-----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, KHJ1uC9VC1wOzmHaMA99psuV5q5vxNnY//EKyW1YfXHpVynRKOZIBDm/lLin4CDo q3/TfWulrs2gvrHlII7lgg== 0001116679-04-001187.txt : 20040512 0001116679-04-001187.hdr.sgml : 20040512 20040512171234 ACCESSION NUMBER: 0001116679-04-001187 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL TRUST INC CENTRAL INDEX KEY: 0001061630 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946181186 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14788 FILM NUMBER: 04800104 BUSINESS ADDRESS: STREET 1: 410 PARK AVENUE STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2126550220 MAIL ADDRESS: STREET 1: PAUL, HASTINGS, JANOFSKY & WALKER LLP STREET 2: 75 E 55TH ST CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 cap10q.txt To be filed with the Securities and Exchange Commission on May 12, 2004 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 March 31, 2004 -------------- 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, as of May 12, 2004 was 7,946,882. CAPITAL TRUST, INC. INDEX
Part I. Financial Information Item 1: Financial Statements 1 Consolidated Balance Sheets - March 31, 2004 (unaudited) and December 31, 2003 (audited) 1 Consolidated Statements of Income - Three Months Ended March 31, 2004 and 2003 (unaudited) 2 Consolidated Statements of Changes in Shareholders' Equity - Three Months Ended March 31, 2004 and 2003 (unaudited) 3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003 (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 Item 4: Disclosure Controls and Procedures 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 23
Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets March 31, 2004 and December 31, 2003 (in thousands)
March 31, December 31, 2004 2003 -------------------- ------------------ Unaudited Audited Assets Cash and cash equivalents $ 23,124 $ 8,738 Available-for-sale securities, at fair value 16,801 20,052 Commercial mortgage-backed securities available-for-sale, at fair value 199,784 158,136 Loans receivable, net of $6,672 reserve for possible credit losses at March 31, 2004 and December 31, 2003 190,806 177,049 Equity investment in CT Mezzanine Partners I LLC ("Fund I"), CT Mezzanine Partners II LP ("Fund II"), CT MP II LLC ("Fund II GP") and CT Mezzanine Partners III, Inc. ("Fund III") (together "Funds") 21,967 21,988 Deposits and other receivables 5 345 Accrued interest receivable 3,425 3,834 Interest rate hedge assets -- 168 Deferred income taxes 4,181 3,369 Prepaid and other assets 5,710 6,247 -------------------- ------------------ Total assets $ 465,803 $ 399,926 ==================== ================== Liabilities and Shareholders' Equity Liabilities: Accounts payable and accrued expenses $ 8,637 $ 11,041 Credit facilities 64,700 38,868 Term redeemable securities contract -- 11,651 Repurchase obligations 194,333 146,894 Step up convertible junior subordinated debentures 92,367 92,248 Deferred origination fees and other revenue 2,832 3,207 Interest rate hedge liabilities 3,297 -- -------------------- ------------------ Total liabilities 366,166 303,909 -------------------- ------------------ Shareholders' equity: Class A common stock, $0.01 par value, 100,000 shares authorized, 6,572 and 6,502 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively ("class A common stock") 66 65 Restricted class A common stock, $0.01 par value, 64 and 34 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively ("restricted class A common stock" and together with class A common stock, "common stock") 1 -- Additional paid-in capital 143,359 141,402 Unearned compensation (1,371) (247) Accumulated other comprehensive loss (31,190) (33,880) Accumulated deficit (11,228) (11,323) -------------------- ------------------ Total shareholders' equity 99,637 96,017 -------------------- ------------------ Total liabilities and shareholders' equity $ 465,803 $ 399,926 ==================== ==================
See accompanying notes to unaudited consolidated financial statements. -1- Capital Trust, Inc. and Subsidiaries Consolidated Statements of Income Three Months Ended March 31, 2004 and 2003 (in thousands, except per share data) (unaudited)
2004 2003 ------------------ ------------------- Income from loans and other investments: Interest and related income $ 9,018 $ 9,029 Less: Interest and related expenses on secured debt 2,636 2,295 Less: Interest and related expenses on step up convertible junior subordinated debentures 2,433 2,433 ------------------ ------------------- Income from loans and other investments, net 3,949 4,301 ------------------ ------------------- Other revenues: Management and advisory fees from Funds 2,084 1,376 Income/(loss) from equity investments in Funds 394 785 Other interest income 8 19 ------------------ ------------------- Total other revenues 2,486 2,180 ------------------ ------------------- Other expenses: General and administrative 2,938 3,704 Depreciation and amortization 274 232 Provision for/(recapture of) allowance for possible credit losses -- -- ------------------ ------------------- Total other expenses 3,212 3,936 ------------------ ------------------- Income before income 3,223 2,545 Provision for income taxes 141 -- ------------------ ------------------- Net income allocable to common stock $ 3,082 $ 2,545 ================== =================== Per share information: Net earnings per share of common stock Basic $ 0.47 $ 0.46 ================== =================== Diluted $ 0.46 $ 0.46 ================== =================== Weighted average shares of common stock outstanding Basic 6,583,412 5,515,484 ================== =================== Diluted 6,730,074 5,539,446 ================== =================== Dividends declared per share of common stock $ 0.45 $ 0.45 ================== ===================
See accompanying notes to unaudited consolidated financial statements. -2- Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the Three Months Ended March 31, 2004 and 2003 (in thousands) (unaudited)
Restricted Accumulated Class A Class A Additional Other Comprehensive Common Common Paid-In Unearned Comprehensive Income/(Loss) Stock Stock Capital Compensation Income/(Loss) ---------------- --------------------------------------------------------------- Balance at January 1, 2003 $ 162 $ 3 $ 126,809 $ (320) $ (28,988) Net income $ 2,545 -- -- -- -- -- Unrealized loss on derivative financial instruments (436) -- -- -- -- (436) Unrealized loss on available-for-sale securities (342) -- -- -- -- (342) Sale of shares of class A common stock under stock option agreement -- -- -- 4 -- -- Cancellation of restricted class A common stock -- -- -- (192) 192 -- Vesting of restricted class A common stock to unrestricted class A common stock -- 2 (2) -- -- -- Restricted class A common stock earned -- -- -- -- 66 -- Repurchase of warrants to purchase shares of class A common stock -- -- -- (2,132) -- -- Repurchase and retirement of shares of class A common stock previously outstanding -- (2) -- (944) -- -- Dividends declared on class A common stock -- -- -- -- -- -- Shares redeemed in one for three reverse stock split -- (108) (1) 109 -- -- ---------------- --------------------------------------------------------------- Balance at March 31, 2003 $ 1,767 $ 54 $ -- $ 123,654 $ (62) $ (29,766) ================ =============================================================== Balance at January 1, 2004 $ 65 $ -- $ 141,402 $ (247) $ (33,880) Net income $ 3,082 -- -- -- -- -- Unrealized loss on derivative financial instruments (3,465) -- -- -- -- (3,465) Unrealized gain on available-for-sale securities 6,155 -- -- -- -- 6,155 Issuance of restricted class A common stock -- -- 1 1,199 (1,200) -- Sale of shares of class A common stock under stock option agreement -- 1 -- 673 -- -- Vesting of restricted class A common stock to unrestricted class A common stock -- -- -- -- -- -- Restricted class A common stock earned -- -- -- -- 161 -- Revaluation of restricted class A common stock -- -- -- 85 (85) -- Dividends declared on class A common stock -- -- -- -- -- -- ---------------- --------------------------------------------------------------- Balance at March 31, 2004 $ 5,772 $ 66 $ 1 $ 143,359 $ (1,371) $ (31,190) ================ =============================================================== Accumulated Deficit Total ------------------------------ Balance at January 1, 2003 $ (13,610) $ 84,056 Net income 2,545 2,545 Unrealized loss on derivative financial instruments -- (436) Unrealized loss on available-for-sale securities -- (342) Sale of shares of class A common stock under stock option agreement -- 4 Cancellation of restricted class A common stock -- -- Vesting of restricted class A common stock to unrestricted class A common stock -- -- Restricted class A common stock earned -- 66 Repurchase of warrants to purchase shares of class A common stock -- (2,132) Repurchase and retirement of shares of class A common stock previously outstanding -- (946) Dividends declared on class A common stock (2,442) (2,442) Shares redeemed in one for three reverse stock split -- -- ------------------------------ Balance at March 31, 2003 $ (13,507) $ 80,373 ============================== Balance at January 1, 2004 $ (11,323) $ 96,017 Net income 3,082 3,082 Unrealized loss on derivative financial instruments -- (3,465) Unrealized gain on available-for-sale securities -- 6,155 Issuance of restricted class A common stock -- -- Sale of shares of class A common stock under stock option agreement -- 674 Vesting of restricted class A common stock to unrestricted class A common stock -- -- Restricted class A common stock earned -- 161 Revaluation of restricted class A common stock -- -- Dividends declared on class A common stock (2,987) (2,987) ------------------------------ Balance at March 31, 2004 $ (11,228) $ 99,637 ==============================
See accompanying notes to unaudited consolidated financial statements. -3- Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows Three months ended March 31, 2004 and 2003 (in thousands) (unaudited)
2004 2003 ---------------- ----------------- Cash flows from operating activities: Net income $ 3,082 $ 2,545 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income taxes (812) (170) Depreciation and amortization 274 232 Loss/(income) from equity investments in Funds (394) (785) Restricted class A common stock earned 161 66 Amortization of premiums and accretion of discounts on loans and investments, net (380) (136) Accretion of discounts and fees on convertible trust preferred securities or convertible step up junior subordinated debentures, net 119 119 Changes in assets and liabilities, net: Deposits and other receivables 340 407 Accrued interest receivable 410 4,235 Prepaid and other assets 528 236 Deferred origination fees and other revenue (375) (147) Accounts payable and accrued expenses (2,451) (4,753) ---------------- ----------------- Net cash provided by operating activities 502 1,849 ---------------- ----------------- Cash flows from investing activities: Purchases of commercial mortgage-backed securities (35,037) -- Principal collections on available-for-sale securities 3,157 18,046 Origination and purchase of loans receivable (32,500) -- Principal collections and proceeds from sale of loans receivable 18,761 28,902 Equity investments in Funds (1,200) (6,216) Return of capital from Funds 1,366 609 Purchase of remaining interest in Fund I -- (19,946) Purchases of equipment and leasehold improvements (16) (2) ---------------- ----------------- Net cash provided by (used in) investing activities (45,469) 21,393 ---------------- ----------------- Cash flows from financing activities: Proceeds from repurchase obligations 54,596 134 Repayment of repurchase obligations (7,157) (19,695) Proceeds from credit facilities 39,500 21,000 Repayment of credit facilities (13,668) (40,617) Proceeds from term redeemable securities contract -- 20,000 Repayment of term redeemable securities contract (11,651) -- Dividends paid on class A common stock (2,941) -- Sale of shares of class A common stock under stock option agreement 674 4 Repurchase and retirement of shares of class A common stock previously outstanding -- (946) Repurchase of warrants to purchase shares of class A common stock -- (2,132) ---------------- ----------------- Net cash provided by (used in) financing activities 59,353 (22,252) ---------------- ----------------- Net increase (decrease) in cash and cash equivalents 14,386 990 Cash and cash equivalents at beginning of year 8,738 10,186 ---------------- ----------------- Cash and cash equivalents at end of period $ 23,124 $ 11,176 ================ =================
See accompanying notes to unaudited consolidated financial statements. -4- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 1. Presentation of Financial Information References herein to "we," "us" or "our" refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise. We are a finance and investment management company that specializes in originating and managing credit sensitive structured financial products. We make, for our own account and as investment manager for the account of funds under management, loans and debt-related investments in various types of commercial real estate assets and operating companies. The 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. In our opinion, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2004, are not necessarily indicative of results that may be expected for the entire year ending December 31, 2004. The accompanying unaudited consolidated interim financial statements include our accounts and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Our accounting and reporting policies 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. Application of New Accounting Standard In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin 51. Interpretation No. 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights, and how to determine when and which business enterprise should consolidate a variable interest entity. In addition, Interpretation No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a variable interest entity make additional disclosures. The transitional disclosure requirements took effect almost immediately and are required for all financial statements initially issued after January 31, 2003. In December 2003, the Financial Accounting Standards Board issued a revision of Interpretation No. 46, Interpretation No. 46R, to clarify the provisions of Interpretation No. 46. The application of Interpretation No. 46R is effective for public companies, other than small business issuers, after March 15, 2004. We have evaluated all of our investments and other interests in entities that may be deemed variable interest entities under the provisions of Interpretation No. 46 and have concluded that no additional entities need to be consolidated. In evaluating Interpretation No. 46R, we concluded that we could no longer consolidate CT Convertible Trust I, the entity which had purchased our step up convertible junior subordinated debentures and issued company-obligated, mandatory redeemable, convertible trust common and preferred securities. Capital Trust, Inc. had issued the convertible junior subordinated debentures and had purchased the convertible trust common securities. The consolidation of CT Convertible Trust I resulted in the elimination of both the convertible junior subordinated debentures and the convertible trust common securities with the convertible trust preferred securities being reported on our balance sheet after liabilities but before equity and the related expense being reported on the income statement below income taxes and net of income tax benefits. After the deconsolidation, we report the convertible junior subordinated debentures as liabilities and the convertible trust common securities as other assets. The expense from the payment of interest on the debentures is reported as interest and related expenses on convertible junior subordinated debentures and the income received from our investment in the common securities is reported as a component of interest and related income. We have elected to restate prior periods for the application of Interpretation 46R. The restatement was effected by a cumulative type change in accounting principle on January 1, 2002. There was no change to previously reported net income as a result of such restatement. -5- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 3. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 4. Available-for-Sale Securities At March 31, 2004, our available-for-sale securities consisted of the following (in thousands):
Gross Unrealized Amortized --------------------- Estimated Cost Gains Losses Fair Value ----------------------------------------------- Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 $ 2,229 $ 92 $ -- $ 2,321 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 6,533 218 -- 6,751 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 451 18 -- 469 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due April 1, 2032 6,903 357 -- 7,260 ----------------------------------------------- $ 16,116 $ 685 $ -- $ 16,801 ===============================================
5. Commercial Mortgage-Backed Securities During the quarter ended March 31, 2004, we purchased three investments in two issues of commercial mortgage-backed securities. The securities had a face value of $$36,367,000 and were purchased at a discount for $35,037,000. At March 31, 2004, we held twenty-one investments in fourteen separate issues of commercial mortgage-backed securities with an aggregate face value of $251,880,000 at March 31, 2004. $41,367,000 face value of the commercial mortgage-backed securities earn interest at a variable rate which averages the London Interbank Offered Rate, or LIBOR, plus 3.17% (4.26% at March 31, 2004). The remaining commercial mortgage-backed securities, $210,512,000 face value, earn interest at fixed rates averaging 7.70% of the face value. We purchased the commercial mortgage-backed securities at discounts. As of March 31, 2004, the remaining discount to be amortized into income over the remaining lives of the securities was $23,517,000. At March 31, 2004, with discount amortization, the commercial mortgage-backed securities earn interest at a blended rate of 8.51% of the face value less the unamortized discount. As of March 31, 2004, the securities were carried at market value of $199,784,000, reflecting a $28,578,000 unrealized loss to their amortized cost. -6- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 6. Loans Receivable At March 31, 2004 and December 31, 2003, the our loans receivable consisted of the following (in thousands):
March 31, December 31, 2004 2003 ------------------- ------------------- First mortgage loans $ 11,990 $ 12,672 Property mezzanine loans 116,838 106,449 B Notes 68,650 64,600 ------------------- ------------------- 197,478 183,721 Less: reserve for possible credit losses (6,672) (6,672) ------------------- ------------------- Total loans $ 190,806 $ 177,049 =================== ===================
One first mortgage loan with an original principal balance of $8,000,000 reached maturity on July 15, 2001 and has not been repaid with respect to principal and interest. In December 2002, the loan was written down to $4,000,000 through a charge to the allowance for possible credit losses. Since the December 2002 write-down, we received proceeds of $962,000 reducing the carrying value of the loan to $3,038,000. In accordance with our policy for revenue recognition, income recognition has been suspended on this loan and for the three months ended March 31, 2004 and $225,000 of potential interest income has not been recorded. All remaining loans are performing in accordance with the terms of the loan agreements. During the three months ended March 31, 2004, we purchased or originated one property mezzanine loan for $23,500,000 and one B Note for $9,000,000, received partial repayments on nine mortgage and property mezzanine loans totaling $1,908,000 and one property mezzanine loan and one B Note totaling $16,853,000 were satisfied and repaid. We have no outstanding loan commitments at March 31, 2004. At March 31, 2004, the weighted average interest rate in effect, including amortization of fees and premiums, for our performing loans receivable were as follows: First mortgage loan 10.51% Property mezzanine loans 9.11% B Notes 6.60% Total Loans 8.28% At March 31, 2004, $145,527,000 (75%) of the aforementioned performing loans bear interest at floating rates ranging from LIBOR plus 235 basis points to LIBOR plus 900 basis points. The remaining $48,913,000 (25%) of loans bear interest at a fixed rate of 11.67%. 7. Long-Term Debt Credit Facility At March 31, 2004, we have borrowed $64,700,000 under a $150 million credit facility at an average borrowing rate (including amortization of fees incurred and capitalized) of 3.96%. We pledged assets of $115,974,000 as collateral for the borrowing against such credit facility. On March 31, 2004, the unused amount of potential credit under the remaining credit facility was $85,300,000. Repurchase Obligations At March 31, 2004, we were obligated to five counterparties under repurchase agreements. The repurchase obligation with the first counterparty, an affiliate of a securities dealer, was utilized to finance commercial mortgage-backed securities. At March 31, 2004, we have sold commercial mortgage-backed securities with a book and market value of $189,154,000 and have a liability to repurchase these assets for $118,709,000 that is non-recourse to us. This repurchase obligation had an original one-year term that expired in February 2003 and -7- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) was extended twice to February 2005. The liability balance bears interest at specified rates over LIBOR based upon each asset included in the obligation. The repurchase obligation with the second counterparty, a securities dealer, arose in connection with the purchase of Federal Home Loan Mortgage Corporation Gold available-for-sale securities. At March 31, 2004, we have sold such assets with a book and market value of $16,801,000 and have a liability to repurchase these assets for $16,354,000. This repurchase agreement comes due monthly and has a current maturity date in June 2004. The liability balance bears interest at LIBOR. The repurchase obligation with the third counterparty, a securities dealer, was entered into on May 28, 2003 pursuant to the terms of a master repurchase agreement and provides us with the right to finance up to $50,000,000, which was upsized to $100,000,000 in August 2003, by selling specific assets to the counterparty. Through March 31, 2004, the master repurchase agreement has been utilized in connection with the purchase of five loans. At March 31, 2004, we have sold loans with a book and market value of $53,141,000 and have a liability to repurchase these assets for $33,944,000. The master repurchase agreement terminates on June 1, 2004, with an automatic nine-month amortizing extension option, if not otherwise extended, and bears interest at specified rates over LIBOR based upon each asset included in the obligation. The repurchase obligations with the fourth counterparty, a securities dealer, were entered into during 2003 in connection with the purchase of commercial mortgage-backed securities. At March 31, 2004, we have sold commercial mortgage-backed securities with a book and market value of $5,000,000 and have a liability to repurchase these assets for $4,250,000. The repurchase agreements are matched to the term of the commercial mortgage-backed securities, which have an extended maturity in August 2007, and bear interest at specified rates over LIBOR based upon each asset included in the obligation. The repurchase obligation with the fifth counterparty, a securities dealer, was entered into in connection with the purchase of two loans. At March 31, 2004, we have sold loans with a book and market value of $25,326,000 and have a liability to repurchase these assets for $21,076,000. This repurchase agreement comes due monthly and has a current maturity date in May 2004. The average borrowing rate in effect for all the repurchase obligations outstanding at March 31, 2004 was LIBOR plus 0.95% (2.04% at March 31, 2004). Assuming no additional utilization under the repurchase obligations and including the amortization of fees paid and capitalized over the term of the repurchase obligations, the all-in effective borrowing cost was 2.44% at March 31, 2004. Term Redeemable Securities Contract At December 31, 2003, we had borrowed $11,651,000 under a $75 million term redeemable securities contract. This term redeemable securities contract expired on February 28, 2004 and was repaid by refinancing the previously financed assets under the credit facility. 8. Derivative Financial Instruments The following table summarizes the notional value and fair value of our derivative financial instruments at March 31, 2004. The notional value provides an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or foreign exchange market risks.
