248 shares of Class A
Preferred Stock into an equal number of shares of Class B Preferred Stock.
Pursuant to charter provisions relating to compliance with the Bank Holding
Company Act of 1956, as amended ("BHCA"), bank holding companies or their
affiliates can own no more than 4.9% of the voting stock of the Company.
Therefore, in connection with the redemption, the redeemed preferred members
received 1,292,103 shares of Class A Common Stock, 2,293,784 shares of
non-voting Class B Common Stock, 2,277,585 shares of Class A Preferred Stock and
4,043,248 shares of non-voting Class B Preferred Stock.
The Class B Common Stock and the Class B Preferred Stock are
identical and have the same rights as the Class A Common Stock and the Class B
Preferred Stock, respectively, except that the Class B Common Stock and the
Class B Preferred Stock do not have voting rights and, subject to compliance
with the BHCA, the Class B Common Stock and the Class B Preferred Stock are
convertible on a one share for one share basis into Class A Common Stock and
Class A Preferred Stock, respectively. After the Conversion Date, the common
members of Veqtor owned 100% of the equity ownership of Veqtor.
On September 30, 1999, in accordance with a commitment made by Veqtor
and its common members, all 5,946,825 shares of Class A Preferred Stock were,
upon exercise of existing conversion rights, converted into an equal number of
shares of Class A Common Stock.
- 13 -
<PAGE>
As a result of this conversion, the Company's annual dividend on preferred sock
has been reduced from $3,135,000 to $1,615,000.
Overview of Financial Condition
- -------------------------------
During the first quarter of 1999, the Company, through its then newly
formed wholly-owned subsidiary, CT-BB Funding Corp., acquired a portfolio (the
"BB CMBS Portfolio") of "BB" rated commercial mortgage-backed securities
("CMBS") from an affiliate of the Company's credit provider under the First
Credit Facility (as hereinafter defined). 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") and entered
into an interest rate swap with the Company for the full duration of the BB CMBS
Portfolio thereby providing a hedge for interest rate risk. The financing was
provided at a rate which was below the current market for similar financings
and, as such, the carrying amounts of the assets and the debt were reduced by
$10.9 million which had the effect of adjusting the yield on the debt to current
market terms. These securities bear interest at various fixed rates, which, when
including the amortization of the discount, average 11.16%.
Since December 31, 1998, the Company originated three Mortgage Loans
totaling $45.0 million, one other loan for $52.5 million and funded $5.1 million
of commitments under four existing loans. The Company received full satisfaction
of seven loans totaling $190.5 million and recorded a write-down of one loan
asset by $500,000 and subsequently sold it for $9.5 million, at net book value,
during the period. The Company also received $9.0 million of partial repayments
on eight loans. At September 30, 1999, the Company had outstanding loans,
certificated mezzanine investments and investments in CMBS totaling
approximately $780 million and additional commitments for fundings on
outstanding loans and certificated mezzanine investments of approximately $32.9
million.
During the nine months ended September 30, 1999, the Company sold all
of its other available-for-sale securities that had an amortized cost of
$2,764,000 for a $35,000 gain. In connection with the sale, the Company
satisfied the repurchase obligation outstanding relating to these assets for
$2,526,000.
In connection with the sale of a loan described above, a repurchase
obligation outstanding at December 31, 1998 for $7.5 million was satisfied. Two
other repurchase obligations outstanding at December 31, 1998 totaling $27.0
million were satisfied by the transfer of the liabilities associated with the
two related assets to the Credit Facilities (as hereinafter defined). A fourth
repurchase obligation outstanding at December 31, 1998 for $10.5 million was
settled for cash. At September 30, 1999, the Company was party to two repurchase
obligations relating to assets sold by the Company with an aggregate carrying
amount of $44.8 million, which approximates the assets' market value, and has
liabilities to repurchase these assets for $34.5 million. The average interest
rate in effect for all repurchase obligations at September 30, 1999 is 6.80%.
- 14 -
<PAGE>
At December 31, 1998, the Company was a party to a credit agreement
with a commercial lender that provided for a three-year $355 million line of
credit (the "First Credit Facility"). Concurrent with the BB CMBS Portfolio
transaction, the First Credit Facility's maturity was extended to February 28,
2002 with an automatic one-year amortizing extension option, if not otherwise
extended.
