To be filed with the Securities and Exchange Commission on November 9, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 1-14788
-------
Capital Trust, Inc.
-------------------
(Exact name of registrant as specified in its charter)
Maryland 94-6181186
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 Park Avenue, 14th Floor, New York, NY 10022
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 655-0220
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes[ X ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of outstanding shares of the Registrant's Class A Common
stock, par value $0.01 per share ("Class A Common Stock"), as of November 8,
2000 was 19,588,152
<PAGE>
CAPITAL TRUST, INC.
INDEX
Part I. Financial Information
Item 1: Financial Statements 1
Consolidated Balance Sheets - September 30, 2000
(unaudited) and December 31, 1999 (audited) 1
Consolidated Statements of Income - Three and
Nine months ended September 30, 2000 and 1999
(unaudited) 2
Consolidated Statements of Changes in
Stockholders' Equity - Nine months ended
September 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2000 and 1999
(unaudited) 4
Notes to Consolidated Financial Statements
(unaudited) 5
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3: Quantitative and Qualitative Disclosures about
Market Risk 20
Part II. Other Information
Item 1: Legal Proceedings 21
Item 2: Changes in Securities 21
Item 3: Defaults Upon Senior Securities 21
Item 4: Submission of Matters to a Vote of Security Holders 21
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22
<PAGE>
Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- ------------
Assets (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $ 8,995 $ 38,782
Commercial mortgage-backed securities
available-for-sale, at fair value 219,244 214,058
Certificated mezzanine investments available-for-sale, at fair value 22,683 45,432
Loans receivable, net of $10,145 and $7,605 reserve for possible credit losses at
September 30, 2000 and December 31, 1999, respectively 385,882 509,811
Equity investment in CT Mezzanine Partners I LLC "Fund I") 21,012 -
Excess of purchase price over net tangible assets
acquired, net - 286
Deposits and other receivables 646 533
Accrued interest receivable 7,308 9,528
Deferred income taxes 7,127 5,368
Prepaid and other assets 3,762 4,010
---------- ------------
Total assets $ 676,659 $ 827,808
========== ============
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 11,756 $ 14,432
Notes payable 2,605 3,474
Credit facilities 200,534 343,263
Term redeemable securities contract 132,304 129,642
Repurchase obligations 16,873 28,703
Deferred origination fees and other revenue 2,559 3,411
---------- -----------
Total liabilities 366,631 522,925
---------- -----------
Company-obligated, mandatory redeemable, convertible preferred securities of CT
Convertible Trust I, holding $89,742,000 of convertible 8.25% junior subordinated
debentures and $60,258,000 of non-convertible 13.00% junior subordinated
debentures of Capital Trust, Inc. at September 30, 2000 and holding solely 8.25%
junior subordinated debentures of Capital Trust, Inc. at December 31, 1999
("Convertible Trust Preferred Securities") 146,942 146,343
---------- -----------
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 shares issued and outstanding
at September 30, 2000 and December 31, 1999 (liquidation preference of $6,127)("Class A
Preferred Stock") 23 23
Class B 9.5% cumulative convertible non-voting preferred stock, $0.01 par value, $0.26
cumulative annual dividend, 100,000 shares authorized, shares issued and
outstanding at September 30, 2000 and December 31, 1999 (liquidation preference of
$10,876) ("Class B Preferred Stock" and together with Class A Preferred Stock,
"Preferred Stock") 40 40
Class A common stock, $0.01 par value, 100,000 shares authorized, 19,531 and
21,862 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 195 219
Class B common stock, $0.01 par value, 100,000 shares authorized, 2,755 and 2,294 shares
issued and outstanding at September 30, 2000 and December 31, 1999, respectively
("Class B Common Stock") 28 23
Restricted Class A Common Stock, $0.01 par value, 264 and 127 shares issued and
outstanding at September 30, 2000 and December 31, 1999, respectively ("Restricted
Class A Common Stock" and together with Class A Common Stock and Class B
Common Stock, "Common Stock") 3 1
Additional paid-in capital 184,003 189,456
Unearned compensation (630) (407)
Accumulated other comprehensive loss (5,607) (10,164)
Accumulated deficit (14,969) (20,651)
----------- -----------
Total stockholders' equity 163,086 158,540
----------- -----------
Total liabilities and stockholders' equity $ 676,659 $ 827,808
=========== ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 1 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Income
Three and Nine months ended September 30, 2000 and 1999
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income from loans and other investments:
Interest and related income $ 21,540 $ 22,230 $ 65,050 $ 64,971
Income from equity investments in Fund I 678 - 899 -
Less: Interest and related expenses 9,008 10,701 28,500 28,443
------------ ------------ ------------ ------------
Income from loans and other investments, net 13,210 11,529 37,449 36,528
------------ ------------ ------------ ------------
Other revenues:
Advisory and investment banking fees 75 1,970 3,809 7,144
Management fees from Fund I 159 - 214 -
Other interest income 165 138 587 983
Gain (loss) on sale of investments and fixed assets (64) - (64) 35
------------ ------------ ------------ ------------
Total other revenues 335 2,108 4,546 8,162
------------ ------------ ------------ ------------
Other expenses:
General and administrative 3,600 3,341 13,155 12,202
Other interest expense 42 89 177 290
Depreciation and amortization 165 89 724 264
Provision for possible credit losses 839 1,040 2,681 3,073
------------ ------------ ------------ ------------
Total other expenses 4,646 4,559 16,737 15,829
------------ ------------ ------------ ------------
Income before income taxes and
distributions and amortization on
Convertible Trust Preferred
Securities 8,899 9,078 25,258 28,861
Provision for income taxes 4,362 4,287 12,966 13,770
------------ ------------ ------------ ------------
Income before distributions and amortization on
Convertible Trust Preferred Securities 4,537 4,791 12,292 15,091
Distributions and amortization on Convertible Trust
Preferred Securities, net of income tax benefit of
$1,889 and $1,552 for the three months ended
September 30, 2000 and 1999, respectively, and
$5,234 and $4,656 for the nine months ended
September 30, 2000 and 1999, respectively 2,120 1,741 5,802 5,224
------------ ------------ ------------ ------------
Net income 2,417 3,050 6,490 9,867
Less: Preferred Stock dividend and dividend
requirement 404 403 1,211 1,971
------------ ------------ ------------ -------------
Net income allocable to shares of Common Stock $ 2,013 $ 2,647 $ 5,279 $ 7,896
============ ============ ============ =============
Per share information:
Net income per share of Common Stock:
Basic $ 0.09 $ 0.11 $ 0.22 $ 0.39
============ ============ ============ =============
Diluted $ 0.08 $ 0.10 $ 0.22 $ 0.32
============ ============ ============ =============
Weighted average shares of Common Stock
outstanding:
Basic 22,801,536 24,287,254 23,495,269 20,340,982
=========== ============ ============ ============
Diluted 42,152,217 30,908,087 30,016,121 30,904,582
=========== ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 2 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Nine months ended September 30, 2000 and 1999
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Restricted
Class A Class B Class A Class B Class A
Comprehensive Preferred Preferred Common Common Common
Income/(Loss) Stock Stock Stock Stock Stock
