-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KYYsxrFOVmeATsQV6jXSdK7zlZkg2IhuRGXXxiYakDpRxIcf9ZnS2vQt/ScaA9oy UGy2OA1BZhYlI3I/SFujOQ== /in/edgar/work/20000814/0001116679-00-000067/0001116679-00-000067.txt : 20000921 0001116679-00-000067.hdr.sgml : 20000921 ACCESSION NUMBER: 0001116679-00-000067 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL TRUST INC CENTRAL INDEX KEY: 0001061630 STANDARD INDUSTRIAL CLASSIFICATION: [6162 ] IRS NUMBER: 946181186 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14788 FILM NUMBER: 700414 BUSINESS ADDRESS: STREET 1: 605 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126550220 MAIL ADDRESS: STREET 1: BATTLE FOWLER LLP STREET 2: 75 E 55TH ST CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 0001.txt FORM 10-Q To be filed with the Securities and Exchange Commission on August 14, 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 June 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.) 605 Third Avenue, 26th Floor, New York, NY 10016 - ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 655-0220 -------------- 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 August 14, 2000 was 20,633,428. CAPITAL TRUST, INC. INDEX
Part I. Financial Information Item 1: Financial Statements 1 Consolidated Balance Sheets - June 30, 2000 (unaudited) and December 31, 1999 (audited) 1 Consolidated Statements of Income - Three and Six Months Ended June 30, 2000 and 1999 (unaudited) 2 Consolidated Statements of Changes in Stockholders' Equity - Six Months Ended June 30, 2000 and 1999 (unaudited) 3 Consolidated Statements of Cash Flows - Six Months Ended June 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 13 Item 3: Quantitative and Qualitative Disclosures about Market Risk 19 Part II. Other Information Item 1: Legal Proceedings 20 Item 2: Changes in Securities 20 Item 3: Defaults Upon Senior Securities 20 Item 4: Submission of Matters to a Vote of Security Holders 20 Item 5: Other Information 20 Item 6: Exhibits and Reports on Form 8-K 21 Signatures 22
Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets June 30, 2000 and December 31, 1999 (in thousands)
June 30, December 31, 2000 1999 ------------- ------------- Assets (Unaudited) (Audited) Cash and cash equivalents $11,554 $38,782 Commercial mortgage-backed securities available-for-sale, at fair value 222,589 214,058 Certificated mezzanine investments available-for-sale, at fair value 22,986 45,432 Loans receivable, net of $9,448 and $7,605 reserve for possible credit losses at June 30, 2000 and December 31, 1999, respectively 416,601 509,811 Equity investment in CT Mezzanine Partners I LLC ("Fund I") 26,628 - Excess of purchase price over net tangible assets acquired, net - 286 Deposits and other receivables 516 533 Accrued interest receivable 7,168 9,528 Deferred income taxes 6,560 5,368 Prepaid and other assets 3,630 4,010 ------------- ------------- Total assets $718,232 $827,808 ============= ============= Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued expenses $ 4,043 $ 14,432 Notes payable 3,063 3,474 Credit facilities 246,738 343,263 Term redeemable securities contract 131,391 129,642 Repurchase obligations 17,176 28,703 Deferred origination fees and other revenue 2,938 3,411 ------------- ------------ Total liabilities 405,349 522,925 ------------- ------------ 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 June 30, 2000 and holding solely 8.25% junior subordinated debentures of Capital Trust, Inc. at December 31, 1999 ("Convertible Trust Preferred Securities") 146,743 146,343 ------------- ------------ 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 June 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, 4,043 shares issued and outstanding at June 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, 20,307 and 21,862 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively 203 219 Class B common stock, $0.01 par value, 100,000 shares authorized, 2,294 shares issued and outstanding at June 30, 2000 and December 31, 1999 ("Class B Common Stock") 23 23 Restricted Class A Common Stock, $0.01 par value, 326 and 127 shares issued and outstanding at June 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 185,678 189,456 Unearned compensation (981) (407) Accumulated other comprehensive loss (1,464) (10,164) Accumulated deficit (17,385) (20,651) ------------- ------------ Total stockholders' equity 166,140 158,540 ------------- ------------ Total liabilities and stockholders' equity $718,232 $827,808 ============= ============