Interest Hedge Type Notional Value Rate Maturity Fair Value - ----------- -------------------- ----------------- ---------------- ------------ --------------- Swap Cash Flow Hedge $85,000,000 4.2425% 2015 $ (2,584,000) Swap Cash Flow Hedge 24,000,000 4.2325% 2015 (713,000)
On March 31, 2004, the derivative financial instruments were reported at their fair value as interest rate hedge liabilities of $3,297,000. -8- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 9. Earnings Per Share The following table sets forth the calculation of Basic and Diluted EPS:
Three Months Ended March 31, 2004 Three Months Ended March 31, 2003 ----------------------------------------------------------------------------------------- Per Share Per Share Net Income Shares Amount Net Loss Shares Amount ---------------- ------------- -------------- ------------- ----------------- ----------- Basic EPS: Net earnings per share of Common Stock $ 3,082,000 6,583,412 $ 0.47 $ 2,545,000 5,515,484 $ 0.46 ============== =========== Effect of Dilutive Securities Options outstanding for the purchase of common stock -- 120,560 -- 23,962 Stock units outstanding convertible to shares of common stock -- 26,102 -- -- ---------------- ---------- -------------- ----------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $ 3,082,000 6,730,074 $ 0.46 $ 2,545,000 5,539,446 $ 0.46 ================ ============= ============== ============= ================= ===========
10. Income Taxes We intend to make an election to be taxed as a Real Estate Investment Trust, or REIT, under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax year ending December 31, 2003. As a REIT, we generally are not subject to federal income tax. To maintain qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates. We may also be subject to certain state and local taxes on our income and property. Under certain circumstances, federal income and excise taxes may be due on our undistributed taxable income. At March 31, 2004, we were in compliance with all REIT requirements. During the three months ended March 31, 2004, we recorded $141,000 of income tax expense for income that was attributable to taxable REIT subsidiaries. Our effective tax rate for the year ended December 31, 2003 attributable to our taxable REIT subsidiaries was 48.1%. The difference between the U.S. federal statutory tax rate of 35% and the effective tax rate was primarily state and local taxes, net of federal tax benefit. 11. Commitments and Contingencies John R. Klopp serves as our chief executive officer and president pursuant to an employment agreement entered into on July 15, 1997, which will terminate effective July 15, 2004, the effective date of his new employment agreement that was entered into as of February 24, 2004. The new employment agreement provides for Mr. Klopp's employment through December 31, 2008 (subject to earlier termination under certain circumstances). Under the new employment agreement, Mr. Klopp will receive a base salary and is eligible to receive annual performance compensation awards of cash and restricted shares of common stock. In addition, as of the effective date of the new agreement, Mr. Klopp will receive an initial award of 218,818 restricted shares of common stock which vest over the term of the contract and a performance compensation award tied to the amount of cash we receive, if any, as incentive management fees from CT Mezzanine Partners III, Inc. The agreement provides for severance payments under certain circumstances and contains provisions relating to non-competition during the term of employment, protection of our confidential information and intellectual property, and non-solicitation of our employees, which provisions extend for 24 months following termination in certain circumstances. -9- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 12. Dividends In order to maintain its election to qualify as a REIT, we must currently distribute, at a minimum, an amount equal to 90% of its REIT taxable income and must distribute 100% of its REIT taxable income to avoid paying corporate federal income taxes. We expect to distribute all of our REIT taxable income to our shareholders. Because REIT taxable income differs from cash flow from operations due to non-cash revenues or expenses, in certain circumstances, we may be required to borrow to make sufficient dividend payments to meet this anticipated dividend threshold. On March 19, 2004, we declared a dividend of approximately $2,986,000, or $0.45 per share of common stock applicable to the three-month period ended March 31, 2004, payable on April 15, 2004 to shareholders of record on March 31, 2004. 13. Employee Benefit Plans 1997 Long-Term Incentive Stock Plan During the three months ended March 31, 2004, we did not issue any options to acquire shares of class A common stock. In the first quarter of 2004 we issued 17,500 shares of restricted stock. The shares of restricted stock issued in 2004 are split into two grants. One-half of the shares issued in 2004 vest one-third on each of the following dates: February 1, 2005, February 1, 2006 and February 1, 2007. The remaining one-half are performance based and vest on February 1, 2008 if the total return to shareholders exceeds 13% during the period from January 1, 2004 to December 31, 2007. The following table summarizes the option activity under the incentive stock plan for the quarter ended March 31, 2004:
Weighted Average Options Exercise Price Exercise Price Outstanding per Share per Share ------------------- ------------------------- ------------------ Outstanding at January 1, 2004 517,468 $12.375 - $30.00 $ 19.09 Granted in 2004 -- -- -- Exercised in 2004 (47,522) $12.375 - $18.00 14.16 Canceled in 2004 (1,668) $15.00 - $15.90 15.30 ------------------- ------------------- Outstanding at March 31, 2004 468,278 $12.375 - $30.00 $ 19.60 =================== ==================
At March 31, 2004, 430,884 of the options are exercisable. At March 31, 2004, the outstanding options have various remaining contractual exercise periods ranging from 1.75 to 7.85 years with a weighted average life of 5.24 years. 14. Supplemental Disclosures for Consolidated Statements of Cash Flows Interest paid on our outstanding debt and convertible junior subordinated debentures during the three months ended March 31, 2004 and 2003 was $4,812,000 and $4,716,000, respectively. We paid income taxes during the three months ended March 31, 2004 and 2003 of $113,000 and $1,193,000, respectively. -10- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 15. Segment Reporting We have established two reportable segments beginning January 1, 2003. We have an internal information system that produces performance and asset data for our two segments along service lines. The Balance Sheet Investment segment includes all of our activities related to direct loan and investment activities (including direct investments in Funds) and the financing thereof. The Investment Management segment includes all of our activities related to investment management services provided us and third-party funds under management and includes our taxable REIT subsidiary, CT Investment Management Co., LLC and its subsidiaries. The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the three months ended and as of March 31, 2004, respectively (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ----------------- -------------------- ------------------- Income from loans and other investments: Interest and related income $ 9,018 $ -- $ -- $ 9,018 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 2,636 -- -- 2,636 Less: Interest and related expenses on convertible junior subordinated debentures 2,433 -- -- 2,433 ------------------- ----------------- -------------------- ------------------- Income from loans and other investments, net 3,949 -- -- 3,949 ------------------- ----------------- -------------------- ------------------- Other revenues: Management and advisory fees -- 2,779 (695) 2,084 Income/(loss) from equity investments in Funds 487 (93) -- 394 Other interest income 4 109 (105) 8 ------------------- ----------------- -------------------- ------------------- Total other revenues 491 2,795 (800) 2,486 ------------------- ----------------- -------------------- ------------------- Other expenses: General and administrative 1,194 2,439 (695) 2,938 Other interest expense 105 -- (105) -- Depreciation and amortization 211 63 -- 274 ------------------- ----------------- -------------------- ------------------- Total other expenses 1,510 2,502 (800) 3,212 ------------------- ----------------- -------------------- ------------------- Income before income taxes 2,930 293 -- 3,223 Provision for income taxes -- 141 -- 141 ------------------- ----------------- -------------------- ------------------- Net income allocable to class A common stock $ 2,930 $ 152 $ -- $ 3,082 =================== ================= ==================== =================== Total Assets $ 452,682 $ 19,370 $ (6,249) $ 465,803 =================== ================= ==================== ===================
All revenues were generated from external sources within the United States. The Balance Sheet Investment segment paid the Investment Management segment fees of $695,000 for management of the segment and $105,000 for inter-segment interest, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the table above. -11- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table details each segment's contribution to our overall profitability attributable to each such segment for the three months ended March 31, 2003 (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ----------------- -------------------- ------------------- Income from loans and other investments: Interest and related income $ 9,029 $ -- $ -- $ 9,029 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 2,295 -- -- 2,295 Less: Interest and related expenses on convertible junior subordinated debentures 2,433 -- -- 2,433 ------------------- ----------------- -------------------- ------------------- Income from loans and other investments, net 4,301 -- -- 4,301 ------------------- ----------------- -------------------- ------------------- Other revenues: Management and advisory fees -- 2,535 (1,159) 1,376 Income/(loss) from equity investments in Funds 731 54 -- 785 Other interest income 11 8 -- 19 ------------------- ----------------- -------------------- ------------------- Total other revenues 742 2,597 (1,159) 2,180 ------------------- ----------------- -------------------- ------------------- Other expenses: General and administrative 1,941 2,922 (1,159) 3,704 Depreciation and amortization 199 33 -- 232 ------------------- ----------------- -------------------- ------------------- Total other expenses 2,140 2,955 (1,159) 3,936 ------------------- ----------------- -------------------- ------------------- Income before income taxes 2,903 (358) -- 2,545 Provision for income taxes -- -- -- -- ------------------- ----------------- -------------------- ------------------- Net income allocable to class A common stock $ 2,903 $ (358) $ -- $ 2,545 =================== ================= ==================== ===================
All revenues were generated from external sources within the United States. The Balance Sheet segment paid the Investment Management segment fees of $1,159,000 for management of the segment, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the table above. 16. Subsequent Event On May 11, 2004, we announced that we had completed a direct public offering of our common stock and stock purchase warrants to designated controlled affiliates of W. R. Berkley Corporation. Pursuant to a securities purchase agreement, affiliates of W. R. Berkley Corporation bought 1,310,000 shares of our common stock and warrants to purchase an additional 365,000 shares for a total purchase price of $30,654,000. The warrants have an exercise price of $23.40 per share, expire on December 31, 2004 and are not exercisable unless shareholders approve the issuance of the underlying shares at our 2004 annual meeting of shareholders on June 17, 2004. Subject to shareholder approval at the annual meeting and certain other closing conditions, W. R. Berkley Corporation will purchase an additional 325,000 shares of common stock for $23.40 per share ($7,605,000 in total) at a second closing scheduled for June 18, 2004. -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 our future financial position and results of operations. Introduction We are a fully integrated, self-managed finance and investment management company that specializes in credit-sensitive structured financial products. To date, our investment programs have focused on loans and securities backed by income-producing commercial real estate assets. Since we commenced our finance business in 1997, we have completed $3.6 billion of real estate-related investments in 121 separate transactions. We intend to make an election to be taxed as a REIT for the 2003 tax year. Currently, we make balance sheet investments for our own account and manage a series of private equity funds on behalf of institutional and individual investors. Our investment management business commenced in March 2000. Pursuant to a venture agreement, we have co-sponsored three funds with Citigroup Alternative Investments LLC: CT Mezzanine Partners I LLC, CT Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., which we refer to as Fund I, Fund II and Fund III, respectively. Balance Sheet Overview At March 31, 2004, we had four investments in Federal Home Loan Mortgage Corporation Gold securities with a face value of $15,989,000. The securities bear interest at a fixed rate of 6.5% of the face value. We purchased the securities at a net premium and have $127,000 of the premium remaining to be amortized over the remaining lives of the securities. After premium amortization, the securities bore interest at a blended rate of 6.09% as of March 31, 2004. As of March 31, 2004, the securities were carried at a market value of $16,801,000, a $685,000 unrealized gain to their amortized cost. We held twenty-one investments in fourteen separate issues of commercial mortgage-backed securities with an aggregate face value of $251,880,000 at March 31, 2004. $41,367,000 face value of the commercial mortgage-backed securities earn interest at a variable rate which averages the London Interbank Offered Rate, or LIBOR, plus 3.17% (4.26% at March 31, 2004). The remaining commercial mortgage-backed securities, $210,512,000 in face value, earn interest at fixed rates averaging 7.70% of the face value. We purchased the commercial mortgage-backed securities at discounts and, as of March 31, 2004, the remaining discount to be amortized into income over the remaining lives of the securities was $23,517,000. At March 31, 2004, with discount amortization, the commercial mortgage-backed securities earn interest at a blended rate of 8.51% of the face value less the unamortized discount. As of March 31, 2004, the securities were carried at market value of $199,784,000, reflecting a $28,578,000 unrealized loss to their amortized cost. During the three months ended March 31, 2004, we purchased or originated one property mezzanine loan for $23,500,000 and one B Note for $9,000,000, received partial repayments on nine mortgage and property mezzanine loans totaling $1,908,000 and one property mezzanine loan and one B Note satisfaction totaling $16,853,000 were satisfied and repaid. At March 31, 2004, we had outstanding loans receivable totaling approximately $197.5 million. At March 31, 2004, we had fourteen performing loans receivable with a current carrying value of $194,440,000. One of the loans for $48,913,000 bears interest at a fixed rate of interest of 11.99%. The thirteen remaining loans, totaling $145,527,000, bear interest at a variable rate of interest averaging LIBOR plus 5.72% (7.04% at March 31, 2004 including LIBOR floors). One mortgage loan receivable with an original principal balance of $8,000,000 reached maturity on July 15, 2001 and has not been repaid with respect to principal and interest. In December 2002, the loan was written down to $4,000,000 through a charge to the allowance for possible credit losses. Since the write-down, we have received proceeds of $962,000 reducing the carrying value of the loan to $3,038,000. In accordance with our policy for revenue recognition, income recognition has been suspended on this loan and for the three months ended March 31, 2004, $225,000 of potential interest income has not been recorded. All other loans are performing in accordance with their terms. -13- At March 31, 2004, we had investments in funds of $21,967,000, including $6,322,000 of unamortized costs that were capitalized in connection with entering into our venture agreement with Citigroup Alternative Investments LLC and the related fund business. These costs are being amortized over the lives of the funds and the venture agreement and are reflected as a reduction in income/(loss) from equity investments in funds. We utilize borrowings under a committed credit facility, along with repurchase obligations, to finance our balance sheet assets. At March 31, 2004, we had outstanding borrowings under our credit facility of $64,700,000, and had unused potential credit of $85,300,000, an amount of available credit that we believe provides us with adequate liquidity for our short-term needs over the next 12-month period. The credit facility provides for advances to fund lender-approved loans and investments made by us. Borrowings under the credit facility are secured by pledges of assets owned by us. Borrowings under the credit facility bear interest at specified spreads over LIBOR, which spreads vary based upon the perceived risk of the pledged assets. The credit facility provides for margin calls on asset-specific borrowings in the event of asset quality and/or market value deterioration as determined under the credit facility. The credit facility contains customary representations and warranties, covenants and conditions and events of default. Based upon borrowings in place at March 31, 2004, the effective rate on the credit facility was LIBOR plus 1.55% (2.64% at March 31, 2004). As of March 31, 2004, we had capitalized costs of $1,115,000 that are being amortized over the remaining life of the facility (15.5 months at March 31, 2004). After amortizing these costs to interest expense, the all-in effective borrowing cost on the facility as of March 31, 2004 was 3.96% based upon the amount currently outstanding on the credit facility. At December 31, 2003, we had borrowed $11,651,000 under a $75 million term redeemable securities contract. This term redeemable securities contract expired on February 28, 2004 and was repaid by refinancing the previously financed assets under the credit facility. In the first quarter of 2004, we entered another repurchase obligation with an existing provider in connection with the purchase of a loan. This repurchase agreement comes due monthly and has a current maturity date in May 2004. At March 31, 2004, we had total outstanding repurchase obligations of $194,333,000. Based upon advances in place at March 31, 2004, the blended rate on the repurchase obligations is LIBOR plus 0.95% (2.04% at March 31, 2004). We had capitalized costs of $127,000 as of March 31, 2004, which are being amortized over the remaining lives of the repurchase obligations. After amortizing these costs to interest expense based upon the amount currently outstanding on the repurchase obligations, the all-in effective borrowing cost on the repurchase obligations as of March 31, 2004 was 2.44%. We expect to enter into new repurchase obligations at their maturity or settle the repurchase obligations with the proceeds from the repayment of the underlying financed asset. We were party to two cash flow interest rate swaps with a total notional value of $109 million as of March 31, 2004. These cash flow interest rate swaps effectively convert floating rate debt to fixed rate debt, which is utilized to finance assets that earn interest at fixed rates. We received a rate equal to LIBOR (1.10% at March 31, 2004) and pay an average rate of 4.24%. The market value of the swaps at March 31, 2004 was a liability of $3,297,000, which is recorded as interest rate hedge liabilities and as accumulated other comprehensive loss on our balance sheet. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin 51. Interpretation No. 