As filed with the Securities and Exchange Commission on March 30, 2000
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, 1999
-----------------
[ ] 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)
<TABLE>
<CAPTION>
<S> <C>
Maryland 94-6181186
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
605 Third Avenue, 26th Floor, New York, NY 10016
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(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
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Class A Common Stock, New York Stock Exchange
$0.01 par value ("Class A Common Stock")
</TABLE>
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 __
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. [ ]
<PAGE>
MARKET VALUE
------------
Based on the closing sales price of $3 13/16 per share, the aggregate market
value of the outstanding Class A Common Stock held by non-affiliates of the
registrant as of March 20, 2000 was $50,402,000.
OUTSTANDING STOCK
-----------------
As of March 20, 2000 there were 22,318,828 outstanding shares of Class A Common
Stock. The Class A Common Stock is listed on the New York Stock Exchange
(trading symbol "CT"). Trading is reported in many newspapers as "CapitalTr".
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
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.
<PAGE>
<TABLE>
<CAPTION>
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CAPITAL TRUST, INC.
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<S> <C>
PAGE
Explanatory Note Regarding Succession Transaction ii
Explanatory Note Regarding Forward-Looking Statements Safe Harbor ii
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PART I
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Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
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PART II
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Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 27
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PART III
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Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
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PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
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Signatures 33
Index to Consolidated Financial Statements F-1
</TABLE>
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<PAGE>
EXPLANATORY NOTE REGARDING SUCCESSION TRANSACTION
- -------------------------------------------------
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 whereby the Predecessor ultimately
merged with and into the Company. Upon consummation of the Reorganization, the
entire class of class A common stock, par value $0.01 per share, of the Company
became registered under Section 12(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), in accordance with Rule 12g-3(a) thereunder. The
Commission assigned a new file number (File No. 1-14788), replacing the
Predecessor's file number (File No. 1-8063), for use in periodic filings
required under the Exchange Act and the rules thereunder.
EXPLANATORY NOTE REGARDING FORWARD-LOOKING STATEMENTS SAFE HARBOR
- -----------------------------------------------------------------
Except for historical information contained herein, this annual report on Form
10-K 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. Important factors that the Company believes
might cause such differences are discussed in the cautionary statements
presented under the caption "Factors which may Affect the Company's Business
Strategy" in Item 1 of this Form 10-K or otherwise accompany the forward-looking
statements contained in this Form 10-K. In assessing forward-looking statements
contained herein, readers are urged to read carefully all cautionary statements
contained in this Form 10-K.
<PAGE>
-ii-
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 investment management and real
estate finance company designed to take advantage of high-yielding lending and
investment opportunities in commercial real estate and related assets. The
Company, for its own account and as an investment manager, makes investments in
various types of income-producing commercial real estate and its current
investment program emphasizes senior and junior commercial mortgage loans,
certificated mezzanine investments, direct equity investments and subordinated
interests in commercial mortgage-backed securities ("CMBS"). Pursuant to the
Company's current business strategy, the Company seeks to manage its portfolio
of loans and other assets such that a majority of the Company's investments are
subordinate to third-party financing but senior to the owner/operator's equity
position and therefore represent "mezzanine" capital.
As discussed herein, the Company recently entered into a strategic
relationship with Citigroup Investments Inc. ("Citigroup"), pursuant to which,
among other things, affiliates of the parties will co-sponsor, commit to invest
capital in and manage a series of high-yield commercial real estate mezzanine
investment opportunity funds (collectively, "Mezzanine Funds"). This venture
represents a new strategic direction for the Company as it transitions itself
from primarily a balance sheet lender to an investment management firm engaged
in originating, structuring and managing high-yield real estate financial assets
for third party investment funds. It is the intent of the Company to invest in
these funds, to continue to aggressively manage its existing investment
portfolio, and to selectively add investments to its portfolio that do not
conflict with its role as exclusive investment manager to the Mezzanine Funds.
The Company also provides real estate investment banking, advisory and
asset management services through its wholly owned subsidiary, Victor Capital
Group, L.P. ("Victor Capital"). The Company otherwise remains positioned
opportunistically to invest on balance sheet in a diverse array of real estate
and finance-related assets and enterprises, including operating companies, which
satisfy its investment criteria. Unless the context otherwise requires, "the
Company" means Capital Trust, Inc., a Maryland Corporation, its consolidated
subsidiaries and its predecessor, Capital Trust (f/k/a California Real Estate
Investment Trust, a California business trust (the "Predecessor")).
In executing its business plan, the Company utilizes the extensive real
estate industry contacts and relationships of Equity Group Investments, L.L.C.
("EGI"). EGI is a privately held real estate and corporate investment firm
controlled by Samuel Zell, who serves as chairman of the board of directors of
the Company. Mr. Zell is chairman of the board of trustees of Equity Office
Properties Trust and Equity Residential Properties Trust, the largest U.S. real
estate investment trusts ("REITs") operating in the office and multifamily
residential sectors, respectively. The Company also draws upon the extensive
client roster of Victor Capital for potential investment opportunities and
expects to realize origination synergies from its strategic relationship with
Citigroup and its affiliates, which together constitute the most global
financial services company, providing some 100 million consumers, corporations
and institutions with a broad array of financial products and services.
Strategic Relationship with Citigroup
On March 8, 2000, the Company entered into a strategic relationship with
Citigroup in connection with commencing its new investment management business.
Together, the strategic partners have agreed, among other things, to co-sponsor,
commit to invest capital in, and manage a series of Mezzanine Funds. In
connection with this relationship, Citigroup and the Company have made capital
commitments to the Mezzanine Funds of up to an aggregate of $400.0 million and
$112.5 million, respectively, subject to certain terms and conditions.
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<PAGE>
The strategic relationship is governed by a venture agreement, dated as of
March 8, 2000 (the "Venture Agreement"), pursuant to which the parties have
created CT Mezzanine Partners I LLC ("Fund I"), funded with capital commitments
of $150 million and $50 million from Citigroup and the Company, respectively,
subject to identification of suitable investments of suitable investments
acceptable to Citigroup and the Company. A wholly owned subsidiary of the
Company serves as the exclusive investment manager to Fund I, which is currently
negotiating suitable investments for the fund. Additionally, Citigroup and the
Company have agreed to additional capital commitments of up to $250.0 million
and $62.5 million, respectively, to future co-sponsored Mezzanine Funds that
close prior to December 31, 2001 subject to third-party capital commitments and
other conditions contained the Venture Agreement.
Pursuant to the Venture Agreement, an affiliate of the Company has been
named the exclusive investment manager to the Mezzanine Funds. Further, each
party has agreed to certain exclusivity obligations with respect to the
origination of assets suitable for the Mezzanine Funds and the Company granted
Citigroup the right of first refusal to co-sponsor future Mezzanine Funds. The
Company has also agreed, as soon as practicable, to take the steps necessary for
it to be treated as a REIT for tax purposes subject to changes in law, or good
faith inability to meet the requisite qualifications. Unless the Company can
find a suitable "reverse merger" REIT candidate, the earliest that the Company
can qualify for re-election to REIT status will be upon filing its tax return
for the year ended December 31, 2002.
The Company believes that its new business venture with Citigroup
emphasizes its strengths and provides it with the building blocks for a scalable
platform for high quality earnings growth. It also shifts the Company's focus
from that of a "balance sheet" lender to that of an investment manager. The
investment management business, as structured with Citigroup, also allows the
Company to tap the private equity markets as a source of fresh capital to fund
its business. The venture further 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.
Developments During Fiscal Year 1999
- ------------------------------------
Fiscal year 1999 represented the Company's second full year of operations
as a specialty finance and advisory company. During the year, the Company
increased its total asset base to $827.8 million at December 31, 1999 from
$766.4 million at December 31, 1998. The Company's growth was primarily the
result of its originating and funding approximately $302 million of new loan and
investment assets and further advances under existing unfunded commitments net
of $211 million of repayments, satisfactions and dispositions. The Company
funded this increase in assets with credit obtained pursuant to a term
redeemable securities contract entered into in connection with the purchase of a
portfolio of CMBS assets as described below.
The Company believes that its Credit Facilities (as hereinafter defined)
and the proceeds from capital raising activities provide the Company with the
capital necessary to meet its capital commitments to the Mezzanine Funds, and as
permitted, to expand and diversify its portfolio of loans and other investments
enabling the Company to compete for and consummate larger transactions meeting
the Company's target risk/return profile. In addition to traditional capital
sources, the Company has explored, and will continue to explore, diversified
capital sources to fund its investment activities including, but not limited to,
other joint-ventures, strategic alliances and money management ventures.
Since December 31, 1998, the Company has identified, negotiated and
committed to fund or acquire five loans and investments. These include three
Mortgage Loans (as hereinafter defined) totaling $45.0 million, one corporate
loan for $52.5 million, which the Company classified in other loans, and a
diversified portfolio of "BB" rated CMBS Subordinated Interests (as hereinafter
defined) with an aggregate face amount of $246.0 million which were purchased
for $196.9 million. The Company also funded $7.2 million of commitments under
four loans and Certificated Mezzanine Investments (as hereinafter defined)
originated in prior periods. These increases were offset by the full
satisfaction of seven loans totaling $190.5 million and the recording of a
write-down on one loan asset for $500,000 and the subsequent sale of it for $9.5
million, at net book value, during the period. The Company also received $10.8
million of partial repayments on loans and Certificated Mezzanine Investments.
At December 31, 1999, the Company had outstanding loans, certificated mezzanine
investments and investments in CMBS totaling
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<PAGE>
approximately $777 million and additional commitments for fundings on
outstanding loans and certificated mezzanine investments of approximately $30.8
million.
During 1999, the Company accessed $137.8 million of additional credit
through its borrowing under the Term Redeemable Securities Contract in
conjunction with its BB CMBS Portfolio acquisition (as hereinafter defined). The
Company also extended the maturity of its two Credit Facilities by more than one
year on each facility.
As of December 31, 1999, the Company's portfolio of financial assets
consisted of ten Mortgage Loans, ten Mezzanine Loans, two Certificated Mezzanine
Investments, four other loans, including the corporate loan issued in 1999,
(collectively the "Loan Portfolio") and 18 classes of CMBS Subordinated
Interests (together with the Loan Portfolio, the "Investment Portfolio"). At
December 31, 1999, one Senior Mortgage Loan with a principal balance of
$21,114,000 was in default due to the loan maturing on December 29, 1999; at
December 31, 1999, the loan was earning a fixed interest rate of 20% (the
default rate) and was repaid in full with interest on January 7, 2000. During
1999, the Company recorded a write-down of one loan asset by $500,000 and
subsequently sold it for $9.5 million, at book value. There were no other
delinquencies or losses on such assets as of December 31, 1999 and for the year
then ended. The table set forth below details the composition of the Investment
Portfolio at December 31, 1999.
<TABLE>
<CAPTION>
Underlying Number
Type of Loan/ Property of Loans/ Original Outstanding Unfunded Current Interest
Investment Type Investments Commitment Face Amount Commitment Maturity Rate
- ----------- ---------- ----------- ---------- ----------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Senior Mortgage Office/ 7 $ 195,477,000 $ 176,775,000 $ 14,808,000 1999 to Fixed: 20.00%
Loans Retail/ 2001 Variable: LIBOR +
Hotel 3.20% to LIBOR +
10.00%
Subordinate Office/ 3 102,000,000 93,557,000 8,443,000 2000 to Variable: LIBOR +
Mortgage Loans Hotel 2001 5.08% to LIBOR +
7.00%
Mezzanine Loans Office/ 10 212,045,000 191,673,000 -- 2000 to Fixed: 10.81% to
Retail/ 2008 12.50%
Assisted Variable: LIBOR +
Living/ 5.25% to LIBOR +
Hotel 8.25%
Certificated Office 2 54,466,000 45,432,000 7,536,000 2000 Variable: LIBOR +
Mezzanine 3.95% to LIBOR +
Investments 5.50%
CMBS (1) Various 18 282,526,000 282,526,000 -- 2003 to Fixed: 7.00% to
2114 9.16%
Variable: LIBOR +
2.75% to LIBOR +
7.00%
Other Loans Retail/ 4 55,050,000 54,471,000 -- 2000 to Fixed: 9.50%
Commercial/ 2017 Variable: LIBOR +
Corporate 5.00% to LIBOR +
6.00%
Total 44 $901,564,000 $844,4345,000 $ 30,787,000
== ============ ============ ============
</TABLE>
(1) With respect to the CMBS, in 1998, the Company purchased $36,509,000 face
amount of interests in three classes of CMBS Subordinated Interests issued
by a financial asset securitization investment trust for $36,335,000,
which, at December 31, 1999, had an amortized cost of $36,396,000 and a
market value of $33,089,000.
In March 1999, the Company purchased 15 "BB" rated CMBS subordinated
interest securities from 11 separate issues (the "BB CMBS Portfolio") with
an aggregate face amount of $246.0 million 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 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, the carrying amount of the assets and the
debt were reduced by $10,927,000 to adjust the yield on the debt to current
market terms. At
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<PAGE>
December 31, 1999, the portfolio had an amortized carrying value of
$187,825,000 and a market value of $175,806,000.
Real Estate Lending and Investment Market
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The Company believes that the continued strength of commercial real estate
property values, coupled with fundamental structural changes in the real estate
capital markets (primarily related to the growth in CMBS issuance) and the
effect of the general credit spread widening since the global capital markets
crisis in September 1998, has created significant market-driven opportunities
for companies specializing in commercial real estate lending and investing. Such
opportunities are expected to result from the following developments:
o Scale and Rollover. The U.S. commercial mortgage market--a market that
is comparable in size to the corporate and municipal bond markets--has
approximately $1.2 trillion in total mortgage debt outstanding, which
debt is primarily held privately. In addition, a significant amount of
commercial mortgage loans held by U.S. financial institutions is
scheduled to mature in the near future.
o Rapid Growth of Securitization. With issuance volume of approximately
$66 billion in 1999, the total estimated CMBS market capitalization has
grown to $300 billion from approximately $6 billion in 1990. To date,
the CMBS market expansion has been fueled in large part by "conduits"
that originate whole loans primarily for resale to financial
intermediaries, which in turn package the loans as securities for
distribution to public and private investors.
The Company believes that as the underwriting criteria utilized by
securitized lenders becomes accepted as the market standard, borrowers
are left constrained by relatively inflexible securitization/rating
agency standards, including lower loan-to-value ratios, thereby creating
significant demand for mezzanine financing (typically between 65% and
90% of total capitalization). In addition, since many high quality loans
may not immediately qualify for securitization, due primarily to rating
agency guidelines, or other factors, significant opportunities are
created for shorter-maturity bridge and transition mortgage financings.
o Consolidation. As the real estate market continues to evolve, the
Company expects that consolidation will occur and efficiency will
increase. Over time, the Company believes that the market leaders in the
real estate finance sector will be fully integrated finance companies
capable of originating, underwriting, structuring, managing and
retaining real estate risk, whether as a principal or as an investment
manager.
The Company believes that the commercial real estate capital markets for
both debt and equity are in the midst of dramatic structural change. As a
result, the need for mezzanine investment capital has grown significantly. The
Company seeks to capitalize on this market opportunity.
Business Strategy
- -----------------
Whether as a principal or as an investment manager, the Company seeks to
generate returns from a portfolio of leveraged investments. As it commences its
transition to an investment management firm, the Company will further seek to
generate additional revenue from investment management fees and promotional
returns that will be tied to a portfolio of leveraged investments held by the
managed funds. The Company currently pursues investment and lending
opportunities designed to capitalize on inefficiencies in the real estate
capital, mortgage and finance markets. The Company also earns revenue from its
real estate advisory and investment banking services.
The Company believes that it is well positioned to capitalize on the market
opportunities, which, if carefully underwritten, structured and monitored,
represent attractive investments that pose potentially less risk than direct
equity ownership of real property. Further, the Company believes that the rapid
growth of the CMBS market has given rise to opportunities for the Company to
selectively acquire non-investment grade classes of such securities, which the
Company believes are priced inefficiently in terms of their risk/reward profile.
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<PAGE>
During 1999, the Company dedicated significant resources to 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. Although the Company believed that during 1999 the lending environment
was very favorable and that the Company was able to originate and/or acquire
loans and investments meeting its targeted risk/yield profile, the Company made
the strategic decision to manage its portfolio of loans and investments at its
current level of approximately $800 million. During 1999, in keeping with this
plan, the Company originated sufficient new loans and investments to keep its
portfolio of interest earning assets static and therefore did not experience the
substantial increases in net interest income from loans and investments
corresponding to the substantial growth in interest earning assets that had
occurred in prior years. The Company believed that by maintaining its investment
portfolio at its current level, it was able to preserve sufficient sources of
liquidity to facilitate potential strategic acquisitions and/or joint ventures
such as the strategic relationship concluded with Citigroup.
The Company's investment program emphasizes, but is not limited to, the
following general categories of real estate and finance-related assets, all of
which are suitable investments for the Mezzanine Funds:
o Mortgage Loans. The Company pursues opportunities to originate and fund
senior and junior mortgage loans ("Mortgage Loans") to commercial real
estate owners and property developers who require interim financing
until permanent financing can be obtained. The Company's Mortgage Loans
are generally not intended to be permanent in nature, but rather are
intended to be relatively short-term in duration, with extension options
as deemed appropriate, and typically require a balloon payment of
principal at maturity. The Company may also originate and fund permanent
Mortgage Loans in which the Company intends to sell the senior tranche,
thereby creating a Mezzanine Loan.
o Mezzanine Loans. The Company originates high-yielding loans that are
subordinate to first lien mortgage loans on commercial real estate and
are secured either by a second lien mortgage or a pledge of the
ownership interests in the borrowing property owner ("Mezzanine Loans").
Generally, the Company's Mezzanine Loans have a longer anticipated
duration than its Mortgage Loans and are not intended to serve as
transitional mortgage financing.
o Certificated Mezzanine Investments. The Company purchases high-yielding
investments that are subordinate to senior secured loans on commercial
real estate. Such investments represent interests in debt service from
loans or property cash flow and are issued in certificate form. These
certificated investments carry substantially similar terms and risks as
the Company's Mezzanine Loans.
o Subordinated Interests. The Company pursues rated and unrated
investments in public and private subordinated interests ("Subordinated
Interests") in commercial collateralized mortgage obligations ("CMOs")
and other CMBS.
o Other Investments. The Company remains positioned to develop an
investment portfolio of commercial real estate and finance-related
assets meeting the Company's target risk/return profile. Except as
limited by its role as exclusive investment manager to the Mezzanine
Funds, the Company is not limited in the kinds of commercial real estate
and finance-related assets in which it can invest on balance sheet and
believes that it is positioned to expand opportunistically its financing
business. The Company may pursue investments in, among other assets,
construction loans, distressed mortgages, foreign real estate and
finance-related assets, operating companies, including loan origination
and loan servicing companies, and fee interests in real property
(collectively, "Other Investments").
While serving as the investment manager for the Mezzanine Funds, the
Company will be limited to making Mortgage Loans, Mezzanine Loans, Certificated
Mezzanine Investments, and investments in Subordinated Interests (collectively
"Business Assets") on behalf of the Mezzanine Funds, unless such investments are
otherwise not accepted for origination or acquisition by the Mezzanine Funds. In
this regard, during the respective investment periods of the Mezzanine Funds,
the majority of the Company's
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<PAGE>
investment activity in Business Assets will be conducted through and for the
Mezzanine Funds, although the Company will continue to invest in Other
Investments and other assets which fulfill the Company's risk/reward
characteristics and that do not otherwise conflict with its duties as an
investment manager.
The Company seeks to maximize yield through the use of leverage, consistent
with maintaining an acceptable level of risk. Although there may be limits to
the leverage that can be applied to certain of the Company's assets, the Company
does not intend to exceed a debt-to-equity ratio of 5:1. At December 31, 1999,
the Company's debt-to-equity ratio (treating the Convertible Trust Preferred
Securities as a component of equity) was 1.66:1.