See accompanying notes to unaudited consolidated financial statements. - 1 - Capital Trust, Inc. and Subsidiaries Consolidated Statements of Income Three and Six Months Ended June 30, 2000 and 1999 (in thousands, except per share data) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ----------- ------------ ------------ ---------- Income from loans and other investments: Interest and related income $ 20,817 $ 20,589 $ 43,510 $ 42,741 Income from equity investments in Fund I 221 - 221 - Less: Interest and related expenses 9,278 9,124 19,492 17,742 ----------- ------------ ------------ ---------- Income from loans and other investments, net 11,760 11,465 24,239 24,999 ----------- ------------ ------------ ---------- Other revenues: Advisory and investment banking fees 2,409 2,081 3,734 5,174 Management fees from Fund I 55 - 55 - Other interest income 220 225 422 845 Gain on sale of investments - 35 - 35 ----------- ----------- ----------- ----------- Total other revenues 2,684 2,341 4,211 6,054 ----------- ----------- ----------- ----------- Other expenses: General and administrative 5,802 3,606 9,555 8,861 Other interest expense 64 110 135 201 Depreciation and amortization 453 88 559 175 Provision for possible credit losses 876 954 1,842 2,033 ----------- ----------- ---------- ------------ Total other expenses 7,195 4,758 12,091 11,270 ----------- ----------- ---------- ------------ Income before income taxes and distributions and amortization on Convertible Trust Preferred Securities 7,249 9,048 16,359 19,783 Provision for income taxes 4,154 4,281 8,604 9,483 ----------- ----------- ---------- ----------- Income before distributions and amortization on Convertible Trust Preferred Securities 3,095 4,767 7,755 10,300 Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit of $1,793 and $1,552 for the three months ended June 30, 2000 and 1999, respectively, and $3,345 and $3,104 for the six months ended June 30, 2000 and 1999, respectively 1,941 1,742 3,682 3,483 ----------- ----------- ---------- ------------ Net income 1,154 3,025 4,073 6,817 Less: Preferred Stock dividend and dividend requirement 404 784 807 1,568 ----------- ----------- ---------- ------------ Net income allocable to shares of Common Stock $ 750 $ 2,241 $ 3,266 5,249 =========== =========== =========== =========== Per share information: Net income per share of Common Stock: Basic $ 0.03 0.12 $ 0.14 0.29 =========== =========== =========== =========== Diluted $ 0.03 $ 0.10 $ 0.13 $ 0.22 =========== =========== =========== =========== Weighted average shares of Common Stock outstanding: Basic 23,204,420 18,352,983 23,845,948 18,335,142 =========== =========== =========== =========== Diluted 23,404,420 30,920,641 30,366,781 30,902,800 =========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements. - 2 - Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity For the Six Months Ended June 30, 2000 and 1999 (in thousands) (unaudited)
Class A Class B Class A Class B Comprehensive Preferred Preferred Common Common Income/(Loss) Stock Stock Stock Stock ---------------- --------------------------------------------------------- Balance at January 1, 1999 $ - $ 123 $ - $ 182 $ - Net income 6,817 - - - - Unrealized gain on available-for-sale securities, net of related income taxes 716 - - - - Issuance of Class A Common Stock unit awards - - - - - Cancellation of previously issued restricted Class A Common Stock - - - - - Issuance of restricted Class A Common Stock - - - - - Restricted Class A Common Stock earned - - - - - Dividends paid on Preferred Stock - - - - - ---------------- --------------------------------------------------------- Balance at June 30, 1999 $ 7,533 $ 123 $ - $ 182 $ - ================ ========================================================= Balance at January 1, 2000 $ - $ 23 $ 40 $ 219 $ 23 Net income 4,073 - - - - Unrealized gain on available-for-sale securities, net of related income taxes 8,700 - - - - 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 - - - - - Restricted Class A Common Stock earned - - - - - Dividends paid on Preferred Stock - - - - - Repurchase and retirement of shares of Class A Common Stock previously outstanding - - - (17) - ---------------- --------------------------------------------------------- Balance at June 30, 2000 $ 12,773 $ 23 $ 40 $ 203 $ 23 ================ =======================================================-=
Restricted Accumulated Class A Additional Other Common Paid-In Unearned Comprehensive Accumulated Stock Capital Compensation Income/(Loss) Deficit Total ------------------------------------------------------------------------- Balance at January 1, 1999 $ 1 $188,816 $ (418) $ (4,665) $ (35,352) $ 148,687 Net income - - - - 6,817 6,817 Unrealized gain on available-for-sale securities, net of related income taxes - - - 716 - 716 Issuance of Class A Common Stock unit awards - 312 - - - 312 Cancellation of previously issued restricted Class A Common Stock (1) (149) 104 - - (46) Issuance of restricted Class A Common Stock 1 599 (600) - - - Restricted Class A Common Stock earned - - 216 - - 216 Dividends paid on Preferred Stock - - - - (1,568) (1,568) ------------------------------------------------------------------------- Balance at June 30, 1999 $ 1 $189,578 $ (698) $ (3,949) $ (30,103) $ 155,134 ========================================================================= Balance at January 1, 2000 $ 1 $189,456 $ (407) $(10,164) $ (20,651) $ 158,540 Net income - - - - 4,073 4,073 Unrealized gain on available-for-sale securities, net of related income taxes - - - 8,700 - 8,700 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 2 948 (950) - - - Restricted Class A Common Stock earned - - 376 - - 376 Dividends paid on Preferred Stock - - - - (807) (807) Repurchase and retirement of shares of Class A Common Stock previously outstanding - (6,710) - - - (6,727) -------------------------------------------------------------------------- Balance at June 30, 2000 $ 3 $185,678 $ (981) $ (1,464) $ (17,385) $ 166,140 ==========================================================================