At December 31, 1998, the Company was a party to a credit agreement
with another commercial lender that provided for a $300 million line of credit
(the "Second Credit Facility" and together with the First Credit Facility, the
"Credit Facilities"). During the first quarter of 1999, the Company extended the
expiration date of its Second Credit Facility from December 1999 to June 2000
with an automatic nine-month amortizing extension option, if not otherwise
extended.
At September 30, 1999, the Company had $329.3 million outstanding
under the Credit Facilities. The decrease of $41.5 million in the amount
outstanding under the Credit Facilities from the amount outstanding at December
31, 1998 was due to the significant loan repayments received, offset by the cash
utilized in the BB CMBS Portfolio purchase, cash utilized in loan originations
and cash utilized to satisfy the repurchase obligation which matured.
As of September 30, 1999, certain of the Company's loans and other
investments have been hedged with interest rate swaps so that the assets and the
corresponding liabilities were matched at floating rates over LIBOR and certain
of the Company's liabilities have been hedged so that the liabilities and the
corresponding CMBS were matched at fixed rates. During the nine months ended
September 30, 1999, the Company terminated two swaps and partially terminated a
third swap in connection with the payoff of a loan and the sale of a loan
resulting in a payment of $323,000. At September 30, 19999, the Company was
party to interest rate swap agreements for notional amounts totaling
approximately $238.4 million with financial institution counterparties whereby
the Company swapped fixed-rate instruments, with average interest rates of
approximately 6.01%, for floating rate instruments with interest rates at LIBOR.
The agreements mature at varying times from September 2001 to July 2014.
The Company is exploring strategic acquisitions and joint ventures in
order to bolster its capital position, expand its business platform, grow its
portfolio of interest earning assets, and to take advantage of potential
consolidation opportunities in the sector. As a result, although the Company
believes that the current lending environment is very favorable and the Company
is able to originate and/or acquire loans and investments that meet its targeted
risk/yield profile, the Company has made the strategic decision to manage its
portfolio of loans and investments at its current level of approximately $800
million. In the short term, the Company plans to continue to originate and/or
acquire new loans and investments sufficient to keep its portfolio of interest
earning assets static and therefore does not expect in the short term the
substantial increases in income from loans and investments corresponding to the
substantial growth in interest earning assets that have occurred in recent
years. The Company believes that by maintaining its investment portfolio at its
current level, it will have sufficient sources of liquidity available to
facilitate potential strategic acquisitions and/or joint ventures. No assurance
can be given as to the successful negotiation and completion or the timing of
such transactions.
- 15 -
<PAGE>
Comparison of the Nine and Three Months Ended September 30, 1999 to the
- -----------------------------------------------------------------------
Nine and Three Months Ended September 30, 1998
----------------------------------------------
The Company reported net income allocable to shares of Common Stock
of $7,896,000 for the nine months ended September 30, 1999, a decrease of
$594,000 from the net income allocable to shares of Common Stock of $8,490,000
for the nine months ended September 30, 1998. This change was primarily the
result of reduced advisory and investment banking fees partially off-set by a
reduction in the preferred stock dividend requirement and an increase in the
income from loans and other investments, net. The Company reported net income
allocable to shares of Common Stock of $2,647,000 for the three months ended
September 30, 1999, an increase of $286,000 from the net income allocable to
shares of Common Stock of $2,361,000 for the three months ended September 30,
1998. This change was primarily the result of a reduction in the preferred stock
dividend requirement.
Income from loans and other investments, net, amounted to $36,528,000
for the nine months ended September 30, 1999, an increase of $12,014,000 over
the $24,514,000 amount for the nine months ended September 30, 1998. This
increase was primarily due to the increase in the amount of average interest
earning assets from approximately $468.8 million earning 12.2% for the nine
months ended September 30, 1998 to approximately $740.5 million earning 11.7%
for the nine months ended September 30, 1999. This decrease in the interest rate
earned in 1999 from that earned in 1998 was mainly due to a decrease in LIBOR
partially offset by an increase in additional interest and fees which were
recognized upon the early termination of loans by the borrowers. LIBOR averaged
5.6% for the nine months ended September 30, 1998 and averaged 5.1% for the nine
months ended September 30, 1999. Early terminations, which generated additional
interest income of $3.2 million during the nine months ended September 30, 1998
and $4.0 million during the nine months ended September 30, 1999, had the effect
of raising the average interest rate by 0.9% during the nine months ended
September 30, 1998 and 0.7% during the nine months ended September 30, 1999. The
increase in revenues was partially offset by an increase in the amount of
average interest bearing liabilities from approximately $299.8 million at an
average rate of 8.2% for the nine months ended September 30, 1998 to
approximately $463.9 million at an average rate of 8.2% for the nine months
ended September 30, 1999.