Other than restrictions which result from the Company's intent to avoid
regulation under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), the Company is not subject to any restrictions on the particular
percentage of its portfolio invested in any of the above-referenced asset
classes, nor is it limited in the kinds of assets in which it can invest except
that prospective Business Assets must first be presented to the Mezzanine Funds
for origination or acquisition. 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
decisions through asset and collateral analysis, evaluating investment risks on
a case-by-case basis. To the extent that the Company's assets become
concentrated in a few states or a particular region, the Company's return on
investment will become more dependent on the economy of such states or region.
Until appropriate investments are made, cash available for investment may be
invested in readily marketable securities or in interest-bearing deposit
accounts.
Principal Investment Categories
- -------------------------------
The discussion below describes the principal categories of assets
emphasized in the Company's current business plan and assets that will be
eligible as Business Assets.
Mortgage Loans. The Company actively pursues opportunities to originate and
fund Mortgage Loans to real estate owners and property developers who need
interim financing until permanent financing can be obtained. The Company's
Mortgage Loans generally are 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 generally require a balloon payment at
maturity. These types of loans are intended to be higher-yielding loans with
higher interest rates and commitment fees. Property owners or developers in the
market for these types of loans include, but are not limited to, property owners
who are completing a transition of their commercial real property such as an
asset repositioning or an asset lease-up, traditional property owners and
operators who desire to acquire a property before it has received a commitment
for a long-term mortgage from a traditional commercial mortgage lender, or a
property owner or investor who has an opportunity to purchase its existing
mortgage debt or third party mortgage debt at a discount; in each instance, the
Company's loan would be secured by a Mortgage Loan. The Company may also
originate traditional, long-term mortgage loans and, in doing so, would compete
with traditional commercial mortgage lenders. In pursuing such a strategy, the
Company generally intends to sell or refinance the senior portion of the
mortgage loan, individually or in a pool, and retain a Mezzanine Loan. In
addition, the Company believes that, as a result of the recent increase in
commercial real estate securitizations, there are attractive opportunities to
originate short-term bridge loans to owners of mortgaged properties that are
temporarily prevented as a result of timing and structural reasons from securing
long-term mortgage financing through securitization.
Mezzanine Loans. The Company seeks to take advantage of opportunities to
provide mezzanine financing on commercial property that is subject to first lien
mortgage debt. The Company believes that there is a growing need for mezzanine
capital (i.e., capital representing the level between 65% and 90% of property
value) as a result of current commercial mortgage lending practices setting
loan-to-value targets as low as 65%. The Company's mezzanine financing takes the
form of subordinated loans, commonly known as second mortgages, or, in the case
of loans originated for securitization, partnership loans (also known as pledge
loans). For example, on a commercial property subject to a first lien mortgage
loan with a principal balance equal to 70% of the value of the property, the
Company could lend the owner of the property (typically a partnership) an
additional 15% to 20% of the value of the property. The Company believes that as
a result of (i) the significant changes in the lending practices of traditional
commercial real
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<PAGE>
estate lenders, primarily relating to more conservative loan-to-value ratios,
and (ii) the significant increase in securitized lending with strict
loan-to-value ratios imposed by the rating agencies, there will continue to be
an increasing demand for mezzanine capital by property owners.
Typically in a Mezzanine Loan, as security for its debt to the Company, the
property owner would pledge to the Company either the property subject to the
first lien (giving the Company a second lien position typically subject to an
inter-creditor agreement) or the limited partnership and/or general partnership
interest in the owner. If the owner's general partnership interest is pledged,
then the Company would be in a position to take over the operation of the
property in the event of a default by the owner. By borrowing against the
additional value in their properties, the property owners obtain an additional
level of liquidity to apply to property improvements or alternative uses.
Mezzanine Loans generally provide the Company with the right to receive a stated
interest rate on the loan balance plus various commitment and/or exit fees. In
certain instances, the Company may negotiate to receive a percentage of net
operating income or gross revenues from the property, payable to the Company on
an ongoing basis, and a percentage of any increase in value of the property,
payable upon maturity or refinancing of the loan, or the Company will otherwise
seek terms to allow the Company to charge an interest rate that would provide an
attractive risk-adjusted return.
Certificated Mezzanine Investments. Certificated Mezzanine Investments have
substantially similar terms and risks as the Company's Mezzanine Loans but are
evidenced by certificates representing interests in property debt service or
cash flow rather than by a note. Typically in a Certificated Mezzanine
Investment, the Company obtains, as security for the mezzanine capital provided,
an interest in the debt service provided by the loans that are secured by the
underlying property or in the cash flows generated by the property (held through
a trust and evidenced by trust certificates) that is subject to the senior lien
or liens encumbering the underlying property. This structure provides the
Company with a subordinate investment position typically subject to an
inter-creditor agreement with the senior creditor. By borrowing through such a
mezzanine structure against the additional value in its assets, the property
owner obtains, with the proceeds of the Certificated Mezzanine Investment, an
additional level of liquidity to apply to property improvements or alternative
uses. Certificated Mezzanine Investments generally provide the Company with the
right to receive a stated rate of return on its investment basis plus various
commitment, extension and/or other fees. Generally the terms and conditions on
these investments are the same as those on a Mezzanine Loan.
Subordinated Interests. The Company acquires rated and unrated Subordinated
Interests in CMBS issued in public or private transactions. CMBS typically are
divided into two or more classes, sometimes called "tranches." The senior
classes are higher "rated" securities, which are rated from low investment grade
("BBB") to higher investment grade ("AA" or "AAA"). The junior, subordinated
classes typically include a lower rated, non-investment grade "BB" and "B"
class, and an unrated, high yielding, credit support class (which generally is
required to absorb the first losses on the underlying mortgage loans). The
Company currently invests in the non-investment grade tranches of Subordinated
Interests. The Company may acquire performing and non-performing (i.e.,
defaulted) Subordinated Interests. CMBS generally are issued either as CMOs or
pass-through certificates that are not guaranteed by an entity having the credit
status of a governmental agency or instrumentality, although they generally are
structured with one or more of the types of credit enhancement arrangements to
reduce credit risk. In addition, CMBS may be illiquid.
The credit quality of CMBS depends on the credit quality of the underlying
mortgage loans forming the collateral for the securities. CMBS are backed
generally by a limited number of commercial or multifamily mortgage loans with
larger principal balances than those of single family mortgage loans. As a
result, a loss on a single mortgage loan underlying a CMBS will have a greater
negative effect on the yield of such CMBS, especially the Subordinated Interests
in such CMBS.
Before acquiring Subordinated Interests, the Company performs certain
credit underwriting and stress testing to attempt to evaluate future performance
of the mortgage collateral supporting such CMBS, including (i) a review of the
underwriting criteria used in making mortgage loans comprising the Mortgage
Collateral for the CMBS, (ii) a review of the relative principal amounts of the
loans, their loan-to-value ratios as well as the mortgage loans' purpose and
documentation, (iii) where available, a review of the historical performance of
the loans originated by the particular originator and (iv) some level of
re-underwriting the underlying mortgage loans, including, selected site visits.
-7-
<PAGE>
Unlike the owner of mortgage loans, the owner of Subordinated Interests in CMBS
ordinarily does not control the servicing of the underlying mortgage loans. In
this regard, the Company attempts to negotiate for the right to cure any
defaults on senior CMBS classes and for the right to acquire such senior classes
in the event of a default or for other similar arrangements. The Company may
also seek to acquire rights to service defaulted mortgage loans, including
rights to control the oversight and management of the resolution of such
mortgage loans by workout or modification of loan provisions, foreclosure, deed
in lieu of foreclosure or otherwise, and to control decisions with respect to
the preservation of the collateral generally, including property management and
maintenance decisions ("Special Servicing Rights") with respect to the mortgage
loans underlying CMBS in which the Company owns a Subordinated Interest. Such
rights to cure defaults and Special Servicing Rights may give the Company, for
example, some control over the timing of foreclosures on such mortgage loans
and, thus, may enable the Company to reduce losses on such mortgage loans. The
Company has in the past served as a special servicer with respect to a
Subordinated Interest investment, but is not currently a rated special servicer.
The Company may seek to become rated as a special servicer, or acquire a rated
special servicer. Until the Company can act as a rated special servicer, it will
be difficult to obtain Special Servicing Rights with respect to the mortgage
loans underlying Subordinated Interests. Although the Company's strategy is to
purchase Subordinated Interests at a price designed to return the Company's
investment and generate a profit thereon, there can be no assurance that such
goal will be met or, indeed, that the Company's investment in a Subordinated
Interest will be returned in full or at all.
The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act generally exempts entities
that are "primarily engaged in purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate" ("Qualifying Interests"). The
Company intends to rely on current interpretations by the staff of the
Commission in an effort to qualify for this exemption. To comply with the
foregoing guidance, the Company, among other things, must maintain at least 55%
of its assets in Qualifying Interests and also may be required to maintain an
additional 25% in Qualifying Interests or other real estate-related assets.
Generally, the Mortgage Loans and certain of the Mezzanine Loans and
Certificated Mezzanine Investments in which the Company may invest constitute
Qualifying Interests. While Subordinated Interests generally do not constitute
Qualifying Interests, the Company may seek to structure such investments in a
manner where the Company believes such Subordinated Interests may constitute
Qualifying Interests. The Company may seek, where appropriate, (i) to obtain
foreclosure rights or other similar arrangements (including obtaining Special
Servicing Rights before or after acquiring or becoming a rated special servicer)
with respect to the underlying mortgage loans, although there can be no
assurance that it will be able to do so on acceptable terms or (ii) to acquire
Subordinated Interests collateralized by whole pools of mortgage loans. As a
result of obtaining such rights or whole pools of mortgage loans as collateral,
the Company believes that the related Subordinated Interests will constitute
Qualifying Interests for purposes of the Investment Company Act. The Company
does not intend, however, to seek an exemptive order, no-action letter or other
form of interpretive guidance from the Commission or its staff on this position.
Any decision by the Commission or its staff advancing a position with respect to
whether such Subordinated Interests constitute Qualifying Interests that differs
from the position taken by the Company could have a material adverse effect on
the Company.
Other Investments The Company may also pursue a variety of complementary
commercial real estate and finance-related businesses and investments in
furtherance of executing its current business plan. Such activities include, but
are not limited to, investments in other classes of mortgage-backed securities,
distressed investing in non-performing and sub-performing loans and fee owned
commercial real property, whole loan acquisition programs, foreign real
estate-related asset investments, note financings, environmentally hazardous
lending, operating company investing/lending, construction and rehabilitation
lending and other types of financing activity. Any lending with regard to the
foregoing may be on a secured or an unsecured basis and will be subject to risks
similar to those attendant to investing in Mortgage Loans, Mezzanine Loans,
Certificated Mezzanine Investments and Subordinated Interests. The Company seeks
to maximize yield by managing credit risk by employing its credit underwriting
procedures, although there can be no assurance that the Company will be
successful in this regard. The Company is actively investigating potential
business acquisition opportunities that it believes will complement the
Company's operations including equity and mortgage REITS (in order to facilitate
and/or accelerate the Company electing REIT status for tax purposes), and other
firms engaged in commercial
-8-
<PAGE>
loan origination, loan servicing, mortgage banking, financing activities, real
estate loan and property acquisitions and real estate investment banking and
advisory services similar to or related to the services provided by the Company.
No assurance can be given that any such transactions will be negotiated or
completed or that any business acquired can be efficiently integrated with the
Company's ongoing operations.
Portfolio Management
- --------------------
As a principal or as an investment manager, the following describes certain
of the portfolio management practices that the Company may employ from time to
time to earn income, facilitate portfolio management (including managing the
effect of maturity or interest rate sensitivity) and mitigate risk (such as the
risk of changes in interest rates). There can be no assurance that the Company
will not amend or deviate from these policies or adopt other policies in the
future.
Leverage and Borrowing. The success of the Company's current business plan
is dependent upon the Company's ability to grow its portfolio of invested assets
through the use of leverage. The Company believes that its new investment
management business strategy will reduce the Company's dependence on financial
leverage since the Mezzanine Funds do not currently intend to employ leverage to
the same extent as the Company. When the Company does use leverage, it will do
so by leveraging its assets through the use of, among other things, bank credit
facilities including the Credit Facilities, secured and unsecured borrowings,
repurchase agreements and other borrowings. When there is an expectation that
such leverage will benefit the Company, such borrowings may have recourse to the
Company 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 meeting market underwriting standards. In
leveraging its portfolio, the Company plans not to exceed a debt-to-equity ratio
of 5:1. The Company has also agreed it will not incur any indebtedness if the
Company's debt-to-equity ratio would exceed 5:1 without the prior written
consent of the holders of a majority of the outstanding Preferred Stock (as
hereinafter defined).
Leverage creates an opportunity for increased income, but at the same time
creates special risks. For example, leveraging magnifies changes in the net
worth of the Company. Although the amount owed will be fixed, the Company's
assets may change in value during the time the debt is outstanding. Leverage
will create interest expense for the Company that can exceed the revenues from
the assets retained. To the extent the revenues derived from assets acquired
with borrowed funds exceed the interest expense incurred by the Company, the
Company's net income will be greater than if borrowed funds had not been used.
Conversely, if the revenues from the assets acquired with borrowed funds are not
sufficient to cover the cost of borrowing, the Company's net income will be less
than if borrowed funds had not been used.
In order to grow and enhance its return on equity, the Company currently
utilizes three primary sources of leverage: the Credit Facilities, the Term
Redeemable Securities Contract and repurchase agreements.
Credit Facilities. The Company has two Credit Facilities under which it can
borrow funds to finance origination or acquisition of loan and investment
assets. At December 31, 1999, the Company had $343.3 million of outstanding
borrowings under the Credit Facilities. On December 31, 1999, the unused portion
of the Credit Facilities amounted to $305.2 million providing the Company with
adequate liquidity for its short-term needs.
Term Redeemable Securities Contract. In connection with the Company's
purchase of the BB CMBS Portfolio as discussed earlier, 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.
-9-
<PAGE>
Repurchase Agreements. At December 31, 1999, the Company had two existing
repurchase agreements and may enter into other such agreements 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 agreements may be characterized as loans to the Company from the
other party as they are secured by the underlying assets. The repurchase price
reflects the purchase price plus an agreed market rate of interest, which is
generally paid on a monthly basis.
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
maturity or interest rate of its assets and/or liabilities. These techniques
also may be used to attempt to protect against declines in the market value of
the Company's assets resulting from general trends in debt markets. Any such
transaction is subject to risks and may limit the potential earnings on the
Company's loans and investments in real estate-related assets. Such techniques
include 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. Amounts arising from
the differential are recognized as an adjustment to the interest income related
to the earning asset or an adjustment to interest expense related to the
interest bearing liability. In June 1998, the FASB issued Statement of Financial
Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133") which, as amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000, although earlier application is
permitted. The Company plans to adopt SFAS No. 133 effective January 1, 2001.
Based upon the Company's derivative positions, which are considered effective
hedges at December 31, 1999, the Company estimates that it would have reported
an increase in other comprehensive income of $3.8 million had the statement been
adopted at that time.
Real Estate Advisory and Investment Banking Services
- ----------------------------------------------------
The Company provides real estate advisory and investment banking services
through its Victor Capital subsidiary, which commenced operations in 1989.
Victor Capital provides such services to an extensive client roster of real
estate investors, owners, developers and financial institutions in connection
with mortgage financings, securitizations, joint ventures, debt and equity
investments, mergers and acquisitions, portfolio evaluations, restructurings and
disposition programs.
Victor Capital provides an array of real estate investment banking and
advisory services to a variety of clients such as financial institutions,
including banks and insurance companies, public and private owners of commercial
real estate, creditor committees and investment funds. In such engagements,
Victor Capital typically negotiates for a retainer and/or a monthly fee plus
disbursements; these fees are typically applied against a success-oriented fee,
which is based on achieving the client's goals. While dependent upon the size
and complexity of the underlying transaction, Victor Capital's fees for capital
raising assignments are generally in the range of 0.5% to 3.0% of the total
amount of debt and equity raised. For pure real estate advisory assignments, a
fee is typically negotiated in advance and can take the form of a flat fee or a
monthly retainer. In certain instances, Victor Capital negotiates for the right
to receive a portion of its compensation in-kind, such as the receipt of stock
in a publicly traded company. Victor Capital also provides its real estate asset
management services primarily to institutional investors such as public and
private money management firms. Victor Capital's services may include the
identification and acquisition of specific mortgage loans and/or properties and
the management and disposition of these assets.
On January 1, 1998, the Company adopted FASB Statement of Financial
Accounting Standards No. 131, "Disclosure about segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 requires disclosures about
segments of an enterprise and related information regarding the different types
of business activities in which an enterprise engages and the different economic
environments in which it operates.
In 1998, the Company operated as two segments: Lending/Investment and
Advisory and had an internal information system that produced performance and
asset data for its two segments along service lines. During the first quarter of
1999, the Company reorganized the structure of its internal organization
-10-
<PAGE>
by merging its Lending/Investment and Advisory segments and thereby no longer
managing its operations as separate segments. As such, separate segment
reporting is not presented for 1999 as there is only one segment and the
financial information for that segment is the same as the information in the
consolidated financial statements. The disclosures as to the operating results
and identifiable assets as required by SFAS No. 131 are presented for the
Company's two segments along service lines for 1998 in Note 23 to the
accompanying Consolidated Financial Statements.
Factors that may Affect the Company's Business Strategy
- -------------------------------------------------------
The success of the Company's business strategy depends in part on important
factors, many of which are not within the control of the Company. The
availability of desirable loan and investment opportunities and the results of
the Company's operations will be affected by the amount of available capital,
the level and volatility of interest rates and credit spreads, conditions in the
financial markets and general economic conditions. There can be no assurances as
to the effects of unanticipated changes in any of the foregoing. The Company's
business strategy also depends on the ability to grow its portfolio of invested
assets through the use of leverage. There can be no assurance that the Company
will be able to obtain and maintain targeted levels of leverage or that the cost
of debt financing will increase relative to the income generated from the assets
acquired with such financing and cause the Company to reduce the amount of
leverage it utilizes. The Company risks the loss of some or all of its assets or
a financial loss if the Company is required to liquidate assets at a
commercially inopportune time.
The Company confronts the prospect that competition from other providers of
mezzanine capital may lead to a lowering of the interest rates earned on the
Company's interest-earning assets that may not be offset by lower borrowing
costs. Changes in interest rates are also affected by the rate of inflation
prevailing in the economy. A significant reduction in interest rates could
increase prepayment rates and thereby reduce the projected average life of the
Company's interest-bearing asset portfolio. While the Company may employ various
hedging strategies, there can be no assurance that the Company would not be
adversely affected during any period of changing interest rates. In addition,
many of the Company's assets will be at risk to the deterioration in or total
losses of the underlying real property securing the assets, which may not be
adequately covered by insurance necessary to restore the Company's economic
position with respect to the affected property.
Further, the Company has recently commenced its investment management
operation and therefore confronts risks associated with any start-up operation
as well as risks specifically related to the investment management business,
including but not limited to, the risks associated with the Business Assets as
outlined herein, the Company's ability to raise capital, successfully manage and
invest the capital raised and obtain leverage for such funds.
Adverse changes in national and regional economic conditions 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's 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's asset. In
addition, the yield to maturity on the Company's CMBS assets is subject to
default and loss experience on the underlying mortgage loans, as well as
interest rate changes caused by pre-payments of principal. If there are realized
losses on the underlying loans, the Company may not recover the full amount, or
possibly, any of its 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's CMBS assets may be retired
substantially earlier than their stated maturities leading to reinvestment in
lower yielding assets.
Competition
- -----------
The Company is engaged in a highly competitive business. The Company
competes for loan and investment opportunities with numerous public and private
real estate investment vehicles, including financial institutions (such as
mortgage banks, pension funds, opportunity funds and REITs) and other
institutional investors, as well as individuals. Many competitors are
significantly larger than the Company,
-11-
<PAGE>
have well established operating histories and may have access to greater capital
and other resources. In addition, the real estate, advisory and investment
management services industries are highly competitive and there are numerous
well-established competitors possessing substantially greater financial,
marketing, personnel and other resources than the Company. Victor Capital
competes with national, regional and local real estate service firms and the
Company's new investment management operations will compete with large Wall
Street investment banking firms and major financial institutions which have
extensive investment management track records and third party investor networks
already in place.