------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ - $ 123 $ - $ 182 $ - $ 1
Net income 9,867 - - - - -
Unrealized gain on available-for-sale
securities, net of related income taxes (652) - - - - -
Conversion of Class A Common and
Preferred Stock to Class B Common
and Preferred Stock - (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 September 30, 1999 $ 9,215 $ 23 $ 40 $ 219 $ 23 $ 1
=========== =======================================================
Balance at January 1, 2000 $ - $ 23 $ 40 $ 219 $ 23 $ 1
Net income 6,490 - - - - -
Unrealized gain on available-for-sale
securities, net of related income taxes 4,557 - - - - -
Conversion of Class A Common Stock
to Class B Common Stock - - - (5) 5 -
Issuance of warrants to purchase shares of
Class A Common Stock - - - - - -
Issuance of Class A Common Stock unit
awards - - - 1 - -
Issuance of restricted
Class A Common Stock - - - - - 2
Cancellation of previously issued restricted
Class A Common Stock - - - - - -
Restricted Class A Common Stock earned - - - - - -
Dividends paid on Preferred Stock - - - - - -
Repurchase and retirement of shares of Class
A Common Stock previously outstanding - - - (20) - -
----------- -------------------------------------------------------
Balance at September 30, 2000 $ 11,047 $ 23 $ 40 $ 195 $ 28 $ 3
=========== =======================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-In Unearned Comprehensive Accumulated
Capital Compensation Income/(Loss) Deficit Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 188,816 $ (418) $ (4,665) $ (35,352) $ 148,687
Net income - - - 9,867 9,867
Unrealized gain on available-for-sale
securities, net of related income taxes - - (652) - (652)
Conversion of Class A Common and
Preferred Stock to Class B Common
and Preferred Stock - - - - -
Conversion of Class A Preferred Stock to
Class A Common Stock - - - - -
Issuance of Class A Common Stock unit
awards 312 - - - 312
Cancellation of previously issued restricted
Class A Common Stock (271) 180 - - (92)
Issuance of restricted
Class A Common Stock 599 (600) - - -
Restricted Class A Common Stock earned - 323 - - 323
Dividends paid on Preferred Stock - - - (1,568) (1,568)
------------------------------------------------------------------
Balance at September 30, 1999 $ 189,456 $ (515) $ (5,317) $ (27,053) $ 156,877
==================================================================
Balance at January 1, 2000 $ 189,456 $ (407) $ (10,164) $ (20,651) $ 158,540
Net income - - - 6,490 6,490
Unrealized gain on available-for-sale
securities, net of related income taxes - - 4,557 - 4,557
Conversion of Class A Common Stock
to Class B Common Stock - - - - -
Issuance of warrants to purchase shares of
Class A Common Stock 1,360 - - - 1,360
Issuance of Class A Common Stock unit
awards 624 - - - 625
Issuance of restricted
Class A Common Stock 948 (950) - - -
Cancellation of previously issued restricted
Class A Common Stock (280) 182 - - (98)
Restricted Class A Common Stock earned - 545 - - 545
Dividends paid on Preferred Stock - - - (808) (808)
Repurchase and retirement of shares of Class
A Common Stock previously outstanding (8,105) - - - (8,125)
------------------------------------------------------------------
Balance at September 30, 2000 $ 184,003 $ (630) $ (5,607) $ (14,969) $ 163,086
==================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 3 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,490 $ 9,867
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Deferred income taxes (1,759) (1,417)
Provision for credit losses 2,681 3,073
Depreciation and amortization 724 264
Income from equity investments in Fund I (898) -
Restricted Class A Common Stock earned 545 323
Amortization of premiums and accretion of discounts on loans
and investments, net (1,919) (624)
Accretion of discounts on term redeemable securities contract 2,662 1,901
Accretion of discounts and fees on Convertible Trust Preferred Securities, net 599 599
Expenses reversed on cancellation of restricted stock
previously issued (97) (92)
Gain on sale of investments - (35)
Loss on sale of fixed assets 64 -
Changes in assets and liabilities, net:
Deposits and other receivables (113) (321)
Accrued interest receivable 2,220 504
Prepaid and other assets 214 (182)
Deferred origination fees and other revenue (852) (395)
Accounts payable and accrued expenses (2,051) (4,779)
---------- ---------
Net cash provided by operating activities 8,510 8,686
---------- ---------
Cash flows from investing activities:
Purchases of commercial mortgage-backed securities - (185,947)
Cash received on commercial mortgage-backed securities recorded as discount 1,446 -
Principal collections on certificated mezzanine investments 22,749 737
Origination and purchase of loans receivable 13,524 (102,593)
Principal collections and proceeds from sale of loans receivable 134,616 208,937
Equity investment in Fund I (31,637) -
Return of capital from Fund I 12,622 -
Purchases of fixed assets (219) (58)
Proceeds from sale of fixed assets 12 -
Principal collections and proceeds from sales of available-
for-sale securities - 3,344
---------- ----------
Net cash provided by (used in) investing activities 126,065 (75,580)
---------- ----------
Cash flows from financing activities:
Proceeds from repurchase obligations - 3,929
Repayment of repurchase obligations (11,830) (48,873)
Proceeds from credit facilities 40,000 200,026
Repayment of credit facilities (182,729) (242,489)
Repayment of notes payable (869) (802)
Dividends paid on Preferred Stock (808) (1,568)
Net proceeds from issuance of term redeemable
securities contract - 126,885
Repurchase and retirement of shares of Class A Common
Stock previously outstanding (8,126) -
---------- -----------
Net cash provided by (used in) financing activities (164,362) 37,108
---------- -----------
Net decrease in cash and cash equivalents (29,787) (29,786)
Cash and cash equivalents at beginning of year 38,782 46,623
---------- ------------
Cash and cash equivalents at end of period $ 8,995 $ 16,837
========== ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 4 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
1. Presentation of Financial Information
The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The
accompanying unaudited consolidated interim financial statements should be read
in conjunction with the financial statements and the related management's
discussion and analysis of financial condition and results of operations filed
with the Annual Report on Form 10-K of Capital Trust, Inc. and Subsidiaries
(collectively, the "Company") for the fiscal year ended December 31, 1999. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for the nine months ended September 30, 2000, are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 2000.
The accompanying unaudited consolidated interim financial statements of the
Company include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation. The accounting and reporting policies of the Company conform in
all material respects to accounting principles generally accepted in the United
States. Certain prior period amounts have been reclassified to conform to
current period classifications.
2. Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. New Accounting Pronouncements
In December 1999, the SEC staff issued Staff Accounting Bulletin 101, "Revenue
Recognition" ("SAB 101"). SAB 101 discusses the SEC staff views on certain
revenue recognition transactions. The Company is required to adopt SAB 101 no
later than the fourth quarter of 2000 and any change in accounting would be
recognized as a cumulative effect of a change in accounting principle as of
January 1, 2000. Management does not anticipate that its adoption will have a
material effect on the consolidated financial position or results of operations
of the Company.