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights, and how to determine when and which business enterprise should consolidate a variable interest entity. In addition, Interpretation No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a variable interest entity make additional disclosures. The transitional disclosure requirements took effect almost immediately and are required for all financial statements initially issued after January 31, 2003. In December 2003, the Financial Accounting Standards Board issued a revision of Interpretation No. 46, Interpretation No. 46R, to clarify the provisions of Interpretation No. 46. The application of Interpretation No. 46R is effective for public companies, other than small business issuers, after March 15, 2004. We have evaluated all of our investments and other interests in entities that may be deemed variable interest entities under the provisions of Interpretation No. 46 and have concluded that no additional entities need to be consolidated. In evaluating Interpretation No. 46R, we concluded that we could no longer consolidate CT Convertible Trust I, the entity which had purchased our step up convertible junior subordinated debentures and issued company-obligated, mandatory redeemable, convertible trust common and preferred securities. We had issued the convertible junior -14- subordinated debentures and had purchased the convertible trust common securities. The consolidation of CT Convertible Trust I resulted in the elimination of both the convertible junior subordinated debentures and the convertible trust common securities with the convertible trust preferred securities being reported on our balance sheet after liabilities but before equity and the related expense being reported on the income statement below income taxes and net of income tax benefits. After the deconsolidation, we report the convertible junior subordinated debentures as liabilities and the convertible trust common securities as other assets. The expense from the payment of interest on the debentures is reported as interest and related expenses on convertible junior subordinated debentures and the income received from our investment in the common securities is reported as a component of interest and related income. We have elected to restate prior periods for the application of Interpretation 46R. The restatement was effected by a cumulative type change in accounting principle on January 1, 2002. There was no change to previously reported net income as a result of such restatement. We currently have $92,524,000 aggregate principal amount of our outstanding convertible junior subordinated debentures. The convertible junior subordinated debentures are convertible into shares of class A common stock, in increments of $1,000 in liquidation amount, at a conversion price of $21.00 per share and are redeemable by us, in whole or in part, on or after September 30, 2004. Distributions on the outstanding convertible junior subordinated debentures are payable quarterly in arrears on each calendar quarter-end. The convertible junior subordinated debentures bear interest at 10% through September 30, 2004. The interest rate increases by 0.75% on October 1, 2004 and on each October 1 thereafter. If the quarterly dividend paid on a share of our class A common stock multiplied by four and divided by $21.00 is in excess of the interest rate in effect at that time, then the holders are entitled to be paid additional interest at that rate. In 2000, we announced an open market share repurchase program under which we may purchase, from time to time, up to 666,667 shares of our class A common stock. Since that time the authorization has been increased by the board of directors to purchase cumulatively up to 2,366,923 shares of class A common stock. In March 31, 2004 we had 666,339 shares remaining authorized for repurchase under the program. At March 31, 2004, we had 6,636,382 shares of our class A common stock outstanding. Investment Management Overview We operated principally as a balance sheet investor until the start of our investment management business in March 2000 when we entered into a venture with affiliates of Citigroup Alternative Investments to co-sponsor and invest capital in a series of commercial real estate mezzanine investment funds managed by us. Pursuant to the venture agreement, we have co-sponsored with Citigroup Alternative Investments Fund I, Fund II and Fund III. We have capitalized costs of $6,322,000, net, from the formation of the venture and the Funds that are being amortized over the remaining anticipated lives of the Funds and the related venture agreement. Fund I commenced its investment operations in May 2000 with equity capital supplied solely by Citigroup Alternative Investments (75%) and us (25%). From May 11, 2000 to April 8, 2001, the investment period for the fund, Fund I completed $330 million of total investments in 12 transactions. On January 31, 2003, we purchased from an affiliate of Citigroup Alternative Investments its interest in Fund I and began consolidating the operations of Fund I in our consolidated financial statements. Fund II had its initial closing on equity commitments on April 9, 2001 and its final closing on August 7, 2001, ultimately raising $845.2 million of total equity commitments, including $49.7 million (5.9%) and $198.9 million (23.5%) from us and Citigroup Alternative Investments, respectively. Third-party private equity investors, including public and corporate pension plans, endowment funds, financial institutions and high net worth individuals, made the balance of the equity commitments. During its two-year investment period, which expired on April 9, 2003, Fund II invested $1.2 billion in 40 separate transactions. Fund II utilizes leverage to increase its return on equity, with a target debt-to-equity ratio of 2:1. Total capital calls during the investment period were $329.0 million. CT Investment Management Co. LLC, our wholly-owned taxable REIT subsidiary, acts as the investment manager to Fund II and receives 100% of the base management fees paid by the fund. As of April 9, 2003, the end of the Fund II investment period, CT Investment Management Co. began earning annual base management fees of 1.287% of invested capital. Based upon Fund II's invested capital at March 31, 2004, the date upon which the calculation for the next quarter is based, CT Investment Management Co. will earn base management fees of $522,000 for the quarter ending June 30, 2004. -15- We and Citigroup Alternative Investments, through our collective ownership of the general partner, are also entitled to receive incentive management fees from Fund II if the return on invested equity is in excess of 10% after all invested capital has been returned. The Fund II incentive management fees are split equally between Citigroup Alternative Investments and us. We intend to pay 25% of our share of the Fund II incentive management fees as long-term incentive compensation to our employees. No such incentive fees have been earned at March 31, 2004 and as such, no amount has been accrued as income for such potential fees in our financial statements. The amount of incentive fees to be received in the future will depend upon a number of factors, including the level of interest rates and the fund's ability to generate returns in excess of 10%, which is in turn impacted by the duration and ultimate performance of the fund's assets. Potential incentive fees received as Fund II winds down could result in significant additional income from operations in certain periods during which such payments can be recorded as income. If Fund II's assets were sold and liabilities were settled on April 1, 2004 at the recorded book value, net of the allowance for possible credit losses, and the fund equity and income were distributed, we would record approximately $7.0 million of incentive income. We do not anticipate making any additional equity contributions to Fund II or its general partner. Our net investment in Fund II and its general partner at March 31, 2004 was $11.6 million. As of March 31, 2004, Fund II had 22 outstanding loans and investments totaling $432.9 million, all of which were performing in accordance with the terms of their agreements. On June 2, 2003, Fund III effected its initial closing on equity commitments and on August 8, 2003, its final closing, raising a total of $425.0 million in equity commitments. Our equity commitment was $20.0 million (4.7%) and Citigroup Alternative Investments' equity commitment was $80.0 million (18.8%), with the balance made by third-party private equity investors. From the initial closing through March 31, 2004, we have made equity investments in Fund III of $4,000,000. As of March 31, 2004, Fund III had ten outstanding loans and investments totaling $268.4 million, all of which were performing in accordance with the terms of their agreements. CT Investment Management Co. receives 100% of the base management fees from Fund III calculated at a rate equal to 1.42% per annum of committed capital during Fund III's two-year investment period, which expires June 2, 2005, and 1.42% of invested capital thereafter. Based upon Fund III's $425.0 million of total equity commitments, CT Investment Management Co. will earn annual base management fees of $6.0 million during the investment period. We and Citigroup Alternative Investments are also entitled to receive incentive management fees from Fund III if the return on invested equity is in excess of 10% after all invested capital has been returned. We will receive 62.5% and Citigroup Alternative Investments will receive 37.5% of the total incentive management fees. We expect to distribute a portion of our share of the Fund III incentive management fees as long-term incentive compensation to our employees. Three months Ended March 31, 2004 Compared to Three months Ended March 31, 2003 We reported net income of $3,082,000 for the three months ended March 31, 2004, an increase of $537,000 from the net income of $2,545,000 for the three months ended March 31, 2003. This increase was primarily the result of a reduction in general and administrative costs due to reduced employee compensation and reduced legal expenses. Interest and related income from loans and other investments amounted to $9,018,000 for the three months ended March 31, 2004, a decrease of $11,000 from the $9,029,000 amount for the three months ended March 31, 2003. Average interest-earning assets increased from approximately $354.4 million for the three months ended March 31, 2003 to approximately $385.3 million for the three months ended March 31, 2004. The average interest rate earned on such assets decreased from 10.3% for the three months ended March 31, 2003 to 9.4% for the three months ended March 31, 2004. During the three months ended March 31, 2003, the Company recognized $367,000 in additional income on the early repayment of loans. Without this additional interest income, the earning rate for the 2003 period would have been 9.9%. LIBOR rates averaged 1.1% for the three months ended March 31, 2004 and 1.3% for the three months ended March 31, 2003, a decrease of 0.2%. The remaining decrease in rates was due to the repayment of two fixed rates loans (which earned interest at rates in excess of the portfolio average) and a change in the mix of our investment portfolio to include lower risk B Notes in 2004 (which generally carry lower interest rates than mezzanine loans). We utilize our existing credit facility and repurchase obligations to finance our interest-earning assets. -16- Interest and related expenses on secured debt amounted to $2,636,000 for the three months ended March 31, 2004, an increase of $341,000 from the $2,295,000 amount for the three months ended March 31, 2003. The increase in expense was due to an increase in the amount of average interest-bearing liabilities outstanding from approximately $205.9 million for the three months ended March 31, 2003 to approximately $218.8 million for the three months ended March 31, 2004, and an increase in the average rate on interest-bearing liabilities from 4.5% to 4.8% for the same periods. The increase in the average rate is substantially due to an increase in the rate paid on repurchase agreements, which increased from 2.2% for the three months ended March 31, 2003 to 2.6% for the three months ended March 31, 2004. This rate increase resulted from a significant decrease in FHLMC securities, which are financed at LIBOR flat. We also utilize the convertible junior subordinated debentures to finance our interest-earning assets. During the three months ended March 31, 2004 and 2003, we recognized $2,433,000 of expenses related to the convertible junior subordinated debentures, as the terms of the debt were the same in both periods. Other revenues increased $306,000 from $2,180,000 for the three months ended March 31, 2003 to $2,486,000 for the three months ended March 31, 2004. The increase is primarily due to the management fees charged to Fund III in 2004, as Fund III did not begin its investment period until June 2003. This was partially offset by a decrease in the earnings from Fund II, due to lower levels of investment in 2004 as the fund is no longer investing in new assets, and the reclassification of earnings from Fund I to other income statement captions as it is now a consolidated entity. General and administrative expenses decreased $766,000 to $2,938,000 for the three months ended March 31, 2004 from $3,704,000 for the three months ended March 31, 2003. The decrease in general and administrative expenses was primarily due to reduced employee compensation and legal expenses. We employed an average of 25 employees during the three months ended March 31, 2004 and the three months ended March 31, 2003. We had 23 full-time employees at March 31, 2004. We intend to make an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax year ending December 31, 2003. As a REIT, we generally are not subject to federal income tax. To maintain qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates. We may also be subject to certain state and local taxes on our income and property. Under certain circumstances, federal income and excise taxes may be due on our undistributed taxable income. At March 31, 2004, we were in compliance with all REIT requirements and as such, have only provided for income tax expense on taxable income attributed to our taxable REIT subsidiaries during the three months ended March 31, 2004. Liquidity and Capital Resources At March 31, 2004, we had $23,124,000 in cash. Our primary sources of liquidity for 2004 are expected to be cash on hand, cash generated from operations, principal and interest payments received on loans and investments, additional borrowings under our credit facility and repurchase obligations and proceeds from the sale of securities. We believe these sources of capital are adequate to meet future cash requirements for the remainder of 2004. We expect that during 2004, we will use a significant amount of our available capital resources to satisfy capital contributions required pursuant to our equity commitments to Fund III and to originate new loans and investments for our balance sheet. We intend to continue to employ leverage on our balance sheet assets to enhance our return on equity. We experienced a net increase in cash of $14,386,000 for the three months ended March 31, 2004, compared to a net increase of $990,000 for the three months ended March 31, 2003. Cash provided by operating activities during the three months ended March 31, 2004 was $502,000, compared to $1,849,000 during the same period of 2003. For the three months ended March 31, 2004, cash used in investing activities was $45,469,000, compared to cash provided of $21,393,000 during the same period in 2003. The change was primarily due our new loan and investment activity totaling $67.5 million for the three months ended March 31, 2004. We financed the new investment activity with additional borrowings under our credit facility, term redeemable securities contract and repurchase obligations. This accounted for substantially all of the change in the net cash activity from financing activities. -17- During the investment periods for Fund I and Fund II, we generally did not originate or acquire loans or commercial mortgage-backed securities directly for our own balance sheet portfolio. When the Fund II investment period ended, we began originating loans and investments for our own account as permitted by the provisions of Fund III. We expect to use our available working capital to make contributions to Fund III or any other funds sponsored by us as and when required by the equity commitments made by us to such funds. At March 31, 2004, we had outstanding borrowings under our credit facility of $64,700,000, and outstanding repurchase obligations totaling $194,333,000. The terms of these agreements are described above under the caption "Balance Sheet Overview". At March 31, 2004, we had pledged assets that enable us to borrow an additional $25.4 million and had $232.6 million of credit available for the financing of new and existing unpledged assets pursuant to these sources of financing. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Impact of Inflation Our operating results depend in part on the difference between the interest income earned on our interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities. Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation or otherwise can affect our income by affecting the spread between our interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of our interest-earning assets and our ability to realize gains from the sale of assets and the average life of our interest-earning assets. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We employ the use of correlated hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps and interest rate caps to minimize our exposure to changes in interest rates. There can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately realize an economic benefit from any hedging contract into which we enter. Note on Forward-Looking Statements Except for historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Section 21E of the Securities and Exchange Act of 1934, as amended, which involve certain risks and uncertainties. Forward-looking statements are included with respect to, among other things, the Company's current business plan, business and investment strategy and portfolio management. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes" and "scheduled" and similar expressions. The Company's actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that we believe might cause actual results to differ from any results expressed or implied by these forward-looking statements are discussed in the cautionary statements contained in Exhibit 99.1 to this Form 10-Q (filed as Exhibit 99.1 to our Annual Report on Form 10-K, filed on March 3, 2004 and incorporated therein by reference), which are incorporated herein by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q. -18- ITEM 3. Quantitative and Qualitative Disclosures about Market Risk The principal objective of our 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, we use interest rate swaps to effectively convert fixed rate assets to variable rate assets for proper matching with variable rate liabilities and variable rate liabilities to fixed rate liabilities for proper matching with fixed rate assets. Each derivative used as a hedge is matched with an asset or liability with which it has a high correlation. The swap agreements are generally held-to-maturity and we do not use derivative financial instruments for trading purposes. We use interest rate swaps to effectively convert variable rate debt to fixed rate debt for the financed portion of fixed rate assets. The differential to be paid or received on these agreements is recognized as an adjustment to the interest expense related to debt and is recognized on the accrual basis. The following table provides information about our financial instruments that are sensitive to changes in interest rates at March 31, 2004. 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 ----------------------------------------------------------------------------------- 2004 2005 2006 2007 2008 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Assets: (dollars in thousands) Available-for-sale securities Fixed Rate $ 5,009 $ 4,436 $ 2,640 $ 1,573 $ 938 $ 1,393 $ 15,989 $ 16,801 Average interest rate 6.09% 6.09% 6.09% 6.09% 6.09% 6.09% 6.09% Commercial Mortgage-backed Securities Fixed Rate -- -- $ 7,811 $ 135 $ 1,420 $ 201,146 $ 210,512 $159,934 Average interest rate -- -- 9.02% 8.99% 8.97% 11.22% 11.10% Variable Rate $ 5,000 -- -- -- $ 34,783 $ 1,268 $ 41,051 $ 39,995 Average interest rate 4.11% -- -- -- 3.95% 21.92% 4.22% Loans receivable Fixed Rate -- -- -- -- -- $ 48,913 $ 48,913 $ 58,169 Average interest rate -- -- -- -- -- 11.99% 11.99% Variable Rate $ 14,839 $ 18,961 $ 2,349 $ 15,976 $ 57,987 $ 38,474 $ 148,586 $149,655 Average interest rate 7.70% 6.71% 6.85% 8.76% 6.81% 6.04% 6.90% Liabilities: Credit Facility Variable Rate -- $ 64,700 -- -- -- -- $ 64,700 $ 64,700 Average interest rate -- 3.96% -- -- -- -- 3.96% Repurchase obligations Variable Rate $ 75,624 $118,709 -- -- -- -- $ 194,333 $194,333 Average interest rate 3.11% 2.01% -- -- -- -- 2.44% Convertible junior subordinated debentures Fixed Rate $ 92,524 -- -- -- -- -- $ 92,524 $118,089 Average interest rate 10.00% -- -- -- -- -- 10.00% Interest rate swaps Notional amounts -- -- -- -- -- $ 109,000 $ 109,000 $(3,297) Average fixed pay rate -- -- -- -- -- 4.24% 4.24% Average variable receive rate -- -- -- -- -- 1.10% 1.10%