Government Regulation
- ---------------------
The Company's activities, including the financing of its 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. In addition,
a majority of states have ceilings on interest rates chargeable to customers in
financing transactions.
Employees
- ---------
As of December 31, 1999, the Company employed 22 full-time professionals
and seven other full-time employees. None of the Company's employees are covered
by a collective bargaining agreement and management considers the relationship
with its employees to be good.
-12-
<PAGE>
- ------------------------------------------------------------------------------
Item 2. Properties
- ------------------------------------------------------------------------------
The Company's principal executive and administrative offices are located in
approximately 18,700 square feet of office space leased at 605 Third Avenue,
26th Floor, New York, New York 10016 and its telephone number is (212) 655-0220.
The lease for such space expires in April 2000 with the Company having a
month-to-month lease (with a six-month notice period) thereafter. The Company
believes that this office space is suitable for its current operations for the
foreseeable future.
- ------------------------------------------------------------------------------
Item 3. Legal Proceedings
- ------------------------------------------------------------------------------
The Company is not a party to any material litigation or legal proceedings,
or to the best of its knowledge, any threatened litigation or legal proceedings,
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.
13
<PAGE>
- ------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------------------------
(a). The Company held its 1999 annual meeting of stockholders on December
16, 1999.
(b) and (c). Stockholders acted on the following proposals:
1. To elect ten directors (identified in the table below) to
serve until the next annual meeting of stockholders or
until such directors' successors are elected and shall
have been duly qualified ("Proposal 1"); and
2. To ratify the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year
ending December 31, 1999 ("Proposal 2").
The following table sets forth the number of votes in favor, the number
of votes opposed the number of abstentions (or votes withheld in the case of the
election of trustees) and broker non-votes with respect to each of the foregoing
proposals.
<TABLE>
<CAPTION>
Proposal Votes in Favor Votes Opposed Abstentions Broker Non-Votes
(Withheld)
<S> <C> <C> <C> <C>
Proposal 1
Samuel Zell 21,129,205 -- 64,208 --
Jeffrey A. Altman 21,129,205 -- 64,208 --
Thomas E. Dobrowski 21,129,205 -- 64,208 --
Martin L. Edelman 21,129,205 -- 64,208 --
Gary R. Garrabrant 21,129,105 -- 64,308 --
Craig M. Hatkoff 21,128,954 -- 64,459 --
John R. Klopp 21,128,954 -- 64,459 --
Sheli Z. Rosenberg 21,129,105 -- 64,308 --
Steven Roth 21,129,205 -- 64,208 --
Lynne B. Sagalyn 21,124,583 -- 68,830 --
Proposal 2 21,151,198 10,699 31,516 --
</TABLE>
-14-
<PAGE>
PART II
- ------------------------------------------------------------------------------
Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters
- ------------------------------------------------------------------------------
The Company's class A common stock, par value $0.01 per share ("Class A
Common Stock") is listed on the New York Stock Exchange ("NYSE"). The trading
symbol for the Class A Common Stock is "CT". The Company had approximately 1,516
stockholders-of-record at March 20, 2000.
The table below sets forth, for the calendar quarters indicated, the
reported high and low sale prices of the Class A Common Stock, and prior to the
Reorganization (as hereinafter defined) in 1998, of the Predecessor's Class A
Common Shares (as hereinafter defined) as reported on the NYSE based on
published financial sources.
High Low
1997
First Quarter...................6 7/8 2 1/2...
Second Quarter..................6 1/8 4 1/2...
Third Quarter..................11 3/8 5 5/8...
Fourth Quarter.................15 1/8 9 13/16.
1998
First Quarter..................11 1/4 9
Second Quarter.................11 7/8 9 1/16..
Third Quarter...................9 9/16 4 7/16..
Fourth Quarter..................7 3/8 4 3/8...
1999
First Quarter...................6 4
Second Quarter..................5 7/8 3 3/4...
Third Quarter...................4 15/16 3 5/8...
Fourth Quarter..................5 3 7/8...
No dividends were paid on the Company's Class A Common Stock, Class B
Common Stock (as hereinafter defined) or on the Predecessor's Class A Common
Shares in 1997, 1998 or 1999 and the Company does not expect to declare or pay
dividends on its Common Stock in the foreseeable future. The Company's current
policy with respect to dividends is to reinvest earnings to the extent that such
earnings are in excess of the dividend requirements on the Class A Preferred
Stock and Class B Preferred Stock (as hereinafter defined). Unless all accrued
dividends and other amounts then accrued through the end of the last dividend
period and unpaid with respect to preferred stock have been paid in full, the
Company may not declare or pay or set apart for payment any dividends on common
stock. The Company's charter provides for a semi-annual dividend of $0.1278 per
share on the Preferred Stock based on a dividend rate of 9.5%, amounting to an
aggregate annual dividend of $1,615,000 based on the 2,277,585 shares of Class A
Preferred Stock and the 4,043,248 shares of Class B Preferred Stock currently
outstanding.
-15-
<PAGE>
- ------------------------------------------------------------------------------
Item 6. Selected Financial Data
- ------------------------------------------------------------------------------
Prior to July 1997, the Company operated as a real estate investment trust
("REIT"), originating, acquiring, operating and holding income-producing real
property and mortgage-related investments. Therefore, the Company's historical
financial information, as of and for the years ended December 31, 1995, December
31, 1996 and part of the year ended December 31, 1997, does not reflect any
operating results from its finance or real estate investment banking services
operations. The following selected financial data relating to the Company have
been derived from the historical financial statements as of and for the years
ended December 31, 1999, 1998, 1997, 1996, and 1995. Other than the data for the
years ended December 31, 1999 and 1998, the following data does not reflect the
results of the acquisition of Victor Capital (as hereinafter defined) and the
Predecessor's issuance of 12,267,658 Preferred Shares (as hereinafter defined)
for $33 million, both of which occurred on July 15, 1997, or the Predecessor's
public securities offering of 9,000,000 new Class A Common Shares completed in
December 1997. For these reasons, the Company believes that except for the
information for the years ended December 31, 1999 and 1998, the following
information is not indicative of the Company's current business.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------ ----------- ------------------------
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Interest and investment income ............................. $ 89,839 $63,954 $ 6,445 $ 1,136 $ 1,396
Advisory and investment banking fees ....................... 17,772 10,311 1,698 -- --
Rental income .............................................. -- -- 307 2,019 2,093
Gain (loss) on sale of investments ......................... 35 -- (432) 1,069 66
Other ...................................................... -- -- -- -- 46
-------- -------- -------- ------- -------
Total revenues .......................................... 107,646 74,265 8,018 4,224 3,601
-------- -------- -------- ------- -------
OPERATING EXPENSES:
Interest ................................................... 39,791 27,665 2,379 547 815
General and administrative ................................. 17,345 17,045 9,463 1,503 933
Rental property expenses ................................... -- -- 124 781 688
Provision for possible credit losses ....................... 4,103 3,555 462 1,743 3,281
Depreciation and amortization .............................. 345 249 92 64 662
-------- -------- -------- ------- -------
Total operating expenses ................................ 61,584 48,514 12,520 4,638 6,379
-------- ------- -------
Income (loss) before income tax expense and
distributions and amortization on Convertible
Trust Preferred Securities ............................... 46,062 25,751 (4,502) (414) (2,778)
Income tax expense ......................................... 22,020 9,367 -- -- --
-------- -------- -------- ------- -------
Income (loss) before distributions and
amortization on Convertible Trust Preferred ............. 24,042 16,384 (4,557) (414) (2,778)
Securities
Distributions and amortization on Convertible
Trust Preferred Securities, net of income tax benefit.... 6,966 2,941 -- -- --
-------- -------- -------- ------- -------
NET INCOME (LOSS) .......................................... 17,076 13,443 (4,557) (414) (2,778)
Less: Preferred Stock dividend and
dividend requirement ..................................... 2,375 3,135 1,471 -- --
-------- -------- -------- ------- -------
Net income (loss) allocable to Common Stock ................ $ 14,701 $10,308 $ (6,028) $ (414) $(2,778)
======== ======== ======== ======= =======
PER SHARE INFORMATION:
Net income (loss) per share of Common Stock:
Basic.................................................. $ 0.69 $ 0.57 $ (0.63) $ (0.05) $ (0.30)
======== ======== ======== ======== ========
Diluted................................................ $ 0.55 $ 0.44 $ (0.63) $ (0.05) $ (0.30)
======== ======== ======== ======== ========
Weighted average shares of Common Stock
outstanding:
Basic.................................................. 21,334 18,209 9,527 9,157 9,157
======== ======== ======== ======== ========
Diluted................................................ 43,725 30,625 9,527 9,157 9,157
======== ======== ======== ======== ========
As of December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------ ----------- ------------------------
BALANCE SHEET DATA:
Total assets..................................... $827,808 $766,438 $317,366 $ 30,036 $ 33,532
Total liabilities................................ 522,925 472,207 174,077 5,565 8,625
Convertible Trust Preferred Securities........... 146,343 145,544 -- -- --
Stockholders' equity............................. 158,540 148,687 143,289 24,471 24,907
</TABLE>
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<PAGE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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Overview
- --------
Prior to July 1997, the Company operated as a REIT, originating, acquiring,
operating and holding income-producing real property and mortgage-related
investments. Since July 1997, the Company has pursued a new strategic direction
operating as a finance company designed primarily to take advantage of
high-yielding mezzanine investments and other real estate asset and finance
opportunities in commercial real estate. At that time, the Company elected to no
longer qualify for treatment as a REIT for federal income tax purposes.
Consequently, the results for the year ended December 31, 1997 reflect partial
year real estate finance and advisory operations. The results for the years
ended December 31, 1999 and 1998 reflect full year real estate finance and
advisory operations.
The Company is successor to the Predecessor, following consummation of the
reorganization on January 28, 1999, whereby the Predecessor ultimately merged
with and into the Company, which thereafter continued as the surviving Maryland
corporation (the "Reorganization"). 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.
Ownership and Capital Changes
- -----------------------------
On January 3, 1997, CalREIT Investors Limited Partnership ("CRIL"), an
affiliate of EGI and Samuel Zell, purchased from the Predecessor's former parent
6,959,593 common shares of beneficial interest, $1.00 par value ("Common
Shares") in the Predecessor (representing approximately 76% of the
then-outstanding Common Shares) for an aggregate purchase price of $20,222,011.
In July 1997, the Predecessor consummated the sale of 12,267,658 class A 9.5%
cumulative convertible preferred shares of beneficial interest, $1.00 par value
("Class A Preferred Shares"), in the Predecessor, to Veqtor Finance Company,
L.L.C. ("Veqtor"), a then affiliate of Samuel Zell and the then principals of
Victor Capital, for an aggregate purchase price of $33,000,000 (the
"Investment"). Concurrently with the foregoing transaction, Veqtor purchased the
6,959,593 Common Shares (which were reclassified at that time as class A common
shares of beneficial interest, $1.00 par value ("Class A Common Shares")) held
by CRIL for an aggregate purchase price of approximately $21.3 million.
Concurrently with the foregoing transactions, the Predecessor consummated
the acquisition of the real estate services businesses of Victor Capital and
appointed a new management team from among the ranks of Victor Capital's
professional team and elsewhere. The Predecessor thereafter immediately
commenced full implementation of its operations as a finance and advisory
company under the direction of its newly elected board of trustees and new
management team.
In December 1997, the Predecessor completed a public securities offering of
9,000,000 new Class A Common Shares in the Company at $11.00 per share raising
approximately $91.4 million in net proceeds ("the Offering"). In July 1998, the
Company completed a private placement of $150 million of Convertible Trust
Preferred Securities that are convertible into Class A Common Stock (as
hereinafter defined) at a conversion price of $11.70 per share. The Company
raised approximately $145.2 million in net proceeds from the private placement
transaction.
In the Reorganization, the Predecessor merged with and into Captrust
Limited Partnership, a Maryland limited partnership ("CTLP"), with CTLP
continuing as the surviving entity, and CTLP merged with and into the Company,
with the Company continuing as the surviving Maryland corporation. Each
outstanding Class A Common Share was converted into one share of class A common
stock, par value $0.01 per share ("Class A Common Stock"), and each outstanding
Class A Preferred Share 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 have been reclassified as shares of Class A Common Stock
and all of the Predecessor's previously issued Class A Preferred Shares have
been reclassified as shares of Class A Preferred Stock.
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<PAGE>
As of December 31, 1998, there were 12,267,658 shares of Class A Preferred
Stock issued and outstanding, no shares of Class B Preferred Stock (as defined
below) were issued and outstanding, 18,158,816 shares of Class A Common Stock
were issued and outstanding and no shares of Class B Common Stock issued and
outstanding. The 12,267,658 shares of Class A Preferred Stock outstanding at
December 31, 1998 were originally issued and purchased by Veqtor on July 15,
1997 for an aggregate purchase price of approximately $33 million (see Note 1).
Until August 10, 1999 (the "Conversion Date"), Veqtor owned 6,959,593 of
the outstanding shares of Class A Common Stock and all 12,267,658 of the
outstanding shares of Class A Preferred Stock. Veqtor was then 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 the Conversion Date, the common members owned approximately
48% of the equity ownership of Veqtor and three commercial banks, as preferred
members of Veqtor, owned the remaining 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 share 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 provisions of the
Company's charter 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. After the Conversion Date, until the Separation
Transaction (as defined below), 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 held by
Veqtor were, upon exercise of existing conversion rights, converted into an
equal number of shares of Class A Common Stock. As a result of the foregoing
redemption and subsequent conversion transactions, as of September 30, 1999,
Veqtor owned 9,320,531 (or approximately 42.4%) of the outstanding shares of
Class A Common Stock and the Company's annual dividend on Preferred Stock has
been reduced from $3,135,000 to $1,615,000.
In December 1999, a series of coordinated transactions (the "Separation
Transaction") were effected in which beneficial ownership of an aggregate of
6,128,243 shares of the 9,320,531 shares of Class A Common Stock previously
owned by Veqtor prior to the Separation Transaction were transferred to
partnerships controlled by the vice chairman and chief executive officer of the
Company (the "Klopp LP"), the vice chairman and chairman of the executive
committee of the board of directors of the Company (the "Hatkoff LP") and
certain of the former partners of CTILP (the "Other Partnerships"). Each of
partnerships acquired direct beneficial ownership of such number of shares of
Class A Common Stock equal to the number of shares in which the persons
currently controlling such partnerships held an indirect pecuniary interest
prior to the Separation Transaction. Veqtor retained direct beneficial ownership
of 3,192,888 shares of Class A Common Stock, which represents the number of
shares in which the persons then controlling Veqtor held an indirect pecuniary
interest prior to the Separation Transaction.
Upon consummation of the Separation Transaction by means of the foregoing
transactions, Hatkoff LP, Klopp LP, Veqtor and the Other Partnerships acquired
(or, in the case of Veqtor, retained) direct beneficial ownership of 2,330,132,
2,330,132, 3,192,288 and 1,467,979 shares of Class A Common Stock, respectively.
On January 1, 2000, ownership and control of Veqtor was transferred to a trust
for the benefit of the family of the Company's chairman of the board.
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<PAGE>
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 that had the effect of adjusting the yield on the debt to current
market terms. 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, 1999 is 12.19%.
In 1999, the Company originated three Mortgage Loans totaling $45.0
million, one other loan for $52.5 million and funded $7.2 million of commitments
under existing loans amd Certificated Mezzanine Investments. 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 $10.8
million of partial repayments on loans and Certificated Mezzanine Investments.
At December 31, 1999, the Company had outstanding loans, certificated mezzanine
investments and investments in CMBS totaling approximately $777 million and
additional commitments for fundings on outstanding loans and certificated
mezzanine investments of approximately $30.8 million.
The Company believes that the loans and investments originated in 1999 will
provide investment yields within the Company's target range of 500 to 700 basis
points above LIBOR. The Company maximizes its return on equity by utilizing its
existing cash on hand and then employing leverage on its investments. The
Company may make loans and investments with yields that fall outside of the
investment range set forth above, but that correspond with the level of risk
perceived by the Company to be inherent in such investments.
The Company's 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's 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 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's 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's asset. In
addition, the yield to maturity on the Company's CMBS assets is subject to
default and loss experience on the underlying mortgage loans, as well as
interest rate changes caused by pre-payments of principal. If there are realized
losses on the underlying loans, the Company may not recover the full amount, or
possibly, any of its 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's 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's assets will
not experience any of the foregoing risks or that, as a result of any such
experience, the Company will not suffer a reduced return on investment or an
investment loss. During the year ended December 31, 1999, the Company sold all
of its other available-for-sale securities
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<PAGE>
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 December 31, 1999, the Company was party to two repurchase
obligations relating to assets sold by the Company with an aggregate carrying
amount of $45.4 million, which approximates the assets' market value, and has
liabilities to repurchase these assets for $28.7 million. The average interest
rate in effect for the two remaining repurchase obligations at December 31, 1999
is 7.76%.
The Company is party to two credit agreements with commercial lenders (the
"First Credit Facility" and the "Second Credit Facility", (together the "Credit
Facilities")) that after amendments provide for $655 million of credit. The
First Credit Facility provides for a $355 million line of credit with an
original three year term. Concurrent with the BB CMBS Portfolio transaction, the
$355 million First Credit Facility's maturity was extended to February 28, 2002
with an automatic one-year amortizing extension option, if not otherwise
extended. The Second Credit Facility provides for a $300 million line of credit
with an original 18-month term. During the year ended December 31, 1999, the
Company extended the maturity date of its Second Credit Facility from December
1999 to June 2000 with an automatic nine-month amortizing extension option, if
not otherwise extended.
The Credit Facilities provide for advances to fund lender-approved loans
and investments made by the Company ("Funded Portfolio Assets"). The obligations
of the Company under the Credit Facilities are secured by pledges of the Funded
Portfolio Assets acquired with advances under the Credit Facilities. Borrowings
under the Credit Facilities bear 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 previously subject to the
drawdown fee will not require the Company to pay any additional fees. The Credit
Facilities provide for margin calls on asset-specific borrowings in the event of
asset quality and/or market value deterioration as determined under the Credit
Facilities. The Credit Facilities contain customary representations and
warranties, covenants and conditions and events of default. The Credit
Facilities also contain a covenant obligating the Company 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 Company and
practical control of the Company's business and operations.
At December 31, 1999, the Company had $343.3 million of outstanding
borrowings under the Credit Facilities as compared to $371.8 million at December
31, 1998. The decrease of $28.5 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 borrowings utilized to fund
the non-financed portion of the BB CMBS Portfolio acquisition, cash utilized in
loan originations and cash utilized to satisfy the repurchase obligation that
matured.
As of December 31, 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 year ended December
31, 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 which was recorded as a reduction in interest income for the
year. At December 31, 1999, the Company was party to interest rate swap
agreements for notional amounts totaling approximately $220 million with
financial institution counterparties whereby the Company swapped fixed-rate
instruments, with average interest rates of approximately 5.93%, for floating
rate instruments with interest rates at LIBOR. The agreements mature at varying
times from September 2001 to July 2014.
The Company is exposed to credit loss in the event of non-performance by
the counterparties (banks whose securities are rated investment grade) to the
interest rate swap and cap agreements, although it does
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<PAGE>
not anticipate such non-performance. The counterparties would bear the interest
rate risk of such transactions as market interest rates increase. If an interest
rate swap or interest rate cap is sold or terminated and cash is received or
paid, the gain or loss is deferred and recognized when the hedged asset is sold
or matures.