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25. The Interpretation
clarifies guidance of certain issues that arose in the application of APB
Opinion 25, "Accounting for Stock Issued to Employees". The Interpretation is
primarily applied prospectively to all new awards, modifications to outstanding
awards, and changes in employee status after July 1, 2000. Management has
adopted the Interpretation on July 1, 2000. The adoption of Interpretation did
not have a material effect on the consolidated financial position or results of
operations of the Company as of and for the three months ended September 30,
2000.
- 5 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
4. Loans receivable
At September 30, 2000 and December 31, 1999, the Company's loans receivable
consisted of the following (in thousands):
September 30, December 31,
2000 1999
--------------------------
(1) Mortgage Loans $ 156,899 $ 270,332
(2) Mezzanine Loans 187,849 192,613
(3) Other mortgage loans receivable 51,279 54,471
--------------------------
396,027 517,416
Less: reserve for possible credit losses (10,145) (7,605)
--------------------------
Total loans $ 385,882 $ 509,811
==========================
One Mortgage Loan receivable with a principal balance of $8,000,000 reached
maturity on July 15, 2000 and has not been repaid with respect to principal and
interest. In accordance with the Company's policy for revenue recognition,
income recognition has been suspended on this loan and through September 30,
2000, $450,000 of potential interest income has not been recorded.
At June 30, 2000, one other mortgage loan receivable with a net investment of
$141,000 was past-due more than 90 days and during the quarter ended September
30, 2000, was written-off. The net investment prior to the write-off included
the loan balance of $912,000 offset by $779,000 of non-recourse financing of the
asset. After the write-off, both the loan receivable and the non-recourse
financing are carried at $779,000. The loan was originated during the Company's
prior operations as a REIT to facilitate the disposal of a previously
foreclosed-upon asset. In accordance with the Company's policy for revenue
recognition, income recognition was suspended on this loan and through September
30, 2000, $53,000 of potential interest income has not been recorded.
At September 30, 2000, 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 is as follows:
(1) Mortgage Loans 12.35%
(2) Mezzanine Loans 12.66%
(3) Other mortgage loans receivable 13.45%
Total loans 12.65%
At September 30, 2000, $262,659,000 (approximately 68%) of the aforementioned
performing loans bear interest at floating rates ranging from LIBOR plus 320
basis points to LIBOR plus 900 basis points. The remaining $124,589,000
(approximately 32%) of performing loans were financed at fixed rates ranging
from 10.81% to 12.50%.
During the nine months ended September 30, 2000, the Company provided $13.5
million of additional fundings on three existing loans. The Company had unfunded
commitments on four loans and certificated mezzanine investments totaling $22.1
million at September 30, 2000.
At September 30, 2000, the Company had no outstanding commitments to originate
or purchase any new loans or investments.
- 6 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
5. Strategic Business Venture with Citigroup Investments Inc.
On March 8, 2000, the Company and certain of its wholly owned subsidiaries
entered into a strategic venture with affiliates of Citigroup Investments Inc.
("Citigroup"), following which it commenced its new investment management
business. The venture parties 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 funds (collectively, the "Mezzanine Funds").
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.
The strategic venture 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"), to which a Citigroup affiliate and a wholly
owned subsidiary of the Company, as members thereof, have made capital
commitments of $150 million and $50 million, respectively, to be invested in
stages upon approval by both members of each investment to be made by Fund I. A
wholly owned subsidiary of the Company, CT Investment Management Co., LLC
("CTIMCO"), serves as the exclusive investment manager to Fund I and is
currently negotiating suitable investments for the fund. Additionally, Citigroup
affiliates and subsidiaries of the Company have agreed to make additional
capital commitments of up to $250.0 million and $62.5 million, respectively, to
future Mezzanine Funds sponsored pursuant to the Venture Agreement that close
prior to December 31, 2001, which commitments are 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 aggregate
capital commitment to the Mezzanine Funds, the Company agreed in the Venture
Agreement to issue affiliates of Citigroup warrants to purchase shares of Class
A Common Stock. In connection with the organization of Fund I, the Company
issued a warrant to purchase 4.25 million shares of Class A Common Stock at
$5.00 per share. The foregoing warrant has a term of five years that expires on
March 8, 2005 and is not exercisable until March 8, 2001, whereupon it may be
exercised with cash or pursuant to a cash-less exercise feature. In connection
with the organization of subsequent Mezzanine Funds that close before December
31, 2001, the Company agreed, subject to stockholder approval, which was
received on June 21, 2000, to issue additional warrants to purchase up to 5.25
million shares of Class A Common Stock on the same terms as the initial warrant;
the number of shares subject to such warrants to be determined pursuant to a
formula based on the aggregate dollar amount of capital commitments made by
affiliates of Citigroup and clients of Citibank's private bank.
Pursuant to the Venture Agreement, CTIMCO 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 on terms mutually satisfactory to the Company and
affiliates of Citigroup, 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 size of its board
of directors by two and appointed directors Marc Weill and Michael Watson, chief
executive officer and senior vice president, respectively, of Citigroup
Investments Inc. Effective June 1, 2000, Mr. Weill resigned from the board of
directors and was replaced by Susan Lewis, executive vice president of Citigroup
Investments Inc.
As a condition to 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 agreed in principle on March 8, 2000,
to terminate their co-investment agreement with the Company and to amend the
terms of such securities. Such termination and amendment were completed as of
May 10, 2000. The revised terms are fully described in Note 8.
- 7 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Through September 30, 2000, the Company has made equity contributions to Fund I
of $28,245,000 of which Fund I has returned $12,622,000 for net equity
contributions of $15,623,000. The Company has also capitalized costs totaling
$4,752,000 that will be amortized over the anticipated lives of the Mezzanine
Funds.
As of September 30, 2000, Fund I has loans outstanding totaling $79,454,000, all
of which are performing in accordance with the terms of the loan agreements.
6. 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
has been amortizing it on a straight-line basis over a period of 15 years. The
carrying value of the excess of purchase price over net tangible assets acquired
was analyzed quarterly by the Company based upon the expected revenue and
profitability levels of the acquired enterprise to determine whether the value
and future benefit may indicate a decline in value.
In April 2000, the Company increased its level of resources devoted to its new
investment management business and reduced resources devoted to its investment
banking and advisory operations. As a result, the Company determined that there
has been a decline in the value of the acquired enterprise and the Company wrote
off the remaining value of the excess of purchase price over net tangible assets
acquired. This additional $275,000 write-off was recorded as additional
amortization expense in the quarter ended June 30, 2000.
7. Long-Term Debt
Credit Facility
At December 31, 1999, the Company was party to a credit agreement with a
commercial lender that provided for a $300 million line of credit scheduled to
expire in June 2000. Effective June 30, 2000, pursuant to an amended and
restated credit agreement, the Company extended the expiration of such credit
facility from June 2000 to June 2001 with an automatic nine-month amortizing
extension option, if not otherwise extended.