Income from loans and other investments, net, amounted to $11,529,000
for the three months ended September 30, 1999, a decrease of $539,000 over the
$12,068,000 amount for the three months ended September 30, 1998. This decrease
was primarily due to the decrease in the average earning rate on interest
earning assets from 12.5% for the three months ended September 30, 1998 to 11.2%
for the three months ended September 30, 1999 and an increase in the amount of
average interest bearing liabilities from approximately $417.8 million at an
average rate of 8.3% for the three months ended September 30, 1998 to
approximately $494.7 million at an average rate of 8.6% for the three months
ended September 30, 1999. This decrease was offset by an increase in the amount
of average interest earning assets from approximately $659.0 million for the
three months ended September 30, 1998 to approximately $788.1 million for the
three months ended September 30, 1999. This decrease in the interest rate earned
in 1999 from that earned in 1998 was mainly due to a decrease in LIBOR and a
decrease in additional interest and fees which were recognized upon the early
termination of loans by the borrowers. LIBOR averaged 5.6% for the three months
ended September 30, 1998 and averaged 5.3% for the three months ended September
30, 1999. Early terminations, which generated
- 16 -
<PAGE>
additional interest income of $1.5 million during the three months ended
September 30, 1998 (versus zero income in the same period of 1999) had the
effect of raising the average interest rate by 0.9% during the three months
ended September 30, 1998.
In addition, the Company also utilized proceeds from the $150.0
million of Convertible Trust Preferred Securities that were issued on July 28,
1998 to finance its interest earning assets. During the three and nine months
ended September 30, 1999, the Company recognized $1,741,000 and $5,224,000,
respectively, of net expenses related to these securities. During the three and
nine months ended September 30, 1998, the Company recognized $1,199,000 of net
expenses related to these securities. Distributions to the holders totaled
$3,094,000 and $9,281,000 for the three and nine months ended September 30,
1999, respectively, and $2,131,000 for the three and nine months ended September
30, 1998. Amortization of discount and origination costs totaled $199,000 and
$599,000, respectively, during the three and nine months ended September 30,
1999 and $137,000 for the three and nine months ended September 30, 1998. This
was partially offset by a tax benefit of $1,552,000 and $4,656,000, respectively
during the three and nine months ended September 30, 1999 and $1,069,000 for the
three and nine months ended September 30, 1998.
During the nine months ended September 30, 1999, other revenues
decreased $2,258,000 to $8,162,000 over the same period in 1998. The increase
during the three months ended September 30, 1999 over the same period in 1998
was $1,018,000 to $2,108,000. The changes for the three and nine months ended
September 30, 1999 was primarily due to the timing and size of advisory and
investment banking fees generated by Victor Capital and its related
subsidiaries.
Other expenses increased from $14,582,000 for the nine months ended
September 30, 1998 to $15,829,000 for nine months ended September 30, 1999 and
decreased from $5,762,000 for the three months ended September 30, 1998 to
$4,559,000 for three months ended September 30, 1999. The largest components of
other expenses are employee salaries and related costs and the provision for
possible credit losses. In March 1999, to reduce general and administrative
expenses to a level in line with budgeted business activity, the Company reduced
its workforce by approximately 30% and recorded a restructuring charge of
$650,000. This charge along with the higher number of employees in the first
quarter accounted for the increase in general and administrative expenses for
the nine months ended September 30, 1999 as compared to the same period in 1998.
The reduction in workforce was the primary factor in the reduced general and
administrative expenses for the three months ended September 30, 1999. For the
three months ended September 30, 1999, the Company had an average of 30
employees as compared to 47 for the same period in 1998. For the nine months
ended September 30, 1999, the Company had an average of 35 employees as compared
to 41 for the same period in 1998. The Company had 30 full time employees at
September 30, 1999. The increase in the provision for possible credit losses
from $2,359,000 for the nine months ended September 30, 1998 to $3,073,000 for
the nine months ended September 30, 1999 was due to the increase in average
earning assets as previously described.