During 1999, the Company dedicated significant resources to 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. Although the Company believed that during 1999 the lending environment
was very favorable and that the Company was able to originate and/or acquire
loans and investments meeting its targeted risk/yield profile, the Company made
the strategic decision to manage its portfolio of loans and investments at its
current level of approximately $800 million. During 1999, and in keeping with
this plan, the Company originated sufficient new loans and investments to keep
its portfolio of interest earning assets static and therefore did not experience
the substantial increases in net interest income from loans and investments
corresponding to the substantial growth in interest earning assets that had
occurred in prior years. The Company believed that by maintaining its investment
portfolio at its current level, it was able to preserve sufficient sources of
liquidity to facilitate potential strategic acquisitions and/or joint ventures
such as the strategic relationship concluded with Citigroup.
Results of Operations for the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------
The Company reported net income allocable to shares of Common Stock of
$14,701,000 for the year ended December 31, 1999, an increase of $4,393,000 from
the net income allocable to shares of Common Stock of $10,308,000 for the year
ended December 31, 1998. This change was primarily the result of an increase in
advisory and investment banking fees and an increase in income from loans and
other investments, net, partially offset by an increase in the distributions on
the Convertible Trust Preferred Securities and an increase in the provision for
income taxes.
Income from loans and other investments, net, amounted to $49,136,000 for
the year ended December 31, 1999, an increase of $14,072,000 over the
$35,064,000 amount for the year ended December 31, 1998. This increase was due
primarily to increase in average earning assets of $223.4 million while interest
bearing liabilities only increased by $133.5 million. The approximately $90
million difference was financed with proceeds from the Convertible Trust
Preferred Securities.
The increase in interest and related income was primarily due to the
increase in the amount of average interest earning assets from approximately
$526.3 million for the year ended December 31, 1998 to approximately $749.7
million for the year ended December 31, 1999. The average interest rate in
effect for both years was 11.8%.
The increase in interest and related expenses was due to an increase in the
amount of average interest bearing liabilities from approximately $338.3 million
at an average rate of 8.1% for the year ended December 31, 1998 to approximately
$471.8 million at an average rate of 8.4% for the year ended December 31, 1999.
The increase in rate was due primarily to the Company utilizing its Credit
Facilities for a higher percentage of its borrowing needs at rates generally
higher than it had previously enjoyed through repurchase agreements.
The Company also utilized the net 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 year ended December 31, 1999,
the Company recognized $6,966,000 of net expenses related to these securities.
During the year ended December 31, 1998, the Company recognized $2,941,000 of
net expenses related to these securities. Distributions to the holders totaled
$12,375,000 for the year ended December 31, 1999, and $5,225,000 for the year
ended December 31, 1998. Amortization of discount and origination costs totaled
$799,000 during the year ended December 31, 1999 and $337,000 for the year ended
December 31, 1998. These expenses were partially offset by a tax benefit of
$6,208,000 during the year ended December 31, 1999 and $2,621,000 for the year
ended December 31, 1998.
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<PAGE>
During the year ended December 31, 1999, other revenues increased
$7,107,000 to $19,056,000 over the same period in 1998. The changes for the year
ended December 31, 1999 was primarily due to an increase in advisory and
investment banking fees generated by Victor Capital and its related
subsidiaries.
Other expenses increased from $21,262,000 for the year ended December 31,
1998 to $22,130,000 for year ended December 31, 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 increases in compensation for the remaining
employees offset by a decrease in professional fees accounted for the increase
in general and administrative expenses for the year ended December 31, 1999 as
compared to 1998. The Company had 29 full time employees at December 31, 1999.
The increase in the provision for possible credit losses from $3,555,000 for the
year ended December 31, 1998 to $4,103,000 for the year ended December 31, 1999
was due to the increase in average earning assets as previously described.
Management believes that the reserve for possible credit losses is adequate.
For the years ended December 31, 1999 and 1998, the Company accrued income
tax expense of $22,020,000 and $9,367,000, respectively, for federal, state and
local income taxes. The increase in the effective tax rate (from 36.4% to 47.8%)
was primarily due to a decrease in the net operating loss carryforwards utilized
to offset taxable income. For the year ended December 31, 1998, net operating
loss carryforwards reduced the effective tax rate by 10.7% due to significant
losses generated in 1997 that were not limited for utilization in 1998. For the
year ended December 31, 1999, the reduction was only 1.1% 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 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 to 6,320,833 and the dividend
requirement to $1,615,000 per annum.
Results of Operations for the Years Ended December 31, 1998 and 1997
The Company reported total revenues of $74.3 million for the year ended
December 31, 1998, an increase of $66.3 million over total revenues of $8.0
million reported for the year ended December 31, 1997. The Company reported net
income allocable to Common Stock of $10,308,000 for the year ended December 31,
1998, an increase of $16,336,000 from the net loss allocable to Common Stock of
$6,028,000 for the year ended December 31, 1997. These changes were primarily
the result of the full implementation of the Company's operations as a real
estate finance and advisory company that generated revenues from loans and other
investments and significant advisory and investment banking fees.
Interest and related income from loans and other investments amounted to
$62,316,000 for the year ended December 31, 1998, an increase of $57,324,000
over the $4,992,000 for the year ended December 31, 1997. This increase was
primarily due to an eleven-fold increase in the average interest earning assets
from approximately $46.8 million for the year ended December 31, 1997 to
approximately $526.3 million for the year ended December 31, 1998. The increase
was also enhanced by an increase in the average rate earned on the investments
from 10.66% to 11.84%
Interest and related expenses had a similar percentage change increasing
from $2,223,000 at December 31, 1997 to $27,252,000 at December 31, 1998. This
increase of $25,029,000 is due to an increase in the average interest bearing
liabilities from approximately $27.5 million for the year ended December 31,
1997 to approximately $338.3 million for the year ended December 31, 1998. The
average rate paid on average interest-bearing liabilities remained constant from
year to year at 8.1%.
During the year ended December 31, 1998, other revenues totaled
$11,949,000, an increase of $8,923,000 over the same period in 1997. The
increase for the year ended December 31, 1998 was primarily due to an additional
$8,613,000 of advisory and investment banking fees generated by Victor
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<PAGE>
Capital and its related subsidiaries over the amount of such fees generated in
the prior year and an additional $185,000 of other interest income being earned
in 1998. The Company also experienced a $307,000 decrease in rental income as
the Company sold its remaining rental properties during the first quarter of
1997 for which the Company recorded a loss of $432,000.
Other expenses increased from $10,297,000 for the year ended December 31,
1997 to $21,262,000 for the year ended December 31, 1998. The increase was
primarily due to the additional general and administrative expenses necessary
for the commencement and continuation of full-scale operations as a finance
company, the largest components of such expenses are employee salaries and
related costs, and the provision for possible credit losses. As of December 31,
1998, the Company had 44 full-time employees as compared to 29 at December 31,
1997 (who were employed for only five and a half months following the
acquisition of Victor Capital on July 15, 1997). The provision for possible
credit losses was $3,555,000 for the year ended December 31, 1998, as the
Company provided reserves on its loan and investment portfolio pursuant to its
reserve policy. The significant increase from the $462,000 provision for
possible credit loss for the year ended December 31, 1997 was due to the
increase in average earning assets outstanding as previously described.
In 1997, the Company did not incur any income tax expense or benefit
associated with the loss it incurred due to the uncertainty of realization of
net operating loss carryforwards. In the year ended December 31, 1998, the
Company accrued $9,367,000 of income tax expense for federal, state and local
income taxes. For federal purposes, the Company utilized net operating loss
carryforwards of approximately $4.9 million to reduce its current tax expense
and released approximately $1.0 million of reserves on deferred tax assets in
calculating the accrual for the year ended December 31, 1998. This had the
effect of reducing the effective tax rate from the expected rate of 47% to 36%.
As discussed above, the Company issued $150,000,000 of Convertible Trust
Preferred Securities on July 28, 1998. The Company recognized $2,941,000 of net
expenses related to these securities during the year ended December 31, 1998.
This amount consisted of distributions to the holders totaling $5,225,000 and
amortization of discount and origination costs totaling $337,000 that were
partially offset by tax benefits of $2,621,000.
The preferred stock dividend and dividend requirement arose in 1997 as a
result of the Company's issuance of $33 million of Preferred Stock on July 15,
1997. Dividends accrued on such stock at a rate of 9.5% per annum on a per share
price of $2.69 for the 12,267,658 shares outstanding.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1999, the Company had $38,782,000 in cash. Liquidity in
2000 will be provided primarily by cash on hand, cash generated from operations,
principal and interest payments received on investments, loans and securities,
and additional borrowings under the Credit Facilities. The Company believes
these sources of capital will adequately meet future cash requirements. The
Company expects that during 2000 it will use a significant amount of its
available capital resources to satisfy its capital contributions required in
connection with the previously discussed venture with Citigroup. In connection
with the existing portfolio investment and loan business, the Company intends to
employ leverage up to a maximum 5:1 debt-to-equity ratio to enhance its return
on equity.
The Company experienced a net decrease in cash of approximately $7.8
million for the year ended December 31, 1999, compared to a net decrease in cash
of $2.6 million for the year ended December 31, 1998. For the year ended
December 31, 1999, cash provided by operating activities was $24.2 million, an
increase of approximately $9.4 million from cash provided by operations of $14.8
million during the same period in 1998. Cash used in investing activities during
this same period decreased by approximately $371.3 million to approximately
$76.6 million, down from $447.9 million, primarily as a result of the decreased
loan origination and investment activity. Cash provided by financing activities
decreased approximately $386.0 million to approximately $44.5 million, down from
$430.5 million, primarily from a reduced need to borrow on the Credit Facilities
as a result of the Company's stabilized loan and investment portfolio.
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<PAGE>
At December 31, 1999, the Company had two outstanding notes payable
totaling $3,474,000, outstanding borrowings on the Credit Facilities of
$343,263,000 and outstanding repurchase obligations of $28,703,000. At December
31, 1999, the Company had $305,166,000 of borrowing capacity available under the
Credit Facilities.
Impact of Inflation
- -------------------
The Company's operating results depend in part on the difference between
the interest income earned on its interest-earning assets and the interest
expense incurred in connection with its 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 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, the value of the
Company's interest-earning assets and its ability to realize gains from the sale
of assets and the average life of the Company's 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 the control of the Company. 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.
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.
Year 2000 Information
- ---------------------
The Company completed its Year 2000 readiness project and did not
experience any adverse effects of the Year 2000 Issue. The Company incurred
costs totaling $225,000 in connection with the Year 2000 readiness project
($30,000 expensed and $195,000 capitalized for new systems and equipment) and
does not expect any additional project costs in the future.
-24-
<PAGE>
- ------------------------------------------------------------------------------
Item 7A. 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 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 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.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates at December 31,
1999. For financial assets and debt obligations, the table presents cash flows
to the expected maturity and weighted average interest rates based upon the
current carrying values. 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.
-25-
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Dates
------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
CMBS
Fixed Rate - - $196,874 - - - $196,874 $175,806
Average interest rate - - 12.19% - - - 12.19%
Variable Rate - - - $ 36,509 - - $ 36,509 $ 33,089
Average interest rate - - - 12.34% - - 12.34%
Certificated Mezzanine
Investments
Variable Rate $ 45,432 - - - - - $ 45,432 $ 45,432
Average interest rate 10.54% - - - - - 10.54%
Loans receivable
Fixed Rate $ 21,115 $ 28,000 $ 3,000 - - $ 97,861 $149,976 $147,286
Average interest rate 20.00% 12.59% 12.50% - - 11.40% 12.86%
Variable Rate $155,218 $133,223 $ 52,500 - - $ 26,500 $367,441 $354,621
Average interest rate 11.87% 11.37% 12.47% - - 11.88% 11.78%
Liabilities:
Credit facilities
Variable Rate - $157,823 - $185,440 - - $343,263 $343,263
Average interest rate - 9.58% - 8.85% - - 9.18%
Term redeemable securities
contract
Variable Rate - - $137,812 - - - $137,812 $129,642
Average interest rate - - 9.96% - - - 9.96%
Repurchase obligations
Variable Rate $ 28,703 - - - - - $ 28,703 $ 28,703
Average interest rate 7.76% - - - - - 7.76%
Convertible Trust
Preferred Securities
Fixed Rate - - - - - $150,000 $150,000 $146,343
Average interest rate - - - - - 9.02% 9.02%
Interest rate swaps - $ 28,000 $137,812 $ 19,109 - $53,250 $238,171 $ 17,170
Average fixed pay rate - 5.79% 6.05% 6.04% - 6.01% 6.01%
Average variable
receive rate - 6.48% 6.46% 6.46% - 6.47% 6.47%
</TABLE>
-26-
<PAGE>
- ------------------------------------------------------------------------------
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. 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 24 to the consolidated financial statements.
- ------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
- ------------------------------------------------------------------------------
None
-27-
<PAGE>
PART III
- ------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------------------------
The information regarding the Company's trustees is incorporated herein by
reference to the Company's definitive proxy statement to be filed not later than
April 29, 2000, 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 29, 2000, 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 Item 403 of Regulation S-K is incorporated
herein by reference to the Company's definitive proxy statement to be filed not
later than April 29, 2000, 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 29, 2000, with the Securities and Exchange Commission pursuant
to Regulation 14A under the Exchange Act.
-28-
<PAGE>
PART IV
- ------------------------------------------------------------------------------
Item 14. 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, 1999 (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. (comprised of Articles of
Amendment and Restatement of Charter and amendments thereof by
Articles Supplementary with respect to Class A 9.5% Cumulative
Convertible Preferred Stock and Articles Supplementary with respect
to Class B 9.5% Cumulative Convertible Non-Voting Preferred Stock)
(filed as Exhibit 3.1 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).
3.2 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).
4.1 Articles Supplementary with respect to Class A 9.5% Cumulative
Convertible Preferred Stock of Capital Trust, Inc. and Articles
Supplementary with respect to Class B 9.5% Cumulative Convertible
Non-Voting Preferred Stock of Capital Trust, Inc. (included in
Exhibit 3.1).
4.4 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).
4.5 Preferred Securities Purchase Agreement dated as of July 27, 1998
among Capital Trust, CT Convertible Trust I, 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
4.2 to Capital Trust's Current Report on Form 8-K (File No. 1-8063)
filed on August 6, 1998 and incorporated herein by reference).
-29-
<PAGE>
Exhibit
Number Description
- --------- ------------
4.6 Declaration of Trust of CT Convertible Trust I ("CT Trust I") dated
as of July 28, 1998 by the Trustees (as defined therein), Capital
Trust, as sponsor, and the holders, from time to time, of undivided
beneficial interests in CT Trust I to be issued pursuant to such
Declaration (filed as Exhibit 4.3 to Capital Trust's Current Report
on Form 8-K (File No. 1-8063) filed on August 6, 1998 and
incorporated herein by reference).
4.7.a. Indenture dated as of July 28, 1998 between Capital Trust and
Wilmington Trust Company, as trustee (filed as Exhibit 4.4 to Capital
Trust's Current Report on Form 8-K (File No. 1-8063) filed on August
6, 1998 and incorporated herein by reference).
4.7.b. Supplemental Indenture, dated as of January 28, 1999, with respect to
Indenture dated as of July 28, 1998, between Capital Trust, Inc. and
Wilmington Trust Company, as trustee (filed as Exhibit 4.2 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).
4.8 Preferred Securities Guarantee Agreement dated as of July 28, 1998 by
Capital Trust and Wilmington Trust Company, as trustee (filed as
Exhibit 4.5 to Capital Trust's Current Report on Form 8-K (File No.
1-8063) filed on August 6, 1998 and incorporated herein by
reference).
4.9 Common Securities Guarantee Agreement dated as of July 28, 1998 by
Capital Trust (filed as Exhibit 4.6 to Capital Trust's Current Report
on Form 8-K (File No. 1-8063) filed on August 6, 1998 and
incorporated herein by reference).
10.1 Preferred Share Purchase Agreement, dated as of June 16, 1997, by and
between Capital Trust and Veqtor Finance Company, LLC (filed as
Exhibit 10.1 to Capital Trust's Current Report on Form 8-K (File No.
1-8063) filed on July 30, 1997 and incorporated herein by reference).
10.2 Non-Negotiable Notes of Capital Trust payable to John R. Klopp, Craig
M. Hatkoff and Valentine Wildove & Company, Inc. (filed as Exhibit
10.2 to Capital Trust's Current Report on Form 8-K (File No. 1-8063)
filed on July 30, 1997 and incorporated herein by reference).
+10.3 Capital Trust, Inc. Amended and Restated 1997 Long-Term 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).
+10.4 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).
+10.5 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).
+10.6 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).
+10.7 Capital Trust, Inc. Stock Purchase Loan Plan (filed as Exhibit 10.5
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).
+10.8 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).
+10.9 Employment Agreement, dated as of July 15, 1997, by and between
Capital Trust and Craig M. Hatkoff (filed as Exhibit 10.6 to Capital
Trust's Registration Statement on Form S-1 (File No. 333-37271) filed
on October 6, 1997 and incorporated herein by reference).
-30-
<PAGE>
Exhibit
Number Description
+10.10 Consulting Agreement, dated as of July 15, 1997, by and between
Capital Trust and Gary R. Garrabrant (filed as Exhibit 10.7 to
Capital Trust's Registration Statement on Form S-1 (File No.
333-37271) filed on October 6, 1997 and incorporated herein by
reference).
10.11 Sublease, dated as of July 29, 1997, between New York Job Development
Authority and Victor Capital Group, L.P. (filed as Exhibit 10.8 to
Capital Trust's Registration Statement on Form S-1 (File No.
333-37271) filed on October 6, 1997 and incorporated herein by
reference).
10.12.a Amended and Restated Credit Agreement, dated as of January 1, 1998,
between Capital Trust and German American Capital Corporation
("GACC") (filed as Exhibit 10.1 to Capital Trust's Current Report on
Form 8-K (File No. 1-8063) filed on March 18, 1998 and incorporated
herein by reference), as amended by First Amendment to Amended and
Restated Credit Agreement, dated as of June 22, 1998, between Capital
Trust and GACC (filed as Exhibit 10.3 to Capital Trust's Quarterly
Report on Form 10-Q (File No. 1-8063) filed on August 14, 1998 and
incorporated herein by reference), as amended by Second Amendment to
Amended and Restated Credit Agreement, dated as of July 23, 1998,
between Capital Trust and GACC (filed as Exhibit 10.10 to Capital
Trust, Inc.'s Amendment No. 2 to Registration Statement on Form S-4
(File No. 333-52619) filed on October 23, 1998 and incorporated
herein by reference).
10.12.b Third Amendment to Amended and Restated Credit Agreement, dated as of
July 23, 1998, between Capital Trust, Inc. and GACC (filed as Exhibit
10.12b to Capital Trust, Inc.'s Annual Report on Form 10-K (File No.
1-14788) filed on March 31, 1999 and incorporated herein by
reference).
+10.13 Employment Agreement, dated as of August 15, 1998, by and between
Capital Trust and Stephen D. Plavin (filed as Exhibit 10.15 to
Capital Trust, Inc.'s Amendment No. 2 to Registration Statement on
Form S-4 (File No. 333-37271) filed on October 23, 1998 and
incorporated herein by reference).
10.14 Master Loan and Security Agreement, dated as of June 8, 1998, between
Capital Trust and Morgan Stanley Mortgage Capital Inc. (filed as
Exhibit 10.1 to Capital Trust's Quarterly Report on Form 10-Q (File
No. 1-8063) filed on August 14, 1998 and incorporated herein by
reference).
10.15 CMBS Loan Agreement, dated as of June 30, 1998, between Capital Trust
and Morgan Stanley & Co. International Limited (filed as Exhibit 10.2
to Capital Trust's Quarterly Report on Form 10-Q (File No. 1-8063)
filed on August 14, 1998 and incorporated herein by reference).
10.16 Co-Investment Agreement, dated as of July 28, 1998, among Capital
Trust, Vornado Realty L.P., EOP Operating Limited Partnership, and
General Motors Investment Management Corporation, as agent for and
for the benefit of the Pension Plans (as defined therein) (filed as
Exhibit 10.1 to Capital Trust's Current Report on Form 8-K (File No.