Repurchase Obligations
At December 31, 1999, the Company had entered into two repurchase obligations
discussed below to finance the acquisition of assets.
The first repurchase obligation, with a securities dealer, arose in connection
with the purchase of a Certificated Mezzanine Investment. This repurchase
agreement was settled in May 2000 when the Certificated Mezzanine Investment was
repaid.
The other repurchase obligation, with another securities dealer, also arose in
connection with the purchase of a Certificated Mezzanine Investment. At
September 30, 1999, the Company had sold such asset with a book value of
$22,683,000, which approximated market value, and had a liability to repurchase
this asset for $16,873,000. The liability balance bears interest at a specified
rate over LIBOR and the maturity has been extended during the nine months ended
September 30, 2000 to May 2001.
8. Convertible Trust Preferred Securities
On May 10, 2000, the Company modified the terms of the $150 million aggregate
liquidation amount 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") in July 1998. The Convertible
Trust Preferred Securities represented an undivided beneficial interest in the
assets of the Trust that consisted solely of the Company's $154,650,000
aggregate principal amount 8.25% step up convertible junior subordinated
debentures ("Convertible Debentures") that were concurrently issued and sold to
the Trust.
- 8 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
In connection with the modification, the then outstanding Convertible Trust
Preferred Securities were cancelled and new variable step up convertible trust
preferred securities with an aggregate liquidation amount of $150,000,000 (the
"New Convertible Trust Preferred Securities") were issued to the holders of the
canceled securities in exchange therefore, and the Convertible Debentures were
canceled and new 8.25% step up convertible junior subordinated debentures in the
aggregate principal amount of $92,524,000 (the "New Convertible Debentures") and
new 13% step up non-convertible junior subordinated debentures in the aggregate
principal amount of $62,126,000 (the "New Non-Convertible Debentures" and
together with the New Convertible Debentures, the "New Debentures") were issued
to the Trust, as the holder of the canceled bonds, in exchange therefore. The
liquidation amount of the New Convertible Trust Preferred Securities is divided
into $89,742,000 of convertible amount (the "Convertible Amount") and
$60,258,000 of non-convertible amount (the "Non-Convertible Amount"), the
distribution, redemption and, as applicable, conversion terms of which, mirror
the interest, redemption and, as applicable, conversion terms of the New
Convertible Debentures and the New Non-Convertible Debentures, respectively,
held by the Trust.
Distributions on the New Convertible Trust Preferred Securities are payable
quarterly in arrears on each calendar quarter-end and correspond to the payments
of interest made on the New Debentures, the sole assets of the Trust.
Distributions are payable only to the extent payments are made in respect to the
New Debentures.
The New Convertible Trust Preferred Securities initially bear a blended coupon
rate of 10.16% per annum which rate will vary as the proportion of outstanding
Convertible Amount to the outstanding Non-Convertible Amount changes and will
step up in accordance with the coupon rate step up terms applicable to the
Convertible Amount and the Non-Convertible Amount.
The Convertible Amount bears a coupon rate of 8.25% per annum through March 31,
2002 and increases on April 1, 2002 to the greater of (i) 10.00% per annum,
increasing by 0.75% on October 1, 2004 and on each October 1 thereafter or (ii)
a percentage per annum equal to the quarterly dividend paid on a common share
multiplied by four and divided by $7.00. The Convertible Amount is convertible
into shares of Class A Common Stock, in increments of $1,000 in liquidation
amount, at a conversion price of $7.00 per share. The Convertible Amount is
redeemable by the Company, in whole or in part, on or after September 30, 2004.
The Non-Convertible Amount bears a coupon rate of 13.00% per annum through
September 30, 2004, increasing by 0.75% on October 1, 2004 and on each October 1
thereafter. The Non-Convertible Amount is redeemable by the Company, in whole or
in part, at any time.
For financial reporting purposes, the Trust continues to be 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 Debentures, have
been eliminated in the consolidated financial statements of the Company. The New
Convertible Trust Preferred Securities are presented as a separate caption
between liabilities and stockholders' equity in the consolidated balance sheet
of the Company. Distributions on the New 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 statements of
income of the Company.
9. Stockholder's Equity
During March 2000, the Company commenced an open market share repurchase program
under which the Company was authorized to purchase, from time to time, up to two
million shares of Class A Common Stock. In May 2000, the Company announced an
increase in the number of shares purchasable pursuant to its share repurchase
program to four million shares. As of September 30, 2000, the Company had
purchased and retired 1,999,900 shares of Class A Common Stock at an average
price of $4.06 per share (including commissions).
In consideration of, among other things, Citigroup's $400 million capital
commitment to the Mezzanine Funds, the Company agreed in the Venture Agreement
to issue affiliates of Citigroup warrants to purchase shares of Class A
- 9 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Common Stock. The Company issued an initial warrant to purchase 4.25 million
shares of Class A Common Stock and has agreed under certain circumstances to
issue additional warrants to purchase up to 5.25 million shares of Class A
Common Stock. See Note 5 for a description of the terms of the warrants and the
circumstances under which the additional warrants may be issued. The value of
the warrants at issuance date, $1,360,000, was capitalized and will be amortized
over the anticipated lives of the Mezzanine Funds.
10. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
The provision for income taxes for the nine months ended September 30, 2000 and
1999 is comprised as follows (in thousands):
2000 1999
----------- -----------
Current
Federal $ 8,751 $ 9,030
State 3,140 3,236
Local 2,834 2,921
Deferred
Federal (1,063) (856)
State (366) (295)
Local (330) (266)
---------- ----------
Provision for income taxes $12,966 $13,770
========== ==========
The Company has federal net operating loss carryforwards ("NOLs") as of
September 30, 2000 of approximately $9.8 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 the ownership
change that occurred upon the purchase of 6,959,593 predecessor common shares
from the Company's former parent in January 1997 and another prior ownership
change, a substantial portion of the NOLs are limited for federal income tax
purposes to approximately $1.4 million annually. Any unused portion of such
annual limitation can be carried forward to future periods.
The reconciliation of income tax computed at the U.S. federal statutory tax rate
(35%) to the effective income tax rate for the nine months ended September 30,
2000 and 1999 are as follows (in thousands):
2000 1999
----------------- -------------------
$ % $ %
----------------- -------------------
Federal income tax at
statutory rate $8,840 35.0% $10,101 35.0%
State and local taxes, net
of federal tax benefit 3,431 13.6% 3,623 12.6%
Utilization of net
operating loss
carryforwards (367) (1.5)% (368) (1.3)%
Compensation in excess of
deductible limits 838 3.3% 362 1.2%
Other 224 0.9% 52 0.2%
--------------------------------------
$12,966 51.3% $13,770 47.7%
======================================
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.
