To be filed with the Securities and Exchange Commission on August 14, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 1-14788 ------- Capital Trust, Inc. ------------------- (Exact name of registrant as specified in its charter) Maryland 94-6181186 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 410 Park Avenue, 14th Floor, New York, NY 10022 - ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 655-0220 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[ X ] No[ ] APPLICABLE ONLY TO CORPORATE ISSUERS: The number of outstanding shares of the Registrant's Class A Common stock, par value $0.01 per share ("Class A Common Stock"), as of August 13, 2001 was 18,727,731.
CAPITAL TRUST, INC. INDEX <TABLE> <CAPTION> Part I. Financial Information <S> <C> <C> <C> Item 1: Financial Statements 1 Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000 (audited) 1 Consolidated Statements of Income - Three and Six Months Ended June 30, 2001 and 2000 (unaudited) 2 Consolidated Statements of Changes in Stockholders' Equity - Six Months Ended June 30, 2001 and 2000 (unaudited) 3 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 (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 17 Part II. Other Information Item 1: Legal Proceedings 19 Item 2: Changes in Securities 19 Item 3: Defaults Upon Senior Securities 19 Item 4: Submission of Matters to a Vote of Security Holders 19 Item 5: Other Information 19 Item 6: Exhibits and Reports on Form 8-K 20 Signatures 21 </TABLE>
Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets June 30, 2001 and December 31, 2000 (in thousands) <TABLE> <CAPTION> June 30, December 31, 2001 2000 ------------------ ------------------ Assets (Unaudited) (Audited) <S> <C> <C> Cash and cash equivalents $ 11,954 $ 11,388 Available-for-sale securities, at fair value 97,456 - Commercial mortgage-backed securities available-for-sale, at fair value 217,526 215,516 Certificated mezzanine investments available-for-sale, at fair value - 22,379 Loans receivable, net of $13,695 and $12,947 reserve for possible credit losses at June 30, 2001 and December 31, 2000, respectively 267,708 349,089 Equity investment in CT Mezzanine Partners I LLC ("Fund I") and CT Mezzanine Partners II LP ("Fund II")(together "Funds") 34,658 26,011 Deposits and other receivables 298 211 Accrued interest receivable 4,435 7,241 Deferred income taxes 9,446 8,719 Prepaid and other assets 2,149 3,838 ------------------ ------------------- Total assets $ 645,630 $ 644,392 ================== =================== Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued expenses $ 9,233 $ 10,329 Notes payable 1,433 2,647 Credit facilities 118,101 173,641 Term redeemable securities contract 135,127 133,235 Repurchase obligations 94,643 16,569 Deferred origination fees and other revenue 1,903 2,163 Other liabilities 1,423 - ------------------ ------------------- Total liabilities 361,863 338,584 ------------------ ------------------- Company-obligated, mandatory redeemable, convertible preferred securities of CT Convertible Trust I, holding $89,742,000 of convertible 8.25% junior subordinated debentures and $60,258,000 of non-convertible 13.00% junior subordinated debentures of Capital Trust, Inc. ("Convertible Trust Preferred Securities") 147,541 147,142 ------------------ ------------------- Stockholders' equity: Class A 9.5% cumulative convertible preferred stock, $0.01 par value, $0.26 cumulative annual dividend, 100,000 shares authorized, 759 and 2,278 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively (liquidation preference of $2,042) ("Class A Preferred Stock") 8 23 Class B 9.5% cumulative convertible non-voting preferred stock, $0.01 par value, $0.26 cumulative annual dividend, 100,000 shares authorized, 1,769 and 4,043 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively (liquidation preference of $3,320) ("Class B Preferred Stock" and together with Class A Preferred Stock, "Preferred Stock") 17 40 Class A common stock, $0.01 par value, 100,000 shares authorized, 18,532 and 18,967 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 186 190 Class B common stock, $0.01 par value, 100,000 shares authorized, 1,234 and 2,755 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively ("Class B Common Stock") 12 28 Restricted Class A Common Stock, $0.01 par value, 396 and 264 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively ("Restricted Class A Common Stock" and together with Class A Common Stock and Class B Common Stock, "Common Stock") 4 3 Additional paid-in capital 156,398 181,507 Unearned compensation (1,049) (468) Accumulated other comprehensive loss (10,611) (10,152) Accumulated deficit (8,739) (12,505) ------------------ ------------------- Total stockholders' equity 136,226 158,666 ------------------ ------------------- Total liabilities and stockholders' equity $ 645,630 $ 644,392 ================== =================== </TABLE> See accompanying notes to unaudited consolidated financial statements. -1-
Capital Trust, Inc. and Subsidiaries Consolidated Statements of Income Three and Six Months Ended June 30, 2001 and 2000 (in thousands, except per share data) (unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, --------------------------------- ------------------------------ 2001 2000 2001 2000 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Income from loans and other investments: Interest and related income $ 16,844 $ 20,817 $ 34,757 $ 43,510 Income from equity investments in Funds 1,009 221 1,868 221 Less: Interest and related expenses 6,763 9,278 14,017 19,492 -------------- -------------- -------------- -------------- Income from loans and other investments, net 11,090 11,760 22,608 24,239 -------------- -------------- -------------- -------------- Other revenues: Advisory and investment banking fees 52 2,409 127 3,734 Management fees from Funds managed 1,818 55 2,000 55 Other interest income 126 220 277 422 -------------- -------------- -------------- -------------- Total other revenues 1,996 2,684 2,404 4,211 -------------- -------------- -------------- -------------- Other expenses: General and administrative 4,117 5,802 7,775 9,555 Other interest expense 32 64 65 135 Depreciation and amortization 215 453 386 559 Other expenses (332) - (108) - Provision for possible credit losses - 876 748 1,842 -------------- -------------- -------------- -------------- Total other expenses 4,032 7,195 8,866 12,091 -------------- -------------- -------------- -------------- Income before income taxes and distributions and amortization on Convertible Trust Preferred Securities 9,054 7,249 16,146 16,359 Provision for income taxes 4,259 4,154 7,507 8,604 -------------- -------------- -------------- -------------- Income before distributions and amortization on Convertible Trust Preferred Securities 4,795 3,095 8,639 7,755 Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit of $1,889 and $1,793 for the three months ended June 30, 2001 and 2000, respectively, and $3,778 and $3,345 for the six months ended June 30, 2001 and 2000, respectively 2,120 1,941 4,240 3,682 -------------- -------------- -------------- -------------- Net income 2,675 1,154 4,399 4,073 Less: Preferred Stock dividend and dividend requirement adjustment (125) (404) (529) (807) -------------- -------------- -------------- -------------- Net income allocable to shares of Common Stock $ 2,550 $ 750 $ 3,870 $ 3,266 ============== ============== ============== ============== Per share information: Net income per share of Common Stock: Basic $ 0.13 $ 0.03 $ 0.18 $ 0.14 ============== ============== ============== ============== Diluted $ 0.10 $ 0.03 $ 0.17 $ 0.13 ============== ============== ============== ============== Weighted average shares of Common Stock outstanding: Basic 20,351,232 23,204,420 21,287,992 23,845,948 ============== ============== ============== ============== Diluted 36,737,343 23,404,420 38,970,355 30,366,781 ============== ============== ============== ============== </TABLE> See accompanying notes to unaudited consolidated financial statements. -2-
Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity For the Six Months Ended June 30, 2001 and 2000 (in thousands) (unaudited) <TABLE> <CAPTION> Class A Class B Class A Comprehensive Preferred Preferred Common Income/(Loss) Stock Stock Stock ---------------------- ------------------------------------------------- <S> <C> <C> <C> <C> Balance at January 1, 2000 $ - $ 23 $ 40 $ 219 Net income 4,073 - - - Unrealized gain on available-for-sale securities, net of related income taxes 8,700 - - - Issuance of warrants to purchase shares of Class A Common Stock - - - - Issuance of Class A Common Stock unit awards - - - 1 Issuance of restricted Class A Common Stock - - - - Restricted Class A Common Stock earned - - - - Dividends paid on Preferred Stock - - - - Repurchase and retirement of shares of Class A Common Stock previously outstanding - - - (17) ---------------------- ------------------------------------------------- Balance at June 30, 2000 $ 12,773 $ 23 $ 40 $ 203 ====================== ================================================= Balance at January 1, 2001 $ - $ 23 $ 40 $ 190 Net income 4,399 - - - Transition adjustment for recognition of derivative financial instruments - - - - Unrealized loss on derivative financial instruments, net of related income taxes (849) - - - Unrealized gain on available-for-sale securities, net of related income taxes 964 - - - Issuance of warrants to purchase shares of Class A Common Stock - - - - Issuance of Class A Common Stock unit awards - - - 1 Issuance of restricted Class A Common Stock - - - - Restricted Class A Common Stock earned - - - - Vesting of restricted Class A Common Stock to unrestricted Class A Common Stock - - - 1 Dividends paid on Preferred Stock - - - - Repurchase and retirement of shares of Class A Common Stock previously outstanding - (15) (23) (6) ---------------------- ------------------------------------------------- Balance at June 30, 2001 $ 4,514 $ 8 $ 17 $ 186 ====================== ================================================= <CAPTION> Restricted Class B Class A Additional Common Common Paid-In Unearned Stock Stock Capital Compensation ------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance at January 1, 2000 $ 23 $ 1 $ 189,456 $ (407) Net income - - - - Unrealized gain on available-for-sale securities, net of related income taxes - - - - Issuance of warrants to purchase shares of Class A Common Stock - - 1,360 - Issuance of Class A Common Stock unit awards - - 624 - Issuance of restricted Class A Common Stock - 2 948 (950) Restricted Class A Common Stock earned - - - 376 Dividends paid on Preferred Stock - - - - Repurchase and retirement of shares of Class A Common Stock previously outstanding - - (6,710) - ------------------------------------------------------------------- Balance at June 30, 2000 $ 23 $ 3 $ 185,678 $ (981) =================================================================== Balance at January 1, 2001 $ 28 $ 3 $ 181,507 $ (468) Net income - - - - Transition adjustment for recognition of derivative financial instruments - - - - Unrealized loss on derivative financial instruments, net of related income taxes - - - - Unrealized gain on available-for-sale securities, net of related income taxes - - - - Issuance of warrants to purchase shares of Class A Common Stock - - 2,013 - Issuance of Class A Common Stock unit awards - - 624 - Issuance of restricted Class A Common Stock - 2 1,023 (1,025) Restricted Class A Common Stock earned - - - 444 Vesting of restricted Class A Common Stock to unrestricted Class A Common Stock - (1) - - Dividends paid on Preferred Stock - - - - Repurchase and retirement of shares of Class A Common Stock previously outstanding (16) - (28,769) - ------------------------------------------------------------------- Balance at June 30, 2001 $ 12 $ 4 $ 156,398 $ (1,049) =================================================================== <CAPTION> Accumulated Other Comprehensive Accumulated Income/(Loss) Deficit Total ------------------------------------------------------ <S> <C> <C> <C> Balance at January 1, 2000 $ (10,164) $ (20,651) $ 158,540 Net income - 4,073 4,073 Unrealized gain on available-for-sale securities, net of related income taxes 8,700 - 8,700 Issuance of warrants to purchase shares of Class A Common Stock - - 1,360 Issuance of Class A Common Stock unit awards - - 625 Issuance of restricted Class A Common Stock - - - Restricted Class A Common Stock earned - - 376 Dividends paid on Preferred Stock - (807) (807) Repurchase and retirement of shares of Class A Common Stock previously outstanding - - (6,727) ------------------------------------------------------ Balance at June 30, 2000 $ (1,464) $ (17,385) $ 166,140 ====================================================== Balance at January 1, 2001 $ (10,152) $ (12,505) $ 158,666 Net income - 4,399 4,399 Transition adjustment for recognition of derivative financial instruments (574) - (574) Unrealized loss on derivative financial instruments, net of related income taxes (849) - (849) Unrealized gain on available-for-sale securities, net of related income taxes 964 - 964 Issuance of warrants to purchase shares of Class A Common Stock - - 2,013 Issuance of Class A Common Stock unit awards - - 625 Issuance of restricted Class A Common Stock - - - Restricted Class A Common Stock earned - - 444 Vesting of restricted Class A Common Stock to unrestricted Class A Common Stock - - - Dividends paid on Preferred Stock - (633) (633) Repurchase and retirement of shares of Class A Common Stock previously outstanding - - (28,829) ------------------------------------------------------ Balance at June 30, 2001 $ (10,611) $ (8,739) $ 136,226 ====================================================== </TABLE> See accompanying notes to unaudited consolidated financial statements. -3-
Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows Six Months Ended June 30, 2001 and 2000 (in thousands) (unaudited) <TABLE> <CAPTION> 2001 2000 ------------------- ------------------- <S> <C> <C> Cash flows from operating activities: Net income $ 4,399 $ 4,073 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income taxes (727) (1,192) Provision for credit losses 748 1,842 Depreciation and amortization 386 559 Income from equity investments in Funds (1,868) (221) Unrealized gain on hedged and derivative securities (108) - Restricted Class A Common Stock earned 444 376 Amortization of premiums and accretion of discounts on loans and investments, net (1,381) (1,172) Accretion of discounts on term redeemable securities contract 1,892 1,749 Accretion of discounts and fees on Convertible Trust Preferred Securities, net 399 400 Changes in assets and liabilities, net: Deposits and other receivables (87) 17 Accrued interest receivable 2,806 2,360 Prepaid and other assets 2,261 274 Deferred origination fees and other revenue (260) (473) Accounts payable and accrued expenses (471) (9,764) ------------------- ------------------- Net cash provided by (used in) operating activities 8,433 (1,172) ------------------- ------------------- Cash flows from investing activities: Purchases of available-for-sale securities (97,482) - Cash received on commercial mortgage-backed securities recorded as discount - 1,445 Principal collections on certificated mezzanine investments 22,379 22,446 Origination and purchase of loans receivable (1,467) (13,050) Principal collections and proceeds from sale of loans receivable 81,217 104,314 Equity investment in Funds (21,602) (25,192) Return of Capital from Funds 16,560 - Purchases of equipment and leasehold improvements (109) (22) ------------------- ------------------- Net cash provided by (used in) investing activities (504) 89,941 ------------------- ------------------- Cash flows from financing activities: Proceeds from repurchase obligations 94,643 - Repayment of repurchase obligations (16,569) (11,527) Proceeds from credit facilities 111,589 40,000 Repayment of credit facilities (167,129) (136,525) Repayment of notes payable (435) (411) Dividends paid on Preferred Stock (633) (807) Repurchase and retirement of shares of Common and Preferred Stock previously outstanding (28,829) (6,727) ------------------- ------------------- Net cash used in financing activities (7,363) (115,997) ------------------- ------------------- Net decrease in cash and cash equivalents 566 (27,228) Cash and cash equivalents at beginning of year 11,388 38,782 ------------------- ------------------- Cash and cash equivalents at end of period $ 11,954 $ 11,554 =================== =================== </TABLE> See accompanying notes to unaudited consolidated financial statements. -4-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 1. Presentation of Financial Information The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the financial statements and the related management's discussion and analysis of financial condition and results of operations filed with the Annual Report on Form 10-K of Capital Trust, Inc. and Subsidiaries (collectively, the "Company") for the fiscal year ended December 31, 2000. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three months ended June 30, 2001, are not necessarily indicative of results that may be expected for the entire year ending December 31, 2001. The accompanying unaudited consolidated interim financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform in all material respects to accounting principles generally accepted in the United States. Certain prior period amounts have been reclassified to conform to current period classifications. 2. Summary of Significant Accounting Policies Derivative Financial Instruments In the normal course of business, the Company uses a variety of derivative financial instruments to manage, or hedge, interest rate risk. The Company requires derivative financial instruments to be effective in reducing its interest rate risk exposure. This effectiveness is essential for qualifying for hedge accounting. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the derivative instrument matures or is settled. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market each period. The Company uses 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 Company also uses interest rate caps to reduce its exposure to interest rate changes on investments. The Company will receive payments on an interest rate cap should the variable rate for which the cap was purchased exceed a specified threshold level and will be recorded as an adjustment to the interest income related to the related earning asset. To determine the fair values of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. The swap and cap agreements are generally held to maturity and the Company does not use derivative financial instruments for trading purposes. -5-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 3. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 4. Available-for-Sale Securities At June 30, 2001, the Company's available-for-sale securities consisted of the following (in thousands): <TABLE> <CAPTION> Gross Unrealized Amortized --------------------- Estimated Cost Gains Losses Fair Value ------------------------------------------------------- <S> <C> <C> <C> <C> Federal National Mortgage Association, fixed rate interest at 6.00%, due April 1, 2031 $ 84,407 $ - $ - $ 84,407 Federal National Mortgage Association, fixed rate interest at 6.00%, due June 1, 2031 13,049 - - 13,049 ------------------------------------------------------- $ 97,456 $ - $ - $ 97,456 ======================================================= </TABLE> The Company purchased these securities on June 28, 2001 with financing provided by the seller through three repurchase agreements totaling $94,643,000. The Company pays interest on this repurchase agreement at a rate of LIBOR. The securities were sold at the Company's amortized cost and the repurchase agreements were satisfied on July 16, 2001. 5. Loans receivable At June 30, 2001 and December 31, 2000, the Company's loans receivable consisted of the following (in thousands): <TABLE> <CAPTION> June 30, December 31, 2001 2000 ------------------------ ------------------------- <S> <C> <C> (1) Mortgage Loans $ 96,319 $ 135,651 (2) Mezzanine Loans 142,584 179,356 (3) Other mortgage loans receivable 42,500 47,029 ------------------------ ------------------------- 281,403 362,036 Less: reserve for possible credit losses (13,695) (12,947) ------------------------ ------------------------- Total loans $ 267,708 $ 349,089 ======================== ========================= </TABLE> One Mortgage Loan receivable with a principal balance of $8,000,000 reached maturity on July 15, 2000 and has not been repaid with respect to principal and interest. In accordance with the Company's policy for revenue recognition, income recognition has been suspended on this loan and for the six months ended June 30, 2001, $610,000 of potential interest income has not been recorded. At June 30, 2001, the weighted average interest rate in effect, including amortization of fees and premiums, for the Company's performing loans receivable is as follows: (1) Mortgage Loans 10.88% (2) Mezzanine Loans 11.57% (3) Other mortgage loans receivable 11.67% Total loans 11.36% -6-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) At June 30, 2001, $155,319,000 (57%) of the aforementioned loans bear interest at floating rates ranging from LIBOR plus 375 basis points to LIBOR plus 700 basis points. The remaining $118,084,000 (43%) of loans bear interest at fixed rates ranging from 11.62% to 12.00%. During the six months ended June 30, 2001, the Company provided $1,468,000 of additional fundings on two existing loans. The Company had unfunded commitments on two loans totaling $16.6 million at June 30, 2001. 6. Equity Investments in CT Mezzanine Partners II LLC ("Fund II") On April 9, 2001, CT Mezzanine Partners II LP ("Fund II"), the Company's second commercial real estate mezzanine investment fund co-sponsored with Citigroup Investments Inc. ("Citigroup"), held its initial closing (the "Initial Closing"). Fund II closed with an aggregate of $500 million in capital commitments made primarily by third-party institutional private equity investors. Pursuant to the venture agreement among the parties thereto (the "Venture Agreement"), affiliates of the Company and Citigroup made capital commitments of $33.1 million and $132.4 million, respectively, to Fund II. On May 29, 2001, Fund II effected its second closing (the "Second Closing") on an additional $115.5 million of capital commitments made primarily by a third-party institutional private equity investor. Pursuant to the Venture Agreement among the parties thereto, affiliates of the Company and Citigroup made additional capital commitments of $3.1 million and $12.4 million, respectively, to Fund II. Fund II commenced its investment operations immediately following the initial closing and the Company anticipates a final closing no later than August 7, 2001 (the "Final Closing"). The Company will make an additional capital commitment to Fund II, the amount of such commitment to be based upon the amount of commitments made by third party investors at subsequent closings, pursuant to the Venture Agreement. Based upon the $615.5 million aggregate capital commitments made at the Initial and the Second Closing, the Company anticipates earning annual investment management fees of $7.0 million through the service of its subsidiary, CT Investment Management Co. LLC ("CTIMCO"), as investment manager to Fund II. In addition, the General Partner of Fund II, of which the Company is a 50% partner, will retain an additional $883,000 of annual fund management fees not used to fund CTIMCO's investment management fees. Pursuant to the Venture Agreement, in connection with the Initial and the Second Closing, the Company issued to Citigroup warrants to purchase 3,015,600 shares and 236,233 shares, respectively, of its Class A Common Stock at an exercise price of $5.00 per share. The warrants are immediately exercisable and expire on March 8, 2005. The Company is obligated to issue additional warrants at subsequent closings with the same exercise and expiration terms. The number of shares of Class A Common Stock subject to such additional warrants shall be determined based upon the amount of additional third party investor capital commitments made at such closings. In addition, in connection with the Initial Closing, the Company repurchased for $29,138,000 in privately negotiated transactions 630,701 shares of Class A Common Stock, 1,520,831 shares of Class B Common Stock, 1,518,390 shares of Class A Preferred Stock and 2,274,110 shares of Class B Preferred Stock. The sellers of such capital stock made aggregate capital commitments to Fund II of $30 million. With the foregoing repurchase of Preferred Stock, the Company has reduced its annual dividend requirement from $1,615,000 to $646,000 per annum. 