-19- ITEM 4. Disclosure Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) was carried out as of the end of the period covered by this quarterly report. This evaluation was made under the supervision and with the participation of our management, including its Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Controls There have been no significant changes in our "internal control over financial reporting" (as defined in rule 13a-15(f) under the Securities Exchange Act) that occurred during the period covered by this quarterly report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. -20- 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 11.1 Statements regarding Computation of Earnings per Share (Data required by Statement of Financial Accounting Standard No. 128, Earnings per Share, is provided in Note 8 to the consolidated financial statements contained in this report). o 10.1 Employment Agreement, dated as of February 24, 2004, by and between Capital Trust, Inc. and CT Investment Management Co., LLC and John R. Klopp. o 10.2 Registration Rights Agreement dated as of June 18, 2003, by and among Capital Trust, Inc. and the parties named therein. o 31.1 Certification of John R. Klopp, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. o 31.2 Certification of Brian H. Oswald, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. o 32.1 Certification of John R. Klopp, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. o 32.2 Certification of Brian H. Oswald, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Risk Factors (filed as Exhibit 99.1 to the Company's Annual Report on Form 10-K, filed on March 3, 2004 and incorporated herein by reference). o Filed herewith. -21 (b) Reports on Form 8-K During the fiscal quarter ended March 31, 2004, we filed the following Current Reports on Form 8-K: (1) Current Report on Form 8-K, dated March 9, 2004, as filed with the SEC on March 9, 2004, reporting under Item 12 "Results of Operations and Financial Condition" our issuance of a press release reporting our financial results for our year ended December 31, 2003. (2) Current Report on Form 8-K, dated March 10, 2004, as filed with the SEC on March 10, 2004, reporting under Item 12 "Results of Operations and Financial Condition" our holding of a conference call to discuss our financial results for the fourth quarter and our year ended December 31, 2003. (3) Current Report on Form 8-K, dated March 16, 2004, as filed with the SEC on March 16, 2004, reporting under Item 9 "Regulation FD Disclosure" our slide presentation to investors and analysts. -22- 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. May 12, 2004 /s/ John R. Klopp - ------------ ----------------- Date John R. Klopp Chief Executive Officer /s/ Brian H. Oswald ------------------- Brian H. Oswald Chief Financial Officer -23- EX-10 2 ex10-1.txt EX. 10.1 - EMPLOYMENT AGREEMENT Exhibit 10.1 EMPLOYMENT AGREEMENT -------------------- I, John R. Klopp, agree to the terms and conditions of employment with Capital Trust, Inc. (the "CT") and CT Investment Management Co., LLC ("CTIMCO" and together with CT, the "Company") set forth in this Employment Agreement (this "Agreement") dated as of February 24, 2004. 1. Term of Employment. My employment under this Agreement shall commence effective as of July 15, 2004 ("Effective Date") and shall end on December 31, 2008 ("Expiration Date") or such earlier date on which my employment is terminated under Section 5 of this Agreement (the period from the Effective Date through the Expiration Date, or such earlier termination as provided for herein being referred to herein as the "Term"). On or before 180 days prior to the Expiration Date, the parties shall discuss the possibility of renewal or extension of this Agreement on mutually satisfactory terms. If no agreement shall be reached regarding the terms and conditions of such extension or renewal prior to the Expiration Date, this Agreement shall terminate as of the Expiration Date. If the Company continues to employ me beyond the Expiration Date without entering into a written agreement extending the term of this Agreement, except as provided in a new written employment agreement between the Company and me, I shall continue to receive the base salary in effect as of the Expiration Date for as long as I remain employed by the Company, but all other obligations and rights under this Agreement shall prospectively lapse as of the Expiration Date, except my right to payment of compensation accrued or earned prior to the Expiration Date or any other rights which by their terms extend beyond the Expiration Date, including the Company's ongoing indemnification obligation under Section 4, any post-termination payment provisions under Section 5(a), my confidentiality and other obligations under Section 6, and our mutual arbitration obligations under Section 8, and I thereafter shall be an at-will employee of the Company. 2. Nature of Duties. I shall be the Company's Chief Executive Officer and President and report directly to the Company's Board of Directors ("Board") and remain subject to the Board's direction and control. As such, I shall have all of the customary powers and duties associated with that position and shall manage the business of the Company on a day-to-day basis and shall report to and advise the Board regarding the management and operation of the Company's business. All other officers of the Company and its affiliates shall report to me. I shall devote my full business time and effort to the performance of my duties for the Company. I shall be subject to the Company's policies, procedures and approval practices, as generally in effect from time to time and made known to me, to the extent consistent with this Agreement. I shall not, while employed by the Company, engage in, accept employment from or provide services to any other person, firm, corporation, governmental agency or other entity; provided, however, that subject to Section 6(c) hereof, I may (a) devote a reasonable amount of time to civic activities, (b) maintain not more than two outside board positions with companies which do not compete with the Company and serve on the board of directors of a cooperative apartment in which I live, in each case subject to the prior consent of the Board, which consent shall not be unreasonably withheld, and (c) manage my own or my family's investments, provided that such activities do not conflict with or detract from my diligent performance of my duties hereunder. 3. Place of Performance. I shall be based in New York City, except for required travel on the Company's business. 4. Compensation and Related Matters. (a) Base Salary. The Company shall pay me base salary at an annual rate of $600,000, or such higher rate as the Board elects to pay me. My base salary shall be paid in conformity with the Company's salary payment practices generally applicable to senior Company executives. (b) Annual Bonuses; Annual Long Term Equity Incentive Grants. The Company shall pay me annual bonuses and grant me annual long term equity incentives, determined as follows: (i) For each calendar year of the Term commencing with January 1, 2005, I shall receive pursuant to Section 10(b) of the Company's 2004 Long Term Incentive Plan (the "LTIP"), subject to shareholder approval thereof, a Performance Compensation Award grant that provides for an annual cash bonus opportunity for that calendar year ranging from 100% of my base salary at threshold performance to 200% of my base salary at maximum performance (with a target of 150% of my base salary at target performance) achieved in respect of Annual Performance Measures (as defined below) established for the calendar year as the Performance Period. Before February 28 of each such calendar year, the Performance Measures containing threshold, target or maximum performance criteria shall be set by the Compensation Committee of the Board (the "Compensation Committee"), but only after consultation with me in advance (the "Annual Performance Measures"). Any cash bonus earned pursuant to such Performance Compensation Award shall be paid in conformity with the Company's bonus payment practices generally applicable to senior Company executives. The Company shall provide me with an opportunity, on an annual basis, to defer in advance bonus amounts to which I would otherwise become entitled pursuant to the Performance Compensation Award and attributable to the calendar year for which a timely deferral has been made (hereinafter the date the bonus would otherwise be payable is referred to as the "Bonus Deferral Date"), to be paid to me within 90 days following the earlier of the expiration of the Term, or the termination of my employment for any reason (such date constituting a "Bonus Deferral Payment Date"). All amounts deferred by me shall be credited or debited by an amount equal to the annual rate equal to the annual total shareholder positive or negative return (dividends, plus any other property or consideration received by shareholders in connection with their ownership of class A common stock of the Company, plus or minus share price growth or depreciation) on the class A common stock of the Company, commencing as of the Bonus Deferral Date and ending as of the Bonus Deferral Payment Date. (ii) For each calendar year of the Term commencing with January 1, 2005, I shall receive pursuant to Section 10(b) of the LTIP, subject to shareholder approval thereof, a Performance Compensation Award grant that provides for an award of Restricted Shares, ranging in value from $250,000 should I achieve threshold performance to $750,000 should I achieve maximum performance (with a target of $500,000 should I achieve target performance), in each case in respect of the Annual Performance Measures (each, a "LTI Grant"). The Performance Compensation Award for each LTI Grant shall provide that the Restricted Shares earned in respect of the achievement of the Annual Performance Measures shall be issued after the end of the Performance Period in conformity with the Company's stock based award grant practices generally applicable to senior Company executives and shall vest -2- (unless my employment has terminated or as otherwise provided for hereunder) as follows: 50% of the grant shall vest in quarterly installments over the three-year period from January 1 of the calendar year to which the LTI Grant relates; 50% of the grant shall be shall vest on December 31 of the fourth year following the year in which the shares are issued (the "Fourth Anniversary") provided that the "Grant Performance Hurdle" (as defined below) has been satisfied as of the Fourth Anniversary. For purposes of this Agreement, "Grant Performance Hurdle" shall mean a total shareholder return of 13% per annum (consisting of dividends, plus share price growth, plus any other property or consideration received by shareholders in connection with their ownership of Class A common stock of the Company) measured for the four-year period commencing on January 1 during the year in which the shares have been issued and ending on the fourth anniversary thereof. All Dividends that are earned and accrued with respect to all vested and unvested Restricted Shares issued pursuant to each LTI Grant shall be currently paid to me. Notwithstanding the foregoing, in accordance with the deferral provisions of the LTIP, the Company shall permit me to defer receipt of some or all of the Restricted Shares transferable to me prior to vesting. (iii) I shall be eligible for such other bonuses and other incentive compensation under bonus and incentive stock plans (including plans that provide for performance compensation tied to carried interest and investment management fees from funds under management) generally available to other senior Company executives as the Compensation Committee determines in its sole discretion. (iv) The Company covenants to use best efforts to obtain shareholder approval of the LTIP in connection with the above grants. (c) Stock Options, Restricted Stock, and Incentive Plans. (i) As of the Effective Date, pursuant to the LTIP, subject to shareholder approval thereof, the Company shall grant to me Restricted Shares equal to 218,818 shares of Class A common stock of the Company (the "Initial Grant"). The Initial Grant shall (unless my employment has terminated or as otherwise provided for herein) vest as follows: (I) 50% of the value of the award shall vest in eight (8) equal quarterly installments commencing on March 31, 2007, and (II) 50% of the value of the award shall be structured as a "Performance Compensation Award" pursuant to Section 10(b) of the LTIP, and shall vest on the Expiration Date, subject to satisfaction of the Grant Performance Hurdle, measured for the five-year period commencing on January 1, 2004 and ending on the Expiration Date. All dividends that are earned and accrue with respect to all vested and unvested Restricted Shares issued pursuant to the Initial Grant shall be currently paid to me. Notwithstanding the foregoing, in accordance with the deferral provisions of the LTIP, the Company shall permit me to defer receipt of some or all of the Restricted Shares transferable to me upon vesting. (ii) I shall be eligible to participate in all stock option, restricted stock, and incentive plans generally available to other senior Company executives as the Compensation Committee determines in its sole discretion, (including plans that provide for performance compensation tied to carried interest and investment management fees from funds under management). -3- (iii) The Company covenants to use best efforts to obtain shareholder approval of the LTIP in connection with the above grants. (d) Performance Compensation Award. (i) As of the Effective Date, pursuant to the LTIP, subject to shareholder approval thereof, the Company shall grant to me a Performance Compensation Award that provides for a cash payment to me equal to 8% of any payments received by the Company as incentive management fees paid by CT Mezzanine Partners III, Inc. ("Fund III"), which shall (unless otherwise provided for herein) vest as follows: 65% shall be vested as of the close of the investment period for Fund III and the remaining 35% shall be vested upon the Company's receipt of the incentive management fees. (ii) On or before the first anniversary of the date hereof, pursuant to the LTIP, subject to shareholder approval thereof, I shall be eligible receive an additional Performance Compensation Award grant as determined by the Compensation Committee in its sole discretion that provides for a cash payment to me equal to up to an additional 10% of any incentive management fees received by the Company from Fund III, which, if granted, shall (unless otherwise provided for herein) vest as follows: 65% shall be vested as of the close of the investment period for Fund III and the remaining 35% shall be vested upon the Company's receipt of the incentive management fees. (iii) Subject to shareholder approval of the LTIP, I agree to surrender my rights under, and terminate, that certain Incentive Compensation Agreement, dated as of October 15, 2003, by and between me and the Company, relating to incentive compensation payable in respect of carried interest distributions received by the Company from CT Mezzanine Partners II LP ("Incentive Compensation Agreement"); provided that the Company shall grant to me, simultaneously, a Performance Compensation Award pursuant to the LTIP that provides for equivalent incentive compensation fully vested to the extent the right to compensation under the Incentive Compensation Agreement is vested as of the date of grant. (iv) The Company covenants to use best efforts to obtain shareholder approval of the LTIP in connection with the above grants. (e) Standard Benefits. During my employment, I shall be entitled to participate in all employee benefit plans and programs, including paid vacations, to the same extent generally available to other senior Company executives, in accordance with the terms of those plans and programs, including, without limitation, (i) continued coverage for me under the term life insurance policy and disability insurance policy as in effect immediately prior to the Effective Date (with the Company continuing to pay or reimburse for all applicable premiums), (ii) continued first-class business travel, and (iii) continued reimbursement for a luxury automobile and a full-time driver employed for my benefit by the Company. For purposes of determining service credit under any employee benefit or welfare plan maintained by the Company, I shall be given service credit for my service with all predecessors of the Company, including without limitation for this purpose Victor Capital Group LP ("Victor Capital"). -4- (f) Indemnification. The Company shall extend to me the same indemnification arrangements as are generally provided to other senior Company executives, including after the termination of my employment. Notwithstanding the foregoing, during the Term, the Company shall continue in effect at minimum the same terms of indemnification and the same level of Directors and Officers insurance coverage as were in effect immediately prior to the Effective Date. (g) Expenses. I shall be entitled to receive prompt reimbursement for all reasonable and customary travel and business expenses I incur in connection with my employment but I must incur and account for those expenses in accordance with the policies and procedures established by the Company. (h) Sarbanes-Oxley Act Loan Prohibition. To the extent that any Company benefit, program, practice, arrangement, or this Agreement would or might otherwise result in my receipt of an illegal loan ("Loan"), the Company shall use reasonable efforts to provide me with a substitute for the Loan that is lawful and of at least equal value to me. 5. Termination. (a) Rights and Duties. If my employment is terminated, I shall be entitled to the amounts or benefits shown on the applicable row of the following table, subject to the balance of this Section 5. The Company and I shall have no further obligations to each other, except the Company's ongoing indemnification obligation under Section 4, my confidentiality and other obligations under Section 6, and our mutual arbitration obligations under Section 8, or as set forth in any written agreement I subsequently enter into with the Company. -5- - -------------------------------------------------------------------------------- DISCHARGE Payment or provision when due of (1) any unpaid base FOR CAUSE salary, expense reimbursements, and vacation days accrued prior to termination of employment, and (2) other unpaid vested amounts or benefits or amounts deferred under Company compensation, incentive, and benefit plans (including, without limitation vested interests I may have with respect to Fund II and Fund III or any previous grant of equity). In addition, I may continue to exercise my vested options for up to the earlier of (a) the expiration date of such options or (b) the date 90 days following my termination. - -------------------------------------------------------------------------------- DISABILITY Same as for "Discharge for Cause" EXCEPT that (I) my base salary shall continue until the commencement of payments under my disability insurance policy, (II) I shall be entitled to receive a pro-rated bonus determined for the year in which my disability became effective hereunder, and calculated at "target", (III) the Company shall pay the COBRA premiums associated with continuing medical insurance coverage for my benefit and the benefit of my spouse and dependent children for one year following my disability effective date, and (IV) I will continue to vest for one year following my disability effective date in all awards previously granted to me, and in determining the Grant Performance Hurdle for any remaining performance vesting period, I will be credited with the shareholder return for the full year preceding the year of my disability effective date. In addition, I may continue to exercise my vested options for up to one year following my termination, or if later, up until the expiration date of such options. - -------------------------------------------------------------------------------- DISCHARGE Same as for "Discharge for Cause" EXCEPT that, in OTHER THAN exchange for my execution of a release in accordance FOR CAUSE with this section, (1) I shall be entitled to OR receive a lump-sum payment equal to the greater of DISABILITY (x) the sum of my base salary and cash bonus payable through the Expiration Date (with the cash bonus based on target and assuming the satisfaction of all Annual Performance Measures or (y) twice the sum of (I) my base salary then payable and (II) the highest annual bonus paid to me during the Term, (2) all LTI Grants made prior thereto and the Initial Grant shall immediately vest in full, (3) the Performance Compensation Awards awarded under Section 4(d) shall immediately vest in full, (4) I may continue to exercise my vested options for up to one year following my discharge or, if later, up until the expiration date of such options, and (5) the Company shall pay the COBRA premiums associated with continuing medical insurance coverage for my benefit and the benefit of my spouse and dependent children for 18 months following my date of discharge or such earlier time I shall obtain comparable coverage through another employer. - -------------------------------------------------------------------------------- RESIGNATION Same as for "Discharge for Cause." WITHOUT GOOD REASON - -------------------------------------------------------------------------------- -6- - -------------------------------------------------------------------------------- RESIGNATION Same as for "Discharge Other Than for Cause or WITH GOOD Disability." REASON - -------------------------------------------------------------------------------- DEATH Same as for "Discharge for Cause" EXCEPT that (1) my legal representative shall be entitled to receive any death benefits payable under the life insurance maintained on my behalf by the Company as well as any earned but as of yet unpaid bonus amounts from the year preceding the date of my death, (2) any equity and performance compensation awards I have shall continue to vest for one year following the date of my death, and in determining the Grant Performance Hurdle for any remaining performance vesting period, my estate will be credited with the shareholder return for the full year preceding the year of my death, (3) the Company shall pay the COBRA premiums associated with continuing medical insurance coverage for the benefit of my spouse and dependent children for one year following my date of death, and (4) my vested options may continue to be exercised for up to one year following my death, or if later, up until the expiration date of such options. - -------------------------------------------------------------------------------- TERMINATION Same as for "Discharge Other Than for Cause or UPON OR AFTER Disability" EXCEPT (1) the lump-sum payment shall THE EXPIRATION equal one year of my current base salary as of the OF AGREEMENT Expiration Date, (2) I shall be paid any earned but as of yet unpaid bonus at target for the most recently completed fiscal year preceding my termination date, (3) I shall receive additional vesting on all awards previously granted to me for one year following my termination, and (4) I may continue to exercise my vested options for up to one year following my termination, or if later, up until the expiration of such options. - -------------------------------------------------------------------------------- (b) Discharge for Cause. The Company may terminate my employment at any time if the Board (without my vote) believes in good faith that it has Cause to terminate me. "Cause" shall include, but not be limited to: (i) Fraud and Dishonesty. My commission of a willful act of fraud, embezzlement or misappropriation of any money or properties of the Company or its affiliates (other than an insubstantial and unintentional misappropriation that has not been remedied within 10 days after the Company provides me with notice of such misappropriation). (ii) Criminal Act. My conviction of a felony or any material violation of any federal or state securities law (whether by plea of nolo contendere or otherwise) or my being enjoined from violating any federal or state securities law or being determined to have violated any such law. (iii) Reckless Conduct. My engaging in willful or reckless misconduct in connection with any property or activity, the purpose or effect of which materially and adversely affects the Company and/or its subsidiaries and affiliates, and/or their predecessors and successors (collectively, the "Group"). -7- (iv) Substance Abuse. My repeated and intemperate use of alcohol or illegal drugs after written notice from the Board that such use, if continued, would result in the termination of my employment hereunder. (v) Breach of Agreement. My failure to cure my material breach of any of my obligations under this Agreement (other than by reason of physical or mental illness, injury, or condition) after having received 10 days' notice from the Board of the breach. (vi) Barred from Office. My becoming barred or prohibited by the SEC from holding my position with the Company. (c) Termination for Disability. Except as prohibited by applicable law, the Company may terminate my employment on account of Disability, or may transfer me to inactive employment status, which shall have the same effect under this Agreement as a termination for Disability. "Disability" means a physical or mental illness, injury, or condition that prevents me from performing substantially all of my duties under this Agreement for at least 120 consecutive calendar days or for at least 180 calendar days, whether or not consecutive, in any 365 calendar day period, or is likely to do so, as certified by a physician selected by the Board. (d) Discharge Other Than for Cause or Disability. The Company may terminate my employment at any time for any reason, and without advance notice. If I am terminated by the Company other than for Cause under Section 5(b) or Disability under Section 5(c), I will only receive the special benefits provided for a Discharge other than for Cause or Disability under Section 5(a) if I sign a separation agreement and general release in the form attached hereto as Schedule A and do not thereafter revoke the release. (e) Resignation. If I resign other than for Good Reason, the Company may accept my resignation effective on the date set forth in my notice or any earlier date. If I resign other than for Good Reason, I agree that the Restricted Period (as defined in Section 6(b)) shall begin on the date of my resignation. If I resign for Good Reason, my employment will end on my last date of work and I will receive the benefits to which I am entitled under Section 5(a), but only if I sign the separation agreement and general release described in Section 5(d), above, and I do not thereafter revoke the release. "Good Reason" means that, without my express written consent, one or more of the following events occurred after my execution of this Agreement: (i) Demotion. I am assigned any duties, responsibilities or title materially inconsistent with my rights under this Agreement (including without limitation hiring by the Company of an executive to whom I report or does not report to me), other than as a result of (or I connection with) the Company's ceasing to be a public company. (ii) Compensation Reduction. My compensation provided for under this Agreement is materially reduced (other than any reduction resulting from the good faith application by the Compensation Committee of performance factors under the LTIP). -8- (iii) Relocation. The Company requires me, without my consent, to be based at any office or location outside of a 40-mile radius of Midtown Manhattan, New York, New York. (iv) Breach of Promise. The Company fails to cure its material breach of this Agreement within seven days after I give it written notice thereof. (v) Discontinuance of Benefits. The Company stops providing me with benefits that, in the aggregate, are substantially as valuable to me as those I enjoyed immediately prior to the Effective Date other than a result of across-the-board benefit reductions affecting all executives of similar status employed by the Company and any entity in control of the Company. (vi) Change of Control. The Company is involved in: (1) a merger or acquisition in which 50% or more of the Company's voting stock outstanding after the merger or acquisition is held by holders different from those who held the Company's voting stock immediately prior to such merger or acquisition; (2) the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company; (3) a transfer of all or substantially all of the Company's assets pursuant to a partnership or joint venture agreement or similar arrangement where the Company's resulting interest is or becomes less than 50%; (4) on or after the Effective Date, a change in ownership of the Company through an action or series of transactions, such that any person is or becomes the beneficial owner, directly or indirectly, of 50% or more of the Company's voting stock; or (5) a change occurs in the composition of the Board during any two-year period such that the individuals who, as of the beginning of such two-year period, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the beginning of the two-year period, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided further, however, that any such individual whose initial assumption of office occurs as a result of or in connection with a solicitation subject to Rule 14a-12(c) of Regulation 14A promulgated under the Exchange Act of 1934, as amended, or other actual or threatened solicitation of proxies or consents by or on behalf of an entity other than the Board shall not be so considered as a member of the Incumbent Board. -9- (vii) Notice of Prospective Action. I am officially notified (or it is officially announced) that the Company will take any of the actions listed above during the term of this Agreement. However, an event that is or would constitute Good Reason shall cease to be Good Reason if: (1) I do not give the Company written notice of my intent to terminate my employment within 45 days after the event occurs; (2) the Company reverses the action or cures the default that constitutes Good Reason within 30 days after I notify it in writing that Good Reason exists before I terminate employment; or (3) I was a primary instigator of the Good Reason event and the circumstances make it inappropriate for me to receive Good Reason resignation benefits under this Agreement. (f) Death. If I die while employed under this Agreement, the payments required by Section 5(a) in the event of my death shall be made. 6. Confidentiality and Other Obligations. (a) Confidential Information. During the term of my employment, in exchange for my promises to use such information solely for the Company's benefit, the Company has provided and will continue to provide me with Confidential Information concerning, among other things, its business, operations, clients, investors, and business partners. "Confidential Information" refers to information not generally known by others in the form in which it is used by the Company, and which gives the Company a competitive advantage over other companies which do not have access to this information, including secret, confidential, or proprietary information or trade secrets of the Company and its subsidiaries and affiliates, conveyed orally or reduced to a tangible form in any medium, including information concerning the operations, future plans, customers, business models, strategies, and business methods of the Company and its subsidiaries and affiliates, as well as information about the Company's active and prospective investors, clients and business partners and their respective investment preferences, risk tolerances, portfolio allocations and amounts, cash flow requirements, contact information, and other information about how to best serve their needs and preferences. "Confidential Information" does not include information that (i) I knew prior to my employment with the Company, (ii) subsequently came into my possession other than through my work for the Company and not as a result of a breach of any duty owed to the Company, (iii) is generally known within the relevant industry, or (iv) involves my personal materials and materials generated in connection with my prior service with Victor Capital. (b) Promise Not to Disclose. I promise never to use or disclose any Confidential Information before it has become generally known within the relevant industry through no fault of my own. I agree that this promise shall never expire. (c) Promise Not to Solicit. Because my position enables me to learn Confidential Information regarding the clients, investors, and business partners of the Company and how best to serve them, I further agree that, during my employment with the Company and for 24 months after my termination for Cause under Section 5(b), resignation without Good Reason under Section 5(e), or resignation with Good Reason under Section 5(e)(vi) (the "Restricted Period"): (1) as to any client, investor, or business partner of the Company with -10- whom I had dealings or about whom I acquired proprietary information during my employment (or as to any investor in any investment fund or vehicle owned, managed, or established by the Company, I will not solicit or attempt to solicit (or assist others to solicit) the investor, client, or business partner to invest in or do business with any person or entity other than the Company; and (2) I will not solicit or attempt to solicit (or assist others to solicit) for employment any person who is, or within the preceding six months was, an officer, manager, employee, or consultant of the Company. I agree that the restrictions set forth in this paragraph do not prohibit me from engaging in my livelihood and do not foreclose my working with investors, clients, or business partners not identified in this paragraph. (d) Promise Not to Engage in Certain Employment. I agree that, during the Restricted Period, I will not, without the prior written consent of the Board, accept any employment, provide any services, advice or information; or assist or engage in any activity (whether as an employee, consultant, or in any other capacity, whether paid or unpaid) with (1) any specialty finance firm or investment management company focused on commercial real estate-related debt instruments or (2) any business that, as of the date of my termination, directly competes with the Company. (e) Return of Information. When my employment with the Company ends, I will promptly deliver to the Company, or, at its written instruction, destroy, all documents, data, drawings, manuals, letters, notes, reports, electronic mail, recordings, and copies thereof, of or pertaining to it or any other Group member in my possession or control. In addition, during my employment with the Company or the Group and thereafter, I agree to meet with Company personnel and, based on knowledge or insights I gained during my employment with the Company and the Group, answer any question they may have related to the Company or the Group. (f) Intellectual Property. Intellectual property (including such things as all ideas, concepts, inventions, plans, developments, software, data, configurations, materials (whether written or machine-readable), designs, drawings, illustrations, and photographs, that may be protectable, in whole or in part, under any patent, copyright, trademark, trade secret, or other intellectual property law), developed, created, conceived, made, or reduced to practice during my Company employment (except intellectual property that has no relation to the Group or any Group customer that I developed, etc., purely on my own time and at my own expense or that related to the business and affairs of Victor Capital), shall be the sole and exclusive property of the Company, and I hereby assign all my rights, title, and interest in any such intellectual property to the Company. (g) Enforcement of This Section. This section shall survive the termination of this Agreement for any reason. I acknowledge that (a) my services are of a special, unique, and extraordinary character and it would be very difficult or impossible to replace them, (b) this section's terms are reasonable and necessary to protect the Company's legitimate interests, (c) this section's restrictions will not prevent me from earning or seeking a livelihood, (d) this section's restrictions shall apply wherever permitted by law, and (e) my violation of any of this section's terms would irreparably harm the Company. Accordingly, I agree that, if I violate any of the provisions of this section, the Company or any Group member may be entitled to seek, in addition to other remedies available to it, an injunction to be issued by -11- any court of competent jurisdiction restraining me from committing or continuing any such violation. 7. Notice. (a) To the Company. I will send all communications to the Company in writing, by mail, hand delivery or facsimile, addressed as follows (or in any other manner the Company notifies me to use): Capital Trust, Inc. Attention: Samuel Zell 410 Park Avenue, 14th Floor New York, New York 10022 Fax: (212) 655-0044 Tel.: (212) 655-0220 With copy to: Martin L. Edelman Michael L. Zuppone Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, New York 10022-3205 (b) To Me. All communications from the Company to me relating to this Agreement must be sent to me in writing at my Company office or in any other manner I notify the Company to use. (c) Time Notice Deemed Given. Notice shall be deemed to have been given when delivered or, if earlier (1) when mailed by United States certified or registered mail, return receipt requested, postage prepaid, or (2) faxed with confirmation of delivery, in either case, addressed as required in this section. 8. Registration Rights and Related Assistance. During the Term and for so long thereafter as I or my estate directly or indirectly own class A common stock, stock options or equity-based awards issued by the Company, and for so long as the Company's common stock is publicly traded, (A) the Company shall file with the Securities and Exchange Commission and thereafter maintain the effectiveness of one or more registration statements on Form S-8 (or any successor form) registering under the Securities Act of 1933, as amended (the "1933 Act"), the offer and sale of shares by the Company to me pursuant to stock options or other equity-based awards granted to me under this Agreement, Company compensation plans or otherwise and (B) to the extent that I (or my estate) determine to engage in an exempt sale of any common stock or other securities of the Company, the Company shall take all commercially reasonable steps to cooperate with and assist me (or my estate) in connection with such sale. 9. Arbitration of Disputes. Except for the Company's right to seek injunctive relief in accordance with Section 6(g), above, all disputes between the Company and me are to be resolved by final and binding arbitration in accordance with the separate Arbitration -12- Agreement attached as Schedule B to this Agreement. This section shall remain in effect after the termination of this Agreement. 10. Amendment. No provisions of this Agreement may be modified, waived, or discharged except by a written document signed by a duly authorized Company officer and me. Thus, for example, promotions, commendations, and/or bonuses shall not, by themselves, modify, amend, or extend this Agreement. A waiver of any conditions or provisions of this Agreement in a given instance shall not be deemed a waiver of such conditions or provisions at any other time. 11. Interpretation; Exclusive Forum. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the state of New York (excluding any that mandate the use of another jurisdiction's laws). Any litigation, arbitration, or similar proceeding with respect to such matters only may be brought within that state, and all parties to this Agreement consent to that state's jurisdiction and agree that venue anywhere in that state would be proper. 12. Successors. This Agreement shall be binding upon, and shall inure to the benefit of, me and my estate, but I may not assign or pledge this Agreement or any rights arising under it, except to the extent permitted under the terms of the benefit and compensation plans in which I participate. 13. Fees. The Company shall pay for my reasonable legal fees incurred in the preparation and negotiation of this Agreement. 14. Taxes. The Company shall withhold taxes from payments it makes pursuant to this Agreement as it determines to be required by applicable law. 15. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute the same instrument. 17. Entire Agreement; Prior Agreements. All oral or written agreements or representations, express or implied, with respect to the subject matter of this Agreement are set forth in this Agreement. Upon my execution of this Agreement, the employment agreement between myself and the Company dated as of July 15, 1997 will be considered null and void, and neither I nor the Company shall have any further obligations or rights thereunder. -13- - -------------------------------------------------------------------------------- I ACKNOWLEDGE THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THIS AGREEMENT ARE CONTAINED IN IT AND THAT I HAVE ENTERED INTO THIS AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF. I FURTHER ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ALL OF IT, AND THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISHED TO DO SO. I UNDERSTAND THAT BY SIGNING THIS AGREEMENT I AM GIVING UP MY RIGHT TO A JURY TRIAL. - -------------------------------------------------------------------------------- Date: As of February 24, 2004 CAPITAL TRUST, INC. By: /s/ Brian H. Oswald ------------------------- Name: Brian H. Oswald Title: Chief Financial Officer Date: As of February 24, 2004 CT INVESTMENT MANAGEMENT CO., LLC By: /s/ Brain H. Oswald ------------------------- Name: Brain H. Oswald Title: Chief financial Officer Date: As of February 24, 2004 /S/ JOHN R. KLOPP ------------------------------ JOHN R. KLOPP -14- SCHEDULE A SEPARATION AGREEMENT AND GENERAL RELEASE ---------------------------------------- This SEPARATION AGREEMENT AND GENERAL RELEASE ("Release") made this ___ day of _________, ____ by and between Capital Trust, Inc. and CT Investment Management Co., LLC (together, the "Company") and John R. Klopp ("Executive"): In exchange for the mutual promises exchanged herein and other good and valid consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Employment Termination ---------------------- Executive agrees that his employment with the Company has ended or will end on [date]. 