1-8063) filed on August 6, 1998 and incorporated herein by
reference).
10.17 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).
*21.1 Subsidiaries of Capital Trust, Inc.
*23.1 Consent of Ernst & Young LLP
*27.1 Financial Data Schedule.
- ---------------
+ Represents a management contract or compensatory plan or arrangement.
* Filed herewith.
-31-
<PAGE>
(a) (4) Report on Form 8-K
During the fiscal quarter ended December 31, 1999, the Registrant filed the
following Current Report on Form 8-K:
None
-32-
<PAGE>
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 27, 2000 /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 27, 2000 /s/ Samuel Zell
Date Samuel Zell
Chairman of the Board of Directors
March 27, 2000 /s/ John R. Klopp
- ------------------ -----------------
Date John R. Klopp
Vice Chairman and Chief Executive Officer and Director
March 27, 2000 /s/ Edward L. Shugrue III
- ------------------ -------------------------
Date Edward L. Shugrue III
Managing Director and Chief Financial Officer
March 27, 2000 /s/ Brian H. Oswald
- ------------------ -------------------
Date Brian H. Oswald
Chief Accounting Officer
March 27, 2000 /s/ Jeffrey A. Altman
- ------------------ ---------------------
Date Jeffrey A. Altman, Director
March 27, 2000 /s/ Thomas E. Dobrowski
- ------------------ -----------------------
Date Thomas E. Dobrowski, Director
March 27, 2000 /s/ Martin L. Edelman
- ------------------ ---------------------
Date Martin L. Edelman, Director
March 27, 2000 /s/ Gary R. Garrabrant
- ------------------ ----------------------
Date Gary R. Garrabrant, Director
March 27, 2000 /s/ Craig M. Hatkoff
- ------------------ --------------------
Date Craig M. Hatkoff
Vice Chairman and Director
March 27, 2000 /s/ Sheli Z. Rosenberg
- ------------------ ----------------------
Date Sheli Z. Rosenberg, Director
March 27, 2000 /s/ Steven Roth
Date Steven Roth, Director
March 27, 2000 /s/ Lynne B. Sagalyn
- ------------------ --------------------
Date Lynne B. Sagalyn, Director
March 27, 2000 /s/ Michael Watson
Date Michael Watson, Director
March 27, 2000 /s/ Marc P. Weill
- ------------------ -----------------
Date Marc P. Weill, Director
-33-
<PAGE>
Index to Consolidated Financial Statements
Report of Independent Auditors.............................................F-2
Audited Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998...............F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997...........................................F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997...........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997...........................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
<PAGE>
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, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit 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, 1999 and 1998, and the consolidated results of its operations and
their cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
New York, New York
February 14, 2000, except for Note 25,
as to which the date is March 8, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands)
1999 1998
-------------- --------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 38,782 $ 46,623
Other available-for-sale securities, at fair value - 3,355
Commercial mortgage-backed securities available-for-sale, at fair value 214,058 31,650
Certificated mezzanine investments available-for-sale, at fair value 45,432 45,480
Loans receivable, net of $7,605 and $4,017 reserve for possible credit losses
at December 31, 1999 and December 31, 1998, respectively 509,811 620,858
Excess of purchase price over net tangible assets acquired, net 286 308
Deposits and other receivables 533 401
Accrued interest receivable 9,528 8,041
Deferred income taxes 5,368 3,029
Prepaid and other assets 4,010 6,693
-------------- --------------
Total assets 827,808 $ 766,438
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 14,432 $ 12,356
Notes payable 3,474 4,247
Credit facilities 343,263 371,754
Term redeemable securities contract 129,642 -
Repurchase obligations 28,703 79,402
Deferred origination fees and other revenue 3,411 4,448
-------------- --------------
Total liabilities 522,925 472,207
-------------- --------------
Company-obligated, mandatory redeemable, convertible preferred securities of CT
Convertible Trust I, holding solely 8.25% junior subordinated debentures of
Capital Trust, Inc. ("Convertible Trust Preferred Securities") 146,343 145,544
-------------- --------------
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 December 31, 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 December 31, 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 December 31, 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 December 31, 1999 ("Class B Common Stock") 23 -
Restricted Class A Common Stock, $0.01 par value, 127 and 55 shares issued and
outstanding at December 31, 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 (407) (418)
Accumulated other comprehensive loss (10,164) (4,665)
Accumulated deficit (20,651) (35,352)
-------------- --------------
Total stockholders' equity 158,540 148,687
-------------- --------------
Total liabilities and stockholders' equity $ 827,808 $ 766,438
============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands, except per share data)
1999 1998 1997
---------------- ---------------- -----------------
Income from loans and other investments:
<S> <C> <C> <C>
Interest and related income $ 88,590 $ 62,316 $ 4,992
Less: Interest and related expenses 39,454 27,252 2,223
---------------- ---------------- ----------------
Income from loans and other investments, net 49,136 35,064 2,769
---------------- ---------------- ----------------
Other revenues:
Advisory and investment banking fees 17,772 10,311 1,698
Rental income - - 307
Other interest income 1,249 1,638 1,453
Gain (loss) on sale of rental properties and investments 35 - (432)
---------------- ---------------- ---------------
Total other revenues 19,056 11,949 3,026
---------------- ---------------- ----------------
Other expenses:
General and administrative 17,345 17,045 9,463
Other interest expense 337 413 156
Rental property expenses - - 124
Depreciation and amortization 345 249 92
Provision for possible credit losses 4,103 3,555 462
---------------- ---------------- ----------------
Total other expenses 22,130 21,262 10,297
---------------- ---------------- ----------------
Income (loss) before income taxes and distributions and
amortization on Convertible Trust Preferred Securities 46,062 25,751 (4,502)
Provision for income taxes 22,020 9,367 55
---------------- ---------------- ----------------
Income (loss) before distributions and amortization on
Convertible Trust Preferred Securities 24,042 16,384 (4,557)
Distributions and amortization on Convertible Trust Preferred
Securities, net of income tax benefit of $6,208 and $2,621
for the years ended December 31, 1999 and 1998, respectively 6,966 2,941 -
---------------- ---------------- ---------------
Net income (loss) 17,076 13,443
(4,557)
Less: Preferred Stock dividend 2,375 3,135 1,341
Preferred Stock dividend requirement - - 130
---------------- ---------------- ---------------
Net income (loss) allocable to Common Stock $ 14,701 $ 10,308 $ (6,028)
================ ================ ===============
Per share information:
Net earnings (loss) per share of Common Stock
Basic $ 0.69 $ 0.57 $ (0.63)
================ ================ ===============
Diluted $ 0.55 $ 0.44 $ (0.63)
================ ================ ===============
Weighted average shares of Common Stock outstanding
Basic 21,334,412 18,208,812 9,527,013
================ ================ ===============
Diluted 43,724,731 30,625,459 9,527,013
================ ================ ===============
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
(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
----------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ - $ - $ - $ 92 $ - $ -
Net loss (4,557) - - - - -
Change in unrealized gain on
available-for-sale securities, net
of related income taxes 409 - - - - -
Issuance of Class A Common Stock - - - 90 - -
Issuance of Class A Preferred Stock - 123 - - - -
Dividends paid on Preferred Stock - - - - - -
----------------- -----------------------------------------------------------
Balance at December 31, 1997 $ (4,148) $ 123 $ - $ 182 $ - $ -
Net income 13,443 - - - - -
=================
Change in unrealized loss on
available-for-sale securities, net
of related income taxes (5,052) - - - - -
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 December 31, 1998 $ 8,391 $ 123 $ - $ 182 $ - $ 1
=================
Net income 17,076 - - - - -
Change in unrealized loss on
available-for-sale securities, net
of related income taxes (5,499) - - - - -
Conversion of Class A Common and
Preferred Stock to Class B - (40) 40 (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 December 31, 1999 $ 11,577 $ 23 $ 40 $ 219 $ 23 $ 1
================= ===========================================================
See accompanying notes to consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
Accumulated
Additional Other
Paid-In Unearned Comprehensive Accumulated
Capital Compensation Income/(Loss) Deficit Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 64,163 $ - $ (22) $ (39,762) $ 24,471
Net loss - - - (4,557) (4,557)
Change in unrealized gain on
available-for-sale securities, net
of related income taxes - - 409 - 409
Issuance of Class A Common Stock 91,347 - - - 91,437
Issuance of Class A Preferred Stock 32,747 - - - 32,870
Dividends paid on Preferred Stock - - - (1,341) (1,341)
---------------------------------------------------------------------
Balance at December 31, 1997 $ 188,257 $ - $ 387 $ (45,660) $ 143,289
Net income - - - 13,443 13,443
Change in unrealized loss on
available-for-sale securities, net
of related income taxes - - (5,052) - (5,052)
Issuance of Class A Common Stock under
stock option plan 10 - - - 10
Issuance of restricted
Class A Common Stock 724 (725) - - -
Cancellation of previously issued
restricted Class A Common Stock (175) 156 - - (19)
Restricted Class A Common Stock earned - 151 - - 151
Dividends paid on Preferred Stock - - - (3,135) (3,135)
---------------------------------------------------------------------
Balance at December 31, 1998 $ 188,816 $ (418) $ (4,665) $ (35,352) $ 148,687
Net income - - - 17,076 17,076
Change in unrealized loss on
available-for-sale securities, net
of related income taxes - - (5,499) - (5,499)
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 - 431 - - 431
Dividends paid on Preferred Stock - - - (2,375) (2,375)
---------------------------------------------------------------------
Balance at December 31, 1999 $ 189,456 $ (407) $ (10,164) $ (20,651) $ 158,540
=====================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
---------------- ---------------- -----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 17,076 $ 13,443 $ (4,557)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Deferred income taxes (2,339) (3,029) -
Provision for credit losses 4,103 3,555 462
Depreciation and amortization 345 249 92
Restricted Class A Common Stock earned 431 151 -
Amortization of premiums and accretion of discounts on
loans and investments, net (1,032) 1,250 -
Accretion of discount on term redeemable securities contract 2,757 - -
Accretion of discounts and fees on Convertible Trust
Preferred Securities, net 799 337 -
(Gain) loss on sale of rental properties and investments (35) - 432
Expenses reversed on cancellation of restricted stock
previously issued (92) (19) -
Changes in assets and liabilities net of effects from subsidiaries
purchased:
Deposits and other receivables (132) (117) 2,707
Accrued interest receivable (1,487) (7,223) (818)
Prepaid and other assets 2,417 (3,545) (2,988)
Deferred origination fees and other revenue (1,037) 3,079 1,369
Accounts payable and accrued expenses 2,388 6,638 5,857
Other liabilities - - (64)
---------------- ---------------- -----------------
Net cash provided by operating activities 24,162 14,769 2,492
---------------- ---------------- -----------------
Cash flows from investing activities:
Purchases of commercial mortgage-backed securities (185,947) (36,334) (49,524)
Principal collections on and proceeds from sale of
commercial mortgage-backed securities - 49,490 34
Advances on and purchases of certificated mezzanine
investments (985) (23,947) (21,998)
Principal collections on certificated mezzanine investments 1,033 465 -
Origination and purchase of loans receivable (103,732) (515,449) (189,711)
Principal collections on and proceeds from sales of loans
receivable 209,792 70,405 9,935
Purchases of equipment and leasehold improvements (57) (496) (479)
Proceeds from sale of rental properties - - 8,153
Principal collections and proceeds from sales of
available-for-sale securities 3,344 7,957 4,947
Acquisition of Victor Capital Group, L.P., net of cash
acquired - - (4,066)
-------------- -------------- ---------------
Net cash used in investing activities (76,552) (447,909) (242,709)
---------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from repurchase obligations 3,929 41,837 109,458
Repayment of repurchase obligations (54,626) (44,608) (27,285)
Proceeds from credit facilities 214,246 618,686 81,864
Repayment of credit facilities (242,737) (326,796) (2,000)
Proceeds from notes payable - 10,000 4,001
Repayment of notes payable (773) (10,706) (4,217)
Net proceeds from issuance of Convertible Trust Preferred - 145,207 -
Securities
Net proceeds from issuance of term redeemable securities 126,885 - -
contract
Dividends paid on Class A Preferred Stock (2,375) (3,135) (1,341)
Net proceeds from issuance of Class A Common Stock under
stock option plan - 10 -
Net proceeds from issuance of Class A Common Stock - - 91,437
Net proceeds from issuance of Class A Preferred Stock - - 32,870
-------------- ---------------- ----------------
Net cash provided by financing activities 44,549 430,495 284,787
-------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (7,841) (2,645) 44,570
Cash and cash equivalents at beginning of year 46,623 49,268 4,698
-------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 38,782 $ 46,623 $ 49,268
============== ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1. Organization
Capital Trust, Inc. (the "Company") is a finance company designed to take
advantage of high-yielding lending and investment opportunities in commercial
real estate and related assets. The Company makes investments in various types
of income producing commercial real estate, including senior and junior
commercial mortgage loans, preferred equity investments, direct equity
investments and subordinate interests in commercial mortgage-backed securities
("CMBS"). The Company also provides real estate investment banking, advisory and
asset management services through its wholly owned subsidiary, Victor Capital
Group, L.P. ("Victor Capital").
The Company is the successor to Capital Trust (f/k/a California Real Estate
Investment Trust), a business trust organized under the laws of the State of
California pursuant to a declaration of trust dated September 15, 1966 (the
"Predecessor"), following the consummation of the Reorganization (as defined and
described below). On December 31, 1996, 76% of the Predecessor's
then-outstanding common shares of beneficial interest, $1.00 par value ("Common
Shares") were held by the Predecessor 's former parent ("Former Parent"). On
January 3, 1997, the Former Parent sold its entire 76% ownership interest in the
Predecessor (consisting of 6,959,593 Common Shares) to CalREIT Investors Limited
Partnership ("CRIL"), an affiliate of Equity Group Investments, L.L.C. ("EGI")
and Samuel Zell, the Company's current chairman of the board of directors, for
an aggregate price of approximately $20.2 million. Prior to the purchase, which
was approved by the Predecessor's then-incumbent board of trustees, EGI and
Victor Capital, a then privately held company owned by two of the current
directors of the Company, presented to the Predecessor's then-incumbent board of
trustees a proposed new business plan in which the Predecessor would cease to be
a real estate investment trust ("REIT") and instead become a finance company as
discussed above. EGI and Victor Capital also proposed that they provide the
Predecessor with a new management team to implement the business plan and
invest, through an affiliate, a minimum of $30 million in a new class of
preferred equity to be issued by the Predecessor. In connection with the
foregoing, the Predecessor subsequently agreed that, concurrently with the
consummation of the proposed preferred equity investment, it would acquire for
$5.0 million Victor Capital's real estate investment banking, advisory and asset
management businesses, including the services of its experienced management team
(see Note 2).
On July 15, 1997, the proposed preferred equity investment was consummated and
12,267,658 class A 9.5% cumulative convertible preferred shares of beneficial
interest, $1.00 par value ("Class A Preferred Shares"), in the Predecessor were
sold to Veqtor Finance Company, L.L.C. ("Veqtor"), a then affiliate of Samuel
Zell and the then principals of Victor Capital, for an aggregate purchase price
of $33.0 million. Concurrently with the foregoing transaction, Veqtor purchased
from CRIL the 6,959,593 Common Shares held by it for an aggregate purchase price
of approximately $21.3 million (which shares were reclassified on that date as
class A common shares of beneficial interest, $1.00 par value ("Class A Common
Shares"), in the Predecessor pursuant to the terms of an amended and restated
declaration of trust, dated July 15, 1997, adopted on that date (the "Amended
and Restated Declaration of Trust")). See Note 14.
At the Predecessor's 1998 annual meeting of shareholders (held on January 28,
1999), the Predecessor's shareholders approved the reorganization of the
Predecessor into a Maryland corporation (the "Reorganization"). In the
Reorganization, which was consummated on January 28, 1999, the Predecessor
merged with and into Captrust Limited Partnership, a Maryland limited
partnership ("CTLP"), with CTLP continuing as the surviving entity, and CTLP
merged with and into the Company, with the Company continuing as the surviving
Maryland corporation. Each outstanding Class A Common Share was converted into
one share of class A common stock, par value $0.01 per share ("Class A Common
Stock"), and each outstanding Class A Preferred Share 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. The Company assumed all
outstanding obligations to issue shares of Class A Common Stock under the
Incentive Stock Plan and Director Stock Plan (as defined and described in Note
18). Unless the context otherwise requires, hereinafter references to the
business, assets, liabilities, capital structure, operations and affairs of "the
Company" shall include those of "the Predecessor" prior to the Reorganization.
F-7
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Acquisition of Victor Capital
On July 15, 1997, the Company consummated the acquisition of the real estate
investment banking, advisory and asset management businesses of Victor Capital
and certain affiliated entities including the following wholly-owned
subsidiaries: VCG Montreal Management, Inc., Victor Asset Management Partners,
L.L.C., VP Metropolis Services, L.L.C., and 970 Management, LLC.
Victor Capital provides services to real estate investors, owners, developers
and financial institutions in connection with mortgage financings,
securitizations, joint ventures, debt and equity investments, mergers and
acquisitions, portfolio evaluations, restructurings and disposition programs.
Victor Capital's wholly owned subsidiaries provide asset management and advisory
services relating to various mortgage pools and real estate properties. In
addition, VCG Montreal Management, Inc. holds a nominal interest in a Canadian
real estate venture.
The purchase price in the Victor Capital acquisition was $5.0 million, which was
paid by the Company with the issuance of non-interest bearing acquisition notes,
payable in ten semi-annual equal installments of $500,000. The acquisition notes
have been discounted to approximately $3.9 million based on an imputed interest
rate of 9.5%. The acquisition has 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.
During the period from July 15, 1997 to December 31, 1997, significant advisory
income collected as a result of the Company's acquisition of Victor Capital was
applied as a reduction of current accounts receivable and thereby not reflected
as revenue.
Had the acquisition occurred on January 1, 1997, pro forma revenues, net loss
(after giving effect to the Class A Preferred Stock dividend and dividend
requirement) and net loss per common share (basic and diluted) for the year
ended December 31, 1997 would have been: $11,271,000, $5,347,000 and $0.56,
respectively.
3. Summary of Significant Accounting Policies
Principles of Consolidation
During the year ended December 31, 1997, the Company owned commercial rental
property in Sacramento, California through a 59% limited partnership interest in
Totem Square L.P., a Washington limited partnership ("Totem"), and an indirect
1% general partnership interest in Totem through its wholly-owned subsidiary
Cal-REIT Totem Square, Inc. An unrelated party held the remaining 40% interest.
This property was sold during the year ended December 31, 1997 and the Totem
Square L.P. and Totem Square, Inc. subsidiaries were liquidated and dissolved.
The consolidated financial statements of the Company include the accounts of the
Company, VIC, Inc., which holds Victor Capital and its wholly-owned subsidiaries
(included in the consolidated statement of operations since their acquisition on
July 15, 1997), Natrest Funding I, Inc. (a single purpose entity holding one
Mortgage Loan), CT-BB Funding Corp. (an entity which purchased fifteen CMBS
securities as described in Note 6), CT Convertible Trust I (as described in Note
13) and the results from the disposition of its rental property held by Totem,
which was sold on March 4, 1997 prior to commencement of the Company's new
business plan (see Note 1). All significant intercompany balances and
transactions have been eliminated in consolidation.
F-8
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies, continued
Revenue Recognition
Interest income for the Company's mortgage and other 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.
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 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.
Reserve for Possible Credit Losses
The provision for possible credit losses is the charge to income to increase the
reserve for possible credit losses to the level that management estimates to be
adequate considering delinquencies, loss experience and collateral quality.
Other factors considered relate to geographic trends and product
diversification, the size of the portfolio 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.
Cash and Cash Equivalents
The Company classifies highly liquid investments with original maturities of
three months or less from the date of purchase as cash equivalents. At December
31, 1999 and 1998, cash equivalents of approximately $37.1 million and $46.4
million, respectively, consisted of an investment in a money market fund that
invests in U.S. Treasury bills. Bank balances in excess of federally insured
amounts totaled approximately $1.5 million and $26,000 as of December 31, 1999
and 1998, respectively. The Company has not experienced any losses on its demand
deposits or money market investments.