- 10 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
The components of the net deferred tax assets as of September 30, 2000 and
December 31, 1999 are as follows (in thousands):
September 30, December 31,
2000 1999
-------------- --------------
Net operating loss carryforward $ 3,420 $ 3,889
Reserves on other assets and for
possible credit losses 7,575 6,312
Other 1,291 795
-------------- --------------
Deferred tax assets 12,286 10,996
Valuation allowance (5,159) (5,628)
-------------- --------------
$ 7,127 $ 5,368
============== ==============
The Company recorded a valuation allowance to reserve a portion of its net
deferred tax assets in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS
No. 109, this valuation allowance will be adjusted in future years, as
appropriate. However, the timing and extent of such future adjustments can not
presently be determined.
11. Earnings Per Share
The following table sets forth the calculation of Basic and Diluted EPS for the
nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Nine months ended September 30, 2000 Nine months ended September 30, 1999
-------------------------------------- ---------------------------------------
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 $5,279,000 23,495,269 $ 0.22 $7,896,000 20,340,982 $ 0.39
========= =========
Effect of Dilutive Securities
Options outstanding for the
purchase of Class A Common
Stock -- 19 -- --
Future commitments for share
unit awards for the issuance of
Class A Common Stock -- 200,000 -- 300,000
Convertible Preferred Stock 1,211,000 6,320,833 1,971,000 10,263,600
---------- ----------- ----------- -----------
Diluted EPS:
Net earnings per share of
Common Stock and Assumed
Conversions $6,490,000 30,016,121 $ 0.22 $9,867,000 30,904,582 $ 0.32
========== =========== ========= =========== ============ =========
</TABLE>
- 11 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
The following table sets forth the calculation of Basic and Diluted EPS for the
three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended September 30, 2000 Three months ended eptember 30, 1999
-------------------------------------- ----------------------------------------
Per Share Per Share
Net Income Shares Amount Net Loss Shares Amount
----------- ------- --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net earnings per share of
Common Stock $2,013,000 22,801,536 $ 0.09 $ 2,647,000 24,287,254 $ 0.11
======= ========
Effect of Dilutive Securities
Options outstanding for the
purchase of Class A Common
Stock -- 9,335 -- --
Future commitments for share
unit awards for the issuance of
Class A Common Stock -- 200,000 -- 300,000
Convertible Trust Preferred
Securities exchangeable for
shares of Common Stock 964,000 12,820,513 -- --
Convertible Preferred Stock 404,000 6,320,833 403,000 6,320,833
---------- ------------ ----------- ----------
Diluted EPS:
Net earnings per share of
Common Stock and Assumed
Conversions $3,381,000 42,152,217 $ 0.08 $ 3,050,000 30,908,087 $ 0.10
=========== =========== ======= =========== =========== ========
</TABLE>
12. Supplemental Disclosures for Consolidated Statements of Cash Flows
Interest paid on the Company's outstanding debt and Convertible Trust Preferred
Securities during the nine months ended September 30, 2000 and 1999 was
$33,579,000 and $36,362,000, respectively. Income taxes paid by the Company
during the nine months ended September 30, 2000 and 1999 was $13,755,000 and
$13,528,000, respectively.
13. Employee Benefit Plans
1997 Long-Term Incentive Stock Plan
During the nine months ended September 30, 2000, the Company issued an aggregate
of 258,750, 8,500 and 200,000 options to acquire shares of Class A Common Stock
with an exercise price of $4.125, 4.4375 and $6.00 per share, respectively
(prices at or higher than the fair market value based on reported trading prices
on the dates of the grant).
The Company also issued 230,304 restricted shares of Class A Common Stock which
vest one third on each of the following dates: February 1, 2001, February 1,
2002 and February 1, 2003.
- 12 -
<PAGE>
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
The following table summarizes the option activity under the incentive stock
plan for the nine months ended September 30, 2000:
Weighted
Average
Options Exercise Price Exercise
Outstanding per Share Price per Share
------------- ----------------- --------------
Outstanding at January 1, 2000 1,233,917 $6.00 - $10.00 $ 7.89
Granted in 2000 467,250 $4.125 - $6.00 4.94
Exercised in 2000 - - -
Canceled in 2000 (236,668) $4.125 - $10.00 7.01
------------- -------------
Outstanding at
September 30, 2000 1,464,499 $4.125 - $10.00 $ 7.10
============= =============
At September 30, 2000, 772,617 of the options are exercisable. At September 30,
2000, the outstanding options have various remaining contractual exercise
periods ranging from 6.75 to 9.95 years with a weighted average life of 7.99
years.
14. Subsequent Events
During the period from September 30, 2000 to October 31, 2000, Fund I has
originated an additional loan of $22.5 million (of $2.5 million is unfunded)
towards which the Company contributed $5.0 million to originate.
- 13 -
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-Q. Historical results set forth are not necessarily indicative of the
future financial position and results of operations of the Company.
Strategic Venture with Citigroup
--------------------------------
On March 8, 2000, the Company and certain of its wholly owned
subsidiaries entered into a strategic venture with affiliates of Citigroup
Investments Inc. ("Citigroup"), following which it commenced its new investment
management business. The venture parties 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 funds (collectively, the "Mezzanine
Funds"). 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.
The strategic venture 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"), to which a Citigroup affiliate
and a wholly owned subsidiary of the Company, as members thereof, have made
capital commitments of $150 million and $50 million, respectively, to be
invested in stages upon approval by both members of each investment to be made
by Fund I. A wholly owned subsidiary of the Company, CT Investment Management
Co., LLC ("CTIMCO"), serves as the exclusive investment manager to Fund I and is
currently negotiating suitable investments for the fund. Additionally, Citigroup
affiliates and subsidiaries of the Company have agreed to make additional
capital commitments of up to $250.0 million and $62.5 million, respectively, to
future Mezzanine Funds sponsored pursuant to the Venture Agreement that close
prior to December 31, 2001, which commitments are 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
aggregate capital commitment to the Mezzanine Funds, the Company agreed in the
Venture Agreement to issue affiliates of Citigroup warrants to purchase shares
of Class A Common Stock. In connection with the organization of Fund I, the
Company issued a warrant to purchase 4.25 million shares of Class A Common Stock
at $5.00 per share. The foregoing warrant has a term of five years that expires
on March 8, 2005 and is not exercisable until March 8, 2001, whereupon it may be
exercised with cash or pursuant to a cash-less exercise feature. In connection
with the organization of subsequent Mezzanine Funds that close before December
31, 2001, the Company agreed, subject to stockholder approval, which was
received on June 21, 2000, to issue additional warrants to purchase up to 5.25
million shares of Class A Common Stock on the same terms as the initial warrant;
the number of shares subject to such warrants to be determined pursuant to a
formula based on the aggregate dollar amount of capital commitments made by
affiliates of Citigroup and clients of Citibank's private bank.
Pursuant to the Venture Agreement, CTIMCO 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 on terms mutually satisfactory to the Company and
affiliates of Citigroup, 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.