7. Long-Term Debt - Credit Facilities At December 31, 2000, the Company was party to a credit agreement with a commercial lender that provided for a $300 million line of credit scheduled to expire in June 2001. Effective July 9, 2001, pursuant to an amended and restated credit agreement, the Company downsized this line of Credit to $100 million and extended the expiration of such credit facility from June 2001 to July 2002 with an automatic nine-month amortizing extension option, if not otherwise extended. -7-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 8. Derivative Financial Instruments On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS') No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either shareholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. As of January 1, 2001, the adoption of the new standard resulted in an adjustment of $574,000 to accumulated other comprehensive loss and other liabilities. In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including those for the use of derivatives. For interest rate exposures, derivatives are used primarily to align rate movements between interest rates associated with the Company's loans and other financial assets with interest rates on related debt financing, and manage the cost of borrowing obligations. The Company does not use derivatives for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments, nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives. To manage interest rate risk, the Company may employ options, forwards, interest rate swaps, caps and floors or a combination thereof depending on the underlying exposure. To reduce overall interest cost, the Company uses interest rate instruments, typically interest rate swaps, to convert a portion of its variable rate debt to fixed rate debt. Interest rate differentials that arise under these swap contracts are recognized as interest expense over the life of the contracts. The following table summarizes the notional value and fair value of the Company's derivative financial instruments, principally swap contracts at June 30, 2001. The notional value provides an indication of the extent of the Company's involvement in these instruments at that time, but does not represent exposure to credit, interest rate or foreign exchange market risks. <TABLE> <CAPTION> Interest Hedge Type Notional Rate Maturity Fair Value Value - ---------- ------------------ ----------------------- -------------------- ---------------- -------------------- <S> <C> <C> <C> <C> <C> Swap Fair Value Hedge $137,812,000 6.045% 2014 $ 566,000 Swap Cash Flow Hedge 11,250,000 6.580% 2006 (519,000) Swap Cash Flow Hedge 28,000,000 5.793% 2001 (144,000) Swap Cash Flow Hedge 37,125,000 5.905% 2008 (220,000) Swap Cash Flow Hedge 18,838,000 6.035% 2003 (540,000) Cap Cash Flow Hedge 18,750,000 11.250% 2007 42,000 </TABLE> Financial reporting for hedges characterized as fair value hedges and cash flow hedges are different. For those hedges characterized as a fair value hedge, the changes in fair value of the hedge and the hedged item are reflected in earnings each quarter. In the case of the fair value hedge listed above, the Company is hedging the component of interest rate risk that can be directly controlled by the hedging instrument, and it is this portion of the hedged assets that is recognized in earnings. The non-hedged balance is classified as an available-for-sale security consistent with SFAS No. 115, and is reported in accumulated other comprehensive income. For those hedges characterized as cash flow hedges, the unrealized gains/losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income or in earnings, depending on the type of hedging relationship. -8-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) On June 30, 2001, the derivative financial instruments were reported at their fair value as other assets and other liabilities of $608,000 and $1,423,000, respectively. During the six months ended June 30, 2001, the Company recognized a gain of $7,000 for the change in time value for qualifying interest rate hedges. The time value is a component of fair value that must be recognized in earnings, and is shown in the consolidated statement of income as other expense. The fair value hedge in the above table was undertaken by the Company to sustain the value of the Company's CMBS bond holdings. This fair value hedge, when viewed in conjunction with the fair value of the bonds, is sustaining the value of those bonds as interest rates rise and fall. During the six months ended June 30, 2001, the Company recognized a gain of $951,000 for the increase in the value of the swap which was substantially offset by a loss of $850,000 for the change in the fair value of the bonds attributed to the hedged risk resulting in a $101,000 offset to other expense on the consolidated statement of income. The Company utilizes cash flow hedges in order to better control interest costs on variable rate debt transactions. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars, and forwards are considered cash flow hedges. During the six months ended June 30, 2001, the fair value of the cash flow swaps decreased by $849,000, which was deferred into other comprehensive loss and will be released to earnings over the remaining lives of the swaps. Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This reclassification is consistent with the timing of when the hedged items are also recognized in earnings. Within the next twelve months, the Company estimates that $530,000 currently held in accumulated other comprehensive income will be reclassified to earnings, with regard to the cash flow hedges. 9. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The provision for income taxes for the six months ended June 30, 2001 and 2000 is comprised as follows (in thousands): 2001 2000 -------------------- --------------------- Current Federal $ 4,877 $ 5,821 State 1,764 2,089 Local 1,593 1,886 Deferred Federal (439) (720) State (151) (248) Local (137) (224) -------------------- --------------------- Provision for income taxes $ 7,507 $ 8,604 ==================== ===================== -9-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The reconciliation of income tax computed at the U.S. federal statutory tax rate (35%) to the effective income tax rate for the six months ended June 30, 2001 and 2000 are as follows (in thousands): <TABLE> <CAPTION> 2001 2000 ------------------------------------ ------------------------------------- $ % $ % ----------------- ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> Federal income tax at statutory rate $ 5,651 35.0% $ 5,726 35.0% State and local taxes, net of federal tax benefit 1,994 12.4% 2,277 13.9% Utilization of net operating loss carryforwards (245) (1.5)% (245) (1.5)% Compensation in excess of deductible limits 132 0.8% 724 4.4% Other (25) (0.2)% 122 0.8% ----------------- ------------------ ------------------------------------- $ 7,507 46.5% $ 8,604 52.6% ================= ================== ===================================== </TABLE> Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax reporting purposes. The components of the net deferred tax assets as of June 30, 2001 and December 31, 2000 are as follows (in thousands): <TABLE> <CAPTION> June 30, December 31, 2001 2000 -------------------- ---------------------- <S> <C> <C> Net operating loss carryforward $ 3,053 $ 3,298 Reserves on other assets and for possible credit losses 9,040 9,047 Other 2,003 1,411 -------------------- ---------------------- Deferred tax assets 14,096 13,756 Valuation allowance (4,650) (5,037) -------------------- ---------------------- $ 9,446 $ 8,719 ==================== ====================== </TABLE> The Company recorded a valuation allowance to reserve a portion of its net deferred tax assets in accordance with SFAS No. 109, "Accounting for Income Taxes". Under SFAS No. 109, this valuation allowance will be adjusted in future years, as appropriate. However, the timing and extent of such future adjustments can not presently be determined. 10. Employee Benefit Plans 1997 Long-Term Incentive Stock Plan During the six months ended June 30, 2001, the Company issued an aggregate of 454,500 options to acquire shares of Class A Common Stock with exercise prices ranging from $4.50 to $5.50 per share (the fair value market value based on reported trading price on the date of the grant). The Company also issued 227,780 restricted shares of Class A Common Stock which vest one third on each of the following dates: February 1, 2002, February 1, 2003 and February 1, 2004. The following table summarizes the option activity under the incentive stock plan for the quarter ended June 30, 2001: -10-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) <TABLE> <CAPTION> Weighted Options Exercise Price Average Exercise Outstanding per Share Price per Share --------------------- ---------------------------------- ------------------------- <S> <C> <C> <C> Outstanding at January 1, 2001 1,419,500 $4.125 - $10.00 $ 7.04 Granted in 2001 454,500 $4.50-$5.50 4.62 Exercised in 2001 - - - Canceled in 2001 (133,333) $6.00 - $10.00 7.00 --------------------- ------------------------- Outstanding at June 30, 2001 1,740,667 $4.125 - $10.00 $ 6.41 ===================== ========================= </TABLE> At June 30, 2001, 1,008,342 of the options are exercisable. At June 30, 2001, the outstanding options have various remaining contractual exercise periods ranging from 6.04 to 9.93 years with a weighted average life of 7.81 years. 