See accompanying notes to unaudited consolidated financial statements. - 3- Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows Six months ended June 30, 2000 and 1999 (in thousands) (unaudited)
2000 1999 -------------------- -------------------- Cash flows from operating activities: Net income $ 4,073 $ 6,817 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income taxes (1,192) (831) Provision for credit losses 1,842 2,033 Depreciation and amortization 559 175 Income from equity investments in Fund I (221) - Restricted Class A Common Stock earned 376 216 Amortization of premiums and accretion of discounts on loans and investments, net (1,172) (260) Accretion of discounts on term redeemable securities contract 1,749 1,062 Accretion of discounts and fees on Convertible Trust Preferred Securities, net 400 400 Expenses reversed on cancellation of restricted stock previously issued - (46) Gain on sale of investments - (35) Changes in assets and liabilities, net: Deposits and other receivables 17 (330) Accrued interest receivable 2,360 522 Prepaid and other assets 274 (751) Deferred origination fees and other revenue (473) 167 Accounts payable and accrued expenses (9,764) (5,418) -------------------- -------------------- Net cash provided by (used in) operating activities (1,172) 3,721 -------------------- -------------------- Cash flows from investing activities: Purchases of commercial mortgage-backed securities - (185,947) Cash received on commercial mortgage-backed securities recorded as discount 1,445 - Principal collections on certificated mezzanine investments 22,446 442 Origination and purchase of loans receivable (13,050) (86,483) Principal collections and proceeds from sale of loans receivable 104,314 188,001 Equity investment in Fund I (25,192) - Purchases of equipment and leasehold improvements (22) (55) Principal collections and proceeds from sales of available-for-sale securities - 3,344 -------------------- -------------------- Net cash provided by (used in) investing activities 89,941 (80,698) -------------------- -------------------- Cash flows from financing activities: Proceeds from repurchase obligations - 24 Repayment of repurchase obligations (11,527) (40,994) Proceeds from credit facilities 40,000 166,651 Repayment of credit facilities (136,525) (205,470) Repayment of notes payable (411) (363) Dividends paid on Preferred Stock (807) (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 (6,727) - -------------------- -------------------- Net cash provided by (used in) financing activities (115,997) 45,164 -------------------- -------------------- Net decrease in cash and cash equivalents (27,228) (31,813) Cash and cash equivalents at beginning of year 38,782 46,623 -------------------- -------------------- Cash and cash equivalents at end of period $ 11,554 $ 14,810 ==================== ====================
See accompanying notes to unaudited consolidated financial statements. - 4 - 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 six months ended June 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 does not anticipate that its adoption will have a material effect on the consolidated financial position or results of operations of the Company. - 5 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 4. Loans receivable At June 30, 2000 and December 31, 1999, the Company's loans receivable consisted of the following (in thousands):
June 30, December 31, 2000 1999 ---------------------- ---------------------- (1) Mortgage Loans $ 178,488 $ 270,332 (2) Mezzanine Loans 191,106 192,613 (3) Other mortgage loans receivable 56,455 54,471 ---------------------- ---------------------- 426,049 517,416 Less: reserve for possible credit losses (9,448) (7,605) ---------------------- ---------------------- Total loans $ 416,601 $ 509,811 ====================== ======================
At June 30, 2000, one other mortgage loan receivable with a principal balance of $912,000 was past-due more than 90 days; the Company's net investment in this asset is $141,000 as a result of non-recourse financing of this asset. 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 the accrued interest receivable at June 30, 2000 of $30,000 was reversed. At June 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 12.49% (2) Mezzanine Loans 12.62% (3) Other mortgage loans receivable 13.43% Total loans 12.67% At June 30, 2000, $297,410,000 (70%) 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 $127,727,000 (30%) of performing loans were financed at fixed rates ranging from 10.81% to 12.50%. During the six months ended June 30, 2000, the Company provided $13.1 million of additional fundings on three existing loans. The Company had unfunded commitments on four loans and certificated mezzanine investments totaling $22.5 million at June 30, 2000. At June 30, 2000, the Company had no outstanding commitments to originate or purchase any new loans or investments. 