On May 10, 2000, in order to be able to fulfill the terms of the
strategic venture with Citigroup, the Company modified the terms of the $150
million aggregate liquidation amount 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") in July 1998.
The Convertible Trust Preferred Securities represented an undivided beneficial
interest in the assets of the Trust that consisted solely of the Company's
$154,650,000 aggregate principal amount 8.25% step up convertible junior
subordinated debentures ("Convertible Debentures") that were concurrently issued
and sold to the Trust.
- 14 -
<PAGE>
In connection with the modification, the then outstanding Convertible
Trust Preferred Securities were cancelled and new variable step up convertible
trust preferred securities with an aggregate liquidation amount of $150,000,000
(the "New Convertible Trust Preferred Securities") were issued to the holders of
the canceled securities in exchange therefore, and the Convertible Debentures
were canceled and new 8.25% step up convertible junior subordinated debentures
in the aggregate principal amount of $92,524,000 (the "New Convertible
Debentures") and new 13% step up non-convertible junior subordinated debentures
in the aggregate principal amount of $62,126,000 (the "New Non-Convertible
Debentures" and together with the New Convertible Debentures, the "New
Debentures") were issued to the Trust, as the holder of the canceled bonds, in
exchange therefore. The liquidation amount of the New Convertible Trust
Preferred Securities is divided into $89,742,000 of convertible amount (the
"Convertible Amount") and $60,258,000 of non-convertible amount (the
"Non-Convertible Amount"), the distribution, redemption and, as applicable,
conversion terms of which, mirror the interest, redemption and, as applicable,
conversion terms of the New Convertible Debentures and the New Non-Convertible
Debentures, respectively, held by the Trust.
Distributions on the New Convertible Trust Preferred Securities are
payable quarterly in arrears on each calendar quarter-end and correspond to the
payments of interest made on the New Debentures, the sole assets of the Trust.
Distributions are payable only to the extent payments are made in respect to the
New Debentures.
The New Convertible Trust Preferred Securities initially bear a blended
coupon rate of 10.16% per annum which rate will vary as the proportion of the
outstanding Convertible Amount to the outstanding Non-Convertible Amount changes
and will step up in accordance with the coupon rate step up terms applicable to
the Convertible Amount and the Non-Convertible Amount.
The Convertible Amount bears a coupon rate of 8.25% per annum through
March 31, 2002 and increases on April 1, 2002 to the greater of (i) 10.00% per
annum, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter
or (ii) a percentage per annum equal to the quarterly dividend paid on a common
share multiplied by four and divided by $7.00. The Convertible Amount is
convertible into shares of Class A Common Stock, in increments of $1,000 in
liquidation amount, at a conversion price of $7.00 per share. The Convertible
Amount is redeemable by the Company, in whole or in part, on or after September
30, 2004.
The Non-Convertible Amount bears a coupon rate of 13.00% per annum
through September 30, 2004, increasing by 0.75% on October 1, 2004 and on each
October 1 thereafter. The Non-Convertible Amount is redeemable by the Company,
in whole or in part, at any time.
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 incurring substantial portfolio risk.
Through September 30, 2000, the Company has made equity contributions to
Fund I of $28,245,000 of which Fund I has returned $12,622,000 for net equity
contributions of $15,623,000. The Company has also capitalized costs totaling
$4,752,000 that will be amortized over the anticipated lives of the Mezzanine
Funds.
As of September 30, 2000, Fund I has loans outstanding totaling
$79,454,000, all of which are performing in accordance with the terms of the
loan agreements.
- 15 -
<PAGE>
Overview of Financial Condition
-------------------------------
Since December 31, 1999, the Company funded $13.5 million of commitments
and additional borrowings under three existing loans. The Company received full
satisfaction of five loans and a certificated mezzanine investment totaling
$117.4 million and partial repayments on nine loans and a certificated mezzanine
investment totaling $40.0 million. At September 30, 2000, the Company had
outstanding loans, certificated mezzanine investments and investments in
commercial mortgage-backed securities totaling approximately $638 million and
additional commitments for fundings on outstanding loans and certificated
mezzanine investments of approximately $22.1 million.
At September 30, 2000, the Company had borrowings of $200.5 million
outstanding under its credit facilities. The decrease in the amount outstanding
under the credit facilities from the amount outstanding at December 31, 1999
resulted from the use of cash received from loan repayments to pay down the
credit facilities.
At December 31, 1999, the Company was party to a credit agreement with a
commercial lender that provided for a $300 million line of credit scheduled to
expire in June 2000. Effective June 30, 2000, pursuant to an amended and
restated credit agreement, the Company extended the expiration of such credit
facility from June 2000 to June 2001 with an automatic nine-month amortizing
extension option, if not otherwise extended.
A $10.9 million repurchase obligation outstanding at December 31, 1999
that matured in March 2000 and was extended to May 2000 was satisfied in May
2000 when the Certificated Mezzanine Investment was satisfied by the borrower.
During the second quarter of 2000, the remaining repurchase obligation's
maturity was extended to May 2001. This repurchase obligation relates to an
asset sold by the Company with a carrying amount of $22.7 million, which
approximates the asset's market value, for which, the Company has a liability to
repurchase the asset for $16.9 million. The interest rate in effect for the
repurchase obligation at September 30, 2000 was 8.12%.
As of September 30, 2000, 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. At September 30, 2000, the
Company was party to interest rate swap agreements for notional amounts totaling
approximately $237.8 million with financial institution counterparties whereby
the Company swapped fixed-rate instruments, with average interest rates of
approximately 6.01%, for floating rate instruments with interest rates at LIBOR.
The agreements mature at varying times from September 2001 to December 2014.
During March 2000, the Company announced a share repurchase program under
which the Company may purchase, from time to time, up to two million shares of
the Company's Class A Common Stock. In May 2000, the Company announced an
increase in the number of shares in its share repurchase program to four million
shares. As of September 30, 2000, the Company had purchased and retired
1,999,900 shares of the Company's Class A Common Stock. The Company has and will
continue to fund share repurchases with available cash.
Now that the Company's new investment management business has commenced
and Fund I's asset origination and acquisition activities are ongoing under the
management of CTIMCO, the Company will not reinvest directly for its own
portfolio the working capital derived from maturing loans and investments,
unless otherwise approved or permitted by the funds. Pursuant to the Venture
Agreement, the Company will source potential investment opportunities to Fund I
or the second co-sponsored fund, when it has closed, and will use such working
capital to make its contributions to the funds as and when required. Therefore,
if the amount of the Company's maturing loans and investments increases
significantly before excess capital is invested in the funds, the Company may
experience temporary shortfalls in revenues and lower earnings until offsetting
revenues are derived from the funds.
