As filed with the Securities and Exchange Commission on November 6, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 ------------------ 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [x] APPLICABLE ONLY TO CORPORATE ISSUERS: The number of outstanding shares of the Registrant's Class A Common Stock, par value $0.01 per share ("Class A Common Stock"), as of November 5, 2003 was 6,509,067.
EXPLANATORY NOTE - ---------------- On April 2, 2003, the Registrant successively filed with the State Department of Assessments and Taxation of Maryland articles of amendment and restatement and articles of amendment which amended and restated and then further amended the Registrant's charter effective as of that date, among other things, to eliminate from the authorized stock of the Registrant the entire 100,000,000 shares of the Registrant's authorized but unissued class B common stock and to effect a one (1) for three (3) reverse stock split of the Registrant's outstanding class A common stock. The financial statements and other stock and per share related information contained in this quarterly report on Form 10-Q reflects the foregoing amendments to the Registrant's charter as though they were in effect for all fiscal periods and as of all balance sheet dates presented.
CAPITAL TRUST, INC. INDEX <TABLE> <CAPTION> Part I. Financial Information <S> <C> Item 1: Financial Statements 1 Consolidated Balance Sheets - September 30, 2003 (unaudited) and December 31, 2002 (audited) 1 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) 2 Consolidated Statements of Changes in Stockholders' Equity - Nine Months Ended September 30, 2003 and 2002 (unaudited) 3 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2003 and 2002 (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 21 Item 4: Disclosure Controls and Procedures 22 Part II. Other Information Item 1: Legal Proceedings 23 Item 2: Changes in Securities 23 Item 3: Defaults Upon Senior Securities 23 Item 4: Submission of Matters to a Vote of Security Holders 23 Item 5: Other Information 23 Item 6: Exhibits and Reports on Form 8-K 23 Signatures 25 </TABLE>
Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 2003 and December 31, 2002 (in thousands) <TABLE> <CAPTION> September 30, December 31, ---------------- ---------------- 2003 2002 ---------------- ---------------- (Unaudited) (Audited) <S> <C> <C> Assets Cash and cash equivalents $ 10,179 $ 10,186 Available-for-sale securities, at fair value 23,633 65,233 Commercial mortgage-backed securities available-for-sale, at fair value 160,937 155,780 Loans receivable, net of $6,672 and $4,982 reserve for possible credit losses at September 30, 2003 and December 31, 2002, respectively 164,292 116,347 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") 23,997 28,974 Deposits and other receivables 383 431 Accrued interest receivable 3,291 4,422 Deferred income taxes 2,240 1,585 Prepaid and other assets 3,814 2,018 --------- --------- Total assets $ 392,766 $ 384,976 ========= ========= Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued expenses $ 11,347 $ 9,067 Credit facility 33,000 40,000 Term redeemable securities contract 12,089 -- Repurchase obligations 146,922 160,056 Deferred origination fees and other revenue 1,817 987 Interest rate hedge liabilities 838 1,822 --------- --------- Total liabilities 206,013 211,932 --------- --------- Company-obligated, mandatory redeemable, convertible trust preferred securities of CT Convertible Trust I, holding $89,742 of convertible 10.0% junior subordinated debentures at September 30, 2003 and December 31, 2002 ("Convertible Trust Preferred Securities") 89,346 88,988 --------- --------- Stockholders' equity: Class A common stock, $0.01 par value, 100,000 shares authorized, 6,492 and 5,405 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively ("Class A Common Stock" 65 54 Restricted Class A Common Stock, $0.01 par value, 17 and 100 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively ("Restricted Class A Common Stock" and together with Class A Common Stock, "Common Stock") -- 1 Additional paid-in capital 140,917 126,919 Unearned compensation (25) (320) Accumulated other comprehensive loss (31,561) (28,988) Accumulated deficit (11,989) (13,610) --------- --------- Total stockholders' equity 97,407 84,056 --------- --------- Total liabilities and stockholders' equity $ 392,766 $ 384,976 ========= ========= </TABLE> See accompanying notes to unaudited consolidated financial statements. -1-