11. Earnings Per Share The following table sets forth the calculation of Basic and Diluted EPS for the six months ended June 30, 2001 and 2000: <TABLE> <CAPTION> Six Months Ended June 30, 2001 Six Months Ended June 30, 2000 --------------------------------------------- --------------------------------------- Per Share Per Share Net Income Shares Amount Net Loss Shares Amount --------------- ---------------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Basic EPS: Net earnings per share of Common Stock $ 3,870,000 21,287,992 $ 0.18 $ 3,266,000 23,845,948 $ 0.14 ========= ========== Effect of Dilutive Securities Options outstanding for the purchase of Common Stock -- 69,353 -- -- Warrants outstanding for the purchase of Common Stock -- 110,766 -- -- Future commitments for share unit awards for the issuance of Class A Common Stock -- 100,000 -- 200,000 Convertible Trust Preferred Securities exchangeable for shares of Common Stock 2,060,000 12,820,513 -- -- Convertible Preferred Stock 529,000 4,581,731 807,000 6,320,833 --------------- --------------- --------------- ------------ Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $ 6,459,000 38,970,355 $ 0.17 $ 4,073,000 30,366,781 $ 0.13 =============== =============== ========= =============== ============= ========== </TABLE> The following table sets forth the calculation of Basic and Diluted EPS for the three months ended June 30, 2001 and 2000: <TABLE> <CAPTION> Three Months Ended June 30, 2001 Three Months Ended June 30, 2000 --------------------------------------------- --------------------------------------- Per Share Per Share Net Income Shares Amount Net Loss Shares Amount --------------- ---------------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Basic EPS: Net earnings per share of Common Stock $ 2,550,000 20,351,232 $ 0.13 $ 750,000 23,204,420 $ 0.03 ========= ========== </TABLE> -11-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) <TABLE> <S> <C> <C> <C> <C> <C> <C> Effect of Dilutive Securities Options outstanding for the purchase of Common Stock -- 112,572 -- -- Warrants outstanding for the purchase of Common Stock -- 491,286 -- -- Future commitments for share unit awards for the issuance of Class A Common Stock -- 100,000 -- 200,000 Convertible Trust Preferred Securities exchangeable for shares of Common Stock 1,030,000 12,820,513 -- -- Convertible Preferred Stock 125,000 2,861,740 -- -- --------------- -------------- --------------- ------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $ 3,705,000 36,737,343 $ 0.10 $ 750,000 23,404,420 $ 0.03 =============== ============== ========= =============== ============= ========== </TABLE> 12. Supplemental Disclosures for Consolidated Statements of Cash Flows Interest paid on the Company's outstanding debt and Convertible Preferred Trust Securities during the six months ended June 30, 2001 and 2000 was $16,944,000 and $27,015,000, respectively. Income taxes paid by the Company during the six months ended June 30, 2001 and 2000 was $6,537,000 and $11,010,000, respectively. 13. Subsequent Event On August 7, 2001, Fund II effected its final closing on an additional $229.7 million of capital commitments bringing the total equity commitments in Fund II to $845.2 million. Pursuant to the Venture Agreement, affiliates of the Company and Citigroup made total capital commitments of $49.7 million and $198.9 million, respectively, to Fund II. Based upon the $845.2 million aggregate capital commitments made at the initial and subsequent closings, the Company will earn annual investment management fees of $8.1 million through the service of its subsidiary, CTIMCO, as investment manager to Fund II. In addition, the General Partner of Fund II, of which the Company is a 50% partner, will receive an additional $2.8 million of investment management fees. Pursuant to the Venture Agreement, in connection with the final closing, the Company issued to Citigroup a warrant to purchase 1,026,634 shares of its Class A Common Stock at an exercise price of $5.00 per share. The warrant is immediately exercisable and expires on March 8, 2005. In total, the Company has issued to Citigroup four warrants to purchase 8,528,467 shares of its Class A Common Stock at an exercise price of $5.00 per share. The Company is obligated to issue additional warrants at with the same exercise and expiration terms at the closing of subsequent funds co-sponsored with Citigroup that close on or prior to December 31, 2001. On July 13, 2001, a $27 million loan, which reached maturity on July 2, 2001, was repaid in full with deferred and default interest of $3.5 million. The Company will report this additional interest income in the results of operations for the third quarter. On August 13, 2001, the Company repurchased 200,000 shares of Class A Common Stock, 1,234,355 shares of Class B Common Stock, 759,195 shares of Class A Preferred Stock and 1,769,138 shares of Class B Preferred Stock for $21.0 million in a privately negotiated transaction. With this repurchase of Preferred Stock, the Company has repurchased all of its outstanding Preferred Stock and eliminated the related dividend. -12-
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. Historical results set forth are not necessarily indicative of the future financial position and results of operations of the Company. Second Investment Management Fund - --------------------------------- On April 9, 2001, CT Mezzanine Partners II LP ("Fund II"), the Company's second commercial real estate mezzanine investment fund co-sponsored with Citigroup Investments Inc. ("Citigroup"), held its initial closing (the "Initial Closing"). Fund II closed with an aggregate of $500 million in capital commitments made primarily by third-party institutional private equity investors. Pursuant to the venture agreement among the parties thereto (the "Venture Agreement"), affiliates of the Company and Citigroup made capital commitments of $33.1 million and $132.4 million, respectively, to Fund II. On May 29, 2001, Fund II effected its second closing (the "Second Closing") on an additional $115.5 million of capital commitments made primarily by a third-party institutional private equity investor. Pursuant to the Venture Agreement among the parties thereto, affiliates of the Company and Citigroup made additional capital commitments of $3.1 million and $12.4 million, respectively, to Fund II. Fund II commenced its investment operations immediately following the initial closing and the Company anticipates a final closing no later than August 7, 2001 (the "Final Closing"). The Company will make an additional capital commitment to Fund II, the amount of such commitment to be based upon the amount of commitments made by third party investors at subsequent closings, pursuant to the Venture Agreement. Based upon the $615.5 million aggregate capital commitments made at the Initial and the Second Closing, the Company will earn annual investment management fees of $7.0 million through the service of its subsidiary, CT Investment Management Co. LLC, as investment manager to Fund II. In addition, the General Partner of Fund II, of which the Company is a 50% partner, will receive an additional $883,000 annually of investment management fees. Pursuant to the Venture Agreement, in connection with the Initial and the Second Closing, the Company issued to Citigroup warrants to purchase 3,015,600 shares and 236,233 shares, respectively, of its Class A Common Stock at an exercise price of $5.00 per share. The warrants are immediately exercisable and expire on March 8, 2005. The Company is obligated to issue additional warrants at subsequent closings with the same exercise and expiration terms. The number of shares of Class A Common Stock subject to such additional warrants shall be determined based upon the amount of additional third party investor capital commitments made at such closings. In addition, in connection with the Initial Closing, the Company repurchased for $29,138,000 in privately negotiated transactions 630,701 shares of Class A Common Stock, 1,520,831 shares of Class B Common Stock, 1,518,390 shares of Class A Preferred Stock and 2,274,110 shares of Class B Preferred Stock. The sellers of such capital stock made aggregate capital commitments to Fund II of $30 million. With the foregoing repurchase of Preferred Stock, the Company has reduced its annual dividend requirement from $1,615,000 to $646,000 per annum. Overview of Financial Condition - ------------------------------- Since December 31, 2000, the Company funded $1,468,000 of commitments under two existing loans. The Company received full satisfaction of four loans and a certificated mezzanine investment totaling $91.0 million and partial repayments on five loans and a certificated mezzanine investment totaling $13.4 million. At June 30, 2001, the Company had outstanding loans and investments in commercial mortgage-backed securities totaling approximately $485 million and additional commitments for funding on two outstanding loans of approximately $16.6 million. Since December 31, 2000, the Company has made equity contributions to CT Mezzanine Partners I LLC ("Fund I" and together with Fund II, the "Funds") of $21.6 million of which Fund I has returned $16.6 million. The Company's investment in Fund I at June 30, 2001 is $32.7 million. The Company has capitalized costs totaling $4,752,000 that will be amortized over the anticipated lives of the Funds. As of June 30, 2001, Fund I has outstanding loans and investments totaling $213.6 million, all of which are performing in accordance with the terms of their agreements. -13-