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 - 6 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 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. Through June 30, 2000, the Company has made equity contributions to Fund I of $21,882,000. The Company has also capitalized costs totaling $4,670,000 that will be amortized over the anticipated lives of the Mezzanine Funds. As of June 30, 2000, Fund I has mezzanine loans outstanding totaling $77,500,000, 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 - 7 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 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 June 30, 1999, the Company had sold such asset with a book value of $22,986,000, which approximated market value, and had a liability to repurchase this asset for $17,176,000. The liability balance bears interest at a specified rate over LIBOR and the maturity has been extended during the quarter ended June 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. 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. - 8 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 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 June 30, 2000, the Company had purchased and retired 1,685,400 shares of Class A Common Stock at an average price of $3.99 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 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. - 9 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 10. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The provision for income taxes for the six months ended June 30, 2000 and 1999 is comprised as follows (in thousands): 2000 1999 ------------------ ----------------- Current Federal $ 5,821 $ 6,152 State 2,089 2,187 Local 1,886 1,974 Deferred Federal (720) (502) State (248) (172) Local (224) (156) ------------------ ----------------- Provision for income taxes $ 8,604 $ 9,483 ================== ================= The Company has federal net operating loss carryforwards ("NOLs") as of June 30, 2000 of approximately $10.4 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 six months ended June 30, 2000 and 1999 are as follows (in thousands):
2000 1999 ------------------------------- -------------------------------- $ % $ % --------------- --------------- ---------------- --------------- Federal income tax at statutory rate $ 5,726 35.0% $ 6,924 35.0% State and local taxes, net of federal tax benefit 2,277 13.9% 2,490 12.5% Utilization of net operating loss carryforwards (245) (1.5)% (245) (1.2)% Compensation in excess of deductible limits 724 4.4% 252 1.3% Other 122 0.8% 62 0.3% --------------- --------------- -------------------------------- $ 8,604 52.6% $ 9,483 48.9% =============== =============== ================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax reporting purposes. The components of the net deferred tax assets as of June 30, 2000 and December 31, 1999 are as follows (in thousands):
June 30, December 31, 2000 1999 --------------------- --------------------- Net operating loss carryforward $ 3,644 $ 3,889 Reserves on other assets and for possible credit losses 7,180 6,312 Other 1,119 795 --------------------- --------------------- Deferred tax assets 11,943 10,996 Valuation allowance (5,383) (5,628) --------------------- --------------------- $ 6,560 $ 5,368 ===================== =====================
- 10 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 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 six months ended June 30, 2000 and 1999:
Six Months Ended June 30, 2000 Six Months Ended June 30, 1999 ------------------------------------------ ---------------------------------------------- Per Share Per Share Net Income Shares Amount Net Loss Shares Amount -------------- ------------- ------------- -------------- ----------------- ------------- Basic EPS: Net earnings per share of Common Stock $ 3,266,000 23,845,948 $ 0.14 $ 5,249,000 18,335,142 $ 0.29 =============== ============= Effect of Dilutive Securities Future commitments for share unit awards for the issuance of Class A Common Stock -- 200,000 -- 300,000 Convertible Preferred Stock 807,000 6,320,833 1,568,000 12,267,658 -------------- ------------- ------------- -------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $ 4,073,000 30,366,781 $ 0.13 $ 6,817,000 30,902,800 $ 0.22 ============== ============= ============== ============= ================= =============
The following table sets forth the calculation of Basic and Diluted EPS for the three months ended June 30, 2000 and 1999:
Three Months Ended June 30, 2000 Three Months Ended June 30, 1999 ------------------------------------------- --------------------------------------------- Per Share Per Share Net Income Shares Amount Net Loss Shares Amount -------------- ------------- -------------- ------------- ----------------- ------------- Basic EPS: Net earnings per share of Common Stock $ 750,000 23,204,420 $ 0.03 $ 2,241,000 18,352,983 $ 0.12 =========== =========== Effect of Dilutive Securities Future commitments for share unit awards for the issuance of Class A Common Stock -- 200,000 -- 300,000 Convertible Preferred Stock -- -- 784,000 12,267,658 -------------- ------------- -------------- ------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $ 750,000 23,404,420 $ 0.03 $ 3,025,000 30,920,641 $ 0.10 ============= ============= =========== =============== ============= ===========
- 11 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 12. Supplemental Disclosures for Consolidated Statements of Cash Flows Interest paid on the Company's outstanding debt and Convertible Trust Preferred Securities during the six months ended June 30, 2000 and 1999 was $27,015,000 and $25,162,000, respectively. Income taxes paid by the Company during the six months ended June 30, 2000 and 1999 was $11,010,000 and $10,421,000, respectively. 13. Employee Benefit Plans 1997 Long-Term Incentive Stock Plan During the six months ended June 30, 2000, the Company issued an aggregate of 258,750 and 200,000 options to acquire shares of Class A Common Stock with an exercise price of $4.125 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. The following table summarizes the option activity under the incentive stock plan for the quarter ended June 30, 2000:
Weighted Average Exercise Price per Options Exercise Price Share Outstanding per Share --------------------- ------------------------------ ---------------------- Outstanding at January 1, 2000 1,233,917 $6.00 - $10.00 $ 7.89 Granted in 2000 458,750 $4.125 - $6.00 4.95 Exercised in 2000 - - - Canceled in 2000 (146,335) $4.125 - $10.00 7.34 --------------------- ---------------------- Outstanding at June 30, 2000 1,546,332 $4.125 - $10.00 $ 7.07 ===================== ======================
At June 30, 2000, 693,846 of the options are exercisable. At June 30, 2000, the outstanding options have various remaining contractual exercise periods ranging from 7.00 to 9.95 years with a weighted average life of 8.25 years. 14. Subsequent Events On August 11, 2000, the Company received full satisfaction on a $3,000,000 mezzanine loan which had a residual fee structure that resulted in the Company recognizing an additional $1,000,000 of revenue in the third quarter of 2000. A Mortgage Loan with a principal balance of $8,000,000, which was contractually current at June 30, 2000, reached maturity on July 15, 2000 and has not been repaid with respect to principal and interest. During the period from June 30, 2000 to August 14, 2000, Fund I has originated an additional two loans aggregating $35.2 million of which the Company's proportionate share is $8.8 million. - 12 - 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. - 13 - 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. 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 June 30, 2000, the Company has made equity contributions to Fund I of $21,882,000. The Company has also capitalized costs totaling $4,670,000 that will be amortized over the anticipated lives of the Mezzanine Funds. As of June 30, 2000, Fund I has mezzanine loans outstanding totaling $77,500,000, all of which are performing in accordance with the terms of the loan agreements. - 14 - Overview of Financial Condition Since December 31, 1999, the Company funded $13.1 million of commitments and additional borrowings under three existing loans. The Company received full satisfaction of two loans and a certificated mezzanine investment totaling $100.3 million and partial repayments on eleven loans and a certificated mezzanine investment totaling $26.4 million. At June 30, 2000, the Company had outstanding loans, certificated mezzanine investments and investments in commercial mortgage-backed securities totaling approximately $670 million and additional commitments for fundings on outstanding loans and certificated mezzanine investments of approximately $22.5 million. At June 30, 2000, the Company had borrowings of $246.7 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 $23.0 million, which approximates the asset's market value, for which, the Company has a liability to repurchase the asset for $17.2 million. The interest rate in effect for the repurchase obligation at June 30, 2000 was 8.14%. As of June 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 June 30, 2000, the Company was party to interest rate swap agreements for notional amounts totaling approximately $238.2 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 June 30, 2000, the Company had purchased and retired 1,685,400 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 Fund II, 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. - 15 - Comparison of the Six and Three Months Ended June 30, 2000 to the Six and Three Months Ended June 30, 1999 The Company reported net income allocable to shares of Common Stock of $3,266,000 for the six months ended June 30, 2000, a decrease of $1,983,000 from the net income allocable to shares of Common Stock of $5,249,000 for the six months ended June 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 $750,000 for the three months ended June 30, 2000, a decrease of $1,491,000, from the net income allocable to shares of Common Stock of $2,241,000 for the three months ended June 30, 1999. This decrease was primarily the result of higher general and administrative expenses. Interest and related income from loans and other investments amounted to $43,510,000 for the six months ended June 30, 2000, an increase of $769,000 over the $42,741,000 amount for the six months ended June 30, 1999. While average interest earning assets decreased from approximately $736.0 million for the six months ended June 30, 1999 to approximately $720.0 million for the six months ended June 30, 2000, the interest rate earned on such assets increased from 11.7% in 1999 to 12.1% in 2000. During the six months ended June 30, 2000, the Company recognized an additional $456,000 on the early repayment of a loan, while during the six months ended June 30, 1999, the Company recognized an additional $4.0 million on the early repayment of five loans. Without this additional interest income, the earning rate for 2000 would have been 12.0% versus 10.6% for 1999. This increase is due primarily to an increase in the average LIBOR rate from 4.96% for the first six months of 1999 to 6.19% for the first six months of 2000. Interest and related income from loans and other investments amounted to $20,817,000 for the three months ended June 30, 2000, an increase of $228,000 over the $20,589,000 amount for the three months ended June 30, 1999. While average interest earning assets decreased from approximately $765.7 million for the three months ended June 30, 1999 to approximately $684.0 million for the three months ended June 30, 2000, the interest rate earned on such assets increased from 10.8% in 1999 to 12.2% in 2000. During the three months ended June 30, 1999, the Company recognized an additional $371,000 on the early repayment of a loan. Without this additional interest income, the earning rate for 1999 would have been 10.6%. The increase in interest rate, from 10.6% to 12.2%, is due primarily to an increase in the average LIBOR rate from 4.96% for the second quarter of 1999 to 6.47% for the second quarter of 2000. During the second quarter of 2000, Fund I commenced operations and as of June 30, 2000, the Company had earned $221,000 on its equity investment in the fund. Interest and related expenses amounted to $19,492,000 for the six months ended June 30, 2000, an increase of $1,750,000 over the $17,742,000 amount for the six months ended June 30, 1999. The increase in expense was due to an increase in the average rate paid on interest bearing liabilities from 7.9% for the six months ended June 30, 1999 to 9.2% for the six months ended June 30, 2000, offset by a decrease in the amount of average interest bearing liabilities outstanding from approximately $450.8 million to approximately $425.6 million for the same periods. The increase in the average rate is consistent with the increase in the average LIBOR rate for the same periods. Interest and related expenses amounted to $9,278,000 for the three months ended June 30, 2000, an increase of $154,000 over the $9,124,000 amount for the three months ended June 30, 1999. The increase in expense was due to an increase in the average rate paid on interest bearing liabilities from 8.0% for the three months ended June 30, 1999 to 9.4% for the three months ended June 30, 2000, offset by a decrease in the amount of average interest bearing liabilities outstanding from approximately $457.0 million to approximately $395.6 million for the same periods. The increase in the average rate is consistent with the increase in the average LIBOR rate for the same periods. 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. - 16 - During the six months ended June 30, 2000 and 1999, the Company recognized $3,682,000 and $3,483,000, respectively, of net expenses related to the Convertible Trust Preferred Securities. This amount consisted of distributions to the holders totaling $6,627,000 and $6,187,000, respectively, and amortization of discount and origination costs totaling $400,000 and $400,000, respectively, during the six ended June 30, 2000 and 1999. This was partially offset by a tax benefit of $3,345,000 and $3,104,000 during the six ended June 30, 2000 and 1999, respectively. During the three months ended June 30, 2000 and 1999, the Company recognized $1,941,000 and $1,742,000, respectively, of net expenses related to the Convertible Trust Preferred Securities. This amount consisted of distributions to the holders totaling $3,534,000 and $3,094,000, respectively, and amortization of discount and origination costs totaling $200,000 and $200,000, respectively, during the three ended June 30, 2000 and 1999. This was partially offset by a tax benefit of $1,793,000 and $1,552,000 during the three ended June 30, 2000 and 1999, respectively. During the six months ended June 30, 2000, other revenues decreased $1,843,000 to $4,211,000 from $6,054,000 in the same period of 1999. This decrease was primarily due to the reduction in advisory and investment banking fees generated by Victor Capital and its related subsidiaries of $1,440,000 and a reduction in other interest income as the Company maintained a lower level of liquidity during the first quarter of 2000. During the three months ended June 30, 2000, other revenues increased $343,000 to $2,684,000 from $2,341,000 in the same period of 1999 primarily due to an increase in advisory and investment banking fees generated by Victor Capital and its related subsidiaries of $328,000. 