Capital Trust, Inc. and Subsidiaries Consolidated Statements of Income Three and Nine Months Ended September 30, 2003 and 2002 (in thousands, except per share data) (unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 2003 2002 2003 2002 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Income from loans and other investments: Interest and related income $ 11,757 $ 11,036 $ 29,384 $ 37,991 Less: Interest and related expenses 2,616 3,757 7,369 14,020 -------------- -------------- -------------- -------------- Income from loans and other investments, 9,141 7,279 22,015 23,971 net -------------- -------------- -------------- -------------- Other revenues: Management and advisory fees from Funds 2,385 2,548 5,793 7,624 Income/(loss) from equity investments in Funds 367 1,156 1,085 (618) Advisory and investment banking fees -- 2,057 -- 2,207 Net gain on sales of investments and reduced maturity of fair value hedge -- -- -- 1,651 Other interest income 8 46 46 104 -------------- -------------- -------------- -------------- Total other revenues 2,760 5,807 6,924 10,968 -------------- -------------- -------------- -------------- Other expenses: General and administrative 3,804 3,982 10,497 11,390 Other interest expense -- -- -- 23 Depreciation and amortization 293 248 781 744 Net unrealized (gain)/loss on derivative securities and corresponding hedged risk on CMBS securities -- 180 -- 2,776 Recapture of allowance for possible credit losses -- -- -- (2,963) -------------- -------------- -------------- -------------- Total other expenses 4,097 4,410 11,278 11,970 -------------- -------------- -------------- -------------- Income before income taxes and distributions and amortization on Convertible Trust Preferred Securities 7,804 8,676 17,661 22,969 Provision for income taxes 655 4,454 655 11,540 -------------- -------------- -------------- -------------- Income before distributions and amortization on Convertible Trust Preferred Securities 7,149 4,222 17,006 11,429 Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit of $2,301 and $6,195 for the three and nine months ended September 30, 2002, respectively 2,363 2,669 7,089 7,186 -------------- -------------- -------------- -------------- Net income allocable to Common Stock $ 4,786 $ 1,553 $ 9,917 $ 4,243 ============== ============== ============== ============== Per share information: Net earnings per share of Common Stock: Basic $ 0.74 $ 0.26 $ 1.69 $ 0.69 ============== ============== ============== ============== Diluted $ 0.66 $ 0.25 $ 1.67 $ 0.68 ============== ============== ============== ============== Weighted average shares of Common Stock outstanding: Basic 6,502,075 6,090,408 5,858,659 6,174,327 ============== ============== ============== ============== Diluted 10,861,674 6,107,825 10,182,850 6,242,770 ============== ============== ============== ============== </TABLE> See accompanying notes to unaudited consolidated financial statements. -2-
Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity For the Nine Months Ended September 30, 2003 and 2002 (in thousands) (unaudited) <TABLE> <CAPTION> Restricted Accumulated Class A Class A Additional Other Comprehensive Common Common Paid-In Unearned Comprehensive Accumulated Income/(Loss) Stock Stock Capital Compensation Income/(Loss) Deficit Total ------------ ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at January 1, 2002 $ 61 $ 1 $ 136,930 $ (583) $ (29,909) $ (3,872) $ 102,628 Net income $ 4,243 -- -- -- -- -- 4,243 4,243 Unrealized loss on derivative financial instruments, net of related income taxes (3,958) -- -- -- -- (3,958) -- (3,958) Unrealized gain on available-for-sale securities, net of related income taxes 713 -- -- -- -- 713 -- 713 Issuance of Class A Common Stock unit awards -- -- 1 312 -- -- -- 313 Issuance of restricted Class A Common Stock -- -- -- 400 (400) -- -- -- Vesting of restricted Class A Common Stock to unrestricted Class A Common Stock -- 1 (1) -- -- -- -- -- Restricted Class A Common Stock earned -- -- -- -- 504 -- -- 504 Repurchase and retirement of shares of Class A Common Stock previously outstanding -- (2) -- (3,110) -- -- -- (3,112) ----------- ------------------------------------------------------------------------------- Balance at September 30, 2002 $ 998 $ 60 $ 1 $ 134,532 $ (479) $ (33,154) $ 371 $ 101,331 =========== =============================================================================== Balance at January 1, 2003 $ 54 $ 1 $ 126,919 $ (320) $ (28,988) $(13,610) $ 84,056 Net income $ 9,917 -- -- -- -- -- 9,917 9,917 Unrealized gain on derivative financial instruments 984 -- -- -- -- 984 -- 984 Unrealized loss on available-for-sale securities (3,557) -- -- -- -- (3,557) -- (3,557) Sale of shares of Class A Common Stock under stock option agreement -- -- -- 152 -- -- -- 152 Cancellation of restricted Class A Common Stock -- -- -- (192) 192 -- -- -- Vesting of restricted Class A Common Stock to unrestricted Class A Common Stock -- 1 (1) -- -- -- -- -- Restricted Class A Common Stock earned -- -- -- -- 103 -- -- 103 Repurchase of warrants to purchase shares of Class A Common Stock -- -- -- (2,132) -- -- -- (2,132) Repurchase and retirement of shares of Class A Common Stock previously outstanding -- (1) -- (946) -- -- -- (947) Dividends declared on Class A Common Stock -- -- -- -- -- -- (8,296) (8,296) Shares redeemed in one for three reverse stock split -- -- -- (8) -- -- -- (8) Shares of Class A Common Stock issued in private offering -- 11 -- 17,124 -- -- -- 17,135 ----------- ----------------------------------------------------------------------------- Balance at September 30, 2003 $ 7,344 $ 65 $ -- $ 140,917 $ (25) $ (31,561) $(11,989) $ 97,407 =========== ============================================================================= </TABLE> See accompanying notes to unaudited consolidated financial statements. -3-
Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows Nine months ended September 30, 2003 and 2002 (in thousands) (unaudited) <TABLE> <CAPTION> 2003 2002 -------------- -------------- <S> <C> <C> Cash flows from operating activities: Net income $ 9,917 $ 4,243 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income taxes (655) (264) Recapture of allowance for possible credit losses -- (2,963) Depreciation and amortization 781 744 Loss/(income) from equity investments in Funds (1,085) 618 Net gain on sales of CMBS and available-for-sale securities -- (711) Unrealized (gain)/loss on hedged and derivative securities -- 2,776 Restricted Class A Common Stock earned 103 504 Amortization of premiums and accretion of discounts on loans and investments, net (824) (2,084) Accretion of discounts on term redeemable securities contract -- 680 Accretion of discounts and fees on Convertible Trust Preferred Securities, net 358 1,186 Changes in assets and liabilities, net: Deposits and other receivables 48 721 Accrued interest receivable 3,669 256 Prepaid and other assets (1,797) 15 Deferred origination fees and other revenue 775 683 Accounts payable and accrued expenses (766) (1,774) -------------- -------------- Net cash provided by operating activities 10,524 4,630 -------------- -------------- Cash flows from investing activities: Purchases of available-for-sale securities -- (39,999) Principal collections and proceeds from sales of available-for-sale securities 39,923 109,671 Purchases of CMBS (6,157) -- Principal collections and proceeds from sales of CMBS -- 67,880 Origination and purchase of loans receivable (73,275) -- Principal collections and proceeds from sale of loans receivable 73,617 114,955 Equity investments in Funds (9,119) (5,973) Return of capital from Funds 7,745 9,414 Purchase of remaining interest in Fund I (19,946) -- Purchases of equipment and leasehold improvements (22) (5) -------------- -------------- Net cash provided by investing activities 12,766 255,943 -------------- -------------- Cash flows from financing activities: Proceeds from repurchase obligations 41,152 166,974 Repayment of repurchase obligations (54,286) (142,097) Proceeds from credit facilities 83,015 81,000 Repayment of credit facilities (114,100) (167,211) Proceeds from term redeemable securities contract 20,000 35,816 Repayment of term redeemable securities contract (7,911) (173,628) Repayment of notes payable -- (977) Repayment of Convertible Trust Preferred Securities -- (60,258) Sale of shares of Class A Common Stock under stock option agreement 152 -- Payment of Class A Common Stock Dividend (5,367) -- Repurchase of warrants to purchase shares of Class A Common Stock (2,132) -- Proceeds from sale of shares of Class A Common Stock 17,135 -- Repurchase and retirement of shares of Common and Preferred Stock previously outstanding (955) (3,112) -------------- -------------- Net cash used in financing activities (23,297) (263,493) -------------- -------------- Net increase/(decrease) in cash and cash equivalents (7) (2,920) Cash and cash equivalents at beginning of year 10,186 11,651 -------------- -------------- Cash and cash equivalents at end of period $ 10,179 $ 8,731 ============== ============== </TABLE> See accompanying notes to unaudited consolidated financial statements. -4-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003 (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, 2002. 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 September 30, 2003 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2003. 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. On April 2, 2003, the Company's charter was amended and restated and then further amended to eliminate from the authorized stock of the Company the entire 100,000,000 shares of the Company's authorized but unissued class B common stock and to effect a one (1) for three (3) reverse stock split of the Company's class A common stock. Fractional shares resulting from the reverse stock split were settled in cash at a rate of $16.65 multiplied by the percentage of a share owned after the split. All per share information concerning the computation of earnings per share, dividends per share, authorized stock, and per share conversion and exercise prices reported in the accompanying consolidated interim financial statements and these notes to consolidated financial statements have been adjusted as if the amendments to the Company's charter were in effect for all fiscal periods and as of all balance sheet dates presented. 