Since the Initial Closing of Fund II on April 9, 2001, the Company has not made any additional equity contributions to Fund II. The Company's investment in Fund II at June 30, 2001 is $2.0 million, primarily consisting of capitalized costs that will be amortized over the anticipated lives of the Funds. As of June 30, 2001, Fund II has outstanding loans and investments totaling $187.5 million, all of which are performing in accordance with the terms of their agreements. At June 30, 2001, the Company had $118.1 million outstanding under the credit facilities. The decrease in the amount outstanding under the credit facilities from the amount outstanding at December 31, 2000 was due to the cash received on loan repayments being utilized to pay down the credit facilities offset by additional borrowings to repurchase Common and Preferred Stock. At June 30, 2001, the Company had three repurchase obligations that mature in July 2001. These repurchase obligations relate to two available-for-sale securities sold by the Company with a carrying amount of $97.5 million, which approximates the asset's market value, for which the Company has a liability to repurchase these assets for $94.6 million. The interest rate in effect for the repurchase obligations at June 30, 2001 was 3.78%. The Company expects to sell the securities and satisfy the repurchase agreement at maturity. On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS') No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either shareholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. As of January 1, 2001, the adoption of the new standard results in an adjustment of $574,000 to accumulated other comprehensive loss. Financial reporting for hedges characterized as fair value hedges and cash flow hedges are different. For those hedges characterized as a fair value hedge, the changes in fair value of the hedge and the hedged item are reflected in earnings each quarter. In the case of the fair value hedge, the Company is hedging the component of interest rate risk that can be directly controlled by the hedging instrument, and it is this portion of the hedged assets that is recognized in earnings. The non-hedged balance is classified as an available-for-sale security consistent with SFAS No. 115, and is reported in accumulated other comprehensive income. For those hedges characterized as cash flow hedges, the unrealized gains/losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income or in earnings, depending on the type of hedging relationship. In accordance with SFAS No. 133, on June 30, 2001, the derivative financial instruments were reported at their fair value as other assets and other liabilities of $608,000 and $1,423,000, respectively. During 2000, the Company announced a share repurchase program under which the Company may purchase, from time to time, up to four million shares of the Company's Class A Common Stock. During the six months ended June 30, 2001, the Company did not purchase any additional shares of the Company's Class A Common Stock pursuant to the repurchase program and has 1,435,600 shares authorized for repurchase remaining under the program. The Company has and will continue to fund share repurchases with available cash. Now that the Company's new investment management business has commenced and Fund II's asset origination and acquisition activities are ongoing under the management of CTIMCO, the Company will not reinvest directly for its own portfolio the working capital derived from maturing loans and investments, unless otherwise approved or permitted by Fund II or other Mezzanine Funds. Pursuant to the Venture Agreement, the Company will identify potential investment opportunities for Fund II and will use such working capital to make its contributions to the fund as and when required. Therefore, if the amount of the Company's maturing loans and investments increases significantly before excess capital is invested in Fund II or other funds, or otherwise accretively deployed, the Company may experience temporary shortfalls in revenues and lower earnings until offsetting revenues are derived from the Funds. Comparison of the Six and Three Months Ended June 30, 2001 to the Six and Three Months Ended June 30, 2000 ---------------------------------------- The Company reported net income allocable to shares of Common Stock of $3,870,000 for the six months ended June 30, 2001, an increase of $604,000 from the net income allocable to shares of Common Stock of $3,266,000 for -14-
the six months ended June 30, 2000. The Company reported net income allocable to shares of Common Stock of $2,550,000 for the three months ended June 30, 2001, an increase of $1,800,000, from the net income allocable to shares of Common Stock of $750,000 for the three months ended June 30, 2000. These increases were primarily the result of increased income from equity investments in the Funds and related management fees from the management of the Funds and lower general and administrative expenses and a reduction in the provision for possible credit losses offset by decreased advisory and investment banking fees and decreased net interest income from loans and other investments as the Company continues its transition to the investment management business. Interest and related income from loans and other investments amounted to $34,757,000 for the six months ended June 30, 2001, a decrease of $8,753,000 from the $43,510,000 amount for the six months ended June 30, 2000. Average interest earning assets decreased from approximately $720.0 million for the six months ended June 30, 2000 to approximately $574.6 million for the six months ended June 30, 2001. The average interest rate earned on such assets increased from 12.1% in 2000 to 12.2% in 2001. During the six months ended June 30, 2001, the Company recognized an additional $1.6 million on the early repayment of loans, while during the six months ended June 30, 2000, the Company recognized an additional $456,000 on the early repayment of a loan. Without this additional interest income, the earning rate for 2001 would have been 11.6% versus 12.0% for 2000. The decrease in such core earning rate is due to a decrease in the average LIBOR rate from 6.19% for the first six months of 2000 to 4.91% for the first six months of 2001 offset by a change in the mix of the loan portfolio to an increased level of Mezzanine Loans, which generally pay interest at higher rates than Mortgage Loans. Interest and related income from loans and other investments amounted to $16,844,000 for the three months ended June 30, 2001, a decrease of $3,973,000 from the $20,817,000 amount for the three months ended June 30, 2000. Average interest earning assets decreased from approximately $684.0 million for the three months ended June 30, 2000 to approximately $555.1 million for the three months ended June 30, 2001. The average interest rate earned on such assets remained unchanged at 12.2%. During the three months ended June 30, 2001, the Company recognized an additional $1.1 million on the early repayment of loans. Without this additional interest income, the earning rate for 2001 would have been 11.4%. The decrease in such core earning rate from 12.2% to 11.6% is due to a decrease in the average LIBOR rate from 6.47% for the three months ended June 30, 2000 to 4.27% for the three months ended June 30, 2001 offset by a change in the mix of the loan portfolio to an increased level of Mezzanine Loans, which generally pay interest at higher rates than Mortgage Loans. During the second quarter of 2000, Fund I commenced operations and during the second quarter of 2001, Fund II commenced operations. For the six months ended June 30, 2001 and 2000, the Company had earned $1,868,000 and $221,000, and for the three months ended June 30, 2001 and 2000, the Company had earned $1,009,000 and $221,000, respectively, on its equity investment in the Funds. The increase in income in 2001 versus 2000 was due primarily to the increased level of investment in Fund I. Interest and related expenses amounted to $14,017,000 for the six months ended June 30, 2001, a decrease of $5,475,000 from the $19,492,000 amount for the six months ended June 30, 2000. The decrease in expense was due to a decrease in the amount of average interest bearing liabilities outstanding from approximately $425.6 million for the six months ended June 30, 2000 to approximately $311.9 million for the six months ended June 30, 2001, and a decrease in the average rate paid on interest bearing liabilities from 9.2% to 9.1% for the same periods. The decrease in the average rate is not consistent with the decrease in the average LIBOR rate for the same periods due to a change in the mix of interest bearing liabilities. In 2001, a higher percentage of the interest bearing liabilities are the term redeemable securities contract which is generally at a higher rate than the other forms of interest bearing liabilities. Interest and related expenses amounted to $6,763,000 for the three months ended June 30, 2001, a decrease of $2,515,000 from the $9,278,000 amount for the three months ended June 30, 2000. The decrease in expense was due to a decrease in the amount of average interest bearing liabilities outstanding from approximately $395.6 million for the three months ended June 30, 2000 to approximately $306.0 million for the three months ended June 30, 2001, and a decrease in the average rate paid on interest bearing liabilities from 9.4% to 8.9% for the same periods. The decrease in the average rate is not consistent with the decrease in the average LIBOR rate for the same periods due to a change in the mix of interest bearing liabilities. In 2001, a higher percentage of the interest bearing liabilities are the term redeemable securities contract which is generally at a higher rate than the other forms of interest bearing liabilities. In addition, the Company also utilized proceeds from the $150.0 million of Convertible Trust Preferred Securities, which were issued on July 28, 1998 to finance its interest earning assets. As previously disclosed, the terms of the Convertible Trust Preferred Securities were modified effective May 10, 2000. As a result, the blended rate on such securities increased from 8.25% to 10.16% on that date. -15-
During the six months ended June 30, 2001 and 2000, the Company recognized $4,240,000 and $3,682,000, respectively, of net expenses related to the Convertible Trust Preferred Securities. This amount consisted of distributions to the holders totaling $7,619,000 and $6,627,000, respectively, and amortization of discount and origination costs totaling $399,000 and $400,000, respectively, during the six ended June 30, 2001 and 2000. This was partially offset by a tax benefit of $3,778,000 and $3,345,000 during the six ended June 30, 2001 and 2000, respectively. During the three months ended June 30, 2001 and 2000, the Company recognized $2,120,000 and $1,941,000, respectively, of net expenses related to the Convertible Trust Preferred Securities. This amount consisted of distributions to the holders totaling $3,809,000 and $3,534,000, respectively, and amortization of discount and origination costs totaling $200,000 and $200,000, respectively, during the three ended June 30, 2001 and 2000. This was partially offset by a tax benefit of $1,889,000 and $1,793,000 during the three ended June 30, 2001 and 2000, respectively. During the six months ended June 30, 2001, other revenues decreased $1,807,000 to $2,404,000 from $4,211,000 in the same period of 2000. During the three months ended June 30, 2001, other revenues decreased $688,000 to $1,996,000 from $2,684,000 in the same period of 2000. The reduction in advisory and investment banking fees was partially offset by the increase in management fees collected from Fund I and Fund II as the Company continues its transition from a "balance sheet" lender and real estate advisor to an investment manager. The significant reduction in resources devoted to the Company's investment banking and advisory operations following the transition to its new investment management business is expected to eliminate advisory and investment banking fee-earning opportunities in the future. General and administrative expenses decreased from $9,555,000 for the six months ended June 30, 2000 to $7,775,000 for six months ended June 30, 2001. In 2000, as the Company transitioned to its new investment management business, it incurred one-time expenses of $2.1 million that were included in general and administrative expenses. Average staffing levels have remained consistent from year to year at an average of 25 employees during the six months ended June 30, 2001 and 2000. The Company had 30 full time employees at June 30, 2001. General and administrative expenses decreased from $5,802,000 for the three months ended June 30, 2000 to $4,117,000 for three months ended June 30, 2001. When the special one-time expenses discussed in the previous paragraph are removed from other expenses, recurring general and administrative expenses for the three months ended June 30, 2001 increased $419,000 from the same period in the prior year. This increase is primarilly the result of an increase in the average staffing levels from year to year. The Company employed an average of 28 employees during the three months ended June 30, 2001 verses an average of 24 employees during the three months ended June 30, 2000. The Company had 30 full time employees at June 30, 2001. The decrease in the provision for possible credit losses from $1,842,000 for the six months ended June 30, 2000 to $748,000 for the six months ended June 30, 2001 and from $876,000 for the three months ended June 30, 2000 to zero for the three months ended June 30, 2001 was due to the decrease in average earning assets as previously described. The Company did not add to the reserve for possible credit losses during the second quarter of 2001 as the Company believes that the reserve is adequate based on the existing loans and investments in the portfolio. For the six months ended June 30, 2001 and 2000, the Company accrued income tax expense of $7,507,000 and $8,604,000, respectively, for federal, state and local income taxes. For the three months ended June 30, 2001 and 2000, the Company accrued income tax expense of $4,259,000 and $4,154,000, respectively, for federal, state and local income taxes. The decrease (from 52.6% to 46.5% for the six month period and from 57.3% to 47.0% for the three month period) in the effective tax rate was primarily due to higher levels of compensation in excess of deductible limits in the prior year. The preferred stock dividend and dividend requirement arose in 1997 as a result of the Company's issuance of $33 million of shares of Class A Preferred Stock on July 15, 1997. Dividends accrued on these shares at a rate of 9.5% per annum on a per share price of $2.69. In the third quarter of 1999, 5,946,825 shares of Class A Preferred Stock were converted into an equal number of shares of Class A Common Stock thereby reducing the number of outstanding shares of Preferred Stock to 6,320,833 and the dividend requirement to $1,615,000 per annum. In the second quarter of 2001, 3,792,500 shares of Preferred Stock were repurchased thereby reducing the number of outstanding shares of Preferred Stock to 2,528,333 and the dividend requirement to $646,000 per annum. -16-