For the nine months ended September 30, 1999 and 1998, the Company accrued
income tax expense of $13,770,000 and $8,312,000, respectively, for federal,
state and local income taxes. For the three months ended September 30, 1999 and
1998, the Company accrued income tax expense of $4,287,000 and $3,053,000,
respectively, for federal, state and local income taxes.
- 17 -
<PAGE>
The increase in the effective tax rate (from 40.8% to 47.7% for the nine month
period and from 41.3% to 47.2% for the three month period) was primarily due to
a decrease in the net operating loss carryforwards available to offset taxable
income. For the three and nine months ended September 30, 1998, net operating
loss carryforwards reduced the effective tax rate by 5.7% and 6.3%,
respectively, due to significant losses generated in 1997 that were not limited
for utilization in 1998. For the three and nine months ended September 30, 1999,
the reduction was only 1.4% and 1.3%, respectively, as all of the losses
generated in 1997 were utilized in 1998.
The preferred stock dividend and dividend requirement arose in 1997
as a result of the Company's issuance of $33 million of shares of Class A
Preferred Stock on July 15, 1997. Dividends accrued on these shares at a rate of
9.5% per annum on a per share price of $2.69 for the 12,267,658 shares
outstanding or $3,135,000 per annum through the second quarter of 1999. As
discussed above, 5,946,825 shares of Preferred Stock were converted to an equal
number of shares of Common Stock during the third quarter of 1999 thereby
reducing to 6,320,833 the number of outstanding shares of Preferred Stock and
the dividend requirement to $403,000 for the third quarter.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1999, the Company had $16,837,000 in cash. The
primary sources of liquidity for the Company for the remainder of 1999, which
the Company believes will adequately meet future operating liquidity and capital
resource requirements, will be cash on hand, cash generated from operations,
interest and principal payments received on its investments and loans and
additional borrowings under the Credit Facilities.
The Company experienced a net decrease in cash of $29,786,000 for the
nine months ended September 30, 1999, compared to the net decrease of
$32,848,000 for the nine months ended September 30, 1998. The net use of cash in
the first three quarters of 1999 was primarily due to the purchase of the BB
CMBS Portfolio (net of the proceeds from the term redeemable securities
contract) and loan originations off-set by additional borrowings while the net
use of cash in the first three quarters of 1998 was due to the utilization of
the proceeds of the Class A Common Stock offering completed in the fourth
quarter of 1997 in making loans and other investments off-set by additional
borrowings. Cash provided by operating activities during the nine months ended
September 30, 1999 decreased by $1,019,000 to $8,686,000, from $9,705,000 during
the same period of 1998. For the nine months ended September 30, 1999, cash used
in investing activities was $75,580,000, a decrease of $377,003,000 from
$452,583,000 used during the same period in 1998 that was primarily a result of
the significant repayments received on loans and other investments and reduced
loan origination activity since December 31, 1998. The decrease in cash provided
by financing activities, which decreased $372,922,000 to $37,108,000 from
$410,030,000, was due primarily to reduced levels of new borrowings and
significant repayments of borrowings under the Credit Facilities.
At September 30, 1999, the Company had two outstanding notes payable
totaling $3,445,000, outstanding borrowings under the Credit Facilities of
$329,291,000, outstanding borrowings on the term redeemable securities contract
of $128,786,000 and outstanding repurchase obligations of $34,458,000. At
September 30, 1999, the Company had $319,138,000 of borrowing capacity available
under the Credit Facilities.
- 18 -
<PAGE>
Year 2000 Information
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology ("IT") and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar business
activities.
Based upon recent assessments, the Company determined that it was
required to replace certain of its software and certain hardware so that those
systems will properly utilize dates beyond December 31, 1999. The Company
believes that with the replacement of the previously existing software and
certain hardware, the Year 2000 Issue can be mitigated. However, if certain
replacements are not made, or not completed timely, the Year 2000 Issue could
have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing and implementation. To
date, the Company has completed all phases of the plan for its in-house systems
that could be significantly affected by the Year 2000 Issue. In addition, the
Company will continue to gather information about the Year 2000 compliance
status of its significant service providers to monitor their compliance.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
The Company believes it is 100% Year 2000 compliant with its in-house
IT systems (both software and hardware). The testing phase of the project was
completed during the quarter ended March 31, 1999.