Other Available-for-Sale Securities
Other 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 (see
Note 5).
F-9
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies, continued
Commercial Mortgage-Backed Securities
At December 31, 1997, the Company had the intent and ability to hold its
subordinated investment in a commercial mortgage-backed security ("CMBS") until
maturity. Consequently, this investment was classified as held to maturity and
was carried at amortized cost. During 1998, due to prepayments made on
underlying securities that reduced the interest rate/risk profile and maturity
of a CMBS, the Company concluded that it no longer anticipated holding the asset
to maturity. Due to the decision to sell this held-to-maturity security, the
Company has transferred all of its investments in CMBS from held-to-maturity
securities to available-for-sale and they are recorded as such at December 31,
1999 and 1998.
Income from CMBS is recognized based on the effective interest method using the
anticipated yield over the expected life of the investments. Changes in yield
resulting from prepayments are recognized over the remaining life of the
investment. The Company recognizes impairment on its CMBS whenever it determines
that the impact of expected future credit losses, as currently projected,
exceeds the impact of the expected future credit losses as originally projected.
Impairment losses are determined by comparing the current fair value of a CMBS
to its existing carrying amount, the difference being recognized as a loss in
the current period in the consolidated statements of operations of the period in
which the loss is identified. Reduced estimates of credit losses are recognized
as an adjustment to yield over the remaining life of the portfolio.
Certificated Mezzanine Investments
Certificated Mezzanine Investments available-for-sale are reported on the
consolidated balance sheets at fair value with any corresponding temporary
change in value resulting in an unrealized gain (loss) being reported as a
component of comprehensive income in the stockholders' equity section of the
balance sheet, net of related income taxes. See Note 7.
Derivative Financial Instruments
The Company uses interest rate swaps to effectively convert fixed rate assets to
variable rate assets for proper matching with variable rate liabilities
("Asset-based Swap") and to convert variable rate liabilities to fixed rate
liabilities for proper matching with fixed rate assets ("Liability-based Swap").
The differential to be paid or received on these agreements is recognized as an
adjustment to the interest income related to the earning asset or an adjustment
to interest expense related to the interest bearing liability and is recognized
on the accrual basis. These swaps are highly effective in reducing the Company's
risk of changes in LIBOR as they effectively convert the financed portion of an
asset to a variable rate for which the financing cost is also at a variable
rate.
As the Asset-based Swaps relate to assets that are accounted for on an amortized
cost basis, these swaps are accounted for as off-balance sheet assets. The
Liability-based Swaps relate to assets that are accounted for on a
mark-to-market basis and the value of the swaps are included as an adjustment to
the carrying value.
The Company also uses interest rate caps to reduce its exposure to interest rate
changes on investments. The Company will receive payments on an interest rate
cap should the variable rate for which the cap was purchased exceed a specified
threshold level and will be recorded as an adjustment to the interest income
related to the related earning asset.
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.
F-10
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. 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.
Sales of Real Estate
The Company complies with the provisions of 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. The Company has
deferred gains of $239,000 at December 31, 1999 and 1998.
Deferred Debt Issuance Costs
The Company capitalizes costs incurred related to the issuance of long-term
debt. These costs are deferred and amortized on a straight-line basis over the
life of the related debt, which approximates the level-yield method, and is
recognized as a component of interest expense.
Income Taxes
Prior to commencement of full implementation of operations as a finance company
on July 15, 1997, the Company had a REIT status, as permitted by the Internal
Revenue Code, and, as such, was not taxed on that portion of its taxable income
which was distributed to shareholders, provided that at least 95% of its real
estate trust taxable income was distributed and that the Company met certain
other REIT requirements. At July 15, 1997, the Company elected to not meet the
requirements to continue to be taxed as a REIT and was therefore not considered
a REIT retroactive to January 1, 1997.
The Company records its income taxes in accordance with Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying statutory tax rates for
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Deferred tax assets are
recognized for temporary differences 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 not 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.
F-11
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies, continued
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 for as a purchase transaction and
is 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
is 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. If the Company determines
that there has been a decline in the value of the acquired enterprise, the
Company will write down the value of the excess of purchase price over net
tangible assets acquired to the revised fair value. As of December 31, 1999, the
Company has $56,000 of accumulated amortization recorded against the original
excess of purchase price over net tangible assets acquired of $342,000.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Comprehensive Income
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's ("FASB") 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' 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 $11,577,000,
$8,391,000 and $(4,148,000) for the years ended December 31, 1999, 1998 and
1997, respectively. The primary component of comprehensive income other than net
income was the unrealized gain (loss) on available-for-sale securities, net of
related income taxes.
Earnings per Share of Common Stock
Earnings per share of Common Stock is presented based on the requirements of
Statement of Accounting Standards No. 128 ("SFAS No. 128"). Basic EPS is
computed based on the income applicable to Common Stock (which is net income or
loss 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, if
dilutive, dividends on the Preferred Stock and interest paid on Convertible
Trust Preferred Securities, net of tax benefit, 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 December 31, 1999, potentially
dilutive shares of Common Stock include the convertible Preferred Stock and
Convertible Trust Preferred Securities. At December 31, 1998, potentially
dilutive shares of Common Stock include the convertible Preferred Stock and
dilutive Common Stock options. At December 31, 1997, the shares of Preferred
Stock and Common Stock options were not considered Common Stock equivalents for
purposes of calculating Diluted EPS as they were antidilutive and accordingly,
there was no difference between Basic EPS and Diluted EPS or weighted average
shares of Common Stock outstanding.
Reclassifications
Certain reclassifications have been made in the presentation of the 1998 and
1997 consolidated financial statements to conform to the 1999 presentation.
F-12
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies, continued
Segment Reporting
In 1998, the Company adopted FASB Statement of Financial Accounting Standards
No. 131, "Disclosure about segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 requires disclosures about segments of an
enterprise and related information regarding the different types of business
activities in which an enterprise engages and the different economic
environments in which it operates.
In 1998, the Company operated as two segments: Lending/Investment and Advisory
for which the disclosures required by SFAS No. 131 for the year ended December
31, 1998 are presented in Note 23. 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. As such, separate segment reporting is not
presented for 1999 as there is only one segment and the financial information
for that segment is the same as the information in the consolidated financial
statements. The accounting policies of the reportable segments in 1998 are the
same as those described within this summary of significant accounting policies.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). Subsequently, SFAS No. 137, "Deferral of the Effective Date of FASB
No. 133" deferred the adoption of SFAS No. 133 to years beginning after June 15,
2000. SFAS No. 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value, if any, will be immediately recognized in
earnings. The Company plans to adopt SFAS No. 133 effective January 1, 2001.
Based upon the Company's derivative positions, which are considered effective
hedges at December 31, 1999, the Company estimates that it would have reported
an increase in other comprehensive income of $3.8 million had the statement been
adopted at that time.
4. Rental Properties
At January 1, 1997, the Company's rental property portfolio included a retail
and mixed-use property carried at $8,585,000. This property was sold during
1997.
At January 1, 1997 the Company had an allowance for valuation losses on rental
properties of $6,898,000. During the year ended December 31, 1997, a provision
for valuation losses of $1,743,000 was recorded and $8,641,000 was charged
against the allowance for valuation losses decreasing the allowance for
valuation losses on rental properties to zero at December 31, 1997. The Company
did not hold any rental properties during the years ended December 31, 1999 and
1998.
F-13
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Other Available-for-Sale Securities
During the year ended December 31, 1999, the Company sold its entire portfolio
of other available-for sale securities at a gain of $35,000 over their amortized
cost.
At December 31, 1998, the Company's other available-for-sale securities
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
---------------------
Cost Gains Losses Fair Value
-----------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Association, adjustable rate
interest at 7.474%, due April 1, 2024 $ 1,159 $ 17 $ - $ 1,176
Federal Home Loan Mortgage Association, adjustable rate
interest at 7.626%, due June 1, 2024 425 5 - 430
Federal National Mortgage Association, adjustable rate
interest at 7.512%, due May 1, 2025 106 - - 106
Federal National Mortgage Association, adjustable rate
interest at 7.725%, due May 1, 2026 463 3 - 466
Federal National Mortgage Association, adjustable rate
interest at 7.604%, due June 1, 2026 1,139 13 - 1,152
Norwest Corp. Voting Common Stock, 630 shares 17 8 - 25
-----------------------------------------------
$ 3,309 $ 46 $ - $ 3,355
===============================================
</TABLE>
The maturity dates of debt securities were not necessarily indicative of
expected maturities as principal is often prepaid on such instruments.
85,600 shares of SL Green Realty Corp. Common Stock were received as partial
payment for advisory services rendered by Victor Capital to SL Green Realty
Corp. This stock was restricted from sale by the Company for a period of one
year from the date of issuance or until August 20, 1998. The stock was sold in
December 1998 for $1,798,000 with no resulting realized gain or loss.
The cost of securities sold is determined using the specific identification
method.
6. Commercial Mortgage-Backed Securities ("CMBS")
The Company pursues rated and unrated investments in public and private
subordinated interests ("Subordinated Interests") in CMBS.
In 1997, the Company completed an investment for the entire junior subordinated
class of CMBS that provided for both interest payments and principal repayments.
The CMBS investment consisted of a security with a face value of $49,592,000
that was purchased at a discount for $49,174,000 plus accrued interest. At the
time of acquisition, the investment was subordinated to approximately $351.3
million of senior securities. At December 31, 1997, the CMBS investment
(including interest receivable) was $49,471,000 and had a yield of 8.96%. During
1998, due to prepayments made on underlying securities that reduced the interest
rate/risk profile and maturity of this CMBS, the Company concluded that it no
longer anticipated holding this security to maturity. The security was sold
during 1998 at a gain of approximately $100,000. Because of this decision to
sell a held-to-maturity security, the Company transferred all of its investments
in commercial mortgage-backed securities from held-to-maturity securities to
available-for-sale and continues to classify the CMBS as such.
F-14
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Commercial Mortgage-Backed Securities ("CMBS"), continued
In connection with the CMBS investment above, the Company was named "special
servicer" for the entire $413 million loan portfolio in which capacity the
Company earned fee income for management of the collection process when any of
the loans became non-performing. During the year ended December 31, 1998, fees
totaling $43,000 were earned relating to the special servicing arrangement. No
fees were earned during the year ended December 31, 1997.
During the year ended December 31, 1998, the Company purchased $36,509,000 face
amount of interests in three subordinated CMBS issued by a financial asset
securitization investment trust for $36,335,000, which, at December 31, 1999,
had an amortized cost of $36,396,000 and a market value of $33,089,000. These
securities bear interest at floating rates, for which the weighted average
interest rate in effect, after fair value adjustment at December 31, 1999, is
12.34%, and mature in January 2003.
In connection with the aforementioned investments, at December 31, 1999, the
Company has deferred acquisition costs of $51,000 that are being amortized as a
reduction of interest income on a basis to realize a level yield over the life
of the investment.
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 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 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, 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 have an average face rate of 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, 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, 1999 was 12.19%.
7. Certificated Mezzanine Investments
The Company purchases high-yielding mezzanine investments that are subordinate
to senior secured loans on commercial real estate. Such investments represent
interests in debt service from loans or property cash flow and are issued in
certificate form. These certificated investments carry substantially similar
terms and risks as the Company's Mezzanine Loans.
The certificated mezzanine investments are floating rate securities that are
carried at market value of $45,432,000 and $45,480,000 on December 31, 1999 and
1998, respectively. As the market value and amortized cost were the same on
December 31, 1999 and 1998, no unrealized gains or losses have been recorded.
One of the certificated mezzanine investments was subject to early redemption
penalties through October 1999. The certificated mezzanine investments have
remaining terms of five to eleven months with the security with the five-month
maturity having 24 months of additional extensions available. The weighted
average interest rate in effect for the two certificated mezzanine investments
is 10.51% at December 31, 1999.
In connection with the aforementioned investments, at December 31, 1999, the
Company has deferred origination fees, net of direct costs of $19,000 that are
being amortized into interest income on a basis to realize a level yield over
the life of the investment.
F-15
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Loans Receivable
The Company currently pursues lending opportunities designed to capitalize on
inefficiencies in the real estate capital, mortgage and finance markets. The
Company has classified its loans receivable into the following general
categories:
o Mortgage Loans. The Company originates and funds senior and junior
mortgage loans ("Mortgage Loans") to commercial real estate owners and
property developers who require interim financing until permanent
financing can be obtained. The Company's 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 Company may also originate and fund permanent Mortgage
Loans in which the Company intends to sell the senior tranche, thereby
creating a Mezzanine Loan (as defined below).
o Mezzanine Loans. The Company originates high-yielding loans that are
subordinate to first lien mortgage loans on commercial real estate and
are secured either by a second lien mortgage or a pledge of the
ownership interests in the borrowing property owner ("Mezzanine Loans").
Generally, the Company's Mezzanine Loans have a longer anticipated
duration than its Mortgage Loans and are not intended to serve as
transitional mortgage financing.
o Other Loans Receivable. This classification includes loans originated
during the Company's prior operations as a REIT and other loans and
investments not meeting the above criteria.
At December 31, 1999 and 1998, the Company's loans receivable consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Mortgage Loans $ 270,332 $ 305,578
Mezzanine Loans 192,613 317,278
Other loans receivable 54,471 2,019
------------------- -------------------
517,416 624,875
Less: reserve for possible credit losses (7,605) (4,017)
------------------- -------------------
Total loans $ 509,811 $ 620,858
=================== ===================
</TABLE>
At December 31, 1999, one mortgage loan with a principal balance of $21,114,000
was in default as the loan matured on December 29, 1999. At December 31, 1999,
the loan was earning a fixed interest rate of 20% (the default rate) and was
repaid in full with interest on January 7, 2000.
At December 31, 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 performing loans receivable was as follows:
Mortgage Loans 11.40%
Mezzanine Loans 12.07%
Other loans receivable 12.43%
Total Loans 11.77%
At December 31, 1999, $367,441,000 (74%) of the aforementioned performing loans
bear interest at floating rates ranging from LIBOR plus 320 basis points to
LIBOR plus 1000 basis points. The remaining $128,861,000 (26%) of loans were
financed at fixed rates ranging from 9.50% to 12.50%.
F-16
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Loans Receivable, continued
The range of maturity dates and weighted average maturity at December 31, 1999
of the Company's performing loans receivable was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Range of Maturity Dates Maturity
----------------------------------------- -------------
<S> <C> <C>
Mortgage Loans May 2000 to July 2001 12 Months
Mezzanine Loans December 2000 to September 2008 67 Months
Other loans receivable May 2000 to August 2017 35 Months
Total Loans May 2000 to August 2017 36 Months
</TABLE>
In addition, one of the loans for $41,558,000 has borrower extension rights for
an additional year and another loan for $28,000,000 has borrower extension
rights for an additional two years.
At December 31, 1999, there are no loans to a single borrower or to related
groups of borrowers that exceeded ten percent of total assets. Approximately 45%
and 11% of all loans are secured by properties in New York and Texas,
respectively. Approximately 53% of all loans are secured by office buildings and
approximately 16% are secured by office/hotel properties. These credit
concentrations are adequately collateralized as of December 31, 1999.
During the year ended December 31, 1999, the Company completed four new loan
transactions totaling $97,500,000 and provided $6,233,000 of additional fundings
on four loans originated in prior periods. The Company funded all of the
foregoing loans receivable originated during the year ended December 31, 1999
and has remaining outstanding commitments at December 31, 1999 totaling
$23,251,000.
In connection with the aforementioned loans, at December 31, 1999 and 1998 the
Company has deferred origination fees, net of direct costs of $3,330,000 and
$4,460,000, respectively, that are being amortized into income over the life of
the loan. At December 31, 1999 and 1998, the Company has also recorded
$3,479,000 and $1,243,000, 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, 1999, loans totaling $469,655,000 are pledged as collateral
for borrowings on the Credit Facilities (as defined below).
As of December 31, 1997, the Company was in the process of monetizing its assets
and accordingly, recorded such assets at the lower of cost or current market
value, less estimated selling costs. The Company has established a reserve for
possible credit losses on loans receivable as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Beginning balance $ 4,017 $ 462 $ -
Provision for possible credit losses 4,103 3,555 462
Amounts charged against reserve for possible
credit losses (515) - -
-------------- -------------- --------------
Ending balance $ 7,605 $ 4,017 $ 462
============== ============== ==============
</TABLE>
F-17
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Risk Factors
The Company's 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's 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 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's 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's assets. In addition, the yield to
maturity on the Company's 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 Company may not recover the full amount, or possibly, any of its 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's 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's assets will not experience any of the foregoing
risks or that, as a result of any such experience, the Company will not suffer a
reduced return on investment or an investment loss.
10. Equipment and Leasehold Improvements
At December 31, 1999 and 1998, equipment and leasehold improvements, net, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Period of
Depreciation or
Amortization 1999 1998
------------------------- -------------- ----------------
<S> <C> <C> <C>
Office equipment 3 to 7 years $ 759 $ 715
Leasehold improvements Term of leases 245 232
-------------- ----------------
1,004 947
Less: accumulated depreciation (642) (320)
-------------- ----------------
$ 362 $ 627
============== ================
</TABLE>
Depreciation and amortization expense on equipment and leasehold improvements,
which are computed on a straight-line basis totaled $322,000, $227,000 and
$64,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Equipment and leasehold improvements are included at their depreciated cost in
prepaid and other assets in the consolidated balance sheets.
11. Notes Payable
At December 31, 1999 and 1998, the Company has notes payable aggregating
$3,474,000 and $4,247,000, respectively.
In connection with the acquisition of Victor Capital and affiliated entities,
the Company issued $5.0 million of non-interest bearing unsecured notes
("Acquisition Notes") to the sellers, who are the current vice chairman and
chief executive officer and the vice chairman and chairman of the executive
committee of the board of directors of the Company, 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%.
F-18
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Notes Payable, continued
At December 31, 1999, the Acquisition Notes have six remaining semi-annual
payments maturing July 1, 2002. The net present value of the remaining payments
on the Acquisition Notes at December 31, 1999 and 1998 amounted to $2,680,000
and $3,419,000, respectively.
The Company is also indebted under a note payable due to a life insurance
company. This note is secured by the property that was sold in 1998. The note
bears interest at 9.50% per annum with principal and interest payable monthly
until August 7, 2017 when the entire unpaid principal balance and any unpaid
interest is due. The life insurance company has the right to call the entire
note due and payable upon ninety days prior written notice. At December 31, 1999
and 1998, the balance of the note payable amounted to $794,000 and $828,000,
respectively.
12. Long-Term Debt
Credit Facilities
Effective September 30, 1997, the Company entered into a credit agreement with a
commercial lender that provided for a three-year $150 million line of credit
(the "First Credit Facility"). Effective January 1, 1998, pursuant to an amended
and restated credit agreement, the Company increased its First Credit 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 calls for additional
commitment fees when the total borrowing under the Credit Facility exceeds $75
million, $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 2001 to February 2002 with
an automatic one-year amortizing extension option, if not otherwise extended.
On June 8, 1998, the Company entered into an additional credit agreement with
with another commercial lender that provides for a $300 million line of credit
with an orginial expiration date in December 1999 (the "Second Credit Facility"
together with the First Credit Facility, the "Credit Facilities"). The Company
incurred an initial commitment fee upon the signing of the Second Credit
Facility and will pay an additional commitment fee when borrowings exceed $250
million. 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.
The Credit Facilities provide for advances to fund lender-approved loans and
investments made by the Company ("Funded Portfolio Assets"). The obligations of
the Company under the Credit Facilities are secured by pledges of the Funded
Portfolio Assets acquired with advances under the Credit Facilities. Borrowings
under the Credit Facilities bear 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 previously subject to the
drawdown fee will not require the Company to pay any additional fees. The Credit
Facilities provide for margin calls on asset-specific borrowings in the event of
asset quality and/or market value deterioration as determined under the Credit
Facilities. The Credit Facilities contain customary representations and
warranties, covenants and conditions and events of default. The Credit
Facilities also contain a covenant obligating the Company 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 Company and
practical control of the Company's business and operations.