Liquidity and Capital Resources - ------------------------------- At June 30, 2001, the Company had $11,954,000 in cash. The primary sources of liquidity for the Company for the remainder of 2001 will be cash on hand, cash generated from operations, principal and interest payments received on investments (including loan repayments and the return of capital from Fund I), and additional borrowings under its Credit Facilities. The Company believes these sources of capital will adequately meet future cash requirements. The Company expects that during the remainder of 2001, it will use a significant amount of its available capital resources to satisfy its capital contributions required in connection with Fund II. In connection with the existing portfolio investment and loan business, the Company intends to employ leverage, up to a maximum 5:1 debt-to-equity ratio, to enhance its return on equity. The Company experienced a net increase in cash of $566,000 for the six months ended June 30, 2001, compared to the net decrease of $27,228,000 for the six months ended June 30, 2000. The use of cash in the first half of 2000 was primarily to reduce liabilities and make equity contributions to Fund I. Cash provided by operating activities during the six months ended June 30, 2001 was $8,433,000, compared to cash used by operating activities of $1,172,000 during the same period of 2000. For the six months ended June 30, 2001, cash used in investing activities was $504,000, compared to $89,941,000 provided by investing activities during the same period in 2000. This change was primarily due to the purchase of available-for sale securities in June 2001. The Company utilized the cash received on loan repayments in both years to reduce the credit facilities and entered into three repurchase obligations which accounted for most of the $108,634,000 decrease in the net cash used in financing activities from $115,997,000 in the first half of 2000 to the $7,363,000 used in financing activities in the same period of 2001. At June 30, 2001, the Company has one outstanding note payable for $1,433,000, outstanding borrowings under the credit facilities of $118,101,000, outstanding borrowings on the term redeemable securities contract of $135,127,000 and an outstanding repurchase obligation of $94,643,000. At June 30, 2001, the Company had $330,328,000 of borrowing capacity available under the credit facilities. Explanatory Note for the Use of Forward-Looking Statements - ---------------------------------------------------------- Except for historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Section 21E of the Securities and Exchange Act of 1934, as amended, which involve certain risks and uncertainties. Forward-looking statements are included with respect to, among other things, the Company's business plan, business strategy, portfolio management and investment management business. The Company's actual results or outcomes may differ materially from those anticipated. Representative examples of such factors are discussed in more detail in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and include, among other things, the availability of desirable loan and investment opportunities, the ability to obtain and maintain targeted levels of leverage and borrowing costs, fluctuations in interest rates and credit spreads, continued loan performance and repayment, the maintenance of loan loss allowance levels, the strength of the private equity market and the ability to raise private equity capital, the success in managing and deploying the funds' capital into qualified investments, the ability to obtain and maintain the desired level of leverage for the funds and the performance of third party investors in making their third party commitments. The Company disclaims any intention or obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk The principal objective of the Company's asset/liability management activities is to maximize net interest income, while minimizing levels of interest rate risk. Net interest income and interest expense are subject to the risk of interest rate fluctuations. To mitigate the impact of fluctuations in interest rates, the Company uses interest rate swaps to effectively convert fixed rate assets to variable rate assets for proper matching with variable rate liabilities and variable rate liabilities to fixed rate liabilities for proper matching with fixed rate assets. Each derivative used as a hedge is matched with an asset or liability with which it has a high correlation. The swap agreements are generally held to maturity and the Company does not use derivative financial instruments for trading purposes. The Company uses interest rate swaps to reduce the Company's exposure to interest rate fluctuations on certain fixed rate loans and investments and to provide more stable spreads between rates received on loans and investments and the rates paid on their financing sources. -17-
The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates at June 30, 2001. For financial assets and debt obligations, the table presents cash flows to the expected maturity and weighted average interest rates based upon the current carrying values. For interest rate swaps, the table presents notional amounts and weighted average fixed pay and variable receive interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. Weighted-average variable rates are based on rates in effect as of the reporting date. <TABLE> <CAPTION> Expected Maturity Dates ---------------------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 Thereafter ---- ---- ---- ---- ---- ---------- Assets: (dollars in thousands) CMBS <S> <C> <C> <C> <C> <C> <C> Fixed Rate - $196,874 - - - - Average interest rate - 11.64% - - - - Variable Rate - - $ 36,509 - - - Average interest rate - - 11.79% - - - Loans receivable Fixed Rate - - $ 28,000 - - $ 90,084 Average interest rate - - 12.75% - - 11.64% Variable Rate $96,319 - - - $ 57,000 $ 10,000 Average interest rate 9.97% - - - 11.31% 9.59% Liabilities: Credit Facilities Variable Rate - - $ 118,101 - - - Average interest rate - - 7.44% - - - Term Redeemable Securities Contract Variable Rate - $137,812 - - - - Average interest rate - 7.37% - - - - Repurchase obligations Variable Rate $ 94,643 - - - - - Average interest rate 4.78% - - - - - Convertible Trust Preferred Securities Fixed Rate - - - - - $150,000 Average interest rate - - - - - 10.87% Interest rate swaps $ 28,000 $137,812 $ 18,838 - - $48,375 Average fixed pay rate 5.79% 6.05% 6.04% - - 6.06% Average variable receive rate 4.06% 3.83% 4.06% - - 4.06% </TABLE> ------------------- Total Fair Value ----- ---------- Assets: CMBS $196,874 $182,174 Fixed Rate 11.64% Average interest rate $ 36,509 $ 35,352 Variable Rate 11.79% Average interest rate Loans receivable $118,084 $117,067 Fixed Rate 11.91% Average interest rate $163,319 $159,447 Variable Rate 10.42% Average interest rate Liabilities: Credit Facilities $118,101 $118,101 Variable Rate 7.44% Average interest rate Term Redeemable Securities Contract $137,812 $135,127 Variable Rate 7.37% Average interest rate Repurchase obligations $ 94,643 $ 94,643 Variable Rate 4.78% Average interest rate Convertible Trust Preferred Securities $150,000 $147,541 Fixed Rate 10.87% Average interest rate $233,025 $ (857) Interest rate swaps 6.02% Average fixed pay rate Average variable receive rate 3.93% -18-
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 (a). The Company held its 2001 annual meeting of stockholders on May 30, 2001. (b) and (c). Stockholders acted on the following proposals: 1. 1. To elect twelve directors (identified in the table below) to serve until the next annual meeting of stockholders or until such directors' successors are elected and shall have been duly qualified ("Proposal 1"); and 2. To ratify the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 2001 ("Proposal 2"). The following table sets forth the number of votes in favor, the number of votes opposed, the number of abstentions (or votes withheld in the case of the election of directors) and broker non-votes with respect to each of the foregoing proposals. <TABLE> <CAPTION> Proposal Votes in Favor Votes Opposed Abstentions Broker Non-Votes (Withheld) Proposal 1 <S> <C> <C> <C> <C> Samuel Zell 14,416,835 -- 13,665 -- Jeffrey A. Altman 14,416,835 -- 13,665 -- Thomas E. Dobrowski 14,415,835 -- 14,665 -- Martin L. Edelman 14,416,835 -- 13,665 -- Gary R. Garrabrant 14,415,835 -- 14,665 -- Craig M. Hatkoff 14,415,835 -- 14,665 -- John R. Klopp 14,346,204 -- 84,296 -- Susan M. Lewis 14,412,835 -- 17,665 -- Sheli Z. Rosenberg 14,415,835 -- 14,665 -- Steven Roth 14,405,335 -- 25,165 -- Lynne B. Sagalyn 14,382,335 -- 48,165 -- Michael Watson 14,416,835 -- 13,665 -- Proposal 2 14,418,464 5,586 6,450 -- </TABLE> ITEM 5: Other Information None -19-
ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 10.1 Amended and Restated Master Loan and Security Agreement, dated as of July 9, 2001, between Capital Trust, Inc. and Morgan Stanley Dean Witter Mortgage Capital Inc. 10.2 Amended and Restated CMBS Loan Agreement, dated as of July 9, 2001, between Capital Trust, Inc. and Morgan Stanley & Co. International Limited. (b) Reports on Form 8-K During the fiscal quarter ended June 30, 2001, the Company filed the following Current Reports on Form 8-K: None (1) -20-
SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITAL TRUST August 14, 2001 /s/ John R. Klopp - --------------- ----------------- Date John R. Klopp Chief Executive Officer /s/ Edward L. Shugrue III ------------------------- Edward L. Shugrue III Managing Director and Chief Financial Officer -21-