2. REIT Election In December 2002, the Company's board of directors authorized the Company's election to be taxed as a real estate investment trust ("REIT") for the 2003 tax year. The Company will continue to make, for its 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 and related assets. In view of the Company's election to be taxed as a REIT, the Company has tailored its balance sheet investment program to originate or acquire loans and investments to produce a portfolio that meets the asset and income tests necessary to maintain the Company's qualification as a REIT. In order to accommodate the Company's REIT status, the legal structure of future investment funds the Company sponsors may be different from the legal structure of the Company's existing investment funds. In order to qualify as a REIT, five or fewer individuals may own no more than 50% of the Company's Common Stock. As a means of facilitating compliance with such qualification, stockholders controlled by John R. Klopp and Craig M. Hatkoff and trusts for the benefit of the family of Samuel Zell each sold 166,666 shares of Class A Common Stock to an institutional investor in a transaction that closed on February 7, 2003. Following this transaction, the Company's largest five individual stockholders own in the aggregate less than 50% of the Company's Class A Common Stock. -5-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 3. Purchase of Citigroup's Interest in Fund I In January 2003, the Company purchased the 75% interest in CT Mezzanine Partners I LLC ("Fund I") held by affiliates of Citigroup Alternative Investments, LLC ("Citigroup") for a purchase price of approximately $38.4 million (including the assumption of liabilities), at the book value of the fund. On January 31, 2003, the Company began consolidating the balance sheet and operations of Fund I in its consolidated financial statements. 4. 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. 5. New Accounting Pronouncement In May 2003, Statement of Financial Accounting Standards ("SFAS") No. 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No. 150") was issued. SFAS No. 150 defines the appropriate balance sheet classification of instruments with both debt and equity components and the appropriate expense classification for any dividend, interest or fair value adjustments. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The pronouncement is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. The Company has reviewed the provisions of this standard, and its adoption did not have a material effect on the Company's consolidated financial statements. 6. Available-for-Sale Securities At September 30, 2003, 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 Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 $ 2,866 $ 98 $ -- $ 2,964 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 9,737 276 -- 10,013 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 866 31 -- 897 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due April 1, 2032 9,337 422 -- 9,759 ----------------------------------------- $ 22,806 $ 827 $ -- $ 23,633 ========================================= </TABLE> 7. Commercial Mortgage Backed Securities ("CMBS") The Company pursues rated and unrated investments in public and private subordinated interests ("Subordinated Interests") in CMBS. During the three months ended September 30, 2003, the Company purchased $6,542,000 face amount of interests in two subordinated CMBS issues for $6,157,000. At September 30, 2003, the Company has CMBS totaling $160,937,000 of which $155,937,000 bear interest (including the accretion of the discounted purchase price) at fixed rates averaging 11.56% of the book value and $5,000,000 bear interest at variable rates averaging Libor + 2.93% (4.07% at September 30, 2003). The CMBS mature at various dates from August 2004 to March 2015. -6-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 8. Loans Receivable At September 30, 2003 and December 31, 2002, the Company's loans receivable consisted of the following (in thousands): September 30, December 31, 2003 2002 --------------- --------------- (1) Mortgage Loans $ 13,121 $ 15,202 (2) Mezzanine Loans 157,843 98,268 (3) Other loans receivable -- 7,859 --------------- --------------- 170,964 121,329 Less: reserve for possible credit losses (6,672) (4,982) --------------- --------------- Total loans $ 164,292 $ 116,347 =============== =============== In connection with the Company's purchase of the Fund I interest held by Citigroup in January 2003, the Company recorded additional loans receivable of $50,034,000 and recorded a $1,690,000 increase to the reserve for possible credit losses on the acquisition date. The assets were recorded at their carrying value from Fund I, which approximated the market value on the acquisition date. 