Nature and Level of Importance of Third Parties and their Exposure to the Year
2000 Issue
The Company's loan servicing function is performed by an independent
third party. This service includes the calculation of interest and principal for
the Company's loans receivable, the processing of bills to the Company's
customers and the maintenance of lock boxes and escrow accounts on behalf of
borrowers. The vendor has advised the Company that it is Year 2000 compliant for
loan servicing.
The Company has queried its significant service providers that do not
share information systems with the Company (external agents). To date, the
Company is not aware of any external agent with a Year 2000 Issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that any external
agents used by the Company will be Year 2000 compliant. The inability of
external agents to complete their Year 2000 Issue resolution process in a timely
manner could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
- 19 -
<PAGE>
Costs of Year 2000 Compliance
The Company utilized both internal and external resources to replace,
test, and implement the software and operating equipment for Year 2000
modifications. The project was completed during the quarter ended March 31, 1999
and the Company incurred approximately $225,000 ($30,000 expensed and $195,000
capitalized for new systems and equipment) related to all phases of the Year
2000 project which was funded through operating cash flow. The Company does not
expect any additional project costs.
Risks of Year 2000
The Company believes it has an effective program in place to resolve
the Year 2000 Issue and has completed all the necessary phases of the Year 2000
program for its in-house IT systems. While the Company has completed its
project, disruptions in the economy generally resulting from Year 2000 Issue
could materially adversely affect the Company. The amount of potential liability
and lost revenue cannot be reasonably estimated at this time.
The Company currently has contingency plans in the event that the
noted third parties do not complete their Year 2000 compliance.
Explanatory Note for the Use of Forward-Looking Statements
Except for historical information contained herein, this quarterly
report on Form 10-Q contains forward-looking statements within the meaning of
the Section 21E 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, the Company's current business plan,
business strategy and portfolio management. The Company's actual results or
outcomes may differ materially from those anticipated. Representative examples
of such factors are discussed in more detail in the Company's Annual Report on
Form 10-K, as amended, for the 1998 fiscal year, and include, among other
things, the availability of desirable loan and investment opportunities, the
ability to obtain and maintain targeted levels of leverage and borrowing costs,
changes in interest rates, continued loan performance and repayment and the
maintenance of loan loss allowance levels. The Company disclaims any intention
or obligation to update publicly or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
- 20 -
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The principal objective of the Company's 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 uses interest rate swaps to effectively convert
fixed-rate assets to variable-rate assets and variable-rate liabilities to
fixed-rate liabilities for proper matching with variable-rate liabilities and
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 does not use derivative financial
instruments for trading purposes. The Company uses interest rate swaps to reduce
the Company's exposure to interest rate fluctuations on certain fixed-rate loans
and investments and to provide more stable spreads between rates received on
loans and investments and the rates paid on their financing sources.
- 21 -
<PAGE>
The following table provides information about the Company's
financial instruments that are sensitive to changes in interest rates at
September 30, 1999. For financial assets and debt obligations, the table
presents cash flows and weighted average interest rates based on the contractual
maturity dates. For interest rate swaps, the table presents notional amounts and
weighted 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-average variable rates are
based on rates in effect as of the reporting date.