At December 31, 1999, the Company has borrowed $185,440,000 against the First
Credit Facility at an average borrowing rate (including amortization of fees
incurred and capitalized) of 8.85%. The Company has pledged assets of
$273,247,000 as collateral for the borrowing against the First Credit Facility.
F-19
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Long-Term Debt, continued
Credit Facilities, continued
At December 31, 1999, the Company has borrowed $157,823,000 against the Second
Credit Facility at an average borrowing rate (including amortization of fees
incurred and capitalized) of 9.58%. The Company has pledged assets of
$229,497,000 as collateral for the borrowing against the Second Credit Facility.
On December 31, 1999, the unused amounts available under the Credit Facilities
were $305,166,000.
Repurchase Obligations
The Company has entered into two repurchase obligations ("Repurchase
Obligations") discussed below to finance the acquisition of assets at December
31, 1999.
The first repurchase agreement, with a securities dealer, arose in connection
with the purchase of a Certificated Mezzanine Investment. At December 31, 1999,
the Company has sold such asset totaling $21,839,000, which approximates market
value, and has a liability to repurchase this asset for $10,919,000. The
liability balance bears interest at a specified rate over LIBOR and matures in
March 2000.
The other repurchase agreement, with another securities dealer, also arose in
connection with the purchase of a Certificated Mezzanine Investment. At December
31, 1999, the Company has sold such asset with a book value of $23,594,000,
which approximates market value, and has a liability to repurchase this asset
for $17,784,000. The liability balance bears interest at a specified rate over
LIBOR and matures in May 2000.
The average interest rate in effect for both variable rate Repurchase
Obligations at December 31, 1999 is 7.76%.
At December 31, 1998, the Company had entered into seven repurchase agreements
which either matured and were satisfied or were extended during 1999.
Four of the repurchase agreements, with a securities dealer, arose in connection
with the purchase of a Certificated Mezzanine Investment, a Mortgage Loan and
two Mezzanine Loans. At December 31, 1998, the Company had sold such assets
totaling $71,469,000, which approximates market value, and had a liability to
repurchase these assets for $53,704,000. The liability balance bore interest at
specified rates over LIBOR and the agreements generally have a one-year term
with extensions available by mutual consent.
One of the repurchase agreements, with another securities dealer, arose in
connection with the purchase of a Certificated Mezzanine Investment. At December
31, 1998, the Company had sold such asset with a book value of $23,641,000,
which approximates market value, and had a liability to repurchase this asset
for $14,918,000. The liability balance bore interest at a specified rate over
LIBOR.
The Company also had entered into a repurchase agreement with a securities
broker in conjunction with the purchase of one of the classes of subordinated
CMBS issued by a financial asset securitization investment trust. At December
31, 1998, the Company had sold such securities with a cost of $10,000,000
(market value $8,543,750) and had a liability to repurchase these assets for
$7,642,000. The liability balance bore interest at a specified rate over LIBOR.
The Company also had entered into a repurchase agreement with a securities
broker in conjunction with the financing of all of its FNMA and FHLMC
securities. At December 31, 1998, the Company had sold such securities with a
book value totaling $3,292,000 (market value $3,330,000) and had a liability to
repurchase these assets for $3,137,000. The liability balance bore interest at a
specified rate over LIBOR.
F-20
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Long-Term Debt, continued
Term Redeemable Securities Contract
The average interest rate in effect for all variable rate Repurchase Obligations
at December 31, 1998 was 6.74%.
Term Redeemable Securities Contract
In connection with the purchase of the BB CMBS Portfolio described in Note 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 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 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 swaps had a positive value at December 31, 1999 of
$13,332,000.
By entering into interest rate swaps, 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%.
13. Convertible Trust Preferred Securities
On July 28, 1998, the Company privately placed 150,000 8.25% Step Up Convertible
Trust Preferred Securities (liquidation amount $1,000 per security) with an
aggregate liquidation amount of $150 million (the "Convertible Trust Preferred
Securities"). The Convertible Trust Preferred Securities were issued by the
Company's consolidated statutory trust subsidiary, CT Convertible Trust I (the
"Trust"). The Convertible Trust Preferred Securities represent an undivided
beneficial interest in the assets of the Trust that consist solely of the
Company's Convertible Debentures (as hereafter defined). This private placement
transaction was completed concurrently with the related issuance and sale to the
Trust of the Company's 8.25% Step Up Convertible Junior Subordinated Debentures
in the aggregate principal amount of $154,650,000 (the "Convertible
Debentures"). Distributions on the Convertible Trust Preferred Securities are
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 are payable only to the extent payments are made in respect
to the Convertible Debentures.
The Company received $145,207,000 in net proceeds, after original issue discount
of 3% from the liquidation amount of the Convertible Trust Preferred Securities
and transaction expenses, pursuant to the above transactions. The proceeds were
used to pay down the Company's Credit Facilities. The Convertible Trust
Preferred Securities are convertible into shares of Class A Common Stock, at the
direction of the holders of the Convertible Trust Preferred Securities made to
the conversion agent to exchange such Convertible Trust Preferred Securities for
a portion of the Convertible Debentures held by the Trust on the basis of one
security for each $1,000 principal amount of Convertible Debentures, and
immediately convert such amount of Convertible Debentures into Class A Common
Stock at an initial rate of 85.47 shares of Class A Common Stock per $1,000
principal amount of the Convertible Debentures (which is equivalent to a
conversion price of $11.70 per share of Class A Common Stock). The Convertible
Debentures have a 20-year maturity and are non-callable for five years. Upon
repayment of the Convertible Debentures at maturity or upon redemption, the
proceeds of such repayment or payment shall be simultaneously paid and applied
to redeem, among other things, the Convertible Trust Preferred Securities. If
the securities have not been redeemed by September 30, 2004, the distribution
rate will step up by 0.75% per annum for each annual period thereafter. The 3%
($4,500,000) discount and transaction fees on the issuance will be amortized
over the expected life of the Convertible Trust Preferred Securities.
F-21
<PAGE>
13. Convertible Trust Preferred Securities, continued
For financial reporting purposes, the Trust is treated as a subsidiary of the
Company and, accordingly, the accounts of the Trust are included in the
consolidated financial statements of the Company. Intercompany transactions
between the Trust and the Company, including the Junior Subordinated Debentures,
are eliminated in the consolidated financial statements of the Company. The
Convertible Trust Preferred Securities are presented as a separate caption
between liabilities and stockholders' equity in the consolidated balance sheet
of the Company as "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")". Distributions on the Convertible Trust Preferred Securities are
recorded, net of the tax benefit, in a separate caption immediately following
the provision for income taxes in the consolidated statement of operations of
the Company.
14. Stockholders' Equity
Authorized Capital
Upon consummation of the Reorganization (see Note 1), each outstanding Class A
Common Share of the Predecessor was converted into one share of Class A Common
Stock of the Company, and each outstanding Class A Preferred Share of the
Predecessor was converted into one share of Class A Preferred Stock of the
Company. As a result, all of the Predecessor's previously issued Class A Common
Shares have been reclassified as shares of Class A Common Stock and all of the
Predecessor's previously issued Class A Preferred Shares have been reclassified
as shares of Class A Preferred Stock.
The Company has the authority to issue up to 300,000,000 shares of stock,
consisting of (i) 100,000,000 shares of Class A Common Stock, (ii) 100,000,000
shares of Class B Common Stock, and (iii) 100,000,000 shares of Preferred Stock.
The board of directors is generally authorized to issue additional shares of
authorized stock without stockholders' approval.
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 Stock
are voting shares entitled to vote on all matters presented to a vote of
stockholders, 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 Class A Common Stock and shares of Class B Common
Stock on the record date fixed by the Company's 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.
The Company is restricted from declaring or paying any dividends on its Class A
Common Stock or Class B Common Stock unless all accrued and unpaid dividends
with respect to any outstanding Preferred Stock have been paid in full.
F-22
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Stockholders' Equity, continued
Preferred Stock
In connection with the Reorganization, the Company created two classes of
Preferred Stock, Class A Preferred Stock and the Class B Preferred Stock. As
described above, upon consummation of the Reorganization, the Predecessor's
outstanding Class A Preferred Shares were converted into shares of the Company's
Class A Preferred Stock.
Except as described herein or as required by law, both classes of Preferred
Stock are identical and entitled to the same dividend, distribution, liquidation
and other rights. The holders of the Class A Preferred Stock are entitled to
vote together with the holders of the Class A Common Stock as a single class on
all matters submitted to a vote of stockholders. Each share of Class A Preferred
Stock entitles the holder thereof to a number of votes per share equal to the
number of shares of Class A Common Stock into which such shares of Class A
Preferred Stock is then convertible. Except as described herein, the holders of
Class B Preferred Stock do not have voting rights and are not counted in
determining the presence of a quorum for the transaction of business at a
stockholders' meeting. The affirmative vote of the holders of a majority of the
outstanding Preferred Stock, voting together as a separate single class, except
in certain circumstances, have the right to approve any merger, consolidation or
transfer of all or substantially all of the assets of the Company. Holders of
the Preferred Stock are entitled to receive, when and as declared by the board
of directors, cash dividends per share at the rate of 9.5% per annum on a per
share price of $2.69. Such dividends shall accrue (whether or not declared) and,
to the extent not paid for any dividend period, will be cumulative. Dividends on
the authorized Preferred Stock are payable, when and as declared, semi-annually,
in arrears, on December 26 and June 25 of each year.
Each share of Class A Preferred Stock is convertible at the option of the holder
thereof into an equal number of shares of Class B Preferred Stock, or into a
number of shares Class A Common Stock equal to the ratio of (x) $2.69 plus an
amount equal to all dividends per share accrued and unpaid thereon as of the
date of such conversion to (y) the conversion price in effect as of the date of
such conversion. Each share of Class B Preferred Stock is convertible at the
option of the holder thereof, subject to certain conditions, into an equal
number of shares of Class A Preferred Stock or into a number of shares of Class
B Common Stock equal to the ratio of (x) $2.69 plus an amount equal to all
dividends per share accrued and unpaid thereon as of the date of such conversion
to (y) the conversion price in effect as of the date of such conversion. The
conversion price in effect as of December 31, 1999 is $2.69 and therefore the
outstanding shares of Preferred Stock are convertible into an equal number of
shares of Common Stock.
Common and Preferred Stock Outstanding
As of December 31, 1998, there were 12,267,658 shares of Class A Preferred Stock
issued and outstanding, no shares of Class B Preferred Stock were issued and
outstanding, 18,158,816 shares of Class A Common Stock were issued and
outstanding and no shares of Class B Common Stock were issued and outstanding.
The 12,267,658 shares of Class A Preferred Stock outstanding at December 31,
1998 were originally issued and purchased by Veqtor on July 15, 1997 for an
aggregate purchase price of approximately $33 million (see Note 1).
Until August 10, 1999 (the "Conversion Date"), Veqtor owned 6,959,593 of the
outstanding shares of Class A Common Stock and all 12,267,658 of the outstanding
shares of Class A Preferred Stock. Veqtor was then 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 the Conversion Date, the common members owned approximately 48% of the
equity ownership of Veqtor and three commercial banks, as preferred members of
Veqtor, owned the remaining 52% of the equity ownership of Veqtor.
F-23
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Stockholders' Equity, continued
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 provisions of the Company's
charter 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. After the Conversion Date until the Separation Transaction (as
defined below), 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. As a result of the foregoing redemption and subsequent
conversion transactions, as of September 30, 1999, Veqtor owned 9,320,531 (or
approximately 42.4%) of the outstanding shares of Class A Common Stock and the
Company's annual dividend on Preferred Stock has been reduced from $3,135,000 to
$1,615,000.
In December 1999, a series of coordinated transactions (the "Separation
Transaction") were effected in which beneficial ownership of an aggregate of
6,128,243 shares of the 9,320,531 shares of Class A Common Stock previously
owned by Veqtor prior to the Separation Transaction were transferred
partnerships controlled by the vice chairman and chief executive officer of the
Company (the "Klopp LP"), the vice chairman and chairman of the executive
committee of the board of directors of the Company (the "Hatkoff LP") and
certain of the former partners of CTILP (the "Other Partnerships"). Each of the
partnerships acquired direct beneficial ownership of such number of shares of
Class A Common Stock equal to the number of shares in which the persons
currently controlling such partnerships held an indirect pecuniary interest
prior to the Separation Transaction. Veqtor retained direct beneficial ownership
of 3,192,288 shares of Class A Common Stock, which represents the number of
shares in which the persons then controlling Veqtor held an indirect pecuniary
interest prior to the Separation Transaction.
Upon consummation of the Separation Transaction by means of the foregoing
transactions, Hatkoff LP, Klopp LP, Veqtor and the Other Partnerships acquired
(or, in the case of Veqtor, retained) direct beneficial ownership of 2,330,132,
2,330,132, 3,192,288 and 1,467,979 shares of Class A Common Stock, respectively.
On January 1, 2000, ownership and control of Veqtor was transferred to a trust
for the benefit of the family of the Company's chairman of the board.
F-24
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 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 $ 14,701,000 21,334,412 $ 0.69 $ 10,308,000 18,208,812 $ 0.57
============ ===========
Effect of Dilutive
Securities
Options outstanding for
the purchase of Common
Stock -- -- -- 148,989
Future commitments for
stock unit awards for
the issuance of Common
Stock -- 300,000 -- --
Convertible Trust
Preferred Securities
exchangeable for
shares of Common Stock 6,966,000 12,820,513 -- --
Convertible Preferred
Stock 2,375,000 9,269,806 3,135,000 12,267,658
----------------- ----------------- ---------------- -----------------
Diluted EPS:
Net earnings per share
of Common Stock and
Assumed Conversions $ 24,042,000 43,724,731 $ 0.55 $ 13,443,000 30,625,459 $ 0.44
================= ============================= ================ ================= ===========
</TABLE>
For the year ended December 31, 1997, the shares of Preferred Stock and Common
Stock options were not considered Common Stock equivalents for purposes of
calculating Diluted EPS as they were antidilutive and accordingly, there was no
difference between Basic EPS and Diluted EPS or weighted average shares of
Common Stock outstanding.
F-25
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. General and Administrative Expenses
General and administrative expenses for the years ended December 31, 1999, 1998
and 1997 consist of (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------- -------------------
<S> <C> <C> <C>
Salaries and benefits $ 12,914 $ 11,311 $ 5,035
Professional services 2,352 3,138 2,311
Other 2,079 2,596 2,117
------------------ ------------------- -------------------
Total $ 17,345 $ 17,045 $ 9,463
================== =================== ===================
</TABLE>
16. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
The provision for income taxes for the years ended December 31, 1999 and 1998 is
comprised as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Current
Federal $ 14,538 $ 7,226 $ -
State 5,176 2,740 -
Local 4,673 2,480 55
Deferred
Federal (1,430) (2,282) -
State (492) (419) -
Local (445) (378) -
--------------- --------------- ------------
Provision for income taxes $ 22,020 $ 9,367 $ 55
=============== =============== ===========
</TABLE>
The Company has federal net operating loss carryforwards ("NOLs") as of December
31, 1999 of approximately $11.6 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 CRIL's purchase of
6,959,593 Common Shares from the Predecessor'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% for the years ended December 31, 1999 and 1998 and 34% for the year ended
December 31, 1997) to the effective income tax rate for the years ended December
31, 1999, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ------------------------ ------------------------
$ % $ % $ %
----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at
statutory rate $ 16,122 35.0% $ 9,013 35.0% $ (1,531) (34.0)%
State and local taxes, net
of federal tax benefit 5,793 12.6% 2,874 11.2% 36 0.1%
Tax benefit of net
operating loss not
currently recognized - - % - -% 1,536 34.0%
Utilization of net
operating loss (495) (1.1)% (2,755) (10.7)% - - %
carryforwards
Compensation in excess of
deductible limits 566 1.2% 221 0.9% - - %
Other 34 0.1% 14 0.0% 14 0.0%
----------- ----------- ----------- ------------ ------------------------
$ 22,020 47.8% $ 9,367 36.4% $ 55 0.1%
=========== =========== =========== ============ ========================
</TABLE>
F-26
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Income Taxes, continued
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 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Net operating loss carryforward $ 3,889 $ 4,559
Reserves on other assets and for possible credit losses 6,312 4,621
Other 795 119
--------------- ---------------
Deferred tax assets 10,966 9,299
Valuation allowance (5,628) (6,270)
-------------- ---------------
$ 5,368 $ 3,029
=============== ===============
</TABLE>
The Company recorded a valuation allowance to reserve a portion of its net
deferred assets in accordance with 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 cannot presently be determined.
17. Interest Rate Risk Management
The Company uses interest rate swaps and interest rate caps to reduce the
Company's exposure to interest rate fluctuations on certain loans and
investments and to provide more stable spreads between investment yields and the
rates on their financing sources.
In connection with the purchase of the BB CMBS Portfolio described in Note 6 and
the related term redeemable securities contract, an affiliate of the seller
entered into interest rate swaps 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.
In 1999, the Company terminated two swaps and partially terminated a third swap
that was outstanding at December 31, 1998, in connection with the payoff of a
loan and the sale of a loan resulting in a payment of $323,000.
At December 31, 1999, the Company has entered into interest rate swap agreements
for notional amounts totaling approximately $219,869,000 with two investment
grade financial institution counterparties whereby the Company swapped fixed
rate instruments, which averaged approximately 5.93% at December 31, 1999 and
6.03% for the year then ended, for floating rate instruments equal LIBOR which
averaged approximately 6.47% at December 31, 1999 and 5.25% for the year then
ended. Amounts arising from the differential are recognized as an adjustment to
interest income related to the earning asset or an adjustment to interest
expense related to the term redeemable securities contract. If an interest rate
swap or interest rate cap is sold or terminated and cash is received or paid,
the gain or loss is deferred and recognized when the hedged asset is sold or
matures. The agreements mature at varying times from September 2001 to December
2014 with a remaining average term of 126 months.
The Company purchased an interest rate cap with a notional amount of $18.75
million at a cost of approximately $71,000. The interest rate cap provides for
payments to the Company if LIBOR exceeds 11.25% during the period from November
2003 to November 2007.
The Company is exposed to credit loss in the event of non-performance by the
counterparties (which are banks whose securities are rated investment grade) to
the interest rate swap and cap agreements, although it does not anticipate such
non-performance. The counterparties would bear the interest rate risk of such
transactions as market interest rates increase.
F-27
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Employee Benefit Plans
Employee 401(k) and Profit Sharing Plan
In 1999, the Company 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 has 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's contribution expense for the year ended December 31,
1999, was $191,000.
1997 Long-Term Incentive Stock Plan
In May 1997, the board of trustees of the Predecessor adopted the original 1997
long-term incentive share plan, which was approved by the Predecessor's
shareholders, and thereafter amended to reflect the Predecessor's name change,
in July 1997. In May 1998, the Predecessor's board of trustees originally
adopted, subject to shareholder approval, the original form of an amended and
restated 1997 long-term incentive share plan, which was subsequently approved at
the Predecessor's 1998 annual meeting of shareholders on January 28, 1999 (the
"1998 Annual Meeting"). Upon consummation of the Reorganization, the Company
succeeded to and assumed the amended and restated plan which has been amended to
reflect the succession of the Company (the plan is hereinafter referred to as
the "Incentive Stock Plan"). The 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 2,828,798 shares of Class A Common Stock may be
issued during the fiscal year 2000 pursuant to awards under the Incentive Stock
Plan and the Director Stock Plan (as defined below) in addition to the shares
subject to awards outstanding under the two plans at December 31, 1999. The
maximum number of shares that may be subject to awards to any employee during
the term of the plan may not exceed 500,000 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 ISOs 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 Class A 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 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 1999 and 1998 the Company issued 104,167 shares and
72,500 shares, respectively, of restricted stock, of which 32,500 shares and
17,500 shares, respectively, were canceled upon the resignation of employees
prior to vesting. The shares of restricted stock issued in 1999 vest one-third
on each of the following dates: February 2, 2000, February 2, 2001 and February
2, 2002. The shares of restricted stock issued in 1998 vest one-third on each of
the following dates: January 30, 2001, January 30, 2002 and January 30, 2003.