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. During the quarter ended September 30, 2003 the Company received proceeds of $731,000 reducing the carrying value of the loan to $3,269,000. In accordance with the Company's policy for revenue recognition, income recognition has been suspended on this loan and for the nine months ended September 30, 2003, $684,000 of potential interest income has not been recorded. During the nine months ended September 30, 2003, the Company purchased or originated seven Mezzanine Loans for $73,275,000, received partial repayments on eight Mortgage and Mezzanine Loans totaling $4,856,000 and received three Mezzanine Loan satisfactions and one other loan satisfaction totaling $68,761,000. At September 30, 2003, 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 10.00% (2) Mezzanine Loans 9.65% Total loans 9.67% At September 30, 2003, $94,422,000 (56%) 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 $73,273,000 (44%) of loans bear interest at fixed rates ranging from 11.62% to 12.00%. 9. Equity Investments in Funds CT Mezzanine Partners III, Inc. ("Fund III") On June 2, 2003, CT Mezzanine Partners III, Inc. ("Fund III"), the Company's third commercial real estate mezzanine investment fund co-sponsored with Citigroup, effected its initial closing. Fund III commenced its investment operations immediately following the initial closing and on June 27, 2003, July 17, 2003 and August 8, 2003, respectively, Fund III effected its second, third and final closings resulting in total equity commitments in Fund III of $425.0 million. The equity commitments made to Fund III by affiliates of the Company and Citigroup are $20.0 million and $80.0 million, respectively. Based upon the $425.0 million aggregate equity commitments made at the initial and subsequent closings, during the investment period of Fund III, the Company will earn annual investment management fees of $6.0 million through the service of its subsidiary, CT Investment Management Co. LLC ("CTIMCO"), as investment manager to Fund III. -7-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 10. Long-Term Debt Credit Facility In connection with the Company's purchase of the Fund I interest held by Citigroup in January 2003, the Company assumed the obligations under the credit facility entered into by Fund I. There were outstanding borrowings of $24,084,000 on the date of acquisition. The lender for the Fund I credit facility was the same as the lender for the Company's outstanding credit facility and thus the two facilities were combined for reporting purposes. On June 27, 2003, the Company formally combined under one facility the outstanding borrowings under the two facilities and extended the maturity of the $150 million credit facility for two additional years to July 16, 2005, with an automatic nine month amortizing extension option, if not otherwise extended, on substantially the same terms. At September 30, 2003, the Company has borrowed $33,000,000 under the credit facility at an average interest rate of Libor + 2.25% (3.37% at September 30, 2003). On September 30, 2003, the unused amount of potential credit under the remaining credit facility was $117,000,000. Assuming no additional utilization under the credit facility and including the amortization of fees paid and capitalized over the term of the credit facility, the all-in effective borrowing cost was 5.59% at September 30, 2003. The Company has pledged assets of $75,919,000 as collateral for the borrowing against such credit facility. Repurchase Obligations At September 30, 2003, the Company was obligated to four counterparties under repurchase agreements. The repurchase obligation with the first counterparty, an affiliate of a securities dealer, was utilized to finance CMBS securities. At September 30, 2003, the Company has sold CMBS assets with a book and market value of $154,776,000 and has a liability to repurchase these assets for $91,360,000 that is non-recourse to the Company. This repurchase obligation had an original one-year term that expired in February 2003 and was extended to February 2004. 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 September 30, 2003, the Company has sold such assets with a book and market value of $23,633,000 and has a liability to repurchase these assets for $22,909,000. This repurchase agreement comes due monthly and has a current maturity date in November 2003. 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 the Company 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. To September 30, 2003, the master repurchase agreement has been utilized in connection with the purchase of four loans in the second and third quarters of 2003. At September 30, 2003, the Company has sold loans with a book and market value of $49,977,000 and has a liability to repurchase these assets for $24,443,000. 