2. Claims Released --------------- In exchange for the benefits provided herein, Executive irrevocably and unconditionally releases the Company, its current or former parents, subsidiaries, or affiliates, their past, present, or future employees or agents, and their successors (collectively, the "Released Parties"), from all known or unknown claims that Executive presently may have arising out of his employment with, or separation from, the Company, other than claims (i) seeking enforcement of this Release, (ii) for vested awards or benefits under the Company's employee benefit plans, including the 2004 Long-Term Incentive Program, and (iii) to indemnification and coverage under the Company's directors and officers' insurance policies ("Claims"). The Claims Executive is releasing include, without limitation, claims under the Age Discrimination in Employment Act ("ADEA") and Executive Order 11,141; Title VII of the Civil Rights Act of 1964, Sections 1981 and 1983 of the Civil Rights Act of 1866, and Executive Order 11,246; the Americans with Disabilities Act and Sections 503 and 504 of the Rehabilitation Act of 1973; the New York State Human Rights Law; the New York City Human Rights Law; or any other federal, state, or local common law, statute, regulation, or law of any other type. Executive acknowledges that he is releasing Claims he knows he has and Claims he may not know he has, and understands the significance of doing so. 3. Pursuit of Released Claims -------------------------- Executive agrees to withdraw with prejudice all complaints or charges, if any, he has filed against any Released Party with any agency or court. Executive agrees that he will never file any lawsuit or complaint against them based on the Claims purportedly released in this Release. Executive promises never to seek any damages, remedies, or other relief for himself personally (any right to which he hereby waives) by filing or prosecuting a charge with any administrative agency with respect to any Claim purportedly released by this Release. Executive promises to request any administrative agency or other body assuming jurisdiction of any such lawsuit, complaint, or charge to withdraw from the matter or dismiss the matter with prejudice. A-1 4. Nonadmission of Liability ------------------------- Executive agrees that this Release is not an admission of guilt or wrongdoing by the Released Parties and acknowledges that the Released Parties do not believe or admit that they have done anything wrong. 5. Confidentiality and Non-Disparagement ------------------------------------- Executive agrees to keep the fact and terms of this Release in strict confidence. Executive agrees not to disclose this document, its contents or subject matter to any person other than his immediate family, attorney, accountant or income tax preparer, or otherwise as required by law. Executive agrees that he will not denigrate, disparage, defame, impugn, or otherwise damage or assail the reputation or integrity of the Company or any Released Party. 6. Consideration of Release ------------------------ Executive acknowledges that, before signing this Release, he was given at least 21 calendar days to consider this Release. Executive waives any right he might have to additional time beyond this consideration period within which to consider this Release. Executive acknowledges that: (a) he took advantage of that time to consider this Release before signing it; (b) he carefully read this Release; (c) he fully understands what this Release means; (d) he is entering into it voluntarily; (e) he is receiving valuable consideration in exchange for his execution of this Release that he would not otherwise be entitled to receive; and (f) the Company, in writing, encouraged him to discuss this Release with his attorney (at his own expense) before signing it, and that he did so to the extent he deemed appropriate. Executive may revoke his release of claims under the ADEA within seven (7) days after he signs this Release, in which case he will not be entitled to receive all of the benefits set forth herein. 7. Miscellaneous ------------- This Release sets forth the entire agreement between Executive and the Company pertaining to the subject matter of this Release. This Release may not be modified or canceled in any manner except by a writing signed by both Executive and an authorized Company official. Executive acknowledge that the Company has made no representations or promises to him other than those in this Release. If any provision in this Release is found to be unenforceable, all other provisions will remain fully enforceable. It is not necessary that the Company sign this Release for it to become binding on both Executive and the Company. This Release binds Executive's heirs, administrators, representatives, executors, successors, and assigns, and will inure to the benefit of the Released Parties and their heirs, administrators, representatives, executors, successors, and assigns. This Release shall be construed as a whole according to its fair meaning; it shall not be construed strictly for or against Executive or the Released Parties. Unless the context indicates otherwise, the term "or" shall be deemed to include the term "and" and the singular or plural number shall be deemed to include the other. Disputes under this Release are to be resolved in accordance with the existing arbitration agreement between the A-2 parties. Except to the extent governed by federal law, this Release shall be governed by the statutes and common law of the State of New York (excluding any that mandate the use of another jurisdiction's laws). Section headings in this Agreement are included for convenience of reference only and shall not be a part of this Agreement for any other purpose. - -------------------------------------------------------------------------------- TAKE THIS RELEASE HOME, READ IT, AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING IT. THIS RELEASE INCLUDES A RELEASE OF KNOWN AND UNKNOWN CLAIMS. - -------------------------------------------------------------------------------- Date: ________________________ CAPITAL TRUST, INC. By: _________________________ Name: _______________________ Title: ______________________ Date: ________________________ CT INVESTMENT MANAGEMENT CO., LLC By: _________________________ Name: ______________________ Title: ______________________ Date: ________________________ _____________________________ JOHN R. KLOPP A-3 SCHEDULE B MUTUAL AGREEMENT TO ARBITRATE CLAIMS ------------------------------------ I recognize that differences may arise between Capital Trust, Inc. and CT Investment Management Co., LLC (together, the "Company") and me during or following my employment with the Company, and that those differences may or may not be related to my employment. I understand and agree that by entering into this Agreement to Arbitrate Claims ("Agreement"), I anticipate gaining the benefits of a speedy, impartial dispute-resolution procedure. Except as provided in this Agreement, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings pursuant to this Agreement. To the extent that the Federal Arbitration Act either is inapplicable, or held not to require arbitration of a particular claim or claims, New York law pertaining to agreements to arbitrate shall apply. I understand that any reference in this Agreement to the Company will be a reference also to all of its subsidiary and affiliated entities, all benefit plans, the benefit plans' sponsors, fiduciaries, administrators, and affiliates, and all successors and assigns of any of them. Claims Covered by the Agreement The Company and I mutually consent to the resolution by arbitration of all claims or controversies ("claims"), past, present or future, which arise, directly or indirectly, out of my employment (or its termination) or the business of the Company, that the Company may have against me or that I may have against the Company or against its officers, directors, employees or agents in their capacity as such or otherwise. The claims covered by this Agreement include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, sexual orientation, religion, national origin, age, marital status, or medical condition, handicap or disability); and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except claims excluded elsewhere in this Agreement. Except as otherwise provided in this Agreement, both the Company and I agree that neither of us shall initiate or prosecute any lawsuit or administrative action (other than an administrative charge of discrimination to the EEOC or similar fair employment practices agency, or an administrative charge within the jurisdiction of the National Labor Relations Board or U.S. Department of Labor), in any way related to any claim covered by this Agreement. Claims Not Covered by the Agreement This Agreement does not cover claims for workers' compensation or unemployment compensation benefits; or any claim as to which final and binding arbitration cannot be required as a matter of law. Claims, either by the Company or by me, seeking injunctive relief for alleged violations of intellectual property rights and non-disclosure and non-solicitation covenants also B-1 are not covered by this Agreement (although all other aspects of such claims, including any claims for damages, are covered by this Agreement). Required Notice of All Claims and Statute of Limitations The Company and I agree that the aggrieved party must give written notice of any claim to the other party no later than the applicable Statute of Limitations as may be prescribed by law. Written notice to the Company, or its officers, directors, employees or agents, shall be sent to the addresses set forth in my Employment Agreement. I will be given written notice at the last address recorded in my personnel file. The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. The notice shall be sent to the other party by certified or registered mail, return receipt requested. Representation Any party may be represented by an attorney or other representative selected by the party. Discovery Each party shall have the right to take the deposition of three (3) individuals and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had where the arbitrator selected pursuant to this Agreement so orders, upon an appropriate showing of justification. Designation of Witnesses At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration. Subpoenas Each party shall have the right to subpoena witnesses and documents for the arbitration. Arbitration Procedures The arbitration will be held under the auspices of the American Arbitration Association ("AAA"). The Company and I agree that, except as provided in this Agreement, the arbitration shall be in accordance with the AAA's National Rules for Resolution of Employment Disputes (or other then-current employment arbitration procedures). The arbitrator shall be either a retired judge, or an attorney licensed to practice law in the state in which the arbitration is convened and with demonstrated experience and expertise in executive compensation matters (the "Arbitrator"). The arbitration shall take place in or near the city in which I am or was last employed by the Company. B-2 The Arbitrator shall be selected as follows. The sponsoring organization shall give each party a list of 11 arbitrators drawn from its panel of employment dispute arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the lists of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately from the list of common names until only one remains. The party who did not initiate the claim shall strike first. If no common name exists on the lists of all parties, the sponsoring organization shall furnish an additional list and the process shall be repeated. If no arbitrator has been selected after two lists have been distributed, then the parties shall strike alternately from a third list, with the party initiating the claim striking first, until only one name remains. That person shall be designated as the Arbitrator. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state in which the claim arose, or federal law, or both, as applicable to the claim(s) asserted. If the parties' dispute concerns a contract in which the parties have included a choice of law provision, the Arbitrator shall apply the law as designated by the parties. The Arbitrator is without jurisdiction to apply any different substantive law, or law of remedies. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person, as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. Either party may obtain a court reporter to provide a stenographic record of proceedings. Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. The Arbitrator shall render a written award and opinion in the form setting forth his/her findings and conclusions. Either party shall have the right, within 20 days of issuance of the Arbitrator's opinion, to file with the Arbitrator a motion to reconsider (accompanied by a supporting brief), and the other party shall have 20 days from the date of the motion to respond. The Arbitrator thereupon shall reconsider the issues raised by the motion and, promptly, either confirm or change the decision, which (except as provided by this Agreement) shall then be final and conclusive upon the parties. B-3 Arbitration Fees and Costs The Company will be responsible for paying any filing fee and the fees and costs of the Arbitrator and the arbitration; provided, however, that if I am the party initiating the claim, I am responsible for contributing an amount equal to the filing fee to initiate a claim in the court of general jurisdiction in the state in which I am (or was last) employed by the Company. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim which affords the prevailing party attorneys' fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party, under the standards for fee shifting provided by law. Judicial Review Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Interstate Commerce I understand and agree that the Company is engaged in transactions involving interstate commerce and that the Federal Arbitration Act applies to this Agreement. Requirements for Modification or Revocation This Agreement to arbitrate shall survive the termination of my employment. It can only be revoked or modified by a writing signed by the parties which specifically states an intent to revoke or modify this Agreement. Sole and Entire Agreement This is the complete agreement of the parties on the subject of arbitration of disputes. This Agreement supersedes any prior or contemporaneous oral or written understandings on the subject. No party is relying on any representations, oral or written, on the subject of the effect, enforceability or meaning of this Agreement, except as specifically set forth in this Agreement. Severability If any provisions of this Agreement are adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the Agreement, as the parties hereto intend to create a binding agreement to arbitrate regardless of the unenforceability of any particular term or terms. Consideration The promises by the Company and by me to arbitrate differences, rather than litigate them before courts or other bodies, provide consideration for each other. B-4 Voluntary Agreement I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT, AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF. I UNDERSTAND THAT BY SIGNING THIS AGREEMENT I AM GIVING UP MY RIGHT TO A JURY TRIAL. Employee initials: J.K. ------------------ I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISH TO DO SO. Date: As of February 24, 2004 /S/ JOHN R. KLOPP ----------------------------- JOHN R. KLOPP Date: As of February 24, 2004 CAPITAL TRUST, INC. By: /s/ Brian H. Oswald ------------------------- Name: Brian H. Oswald Title: Chief Financial Officer Date: As of February 24, 2004 CT INVESTMENT MANAGEMENT CO., LLC By: /s/ Brian H. Oswald ------------------------- Name: Brian H. Oswald Title: Chief Financial Officer B-5 EX-10 3 ex10-2.txt EX. 10.2 - REGISTRATION RIGHTS AGREEMENT Exhibit 10.2 REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of June 18, 2003 by and among Capital Trust, Inc., a Maryland corporation (the "Company"), and the Persons named on Schedule A attached hereto (each an "Initial Holder" and collectively, the "Initial Holders"). Recitals WHEREAS, pursuant to the terms of that certain stock purchase agreement, dated as of June 13, 2003, by and among the Company and the Initial Holders (the "Stock Purchase Agreement"), the Company has offered and sold to the Initial Holders in a private placement an aggregate of 1,075,000 shares of class A common stock, par value $.01 per share, of the Company (the "Common Stock"); and WHEREAS, the Company has agreed to issue the Common Stock to the Holders (as defined below) and to grant to the Holders the registration rights set forth in this Agreement. NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby agree as follows: Section 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Advice" has the meaning set forth in Section 3(b) hereof. "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or is under common control with such Person. For the purposes of this definition, "control", when used with respect to any Person, means possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "affiliated", "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means a day other than a Saturday, Sunday or other day on which banking institutions in New York, New York are permitted or required by any applicable law to close. "Closing Date" means the date of closing on the purchase and sale of Common Stock pursuant to the Stock Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Common Stock" has the meaning set forth in the Recitals. "Company" has the meaning set forth in the Preamble and also includes the Company's successors. "Delay Notice" has the meaning set forth in Section 2(c) hereof. "Delay Period" has the meaning set forth in Section 2(c) hereof. "Effectiveness Period" has the meaning set forth in Section 2(b) hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Holder" or "Holders" means the Initial Holder(s) or each Person to whom a Holder Transfers Registrable Securities in accordance with Section 7(c). "Initial Holder" or "Initial Holders" has the meaning set forth in the Preamble "Inspectors" has the meaning set forth in Section 3(a)(xii) hereof. "NASD" means the National Association of Securities Dealers, Inc. "Person" means an individual, partnership, corporation, limited liability company, trust, estate, or unincorporated organization, or other entity, or a government or agency or political subdivision thereof. "Prospectus" shall mean the prospectus included in a Shelf Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and, in each case, including all documents incorporated by reference therein. "Records" has the meaning set forth in Section 3(a)(xii) hereof. "Registrable Securities" means (i) the shares of Common Stock purchased pursuant to the Stock Purchase Agreement; (ii) any shares of Common Stock or other securities issued as (or issuable upon the conversion or exercise of any warrant, right or -2- other security which is issued as) a dividend or other distribution with respect to, or in exchange by the Company generally for, or in replacement by the Company generally of, such shares of Common Stock; and (iii) any securities issued in exchange for such shares of Common Stock in any merger, combination or reorganization of the Company; provided, however, that Registrable Securities shall not include any securities which have theretofore been registered and sold by a Holder pursuant to the Securities Act or which have been sold by a Holder to the public pursuant to Rule 144 or any similar rules promulgated by the Commission pursuant to the Securities Act, and, provided further, that the Company shall have no obligation under Section 2 to register any Registrable Securities of a Holder or keep any Shelf Registration Statement effective if the Company shall deliver to the Holders requesting such registration an opinion of counsel reasonably satisfactory to such Holders and their counsel to the effect that the proposed sale or disposition of all of the Registrable Securities does not require registration under the Securities Act for a sale or disposition in a single public sale in accordance with the volume limitations contained in Rule 144(e)(1)(i) under the Securities Act, and if the Company shall offer to remove any and all legends restricting transfer from the certificates evidencing such Registrable Securities. For purposes of this Agreement, a Person will be deemed to be a Holder of Registrable Securities whenever such Person has the then-existing right to acquire such Registrable Securities (by conversion, purchase or otherwise), whether or not such acquisition has actually been effected. "Rule 144" and "Rule 145" mean Rule 144 and Rule 145 promulgated under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Shelf Registration" shall mean a registration effected pursuant to Section 2(a) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2 hereof which covers all of the Registrable Securities, on an appropriate form under Rule 415 under the Securities Act, or any successor or similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein. "Stock Purchase Agreement" has the meaning set forth in the Recitals. "Transfer" means and includes the act of selling, giving, transferring, creating a trust (voting or otherwise), assigning or otherwise disposing of (other than pledging, hypothecating or otherwise transferring as security or any transfer upon any merger or consolidation) (and correlative words shall have correlative meanings); provided however, that any transfer or other disposition upon foreclosure or other -3- exercise of remedies of a secured creditor after an event of default under or with respect to a pledge, hypothecation or other transfer as security shall constitute a Transfer. "Violation" has the meaning set forth in Section 5(a)(i). Section 2. Registration under the Securities Act. (a) Registration Requirement. The Company shall use best efforts to file with the Commission a Shelf Registration Statement meeting the requirements of the Securities Act within 30 days following the Closing Date, and shall use reasonable best efforts to cause such Shelf Registration Statement to be declared effective by the Commission as soon as reasonably practicable thereafter and in any event not later than 120 days after the filing of any such Shelf Registration Statement. No Holder of Registrable Securities shall be entitled to include any of its Registrable Securities in any Shelf Registration pursuant to this Agreement unless and until such Holder agrees in writing to be bound by all of the provisions of this Agreement applicable to such Holder and furnishes to the Company in writing, within 10 Business Days after receipt of a request therefor, such information as the Company may, after conferring with counsel with regard to information relating to Holders that would be required by the Commission to be included in such Shelf Registration Statement or Prospectus included therein, reasonably request for inclusion in any Shelf Registration Statement or Prospectus included therein. Each Holder as to which any Shelf Registration is being effected agrees to furnish to the Company all information with respect to such Holder necessary to make the information previously furnished to the Company by such Holder not materially misleading. (b) Effectiveness Requirement. The Company agrees to use its reasonable best efforts to keep each Shelf Registration Statement continuously effective and the Prospectus usable for resales for a period commencing on the date that such Shelf Registration Statement is initially declared effective by the Commission and terminating on the date when all of the Registrable Securities covered by such Shelf Registration Statement have been sold pursuant to such Shelf Registration Statement or cease to be Registrable Securities (the "Effectiveness Period"); provided, however, the Company shall be permitted to suspend sales of Securities during any Delay Period. (c) Delay Period. The term "Delay Period" shall mean, with respect to any obligation to keep any Shelf Registration Statement or Prospectus usable for resales pursuant to this Section 2, the shortest period of time determined in good faith by the Company to be necessary for such purpose when there exist circumstances relating to a material pending development, including but not limited to a pending or contemplated material acquisition or merger or other material transaction or similar event, which would require disclosure by the Company in such Shelf Registration Statement or Prospectus of material information which the Company determines in good faith that it has a bona fide business purpose for keeping confidential and non-public and the non-disclosure of which in such Shelf Registration Statement or Prospectus might cause such Shelf -4- Registration Statement or Prospectus to fail to comply with applicable disclosure requirements. A Delay Period shall commence on and include the date that the Company gives written notice (a "Delay Notice") to the Holders that the Prospectus is no longer usable as a result of a material pending development pursuant to Section 2(b) hereof and shall end on the date when the Holders are advised in writing by the Company that the current Delay Period has terminated (it being understood that the Company shall give such notice to all Holders promptly upon making the determination that the Delay Period has ended); provided, however, that the Company shall not be entitled to Delay Periods having durations that exceed ninety (90) days in the aggregate during any calendar year. The Company covenants and agrees that it shall not deliver a Delay Notice with respect to a Delay Period unless Company employees, officers and directors and their Affiliates and any other holders of registration rights with respect to the Company's Common Stock are also prohibited by the Company for the duration of such Delay Period from effecting any public sales of shares of Common Stock beneficially owned by them. The Company represents that it has no knowledge of any circumstance that would reasonably be expected at the time of the effectiveness of the Shelf Registration Statement pursuant to Section 2(a) to cause the Company to exercise its rights under this Section 2(c). (d) Notice. The Company will, in the event a Shelf Registration Statement is declared effective, provide to each Holder a reasonable number of copies of the Prospectus which is a part of such Shelf Registration Statement, notify each such Holder when such Shelf Registration Statement has become effective and take such other actions as are required to permit unrestricted resales of the Registrable Securities. The Company further agrees to supplement or amend each Shelf Registration Statement if and as required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registrations, and the Company agrees to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the Commission. (e) Effective Shelf Registration Statement. A Shelf Registration Statement will not be deemed to have become effective unless it has been declared effective by the Commission; provided, however, that if, after it has been declared effective, the offering of Registrable Securities pursuant to such Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the Commission or any other governmental agency or court, such Shelf Registration Statement will be deemed not to have been effective during the period of such interference, until the offering of Registrable Securities pursuant to such Shelf Registration Statement may legally resume. The Company will be deemed not to have used its reasonable best efforts to cause a Shelf Registration Statement to become, or to remain, effective during the requisite period if it voluntarily takes any action or omits to take any action that would result in any such Shelf Registration Statement not being declared effective or that would result in the Holders of Registrable Securities covered -5- thereby not being able to offer and sell such Registrable Securities during that period, unless such action or omission is required by applicable law. (f) Eligibility. As of the Closing Date, the Company will be eligible to file a Shelf Registration Statement with respect to the Registrable Securities. Section 3. Registration Procedures. (a) Obligations of the Company. In connection with its obligations under Section 2 hereof with respect to the Shelf Registration Statement, the Company shall, as expeditiously as practicable: (i) prepare and file with the Commission a Shelf Registration Statement as prescribed by Section 2(a) within the relevant time period specified in Section 2(a) hereof on the appropriate form under the Securities Act, which form shall (i) be selected by the Company, (ii) be available for the sale of the Registrable Securities by the selling Holders thereof, and (iii) comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the Commission to be filed therewith; the Company shall use its reasonable best efforts to cause such Shelf Registration Statement to become effective and remain effective and the Prospectus usable for resales in accordance with Section 2 hereof, subject to the proviso contained in Section 2(b) hereof; provided, however, that, before filing any Shelf Registration Statement or Prospectus or any amendments or supplements thereto, the Company shall furnish to and afford the Holders of the Registrable Securities covered by such Shelf Registration Statement, their counsel and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed; and the Company shall not file any Shelf Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document, other than filings required under the Exchange Act, if the Holders, their counsel or the managing underwriters of an underwritten offering of Registrable Securities, if any, shall reasonably object in a timely manner; (ii) prepare and file with the Commission such amendments and post-effective amendments to such Shelf Registration Statement as may be necessary to keep such Shelf Registration Statement effective for the Effectiveness Period, subject to the proviso contained in Section 2(b) hereof or as reasonably requested by the Holders of a majority of Registrable Securities, and cause each Prospectus to be supplemented, if so determined by the Company or requested by the Commission, by any -6- required prospectus supplement and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force), under the Securities Act, respond within a reasonable time to any comments received from the Commission with respect to such Shelf Registration Statement, or any amendment, post-effective amendment or supplement relating thereto, and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder applicable to it with respect to the disposition of all Registrable Securities covered by such Shelf Registration Statement during the Effectiveness Period in accordance with the intended method or methods of distribution by the selling Holders thereof described in this Agreement; (iii) register or qualify the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions by the time the applicable Shelf Registration Statement is declared effective by the Commission as any Holder of Registrable Securities covered by such Shelf Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request in writing in advance of such date of effectiveness, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Company shall not be required to (A) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(a)(iii) hereof, (B) file any general consent to service of process in any jurisdiction where it would not otherwise be subject to such service of process or (C) subject itself to taxation in any such jurisdiction if it is not then so subject; (iv) promptly notify each Holder of Registrable Securities, its counsel and the managing underwriters of an underwritten offering of Registrable Securities, if any, and promptly confirm such notice in writing (A) when the Shelf Registration Statement covering such Registrable Securities has become effective and when any post-effective amendments thereto become effective, (B) of any request by the Commission or any state securities authority for amendments and supplements to such Shelf Registration Statement or Prospectus or for additional information after such Shelf Registration Statement has become effective, (C) of the issuance or threatened issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of such Shelf Registration Statement or the qualification of the Registrable Securities in any jurisdiction described in Section 3(a)(iii) hereof or the initiation of any proceedings for that purpose, (D) if, between the effective date of such -7- Shelf Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company contained in any purchase agreement, securities sales agreement or other similar agreement cease to be true and correct in all material respects, (E) of the happening of any event or the failure of any event to occur or the discovery of any facts, during the Effectiveness Period, which makes any statement made in such Shelf Registration Statement or the related Prospectus untrue in any material respect or which causes such Shelf Registration Statement or Prospectus to omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (F) of the reasonable determination of the Company that a post-effective amendment to such Shelf Registration Statement would be appropriate; (v) take reasonable efforts to prevent the entry of any stop order suspending the effectiveness of any Shelf Registration Statement, or if entered, to obtain the withdrawal of any such stop order at the earliest possible moment; (vi) furnish to each Holder of Registrable Securities included within the coverage of a Shelf Registration Statement, without charge, a reasonable number of conformed copies of the Shelf Registration Statement relating to such Shelf Registration and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested) as such Holder or managing underwriters, if any, may reasonably request; (vii) deliver to each selling Holder of Registrable Securities and each managing underwriter participating in any such disposition of Registrable Securities, if any, without charge, as many copies of the applicable Prospectus (including each preliminary Prospectus) as such Holder or managing underwriter may reasonably request (it being understood that the Company consents to the use of the Prospectus by each of the selling Holders of Registrable Securities and the underwriter or underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus), such other documents incorporated by reference therein and any exhibits thereto as such selling Holder or managing underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities by such Holder or underwriter; (viii) cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends -8- and registered in such names as the selling Holders or any underwriters may reasonably request at least two Business Days prior to the closing of any sale of Registrable Securities pursuant to the Shelf Registration Statement relating thereto; (ix) as soon as practicable after the resolution of any matter or event specified in Sections 3(a)(iv)(B), 3(a)(iv)(C), 3(a)(iv)(E) (subject to the proviso contained in Section 2(b) hereof) and 3(a)(iv)(F) hereof), prepare a supplement or post-effective amendment to the applicable Shelf Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (x) a reasonable time prior to the filing of any document which is to be incorporated by reference into a Shelf Registration Statement or a Prospectus after the initial filing of such Shelf Registration Statement, provide a reasonable number of copies of such document to the Holders and managing underwriters, if any, and make such of the representatives of the Company as shall be reasonably requested by the Holders of Registrable Securities available for discussion of such document; (xi) if requested by the Holders of Registrable Securities in connection with a firm commitment underwritten offering of at least $1 million of Registrable Securities: (i) (A) enter into such agreements (including underwriting agreements) as are customary in underwritten offerings, (B) make such representations and warranties in such agreements to the underwriters (if any), with respect to the business of the Company and its subsidiaries as then conducted and with respect to the applicable Shelf Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers to underwriters in underwritten offerings (all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters included in each such agreement shall also be made to and for the benefit of such Holders and any or all of the conditions precedent to the obligations of such underwriters under such agreements shall be conditions precedent to the obligations of such Holders), and confirm the same if and when requested and (C) include in such agreements such terms and conditions as are generally prevailing in agreements of that type, including, without limitation, indemnities no less -9- favorable to the recipient thereof than those provided in Section 5 hereof; (ii) obtain opinions of counsel to the Company and updates thereof (which may be in the form of a reliance letter) in form and substance reasonably satisfactory to the managing underwriters covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such underwriters (it being agreed that the matters to be covered by such opinion may be subject to customary qualifications and exceptions); (iii) obtain "cold comfort" accountants' letters and updates thereof in form and substance reasonably satisfactory to the managing underwriters from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings and such other matters as reasonably requested by such underwriters in accordance with Statement on Auditing Standards No. 72; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures customary for such agreements; (xii) if requested by Holders of Registrable Securities in connection with a firm underwritten commitment offering of at least $1 million of Registrable Securities, make reasonably available for inspection by any selling Holder of Registrable Securities who certifies to the Company that it has a current intention to sell Registrable Securities pursuant to the Shelf Registration, any underwriter participating in any such disposition of Registrable Securities, if any, and any attorney, accountant or other agent retained by any such selling Holder or underwriter (collectively, the "Inspectors"), at the offices where normally kept, during the Company's normal business hours, all financial and other records, and pertinent organizational and operational documents of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, trustees and employees of the Company and its subsidiaries to supply all relevant information in each case reasonably requested by any such Inspector in connection with such Shelf Registration Statement, Records and information which the Company, in good faith, determines to be confidential and any Records and information which it notifies the Inspectors are confidential shall not be disclosed to any Inspector except where (i) the disclosure of such Records or information is necessary to avoid or correct a material misstatement or omission in the applicable Shelf Registration Statement, -10- (ii) the release of such Records or information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or is necessary in connection with any action, suit or proceeding, or (iii) such Records or information previously have been made generally available to the public; each selling Holder of such Registrable Securities will be required to agree in writing that Records and information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company unless and until such is made generally available to the public through no fault of an Inspector or a selling Holder; and each selling Holder of such Registrable Securities will be required to further agree in writing that it will, upon learning that disclosure of such Records or information is sought in a court of competent jurisdiction, or in connection with any action, suit or proceeding, give notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records and information deemed confidential; (xiii) comply with all applicable rules and regulations of the Commission so long as any provision of this Agreement shall be applicable and make generally available to its securityholders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any twelve-month period (or 90 days after the end of any twelve-month period if such period is a fiscal year) or, in each case, such shorter period as may be required for the filing of reports containing quarterly and annual financial statements pursuant to the rules and regulations adopted under the Securities Act from time to time (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Shelf Registration Statement, which statements shall cover said twelve-month periods, provided that the obligations under this Section 3(a)(xiii) shall be satisfied by the timely filing of quarterly and annual reports on Forms 10-Q and 10-K under the Exchange Act; (xiv) cooperate with each seller of Registrable Securities covered by a Shelf Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD; -11- (xv) take all other steps necessary to effect the registration of the Registrable Securities covered by a Shelf Registration Statement contemplated hereby; and (xvi) notwithstanding any other provision of this Section 3, if the Company becomes ineligible to use the registration form on which the Shelf Registration Statement is filed and declared effective pursuant to Section 2(a), thereby precluding any Holder from using the related Prospectus, the Company shall use best efforts to prepare and file either a post effective amendment to the Shelf Registration Statement to convert such registration statement to, or a new Shelf Registration Statement on, another registration form which the Company is eligible to use within 30 days after the date that the Company becomes ineligible, provided such other registration form shall be available for the sale of the Registrable Securities by the selling Holders thereof and such amended or new Shelf Registration Statement shall remain subject in all respects to the provisions of this Section 3. (b) Holders' Obligations. (i) Each Holder agrees that, upon receipt