- 16 -
<PAGE>
Comparison of the Nine and Three Months Ended September 30, 2000 to the
-----------------------------------------------------------------------
Nine and Three Months Ended September 30, 1999
----------------------------------------------
The Company reported net income allocable to shares of Common Stock of
$5,279,000 for the nine months ended September 30, 2000, a decrease of
$2,617,000 from the net income allocable to shares of Common Stock of $7,896,000
for the nine months ended September 30, 1999. This decrease was primarily the
result of reduced advisory and investment banking fees and higher general and
administrative expenses. The Company reported net income allocable to shares of
Common Stock of $2,013,000 for the three months ended September 30, 2000, a
decrease of $634,000, from the net income allocable to shares of Common Stock of
$2,647,000 for the three months ended September 30, 1999. This decrease was
primarily the result of reduced advisory and investment banking fees.
Interest and related income from loans and other investments amounted to
$65,050,000 for the nine months ended September 30, 2000, an increase of $79,000
over the $64,971,000 amount for the nine months ended September 30, 1999. While
average interest earning assets decreased from approximately $740.5 million for
the nine months ended September 30, 1999 to approximately $700.6 million for the
nine months ended September 30, 2000, the interest rate earned on such assets
increased from 11.7% in 1999 to 12.4% in 2000. During the nine months ended
September 30, 2000, the Company recognized an additional $1,461,000 on the early
repayment of two loans, while during the nine months ended September 30, 1999,
the Company recognized an additional $4.0 million on the early repayment of five
loans. Also in 2000, two loans were in non-accrual status, which reduced
interest income by $503,000 for the nine months ended September 30, 2000.
Without this additional interest income (offset by the forgone interest on the
non-accrual loans in 2000), the earning rate for 2000 would have been 12.2%
versus 11.0% for 1999. This increase is due primarily to an increase in the
average LIBOR rate from 5.28% for the first nine months of 1999 to 6.62% for the
first nine months of 2000.
Interest and related income from loans and other investments amounted to
$21,540,000 for the three months ended September 30, 2000, a decrease of
$690,000 from the $22,230,000 amount for the three months ended September 30,
1999. While average interest earning assets decreased from approximately $788.1
million for the three months ended September 30, 1999 to approximately $662.2
million for the three months ended September 30, 2000, the interest rate earned
on such assets increased from 11.2% in 1999 to 12.9% in 2000. During the three
months ended September 30, 2000, the Company recognized an additional $1,005,000
on the early repayment of a loan. Also in 2000, two loans were in non-accrual
status, which reduced interest income by $473,000 for the three months ended
September 30, 2000. Without this additional interest income (offset by the
forgone interest on the non-accrual loans in 2000), the earning rate for 2000
would have been 12.6%. The increase in interest rate, from 11.2% to 12.6%, is
due primarily to an increase in the average LIBOR rate from 5.28% for the third
quarter of 1999 to 6.62% for the third quarter of 2000.
During the second quarter of 2000, Fund I commenced operations and for
the nine months and three months ended September 30, 2000, the Company earned
$899,000 and $678,000, respectively, on its equity investment in the fund.
Interest and related expenses amounted to $28,500,000 for the nine months
ended September 30, 2000, an increase of $57,000 over the $28,443,000 amount for
the nine months ended September 30, 1999. The increase in expense was due to an
increase in the average rate paid on interest bearing liabilities from 8.2% for
the nine months ended September 30, 1999 to 9.3% for the nine months ended
September 30, 2000, offset by a decrease in the amount of average interest
bearing liabilities outstanding from approximately $463.9 million to
approximately $410.4 million for the same periods. The increase in the average
rate is consistent with the increase in the average LIBOR rate for the Company's
variable rate liabilities for the same periods.
Interest and related expenses amounted to $9,008,000 for the three months
ended September 30, 2000, a decrease of $1,693,000 from the $10,701,000 amount
for the three months ended September 30, 1999. The decrease in expense was due
to a decrease in the amount of average interest bearing liabilities outstanding
from approximately $494.7 million to approximately $380.3 million for the same
periods, offset by an increase in the average rate paid on interest bearing
liabilities from 8.6% for the three months ended September 30, 1999 to 9.4% for
the three months ended September 30, 2000. The increase in the average rate is
consistent with the increase in the average LIBOR rate for the Company's
variable rate liabilities for the same periods.
- 17 -
<PAGE>
In addition, the Company also utilized proceeds from the $150.0 million
of Convertible Trust Preferred Securities, which were issued on July 28, 1998 to
finance its interest earning assets. As previously discussed, the terms of the
Convertible Trust Preferred Securities were modified effective May 10, 2000. As
a result, the blended rate on the securities increased from 8.25% to 10.16% on
that date.
During the nine months ended September 30, 2000 and 1999, the Company
recognized $5,802,000 and $5,224,000, respectively, of net expenses related to
the Convertible Trust Preferred Securities. This amount consisted of
distributions to the holders totaling $11,235,000 and $9,281,000, respectively,
and amortization of discount and origination costs totaling $599,000 and
$599,000, respectively, during the nine months ended September 30, 2000 and
1999. This was partially offset by a tax benefit of $5,234,000 and $4,656,000
during the nine months ended September 30, 2000 and 1999, respectively.
During the three months ended September 30, 2000 and 1999, the Company
recognized $2,120,000 and $1,741,000, respectively, of net expenses related to
the Convertible Trust Preferred Securities. This amount consisted of
distributions to the holders totaling $4,208,000 and $3,094,000, respectively,
and amortization of discount and origination costs totaling $199,000 and
$199,000, respectively, during the three months ended September 30, 2000 and
1999. This was partially offset by a tax benefit of $1,889,000 and $1,552,000
during the three months ended September 30, 2000 and 1999, respectively.
During the nine months ended September 30, 2000, other revenues decreased
$3,616,000 to $4,546,000 from $8,162,000 in the same period of 1999. During the
three months ended September 30, 2000, other revenues decreased $1,773,000 to
$335,000 from $2,108,000 in the same period of 1999. These decreases were
primarily due to the reduction in advisory and investment banking fees generated
by Victor Capital and its related subsidiaries. The reduction in resources
devoted to the Company's investment banking and advisory operations following
the transition to its new investment management business is expected in the
future to reduce such fee earning opportunities.
Other expenses increased from $15,829,000 for the nine months ended
September 30, 1999 to $16,737,000 for nine months ended September 30, 2000. As
the Company transitioned to its new investment management business, it incurred
one-time expenses of $2.1 million that were included in general and
administrative expenses and wrote-off the remaining $275,000 of the excess of
purchase price for Victor Capital over net tangible assets acquired, net. When
these special one-time expenses are removed from other expenses, recurring other
expenses for the nine months ended September 30, 2000 decreased $1,558,000 from
the same period in the prior year. During 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, along with a decrease in average staffing levels,
primarily accounted for the decrease in recurring general and administrative
expenses. During the period ended September 30, 2000, the Company had an average
of 24 full time employees as compared to an average of 35 during the period
ended September 30, 1999. The Company had 23 full time employees and one part
time employee at September 30, 2000.