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 $4,758,000 for the three months ended June 30, 1999 to $7,195,000 for three months ended June 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. This expense, along with a $275,000 write-off of the excess of purchase price for Victor Capital over net tangible assets acquired, net, accounted for the majority of the increase in other expenses for the three months ended June 30, 2000 as compared to the same period in 1999. Other expenses increased from $11,270,000 for the six months ended June 30, 1999 to $12,091,000 for six months ended June 30, 2000. When the special one-time expenses discussed in the previous paragraph are removed from other expenses, recurring other expenses for the six months ended June 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 June 30, 2000, the Company had an average of 25 full time employees as compared to an average of 38 during the period ended June 30, 1999. The Company had 21 full time employees at June 30, 2000. The decrease in the provision for possible credit losses from $2,033,000 for the six months ended June 30, 1998 to $1,842,000 for the six months ended June 30, 1999 and from $954,000 for the three months ended June 30, 1998 to $876,000 for the three months ended June 30, 1999 was due to the decrease in average earning assets as previously described. For the six months ended June 30, 2000 and 1999, the Company accrued income tax expense of $8,604,000 and $9,483,000, respectively, for federal, state and local income taxes. For the three months ended June 30, 2000 and 1999, the Company accrued income tax expense of $4,154,000 and $4,281,000, respectively, for federal, state and local income taxes. The increase (from 47.9% to 52.6% for the six month period and from 47.3% to 57.3% 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 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. In the third quarter of 1999, 5,946,825 shares of Class A Preferred Stock were - 17 - 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 June 30, 2000, the Company had $11,554,000 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 $27,228,000 for the six months ended June 30, 2000, compared to the net decrease of $31,813,000 for the six months ended June 30, 1999. The use of cash in the first six months of 2000 was primarily to reduce liabilities while the use of cash in the same period of 1999 was primarily to the purchase of the BB CMBS Portfolio (net of the proceeds from the term redeemable securities contract). Cash used in operating activities during the six months ended June 30, 2000 was $1,171,000, a reduction of $4,892,000 from cash provided by operating activities of $3,721,000 during the same period of 1999. For the six months ended June 30, 2000, cash provided by investing activities was $89,940,000, an increase of $170,638,000 from $80,698,000 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 $115,997,000 use of cash in financing activities in the first quarter of 2000, a $161,161,000 decrease from the $45,164,000 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 June 30, 2000, the Company has two outstanding notes payable totaling $3,063,000, outstanding borrowings under its credit facilities of $246,738,000, outstanding borrowings on the term redeemable securities contract of $131,391,000 and an outstanding repurchase obligation of $17,176,000. At June 30, 2000, the Company had $401,691,000 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. - 18 - 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 June 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.
Expected Maturity Dates -------------------------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Assets: (dollars in thousands) CMBS Fixed Rate - - $196,874 - - - $196,874 $181,833 Average interest rate - - 11.27% - - - 11.27% Variable Rate - - - $ 36,509 - - $ 36,509 $ 34,050 Average interest rate - - - 13.65% - - 13.65% Certificated Mezzanine Investments Variable Rate - $ 22,986 - - - - $ 22,986 $ 22,986 Average interest rate - 11.14% - - - - 11.14% Loans receivable Fixed Rate - $ 28,000 $ 3,000 - - $ 97,639 $128,639 $122,598 Average interest rate - 12.59% 12.50% - - 11.41% 11.70% Variable Rate $ 87,992 $128,488 $ 54,500 - - $ 26,500 $297,410 $290,223 Average interest rate 14.00% 11.91% 13.45% - - 12.41% 12.86% Liabilities: Credit facilities Variable Rate - - $102,696 $144,041 - - $246,738 $246,738 Average interest rate - - 9.94% 9.15% - - 9.48% Term redeemable securities contract Variable Rate - - $137,812 - - - $137,812 $131,391 Average interest rate - - 9.60% - - - 9.60% Repurchase obligations Variable Rate - $ 17,176 - - - - $ 17,176 $ 17,176 Average interest rate - 8.14% - - - - 8.14% Convertible Trust Preferred Securities Fixed Rate - - - - - $150,000 $150,000 $146,743 Average interest rate - - - - - 10.93% 10.93% Interest rate swaps - $ 28,000 $137,812 $ 19,109 - $ 53,250 $238,171 $ 17,134 Average fixed pay rate - 5.79% 6.05% 6.04% - 6.01% 6.01% Average variable receive rate - 6.64% 6.65% 6.64% - 6.64% 6.65%