The Company also granted 52,083 shares of performance based restricted stock for
which none of the performance goals have been met and the shares have not been
issued.
The 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 Class A Common 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-28
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Employee Benefit Plans, continued
1997 Long-Term Incentive Stock Plan, continued
The following table summarizes the activity under the Incentive Stock Plan for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price Exercise Price
Outstanding per Share per Share
--------------- -------------------------- -------------------
<S> <C> <C> <C>
Outstanding at January 1, 1997 - $ - $ -
Granted in 1997 607,000 $6.00 6.00
--------------- -------------------
Outstanding at December 31, 1997 607,000 $6.00 6.00
Granted in 1998 907,250 $9.00 - $11.38 9.93
Exercised in 1998 (1,666) $6.00 6.00
Canceled in 1998 (243,500) $6.00 - $10.00 7.81
--------------- -------------------
Outstanding at December 31, 1998 1,269,084 $6.00 - $11.38 8.46
Granted in 1999 352,000 $6.00 6.00
Canceled in 1999 (387,167) $6.00 - $11.38 8.06
--------------- -------------------
Outstanding at December 31, 1999 1,233,917 $6.00 - $10.00 $ 7.89
=============== ===================
</TABLE>
At December 31, 1999 and 1998, 487,761 and 272,834, respectively, of the options
were exercisable. None of the options were exercisable at December 31, 1997. At
December 31, 1999, the outstanding options have various remaining contractual
lives ranging from 7-1/2 to 9-1/12 years with a weighted average life of 8.25
years.
1997 Non-Employee Director Stock Plan
In May 1997, the board of trustees of the Predecessor adopted the original 1997
non-employee trustee share plan, which was approved by the Predecessor's
shareholders, and thereafter amended to reflect the Predecessor's name change,
in July 1997. In May 1998, the Predecessor's board of trustees originally
adopted, subject to shareholder approval, the original form of an amended and
restated 1997 non-employee trustee share plan which was subsequently approved at
the Predecessor's 1998 Annual Meeting. Upon consummation of the Reorganization,
the Company succeeded to and assumed the amended and restated plan, which has
been amended to reflect the succession of the Company (the plan is hereinafter
referred to as the "Director Stock Plan"). The Director Stock Plan permits the
grant of NQSO, restricted stock, SAR, performance unit, stock and stock unit
awards. A maximum of 2,828,798 shares of Class A Common Stock may be issued
during the fiscal year 2000 pursuant to awards under the Director Stock Plan and
the Incentive Stock Plan, in addition to the shares subject to awards
outstanding under the two plans at December 31, 1999.
The board of directors shall determine the purchase price per share of Class A
Common Stock covered by a NQSO granted under the Director Stock Plan. Payment of
a NQSO may be made with cash, with previously owned shares of Class A Common
Stock, by foregoing compensation in accordance with board rules or by a
combination of these payment methods. SARs may be granted under the plan in lieu
of NQSOs, in addition to NQSOs, independent of NQSOs or as a combination of the
foregoing. A holder of a SAR is entitled upon exercise to receive shares of
Class A 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 Class A Common 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 Class
A Common Stock on the date of grant) multiplied by the number of shares in
respect to which the SARs are exercised.
F-29
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Employee Benefit Plans, continued
1997 Non-Employee Director Stock Plan, continued
Restricted stock may be granted under the Director 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 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 Class A Common
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 Plan for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price Exercise Price
Outstanding per Share per Share
--------------- -------------------------- -------------------
<S> <C> <C> <C>
Outstanding at January 1, 1997 - $ - $ -
Granted in 1997 50,000 $6.00 6.00
--------------- -------------------
Outstanding at December 31, 1997 50,000 $6.00 6.00
Granted in 1998 205,000 $10.00 10.00
--------------- -------------------
Outstanding at December 31, 1998 255,000 $6.00-$10.00 9.22
Granted in 1999 - $ - -
--------------- -------------------
Outstanding at December 31, 1999 255,000 $6.00-$10.00 $ 9.22
=============== ===================
</TABLE>
At December 31, 1999 and 1998, 101,688 and 16,666, respectively, of the options
were exercisable. None of the options were exercisable at December 31, 1997. At
December 31, 1999, the outstanding options have a remaining contractual life of
7-1/2 years to 8-1/12 years with a weighted average life of 7.98 years.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by the FASB
in October 1996. 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:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------- -------------------
<S> <C> <C> <C>
Risk-free interest rate 5.2% 5.2% 5.7%
Volatility 40.0% 40.0% 40.0%
Dividend yield 0.0% 0.0% 0.0%
Expected life (years) 5.0 5.0 5.0
</TABLE>
F-30
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Employee Benefit Plans, continued
Accounting for Stock-Based Compensation, continued
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, 1999, 1998 and 1997 were $2.41, $4.44 and $2.63, 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, 1999, 1998 and 1997 is as
follows (in thousands, except for net earnings (loss) per share of common
stock):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ------------------------ ------------------------
As As As
reported Pro forma reported Pro forma reported Pro forma
----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 17,076 $ 16,274 $ 13,443 $ 12,214 $ (4,557) $ (4,953)
Net earnings (loss) per
share of common stock:
Basic $ 0.69 $ 0.62 $ 0.57 $ 0.50 $ (0.63) $ (0.67)
Diluted $ 0.55 $ 0.53 $ 0.44 $ 0.40 $ (0.63) $ (0.67)
</TABLE>
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.
19. Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," 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. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying
value of the Company.
F-31
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. Fair Values of Financial Instruments, continued
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.
Other 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.
Certificated mezzanine investments: 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: 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: 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.
The carrying amounts of all assets and liabilities approximate the fair value
except as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial Assets:
Loans receivable, net 509,811 494,302 620,858 614,477
CMBS 214,058 200,726 31,650 31,650
Interest Rate Swap Agreements - 13,332 - -
Interest rate cap agreement 48 46 60 6
Unrecognized Financial Instruments:
Interest Rate Swap Agreements - 3,839 - (4,521)
</TABLE>
F-32
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
20. Supplemental Schedule of Non-Cash and Financing Activities
The following is a summary of the significant non-cash investing and financing
activities during the year ended December 31, 1997 (in thousands):
Stock received as partial compensation for advisory services $ 1,798
In connection with the sale of properties and notes receivable, the Company
entered into various non-cash transactions as follows during the year ended
December 31, 1997 (in thousands):
Sales price less selling costs $ 8,396
Amount due from buyer (1,090)
----------------
Net cash received $ 7,306
================
Interest paid on the Company's outstanding debt for 1999, 1998 and 1997 was
$49,103,000, $25,184,000 and $1,877,000, respectively. Income taxes paid by the
Company in 1999 and 1998 were $17,165,000 and $7,866,000, respectively. No
income taxes were paid in 1997.
21. Transactions with Related Parties
The Company entered into a consulting agreement, dated as of July 15, 1997, with
a director of the Company. The consulting agreement had an initial term of one
year that was extended to December 31, 1998 and terminated at that date.
Pursuant to the agreement, the director provided consulting services for the
Company including strategic planning, identifying and negotiating mergers,
acquisitions, joint ventures and strategic alliances, and advising as to capital
structure matters. During the years ended December 31, 1998 and 1997, the
Company incurred expenses of $165,000 and $300,000, respectively, in connection
with this agreement.
The Company entered into a consulting agreement, dated as of January 1, 1998,
with another director of the Company. The consulting agreement had an initial
term of one year and has been extended to December 31, 2000. Pursuant to the
agreement, the director provides consulting services for the Company 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, 1999 and 1998, the Company incurred expenses of
$96,000 in connection with this agreement.
The Company pays EGI, an affiliate under common control of the chairman of the
board of directors, for certain corporate services provided to the Company.
These services include consulting on legal matters, tax matters, risk
management, investor relations and investment banking. During the years ended
December 31, 1999, 1998 and 1997, the Company incurred $86,000, $216,000 and
$134,000, respectively, of expenses in connection with these services.
During the year ended December 31, 1998, the Company, through two of its
acquired subsidiaries, earned asset management fees pursuant to agreements 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 years ended December 31, 1999, 1998 and 1997, the Company
earned $391,000, $1,682,000 and $327,000, respectively, from such agreements,
which have been included in the consolidated statements of operations.
F-33
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
22. Commitments and Contingencies
Leases
The Company leases premises and equipment under operating leases with various
expiration dates. Minimum annual rental payments at December 31, 1999 are as
follows (in thousands):
Years ending December 31:
- ------------------------
2000 $ 205
2001 25
2002 25
---------------
$ 255
===============
Rent expense for office space and equipment amounted to $470,000, $530,000 and
$310,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Litigation
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the consolidated financial position or the
results of operations of the Company.
Employment Agreements
The Company has employment agreements with three of its executive officers.
The employment agreements with two of the executive officers provide for
five-year terms of employment commencing as of July 15, 1997. Such agreements
contain extension options that extend such agreements automatically unless
terminated by notice, as defined, by either party. The employment agreements
provide for base annual salaries of $500,000, which has been increased to
$600,000, and will be increased each calendar year to reflect increases in the
cost of living and will otherwise be subject to increase at the discretion of
the board of directors. Such executive officers are also entitled to annual
incentive cash bonuses to be determined by the board of directors based on
individual performance and the profitability of the Company and are participants
in the Incentive Stock Plan and other employee benefit plans of the Company.
The employment agreement with one executive officer provides for a term of
employment commencing as of August 15, 1998 and expiring on January 2, 2002,
which shall be automatically extended until December 31, 2002 unless, prior to
April 7, 2001, either party shall have delivered to the other a non-renewal
notice. The employment agreement provides for a base annual salary of $350,000,
which will be increased each calendar year to reflect increases in the cost of
living and may otherwise be further increased at the discretion of the board of
directors. The employment agreement also provides for annual incentive cash
bonuses for calendar years 1999 through 2001 to be determined by the board of
directors based on individual performance and the profitability of the Company,
provided that the minimum of each of said three annual incentive bonuses shall
be no less than $750,000. In addition to the base salary and incentive bonus,
the executive received during calendar year 1999, a special cash payment of
$1,200,000 of which $850,000 was expensed in 1998. The executive is entitled to
participate in employee benefit plans of the Company at levels determined by the
board of directors and commensurate with his position and receives Company
provided life and disability insurance. In accordance with the agreement, the
executive was granted, pursuant to the Incentive Stock Plan, options to purchase
100,000 shares of Class A Common Stock with an exercise price of $9.00
immediately vested and exercisable as of the date of the agreement. The Company
also agreed to grant, pursuant to the Incentive Stock Plan, fully vested shares
of Class A Common Stock, 50,000 shares on January 1, 1999 and 100,000 shares on
each of the three successive anniversaries thereof.
F-34
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
23. Segment Reporting
In 1998, the Company adopted a new accounting pronouncement requiring disclosure
about the Company's segments based on a management approach. In 1998, the
Company operated as two segments: Lending/Investment and Advisory and had an
internal information system that produced performance and asset data for its two
segments along service lines. 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. The Company has only one reportable segment
that includes operations, lending/investment and advisory activities. As such,
separate segment reporting is not presented for 1999 as there is only one
segment and the financial information for that segment is the same as the
information in the consolidated financial statements. The restatement of the
1998 segment information for the change in the reportable segments is not
presented as again it is the same as the information in the consolidated
financial statements.
In 1998, the Lending and Investment segment included all of the Company's
activities related to the loan and investment portfolio and the financing
thereof.
In 1998, the Advisory segment included all of the Company's activities related
to fee services provided to real estate investors, owners, developers and
financial institutions in connection with mortgage financings, securitizations,
joint ventures, debt and equity investments, mergers and acquisitions, portfolio
evaluations, restructurings and disposition programs. The segment also provided
asset management and advisory services relating to various mortgage pools and
real estate properties.
F-35
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
24. 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, 1999, 1998 and 1997 (in thousands except per share
data):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
--------------- --------------- --------------- ---------------
1999
<S> <C> <C> <C> <C>
Revenues $ 25,865 $ 22,930 $ 24,338 $ 34,513
Net income $ 3,792 $ 3,025 $ 3,050 $ 7,209
Preferred Stock dividends $ 784 $ 784 $ 403 $ 404
Net income per share of
Common Stock:
Basic $ 0.16 $ 0.12 $ 0.11 $ 0.28
Diluted $ 0.12 $ 0.10 $ 0.10 $ 0.20
1998
Revenues $ 11,207 $ 20,166 $ 21,872 $ 21,020
Net income $ 2,673 $ 5,024 $ 3,144 $ 2,602
Preferred Stock dividends $ 784 $ 784 $ 783 $ 784
Net income per share of
Common Stock:
Basic $ 0.10 $ 0.24 $ 0.13 $ 0.10
Diluted $ 0.09 $ 0.16 $ 0.10 $ 0.09
1997
Revenues $ 613 $ 371 $ 2,729 $ 4,737
Net loss $ (508) $ (352) $ (1,593) $ (2,104)
Preferred Stock dividends and
dividend requirement $ - $ - $ 679 $ 792
Net loss per share of Common
Stock - Basic and Diluted $ (0.06) $ (0.04) $ (0.25) $ (0.27)
</TABLE>
25. Subsequent Event
On March 8, 2000, the Company entered into a strategic relationship with
Citigroup Investments Inc., ("Citigroup"), in connection with commencing its new
investment management business. Together, the strategic partners have agreed,
among other things, to co-sponsor, commit to invest capital in, and manage a
series of high-yield commercial real estate mezzanine investment opportunity
funds (collectively, the "Mezzanine Funds"). In connection with this
relationship, Citigroup and the Company have made capital commitments to the
Mezzanine Funds of up to an aggregate of $400.0 million and $112.5 million,
respectively, subject to certain terms and conditions.
F-36
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
25. Subsequent Event, continued
The strategic relationship is governed by a venture agreement, dated as of March
8, 2000 (the "Venture Agreement"), pursuant to which the parties have created CT
Mezzanine Partners I LLC ("Fund I"), which is funded with capital commitments of
$150 million and $50 million from Citigroup and the Company, respectively,
subject to the identification of suitable investments acceptable to Citigroup
and the Company. A wholly owned subsidiary of the Company serves as the
exclusive investment manager to Fund I that is currently negotiating suitable
investments for the fund. Additionally, Citigroup and the Company have agreed to
additional capital commitments of up to $250.0 million and $62.5 million,
respectively, to sponsor future Mezzanine Funds that close prior to December 31,
2001 subject to the amount of third-party capital commitments and other
conditions contained in the Venture Agreement.
In consideration of, among other things, Citigroup's $400 million capital
commitment to the venture, the Company issued Citigroup warrants to purchase
4.25 million shares of Class A Common Stock at $5.00 per share with a five-year
term and has agreed, subject to stockholder approval, to issue additional
warrants to purchase up to an additional 5.25 million shares on the same terms
and conditions expressly contingent upon the amount of capital contributions to
future funds; alternatively, if the required stockholder approval of the
issuance of the shares underlying such warrants is not obtained, the Company
will provide contingent cash rights designed to provide equivalent value.
Pursuant to the Venture Agreement, an affiliate of the Company has been named
the exclusive investment manager to the Mezzanine Funds. Further, each party has
agreed to certain exclusivity obligations with respect to the origination of
assets suitable for the Mezzanine Funds and the Company granted Citigroup the
right of first refusal to co-sponsor future Mezzanine Funds. The Company has
also agreed, as soon as practicable, to take the steps necessary for it to be
treated as a REIT for tax purposes subject to changes in law, or good faith
inability to meet the requisite qualifications. Unless the Company can find a
suitable "reverse merger" REIT candidate, the earliest that the Company can
qualify for re-election to REIT status will be upon filing its tax return for
the year ended December 31, 2002.
Pursuant to the Venture Agreement, the Company increased the number of its
directorships by two and appointed Marc Weill and Michael Watson, chief
executive officer and senior vice president of Citigroup Investments Inc.,
respectively, as directors immediately.
In order to comply with the terms of the Venture Agreement and in order to
facilitate its conversion to REIT status as soon as practicable, the Company and
the holders of the Convertible Trust Preferred Securities have agreed in
principle to terminate their co-investment agreement with the Company and to
amend the terms of such securities by: (i) raising the current coupon rate
payable from 8.25% per annum to an initial blended rate of 10.16% per annum;
(ii) increasing the coupon on approximately 60% of the securities to step-up
commencing April 1, 2002 to the greater of 10% (subject to an automatic step-up
by 75 basis points on October 1, 2004 and on each October 1 thereafter) or the
dividend yield on the underlying Class A Common Stock calculated pursuant to a
formula prescribed therein; (iii) increasing the coupon on approximately 40% of
the securities by 75 basis points on October 1, 2004 and on each October 1
thereafter; (iv) changing the redemption provisions such that approximately 40%
in liquidation amount of the securities is redeemable, in whole or in part, at
any time and such that the remaining balance in liquidation amount of the
securities is redeemable, in whole or in part, on or after September 30, 2004;
and (v) eliminating the conversion provisions with respect to approximately 40%
of the securities and reducing the conversion price at which the balance of the
securities can be converted into shares of Class A Common Stock from $11.70 to
$7.00 per share. As a result, the total number of shares of Class A Common Stock
issuable on conversion of all of the amended securities will not exceed
12,820,512, the number issuable on conversion of the original Convertible Trust
Preferred Securities.
F-37
Exhibit 21.1
<TABLE>
<CAPTION>
JURISDICTION OF D/B/A
ENTITY INCORPORATION JURISDICTION
<S> <C> <C>
Victor Capital Group, L.P. Delaware
Vic, Inc. Delaware Vic NY
VCG Montreal Management, Inc. New York
Victor Asset Management, Inc. New York
970 Management LLC New York
VP Metropolis Services, L.L.C. New Jersey
Natrest Funding I, Inc. Delaware
IPJ Funding Corp. Delaware
CT Convertible Trust I Delaware
CT-BB Funding Corp. Delaware
BB Real Estate Investment Corp. Delaware
CT-F1, LLC Delaware
CT-F2-GP, LLC Delaware
CT-F2-LP, LLC Delaware
CT Investment Management Co., LLC Delaware
CT Mezzanine Partners I LLC Delaware
CT MP II LLC Delaware
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form 10-K
of Capital Trust, Inc. of our report dated February 14, 2000, except for Note 25
which is as of March 8, 2000 (hereinafter referred to as our Report), included
in the 1999 Annual Report to Shareholders of Capital Trust, Inc.
Our audits included the financial statement schedules of Capital Trust, Inc.
listed in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedules referred to above, when
considered in relation to the basis financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in Registration Statements
(Form S-8 No. 333- 39743 and No. 333-72725) and in the related Prospecti of our
Report with respect to the consolidated financial statements and schedules of
Capital Trust, Inc. included and incorporated by reference in this Annual Report
on Form 10-K for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Ernst & Young LLP
New York, New York
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CAPITAL TRUST, INC. FOR THE YEAR ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001061630
<NAME> Capital Trust, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 38,782
<SECURITIES> 259,490
<RECEIVABLES> 517,416
<ALLOWANCES> 7,605
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,004
<DEPRECIATION> 642
<TOTAL-ASSETS> 827,808
<CURRENT-LIABILITIES> 14,432
<BONDS> 505,082
146,434
0
<COMMON> 243
<OTHER-SE> 158,297
<TOTAL-LIABILITY-AND-EQUITY> 827,808
<SALES> 0
<TOTAL-REVENUES> 107,646
<CGS> 0
<TOTAL-COSTS> 70,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,103
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 32,888
<INCOME-TAX> 15,812
<INCOME-CONTINUING> 17,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,076
<EPS-BASIC> 0.69
<EPS-DILUTED> 0.55
</TABLE>