Other expenses remained consistent when comparing the three months ended
September 30, 1999 to the three months ended September 30, 2000 increasing only
$87,000 from $4,559,000 for the three months ended September 30, 1999 to
$4,646,000 for three months ended September 30, 2000. The decrease in the
provision for possible credit losses from $3,073,000 for the nine months ended
September 30, 1999 to $2,681,000 for the nine months ended September 30, 2000
and from $1,040,000 for the three months ended September 30, 1999 to $839,000
for the three months ended September 30, 2000 was due to the decrease in average
earning assets as previously described.
For the nine months ended September 30, 2000 and 1999, the Company
accrued income tax expense of $12,966,000 and $13,770,000 respectively, for
federal, state and local income taxes. For the three months ended September 30,
2000 and 1999, the Company accrued income tax expense of $4,362,000 and
$4,287,000, respectively, for federal, state and local income taxes. The
increase (from 47.7% to 51.3% for the nine month period and from 47.2% to 49.0%
for the three month period) in the effective tax rate was primarily due to
higher levels of compensation in excess of deductible limits.
The preferred stock dividend and dividend requirement arose in 1997 as a
result of the Company's issuance of $33 million of shares of Class A Preferred
Stock on July 15, 1997. Dividends accrued on these shares at a rate of
- 18 -
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 third quarter of 1999. In the
third quarter of 1999, 5,946,825 shares of Class A Preferred Stock were
converted into an equal number of shares of Class A Common Stock thereby
reducing the number of outstanding shares of Preferred Stock to 6,320,833 and
the dividend requirement to $1,615,000 per annum.
Liquidity and Capital Resources
-------------------------------
At September 30, 2000, the Company had $8,995,000 in cash. The primary
sources of liquidity for the Company for the remainder of 2000, will be cash on
hand, cash generated from operations, principal and interest payments received
on investments (including loan repayments), loans and securities, and additional
borrowings under its credit facilities. The Company believes these sources of
capital will adequately meet future cash requirements. The Company expects that
during the remainder of 2000, it will use a significant amount of its available
capital resources to satisfy its capital contributions required in connection
with the previously discussed strategic 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 $29,787,000 for the
nine months ended September 30, 2000, compared to the net decrease of
$29,786,000 for the nine months ended September 30, 1999. The use of cash in the
first nine months of 2000 was primarily to reduce liabilities while the use of
cash in the same period of 1999 was primarily to purchase the BB CMBS Portfolio
(net of the proceeds from the term redeemable securities contract). Cash
provided by operating activities during the nine months ended September 30, 2000
was $8,510,000, a reduction of $176,000 from cash provided by operating
activities of $8,686,000 during the same period of 1999. For the nine months
ended September 30, 2000, cash provided by investing activities was
$126,065,000, an increase of $201,645,000 from $75,580,000 used during the same
period in 1999, primarily as a result of significant repayments received on
loans since December 31, 1999 and a reduced level of loan origination from that
of the prior year. The Company utilized the cash received on loan repayments to
reduce outstanding borrowings under its credit facilities, which accounted for
the majority of the $164,362,000 use of cash in financing activities in the
first quarter of 2000, a $201,470,000 decrease from the $37,108,000 cash
provided by financing activities in the same period of 1999, which included a
significant increase in borrowing from the issuance of the term redeemable
securities contract.
At September 30, 2000, the Company has two outstanding notes payable
totaling $2,605,000, outstanding borrowings under its credit facilities of
$200,534,000, outstanding borrowings on the term redeemable securities contract
of $132,304,000 and an outstanding repurchase obligation of $16,873,000. At
September 30, 2000, the Company had $447,895,000 of borrowing capacity available
under the credit facilities.
Explanatory Note for the Use of Forward-Looking Statements
----------------------------------------------------------
Except for historical information contained herein, this quarterly report
on Form 10-Q contains forward-looking statements within the meaning of the
Section 21E of the Securities and Exchange Act of 1934, as amended, which
involve certain risks and uncertainties. Forward-looking statements are included
with respect to, among other things, the Company's business plan, business
strategy, portfolio management and investment management business. The Company's
actual results or outcomes may differ materially from those anticipated.
Representative examples of such factors are discussed in more detail in the
Company's 1999 fiscal year Annual Report on Form 10-K and include, among other
things, the availability of desirable loan and investment opportunities, the
ability to obtain and maintain targeted levels of leverage and borrowing costs,
fluctuations in interest rates and credit spreads, continued loan performance
and repayment and the maintenance of loan loss allowance levels. The Company
disclaims any intention or obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
- 19 -
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The principal objective of the Company's asset/liability management
activities is to maximize net interest income, while minimizing levels of
interest rate risk. Net interest income and interest expense are subject to the
risk of interest rate fluctuations. To mitigate the impact of fluctuations in
interest rates, the Company uses interest rate swaps to effectively convert
fixed rate assets to variable rate assets 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 September 30,
2000. 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.
<TABLE>
<CAPTION>
Expected Maturity Dates
-----------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Assets: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMBS
Fixed Rate - - $196,874 - - - $196,874 $181,833
Average interest rate - - 11.52% - - - 11.52%
Variable Rate - - - $ 36,509 - - $ 36,509 $ 34,147
Average interest rate - - - 13.64% - - 13.64%
Certificated Mezzanine
Investments
Variable Rate - $ 22,683 - - - - $ 22,683 $ 22,683
Average interest rate - 11.12% - - - - 11.12%
Loans receivable
Fixed Rate - $ 28,779 - - - $ 96,589 $125,368 $120,002
Average interest rate - 12.25% - - - 11.44% 11.62%
Variable Rate $85,677 $107,982 $ 50,500 - - $ 26,500 $270,659 $268,145
Average interest rate 13.01% 11.60% 13.45% - - 12.39% 12.47%
Liabilities:
Credit facilities
Variable Rate - - - $200,534 - - $200,534 $200,534
Average interest rate - - - 9.21% - - 9.21%
Term redeemable
securities contract
Variable Rate - - $137,812 - - - $137,812 $132,304
Average interest rate - - 9.66% - - - 9.66%
Repurchase obligations
Variable Rate - $ 16,873 - - - - $ 16,873 $ 16,873
Average interest rate - 8.12% - - - - 8.12%
Convertible Trust
Preferred Securities
Fixed Rate - - - - - $150,000 $150,000 $146,942
Average interest rate - - - - - 10.93% 10.93%
Interest rate swaps - $ 28,000 $137,812 $ 19,109 - $ 52,875 $237,796 $ 11,476
Average fixed pay rate - 5.79% 6.05% 6.04% - 6.01% 6.01%
Average variable
receive rate - 6.62% 6.65% 6.62% - 6.62% 6.64%
</TABLE>
- 20 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
--------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the fiscal quarter ended September 30, 2000, the Company filed
the following Current Reports on Form 8-K:
None
- 21 -
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL TRUST, INC.
November 9, 2000 /s/ John R. Klopp
---------------- -----------------
Date John R. Klopp
Chief Executive Officer
/s/ Edward L Shugrue III
-------------------------
Edward L. Shugrue III
Managing Director and
Chief Financial Officer
- 22 -
<PAGE>