of any notice from the Company of the occurrence of any event specified in Sections 3(a)(iv)(B), 3(a)(iv)(C), 3(a)(iv)(E), 3(a)(iv)(F) hereof or any Delay Notice, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to the Shelf Registration Statement at issue until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(a)(ix) hereof or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. (ii) Each Holder agrees that the Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to it such information regarding such seller as may be required by the staff of the Commission to be included in the applicable Shelf Registration Statement, the Company may exclude from such registration the Registrable Securities of any seller who fails to furnish such information within 10 Business Days after receiving such request, and the Company shall have no obligation to register under the Securities Act the Registrable Securities of a seller who so fails to furnish such information. -12- Section 4. Expenses of Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing, or qualification of Registrable Securities with respect to a Shelf Registration Statement for each selling Holder, including all registration, exchange listing, accounting, filing and NASD fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the reasonable fees and disbursements of counsel for the Company, and of the Company's independent public accountants, including the expenses of "comfort letters" required by or incident to such performance and compliance and reasonable fees and disbursements of one firm of counsel and one firm of accountants for the Initial Holders. Holders shall be responsible for any underwriting discounts and commissions and taxes of any kind (including without limitation, transfer taxes) relating to any disposition, sale or transfer of Registrable Securities. Section 5. Indemnification; Contribution. (a) Indemnification by the Company. If any Registrable Securities are included in a Shelf Registration Statement under this Agreement: (i) To the extent permitted by applicable law, the Company shall indemnify and hold harmless each selling Holder, each Person, if any, who controls such selling Holder within the meaning of the Securities Act, and each officer, director, trustee, partner, and employee of such selling Holder and such controlling Person, against any and all losses, claims, damages, liabilities and expenses (joint or several), including attorneys' fees and disbursements and expenses of investigation, incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may become subject under the Securities Act, the Exchange Act or other federal or state laws, insofar as such losses, claims, damages, liabilities and expenses arise out of or are based upon any of the following statements, omissions or violations (collectively, a "Violation"): (A) Any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein, or any amendments or supplements thereto or any document incorporated by reference therein; (B) The omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (C) Any violation or alleged violation by the Company of the federal securities laws, any applicable state securities law or -13- any rule or regulation promulgated under the Securities Act, the Exchange Act or any applicable state securities law; provided, however, that the indemnification required by this Section 5(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or expense to the extent that it arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such Registration Statement in reliance upon and in conformity with written information furnished to the Company by the indemnified party expressly for use in connection with such registration; provided, further, that the indemnity agreement contained in this Section 5(a) shall not apply to any underwriter to the extent that any such loss is based on or arises out of an untrue statement or alleged untrue statement of a material fact, or an omission or alleged omission to state a material fact, contained in or omitted from any preliminary prospectus if the final prospectus shall correct such untrue statement or alleged untrue statement, or such omission or alleged omission, and a copy of the final prospectus has not been sent or given to such Person at or prior to the confirmation of sale to such Person if such underwriter was under an obligation to deliver such final prospectus and failed to do so. The Company shall also indemnify underwriters participating in the distribution of the Registrable Securities, their officers, directors, agents and employees and each Person who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the selling Holders. This indemnity shall be in addition to any liability the Company may otherwise have. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such selling Holder or any indemnified party and shall survive the transfer of such securities by such Holder. (b) Indemnification by Holder. If any of a selling Holder's Registrable Securities are included in a registration statement under this Agreement, to the extent permitted by applicable law, such selling Holder shall indemnify and hold harmless the Company, each of its directors, each of its officers who shall have signed the registration statement, each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, any other selling Holder, any controlling Person of any such other selling Holder and each officer, director, partner, and employee of such other selling Holder and such controlling Person, against any and all losses, claims, damages, liabilities and expenses (joint and several), including attorneys' fees and disbursements and expenses of investigation, incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may otherwise become subject under the Securities Act, the Exchange Act or other federal or state laws, insofar as such losses, claims, damages, liabilities and expenses arise out or are based upon any untrue statement of a material fact or any omission of a material fact required to be stated in the -14- Registration Statement under which such Registrable Securities were registered under the Securities Act (including any final, preliminary or summary Prospectus contained therein or any amendment thereof or supplement thereto or any documents incorporated by reference therein), or necessary to make the statements therein (in the case of a Prospectus or preliminary Prospectus, in light or the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or omission had been contained in any information furnished in writing by such selling Holder to the Company expressly for use in connection with such registration; provided, however, that (x) the indemnification required by this Section 5(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense if settlement is effected without the consent of the relevant selling Holder of Registrable Securities, which consent shall not be unreasonably withheld, and (y) in no event shall the amount of any indemnity under this Section 5(b) exceed the gross proceeds from the applicable offering received by such selling Holder. In no event shall a Holder be jointly liable with any other Holder as a result of its indemnification obligations. (c) Conduct of Indemnification Proceedings. Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action, suit, proceeding, investigation or threat thereof made in writing for which such indemnified party may make a claim under this Section 5, such indemnified party shall deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties. The failure to deliver written notice to the indemnifying party within a reasonable time following the commencement of any such action, if not otherwise known by the indemnifying party and if it materially prejudices or results in forfeiture of substantial rights or defenses, shall relieve such indemnifying party of any liability to the indemnified party under this Section 5, to the extent of any damage directly suffered by the indemnifying party as a result thereof, but shall not relieve the indemnifying party of any liability that it may have to any indemnified party otherwise than pursuant to this Section 5. Any fees and expenses incurred by the indemnified party (including any fees and expenses incurred in connection with investigating or preparing to defend such action or proceeding) shall be paid to the indemnified party, as incurred, within thirty (30) days of written notice thereof to the indemnifying party (regardless of whether it is ultimately determined that an indemnified party is not entitled to indemnification hereunder). Any such indemnified party shall have the right to employ separate counsel in any such action, claim or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be the expenses of such indemnified party unless (i) the indemnifying party has agreed to pay such fees and expenses, (ii) the indemnifying party shall have failed to promptly assume the defense of such action, claim or proceeding, (iii) the named parties to any such action, claim or proceeding (including any impleaded parties) include both such indemnified party and the indemnifying party, and such indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it -15- which are different from or in addition to those available to the indemnifying party, or (iv) in the reasonable judgment of the indemnified party, based upon advice of its counsel, a conflict of interest may exist between such party and the indemnifying party with respect to such claims (in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action, claim or proceeding on behalf of such indemnified party, it being understood, however, that the indemnifying party shall not, in connection with any one such action, claim or proceeding or separate but substantially similar or related actions, claims or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one additional firm of attorneys (together with appropriate local counsel) at any time for all such indemnified parties, unless in the reasonable judgment of such indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such action, claim or proceeding, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels). No indemnifying party shall be liable to an indemnified party for any settlement of any action, proceeding or claim without the written consent of the indemnifying party, which consent shall not be unreasonably withheld. (d) Contribution. If the indemnification required by this Section 5 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to in this Section 5: (i) The indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any Violation has been committed by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Violation. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 5(a) and Section 5(b), any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. (ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by -16- pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in Section 5(d)(i). No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (e) Full Indemnification. If indemnification is available under this Section 5, the indemnifying parties shall indemnify each indemnified party to the full extent provided in this Section 5 without regard to the relative fault of such indemnifying party or indemnified party or any other equitable consideration referred to in Section 5(d)(i) hereof. (f) Survival. The obligations of the Company and the selling Holders of Registrable Securities under this Section 5 shall survive the completion of any offering of Registrable Securities pursuant to a registration statement under this agreement, and otherwise. Section 6. Covenants of the Company. The Company hereby agrees and covenants as follows: (a) Exchange Act Filings. (i) The Company shall file as and when applicable, on a timely basis, all reports required to be filed by it under the Exchange Act. If the Company is not required to file reports pursuant to the Exchange Act, upon the request of any Holder of Registrable Securities, the Company shall make publicly available the information specified in subparagraph (c)(2) of Rule 144. The Company shall take such further action as may be reasonably required from time to time and as may be within the reasonable control of the Company, to enable the Holders to Transfer Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 or any other exemption from registration. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements and, if not, the specifics thereof. (ii) In connection with any sale, transfer or other disposition by a Holder of any Registrable Securities pursuant to Rule 144, the Company shall cooperate with such Holder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any Securities Act legend, and enable certificates for such Registrable Securities to be for such number of shares and registered in -17- such names as the Holder may reasonably request at least two business days prior to any sale of Registrable Securities. (b) Merger, Consolidations and Sale of Assets. The Company shall not, directly or indirectly, (x) enter into any merger, consolidation or reorganization in which the Company shall not be the surviving corporation or (y) Transfer or agree to Transfer all or substantially all the Company's assets, unless prior to such merger, consolidation, reorganization or asset Transfer, the surviving corporation or the transferee, respectively, shall have agreed in writing to assume the obligations of the Company under this Agreement, and for that purpose references hereunder to "Registrable Securities" shall be deemed to include the securities which the Holders of Registrable Securities would be entitled to receive in exchange for Registrable Securities pursuant to any such merger, consolidation or reorganization. Section 7. Miscellaneous . (a) Amendments and Waivers. (i) The provisions of this Agreement, including the provisions of this Section 7(a), may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given without the written consent of the Company and the Holders of a majority of the outstanding Registrable Securities, provided that no amendment, modification or supplement or waiver or consent to a departure with respect to Section 5 hereof shall be effective against any Holder unless consented to in writing by such Holder. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder, each future Holder of Registrable Securities, and the Company. (ii) Notice of any amendment, modification or supplement to this Agreement adopted in accordance with this Section 7 shall be provided by the Company to the Holders prior to the effective date of such amendment, modification or supplement. (b) Notices. All notices or other communications under this Agreement shall be sufficient if in writing and delivered by hand or sent, postage prepaid by registered, certified or express mail, or by recognized overnight air courier service and shall be deemed given when so delivered by hand, or if mailed or sent by overnight courier service, on the third Business Day after mailing (one Business Day in the case of express mail or overnight courier service) to the parties at the following addresses: (i) if to the Initial Holders, to the addresses set forth under their signatures on the signature page hereof and if to any other Holder to the address contained in the records of the Company; -18- (ii) if to the Company, to: Capital Trust, Inc. 410 Park Avenue, 14th Floor, New York, New York 10022 Attention: John R. Klopp Chief Executive Officer with a copy to: Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, New York 10022 Attention: Michael L. Zuppone or at such other address as the addressee may have furnished in writing to the sender as provided herein. (c) Assignment. (i) Except as expressly provided in this Section 7(c), the rights of the parties hereto cannot be assigned and any purported assignment or transfer to the contrary shall be void ab initio. So long as the terms of this Section 7(c) are followed, any Holder may assign any of its rights under this Agreement, without the consent of the Company, to any Person to whom such holder Transfers any Registrable Securities or any rights to acquire Registrable Securities so long as such Transfer is not made pursuant to an effective Registration Statement or pursuant to Rule 144 or Rule 145 (or any successor provisions) under the Securities Act or in any other manner the effect of which is to cause the Transferred securities to be freely transferable without regard to the volume and manner of sale limitations set forth in Rule 144 (or any successor provision) in the hands of the transferee as of the date of such Transfer. (ii) Notwithstanding Section 7(c)(i), no Holder may assign any of its rights under this Agreement to any Person to whom such Holder Transfers any Registrable Securities if the Transfer of such Registrable Securities requires registration under the Securities Act. (iii) The nature and extent of any rights assigned shall be as agreed to between the assigning party and the assignee. No Person may be assigned any rights under this Agreement unless (x) the Company is given written notice by the assigning party at the time of such assignment stating -19- the name and address of the assignee, identifying the securities of the Company as to which the rights in question are being assigned, and providing a detailed description of the nature and extent of the rights that are being assigned and (y) and the assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including, without limitation, the provisions of this Section 7(c). (d) Successors and Assigns; No Third Party Beneficiaries. This Agreement will be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns. Except as set forth herein and by operation of law, no party to this Agreement may assign or delegate all or any portion of its rights, obligations, or liabilities under this Agreement without the prior written consent of the Company in the case of a Holder or of all Holders in the case of the Company. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties hereto and their respective successors and permitted assigns to the extent contemplated herein. (e) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. (h) Specific Performance; Costs and Expenses. The parties hereto acknowledge that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under this Agreement in accordance with the terms and conditions of this Agreement in any court of the United States or any State thereof having jurisdiction. The parties agree that if any party or parties violates this Agreement, in addition to the any other rights and remedies the non-violating party may have (including monetary damages), the prevailing party or parties shall be entitled to receive from the losing party or parties all costs and expenses, including reasonable attorneys' fees, incurred or expended by the prevailing party or parties to enforce its rights under the Agreement. (i) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement -20- of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. -21- IN WITNESS WHEREOF, the undersigned Company has executed this Agreement as of the date first written above. CAPITAL TRUST, INC. By:/s/ John R. Klopp --------------------------------- Name: John R. Klopp Title: Chief Executive Officer [Signature pages for persons named on Schedule A have been intentionally omitted] Schedule A WIG LP Verna Harrah Trust HHS Partnership Jerry Markowitz and Maria Markowitz Barbara Clements Heller Revocable Trust Jerome Blank Irrevocable Trust Bernard Osher Trust Prism Partners I LP Fred Stein Sharon B Zell Family Trust JW Family Trust Richard F. Levy Kenneth D. Tuchman Harvey R. Heller Ramius Capital Group, LLC Portside Growth & Opportunity Fund Ltd. Sante Fe Art Foundation Diane Buchanan Wilsey SMS Trust ADS 1212 Trust You Lucky Dog Trust Prima Associates, LP The Alpha Fund Gaston Caperton John Pritzker Herb Lau and Carol Lau Mellon Bank NA, Custodian for the Public Employee Retirement System of Idaho Boston Safe Deposit and Trust Company, as Trustee of the Raytheon Combined DB/DC Master Trust Boston Safe Deposit and Trust Company, as Trustee of the Raytheon Master Pension Trust WHI Growth Fund, LP Shoshana Foundation Inc. Granite Fund I LLC EX-31 4 ex31-1.txt EX. 31.1 - 302 CERTIFICATION OF CEO Exhibit 31.1 CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2003 I, John R. Klopp, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 12, 2004 /s/ John R. Klopp ----------------- John R. Klopp Chief Executive Officer EX-31 5 ex31-2.txt EX. 31.2 - 302 CERTIFICATION OF CFO Exhibit 31.2 CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Brian H. Oswald, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 12, 2004 /s/ Brian H. Oswald ------------------- Brian H. Oswald Chief Financial Officer EX-32 6 ex32-1.txt EX. 32.1 - 906 CERTIFICATION OF CEO Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Klopp, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John R. Klopp ----------------- John R. Klopp Chief Executive Officer May 12, 2004 EX-32 7 ex32-2.txt EX. 32.2 - 906 CERTIFICATION OF CFO Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian H. Oswald, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Brian H. Oswald - ------------------- Brian H. Oswald Chief Financial Officer May 12, 2004 -----END PRIVACY-ENHANCED MESSAGE-----