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 the third quarter of 2003 in connection with the purchase of a loan and CMBS securities. At September 30, 2003, the Company has sold a loan and CMBS with a book and market value of $9,950,000 and has a liability to repurchase these assets for $8,210,000. The repurchase agreements are matched to the term of the underlying loan and CMBS that mature between August 2004 and January 2005 and bear interest at specified rates over LIBOR based upon each asset included in the obligation. The average borrowing interest rate in effect for all the repurchase obligations outstanding at September 30, 2003 was Libor + 1.06% (2.17% at September 30, 2003). 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 2.67% at September 30, 2003. -8-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) Term Redeemable Securities Contract At September 30, 2003, the Company has borrowed $12,089,000 under a $75 million term redeemable securities contract at a blended interest rate of Libor + 1.91% (3.03% at September 30, 2003). On September 30, 2003, the unused amount of potential credit under the remaining credit facility was $62,911,000. Assuming no additional utilization under the term redeemable securities contract and including the amortization of fees paid and capitalized over the term of the term redeemable securities contract, the all-in effective borrowing cost was 6.26% at September 30, 2003. The Company has pledged assets of $18,574,000 as collateral for the borrowing against such credit facility. 11. Derivative Financial Instruments The following table summarizes the notional value and fair value of the Company's derivative financial instruments at September 30, 2003. 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 Final Hedge Type Notional Rate Maturity Fair Value Value - --------- ---------------- -------------- ------------ --------- ------------- <S> <C> <C> <C> <C> <C> Swap Cash Flow Hedge $85,000,000 4.2425% 2015 $ (667,000) Swap Cash Flow Hedge 24,000,000 4.2325% 2015 (171,000) </TABLE> On September 30, 2003, the derivative financial instruments were reported at their fair value as interest rate hedge liabilities of $838,000. 12. Earnings Per Share The following table sets forth the calculation of Basic and Diluted EPS for the nine months ended September 30, 2003 and 2002: <TABLE> <CAPTION> Nine Months Ended September 30, 2003 Nine Months Ended September 30, 2002 -------------------------------------- -------------------------------------- Net Income Shares Per Share Net Income Shares Per Share Amount Amount ------------- ----------- ------------ ------------- ------------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic EPS: Net earnings per share of Common Stock $ 9,917,000 5,858,659 $ 1.69 $4,243,000 6,174,327 $ 0.69 =========== ========== Effect of Dilutive Securities Options outstanding for the purchase of Common -- 50,769 -- 25,493 Stock Convertible Trust Preferred Securities exchangeable for shares of Common Stock 7,089,000 4,273,422 -- -- Warrants outstanding for the purchase of Common -- -- -- 42,950 Stock ------------- ------------ ------------- ------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $17,006,000 10,182,850 $ 1.67 $4,243,000 6,242,770 $ 0.68 ============= ============ =========== ============= ============= ========== </TABLE> -9-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table sets forth the calculation of Basic and Diluted EPS for the three months ended September 30, 2003 and 2002: <TABLE> <CAPTION> Three Months Ended Three Months Ended September 30, 2003 September 30, 2002 ------------------------------------- -------------------------------------- Net Income Shares Per Share Net Income Shares Per Share Amount Amount ------------ -------------- --------- ------------- ------------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic EPS: Net earnings per share of Common Stock $4,786,000 6,502,075 $ 0.74 $1,553,000 6,090,408 $ 0.26 ========= ========== Effect of Dilutive Securities Options outstanding for the purchase of Common -- 86,177 -- 17,417 Stock Convertible Trust Preferred Securities exchangeable for shares of Common Stock 2,363,000 4,273,422 -- -- Warrants outstanding for the purchase of Common -- -- -- -- Stock ------------- ------------ ------------- ------------ Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $7,149,000 10,861,674 $ 0.66 $1,553,000 6,107,825 $ 0.25 ============ ============== ========= ============= ============= ========== </TABLE> All per share information has been adjusted for the one for three reverse stock split in the computation of earnings per share and dividends per share as presented on the consolidated statements of income. See Note 1. 