<TABLE>
<CAPTION>
Expected Maturity Dates
---------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(dollars in thousands)
<S> <C> <C> <C>
Assets:
CMBS
Fixed Rate - - - $193,673 - - $ 193,673 $ 184,542
Average interest rate - - - 11.16% - - 11.16%
Variable Rate - - - - $ 36,509 - $ 36,509 $ 32,202
Average interest rate - - - - 11.45% - 11.45%
Certificated Mezzanine
Investments
Variable Rate - $ 44,743 - - - - $ 44,743 $ 44,743
Average interest rate - 10.14% - - - - 10.14%
Loans receivable
Fixed Rate - - $ 28,000 $ 3,000 - $ 96,929 $ 127,929 $ 126,779
Average interest rate - - 12.59% 12.50% - 11.41% 11.69%
Variable Rate $61,799 $114,711 $132,736 $ 52,500 - $ 26,500 $ 388,247 $ 374,118
Average interest rate 12.65% 10.24% 10.81% 12.17% - 11.15% 11.14%
Liabilities:
Credit facilities
Variable Rate - $153,603 - $ 175,688 - - $ 329,291 $ 329,291
Average interest rate - 8.49% - 7.77% - - 8.11%
Term redeemable securities
contract
Variable Rate - - - $ 137,812 - - $ 137,812 $ 128,786
Average interest rate - - - 9.02% - - 9.02%
Repurchase obligations
Variable Rate $ 34,458 - - - - - $ 34,458 $ 34,458
Average interest rate 6.80% - - - - - 6.80%
Convertible Trust Preferred
Securities
Fixed Rate - - - - - $150,000 $ 150,000 $ 146,143
Average interest rate - - - - - 9.02% 9.02%
Interest rate swaps - - $ 28,000 $ 137,812 $ 19,310 $ 53,250 $ 238,372 $ 12,748
Average fixed pay rate - - 5.79% 6.05% 6.04% 6.01% 6.01%
Average variable
receive rate - - 5.37% 5.38% 5.38% 5.37% 5.38%
</TABLE>
- 22 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
11.1 Statements regarding computation of earnings (loss) per share
27.1 Financial Data Schedules
(b) Reports on Form 8-K
During the fiscal quarter ended September 30, 1999, the Company filed
the following Current Reports on Form 8-K:
None
- 23 -
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
CAPITAL TRUST
Date: November 11, 1999 /s/ John R. Klopp
------------------- -----------------
John R. Klopp
Chief Executive Officer
/s/ Edward L. Shugrue III
------------------------
Edward L. Shugrue III
Managing Director and
Chief Financial Officer
- 24 -
Exhibit 11.1
Capital Trust, Inc. and Subsidiaries
Form 10-Q
Statement Regarding Computation of Earnings per Share
<TABLE>
<CAPTION>
Nine months Ended September 30, 1999 Nine months Ended September 30, 1998
---------------------------------------------------- --------------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
---------------- ---------------- ------------ ---------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net earnings per share of
Common Stock $ 7,896,000 20,340,982 $ 0.39 $ 8,490,000 18,218,279 $ 0.47
============ =============
Effect of Dilutive Securities
Options outstanding for the
purchase of Class A Common
Stock -- -- -- 219,930
Future commitments for stock
unit awards for the
issuance of Class A Common
Stock -- 300,000 -- --
Convertible Preferred Stock 1,971,000 10,263,600 2,351,000 12,267,658
--------------- ---------------- ---------------- -----------------
Diluted EPS:
Net earnings per share of
Common Stock and Assumed
Conversions $ 9,867,000 30,904,582 $ 0.32 $ 10,841,000 30,705,867 $ 0.35
=============== ================ ============ ================ ==================== =============
Three Months Ended September 30, 1999 Three Months Ended September 30, 1998
--------------------------------------------- ---------------------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
--------------- ---------------- ------------ --------------- ---------------- -------------
Basic EPS:
Net earnings per share of
Common Stock $ 2,647,000 24,287,254 $ 0.11 $ 2,361,000 18,217,186 $ 0.13
============ =============
Effect of Dilutive Securities
Options outstanding for the
purchase of Class A Common
Stock -- -- -- 127,562
Future commitments for stock
unit awards for the
issuance of Class A Common
Stock -- 300,000 --- --
Convertible Preferred Stock 403,000 6,320,833 783,000 12,267,658
--------------- ---------------- --------------- ----------------
Diluted EPS:
Net earnings per share of
Common Stock and Assumed
Conversions $ 3,050,000 30,908,087 $ 0.10 $ 3,144,000 30,612,406 $ 0.10
=============== ================ ============ =============== ================ =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL EXTRACTED FROM THE FINANCIAL STATEMENTS
OF CAPITAL TRUST FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,837
<SECURITIES> 263,031
<RECEIVABLES> 517,343
<ALLOWANCES> 6,575
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,004
<DEPRECIATION> 566
<TOTAL-ASSETS> 810,318
<CURRENT-LIABILITIES> 7,265
<BONDS> 495,980
146,143
0
<COMMON> 243
<OTHER-SE> 156,634
<TOTAL-LIABILITY-AND-EQUITY> 810,318
<SALES> 0
<TOTAL-REVENUES> 73,162
<CGS> 0
<TOTAL-COSTS> 51,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,073
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,981
<INCOME-TAX> 9,114
<INCOME-CONTINUING> 9,867
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,867
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.32
</TABLE>