- 19 - PART II. OTHER INFORMATION ITEM 1: Legal Proceedings None ITEM 2: Changes in Securities (c) Recent Sales of Unregistered Securities On May 10, 2000, then outstanding Convertible Trust Preferred Securities issued by the Company's consolidated statutory trust, CT Convertible Trust I (the "Trust"), were cancelled and new variable step up convertible trust preferred securities with an aggregate liquidation amount of $150,000,000 were issued to the holders of the canceled securities in exchange therefore, and the Convertible Debentures were canceled and new 8.25% step up convertible junior subordinated debentures in the aggregate principal amount of $92,524,000 and new 13% step up non-convertible junior subordinated debentures in the aggregate principal amount of $62,126,000 were issued to the Trust, as the holder of the canceled bonds, in exchange therefore. The disclosure in Note 8 - Convertible Trust Preferred Securities contained in Item 1 -- Financial Statements of PART I is incorporated herein by reference in its entirety. The securities were issued in reliance upon Section 4(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving any public offering. ITEM 3: Defaults Upon Senior Securities None ITEM 4: Submission of Matters to a Vote of Security Holders (a). The Company held a special meeting of stockholders on June 21, 2000. (b) and (c). Stockholders acted on the following proposal: 1. To approve and ratify the warrant transaction pursuant to which additional warrants may be issued for ultimate ownership by one or more affiliates of Citigroup Investments Inc. The following table sets forth the number of votes in favor, the number of votes opposed the number of abstentions and broker non-votes with respect to the foregoing proposal. Votes in Favor Votes Opposed Abstentions Broker Non-Votes 17,835,646 237,650 17,431 -- ITEM 5: Other Information None - 20 - ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 10.1 Termination Agreement made as of March 8, 2000 between and among Capital Trust, Inc., 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 the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.2 Modification Agreement, dated as of May 10, 2000, by and among Capital Trust, Inc., John R. Klopp and Sheli Z. Rosenberg, as Regular Trustees for CT Convertible Trust I, Vornado Realty L.P., Vornado Realty Trust, EOP Operating Limited Partnership, Equity Office Properties Trust, and State Street Bank and Trust Company, as trustee for General Motors Employees Global Group Pension Trust (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.3 Amended and Restated Indenture, dated as of May 10, 2000, between Capital Trust, Inc. and Wilmington Trust Company (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.4 Amended and Restated Declaration of Trust, dated and effective as of May 10, 2000, by the Trustees (as defined therein), the Sponsor (as defined therein) and by the holders, from time to time, of undivided beneficial interests in the Trust (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.5 Amended and Restated Preferred Securities Guarantee Agreement, dated as of May 10, 2000, by Capital Trust, Inc. and Wilmington Trust Company, as trustee, for the benefit of the Holders (as defined therein) from time to time of the Preferred Securities (as defined therein) of CT Convertible Trust I (filed as Exhibit 10.5 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.6 Guarantee Agreement, dated as of May 10, 2000, executed and delivered by Capital Trust, Inc., for the benefit of the Holders (as defined therein) from time to time of the Common Securities (as defined therein) of CT Convertible Trust I (filed as Exhibit 10.6 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 27.1 Financial Data Schedule (b) Reports on Form 8-K During the fiscal quarter ended June 30, 2000, the Company filed the Following Current Reports on Form 8-K: (1) Current Report on Form 8-K, dated May 10, 2000, as filed with the Commission on May 18, 2000, reporting under Item 5 "Other Events" modification of the terms of the $150 million aggregate liquidation amount 8.25% step-up convertible trust preferred securities. - 21 - 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 August 14, 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 - EX-27 2 0002.txt FDS -- EXH 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CAPITAL TRUST, INC. FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 11,554 245,575 426,049 9,448 0 0 1,027 771 718,232 4,043 398,368 146,743 0 229 165,911 718,232 0 47,942 0 36,768 0 1,842 0 9,332 5,259 4,073 0 0 0 4,073 0.14 0.13
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