13. Income Taxes The Company intends 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, the Company generally is not subject to federal income tax. To maintain qualification as a REIT, the Company must distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate rates. The Company may also be subject to certain state and local taxes on its income and property. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. At September 30, 2003, the Company was in compliance with all REIT requirements. During the three and nine months ended September 30, 2003, the Company recorded $655,000 of income tax expense for income that was attributable to taxable REIT subsidiaries. The Company's effective tax rate for the three months ended September 30, 2003 attributable to its taxable REIT subsidiaries was 67.7%. 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, and compensation in excess of deductible limits. 14. Class A Common Stock On June 18, 2003, the Company issued 1,075,000 shares of Class A Common Stock in a private placement. Thirty-two separate investors, led by certain institutional clients advised by Lend Lease Rosen Real Estate Securities, LLC, purchased the shares. Net proceeds to the Company were $17.1 million after payment of offering expenses and fees to Conifer Securities, LLC, placement agent for the Company. - 10 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 15. Dividends In order to maintain its election to qualify as a REIT, the Company 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. The Company anticipates it will distribute all of its REIT taxable income to its stockholders. Because REIT taxable income differs from cash flow from operations due to non-cash revenues or expenses, in certain circumstances, the Company may be required to borrow to make sufficient dividend payments to meet this anticipated dividend threshold. On September 22, 2003, the Company declared a dividend of approximately $2,929,000, or $0.45 per share of Class A Common Stock applicable to the three-month period ended September 30, 2003, payable on October 15, 2003 to stockholders of record on September 30, 2003. 16. Employee Benefit Plans 1997 Long-Term Incentive Stock Plan During the nine months ended September 30, 2003, the Company did not issue any options to acquire shares of Class A Common Stock or restricted shares of Class A Common Stock. The following table summarizes the option activity under the incentive stock plan for the quarter ended September 30, 2003: <TABLE> <CAPTION> Weighted Options Exercise Price Average Exercise Outstanding per Share Price per Share ---------------- -------------------- ------------------ <S> <C> <C> <C> Outstanding at January 1, 2003 657,250 $12.375 - $30.00 $ 18.87 Granted in 2003 -- -- -- Exercised in 2003 (8,667) $12.375 - $18.00 17.49 Canceled in 2003 (121,115) $12.375 - $30.00 18.51 ---------------- ------------------ Outstanding at September 30, 2003 527,468 $12.375 - $30.00 $ 18.98 ================ ================== </TABLE> At September 30, 2003, 427,582 of the options are exercisable. At September 30, 2003, the outstanding options have various remaining contractual exercise periods ranging from 2.26 to 8.35 years with a weighted average life of 5.86 years. 17. Supplemental Disclosures for Consolidated Statements of Cash Flows Interest paid on the Company's outstanding debt and Convertible Preferred Trust Securities during the nine months ended September 30, 2003 and 2002 was $14,272,000 and $25,516,000, respectively. Income taxes paid by the Company during the nine months ended September 30, 2003 and 2002 was $1,693,000 and $8,275,000, respectively. In connection with the purchase of the Fund I interest held by Citigroup, the Company assumed $24,084,000 of credit facility debt that is a non-cash activity. 18. Segment Reporting The Company has established two reportable segments beginning January 1, 2003. The Company has an internal information system that produces performance and asset data for its two segments along service lines. The Balance Sheet Investment segment includes all of the Company's activities related to direct loan and investment activities (including direct investments in Funds) and the financing thereof. The Investment Management segment includes all of the Company's activities related to investment management services provided to the Company and funds under management and includes the Company's taxable REIT subsidiary, CTIMCO, and its subsidiaries. The segment also provides asset management and advisory services relating to real estate properties. - 11 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table details each segment's contribution to the Company's overall profitability and the identified assets attributable to each such segment for the nine months ended and as of September 30, 2003, respectively (in thousands): <TABLE> <CAPTION> Balance Sheet Investment Inter-Segment Investment Management Activities Total --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> Income from loans and other investments: Interest and related income $ 29,384 $ -- $ -- $ 29,384 Less: Interest and related expenses 7,369 -- -- 7,369 --------------- --------------- --------------- --------------- Income from loans and other 22,015 -- -- 22,015 investments, net --------------- --------------- --------------- --------------- Other revenues: Management and advisory fees -- 9,509 (3,716) 5,793 Income/(loss) from equity investments in Funds 1,866 (781) -- 1,085 Other interest income (77) 123 -- 46 --------------- --------------- --------------- --------------- Total other revenues 1,789 8,851 (3,716) 6,924 --------------- --------------- --------------- --------------- Other expenses: General and administrative 2,234 8,263 -- 10,497 Management fees paid 3,716 -- (3,716) -- Depreciation and amortization 634 147 -- 781 --------------- --------------- --------------- --------------- Total other expenses 6,584 8,410 (3,716) 11,278 --------------- --------------- --------------- --------------- Income before income taxes and distributions and amortization on Convertible Trust Preferred Securities 17,220 441 -- 17,661 Provision for income taxes -- 655 -- 655 --------------- --------------- --------------- --------------- Income before distributions and amortization on Convertible Trust Preferred Securities 17,220 (214) -- 17,006 Distributions and amortization on Convertible Trust Preferred Securities 7,089 -- -- 7,089 --------------- --------------- --------------- --------------- Net income allocable to Class A Common Stock $ 10,131 $ (214) $ -- $ 9,917 =============== =============== =============== =============== Total Assets $ 393,307 $ 20,855 $ (21,426) $ 392,766 =============== =============== =============== =============== </TABLE> - 12 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table details each segment's contribution to the Company's overall profitability attributable to each such segment for the three months ended and as of September 30, 2003, respectively (in thousands): <TABLE> <CAPTION> Balance Sheet Investment Inter-Segment Investment Management Activities Total --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> Income from loans and other investments: Interest and related income $ 11,757 $ -- $ -- $ 11,757 Less: Interest and related expenses 2,616 -- -- 2,616 --------------- --------------- --------------- --------------- Income from loans and other investments, net 9,141 -- -- 9,141 --------------- --------------- --------------- --------------- Other revenues: Management and advisory fees -- 3,886 (1,501) 2,385 Income/(loss) from equity investments in Funds 457 (90) -- 367 Other interest income (97) 105 -- 8 --------------- --------------- --------------- --------------- Total other revenues 360 3,901 (1,501) 2,760 --------------- --------------- --------------- --------------- Other expenses: General and administrative 953 2,851 -- 3,804 Management fees paid 1,501 -- (1,501) -- Depreciation and amortization 212 81 -- 293 --------------- --------------- --------------- --------------- Total other expenses 2,666 2,932 (1,501) 4,097 --------------- --------------- --------------- --------------- Income before income taxes and distributions and amortization on Convertible Trust Preferred Securities 6,835 969 -- 7,804 Provision for income taxes -- 655 -- 655 --------------- --------------- --------------- --------------- Income before distributions and amortization on Convertible Trust Preferred Securities 6,835 314 -- 7,149 Distributions and amortization on Convertible Trust Preferred Securities 2,363 -- -- 2,363 --------------- --------------- --------------- --------------- Net income allocable to Class A Common Stock $ 4,472 $ 314 $ -- $ 4,786 =============== =============== =============== =============== </TABLE> All revenues were generated from external sources within the United States. The Investment Management segment earned fees of $3,716,000 and $1,501,000 for management of the Balance Sheet Investment segment for the nine and three months ended September 30, 2003, respectively, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the tables above. - 13 -
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. Introduction - ------------ The Company is a fully integrated, self-managed finance and investment management company that makes debt-related investments in various types of commercial real estate assets and operating companies. Currently, the Company makes balance sheet investments for its own account and manages a series of private equity funds on behalf of institutional and individual investors. Since 1997, the Company has completed, for its own account and on behalf of the funds that it manages, $3.2 billion of total investments in 107 separate transactions. In December 2002, the Company's board of directors authorized an election to be taxed as a REIT for the 2003 tax year. Balance Sheet Overview - ---------------------- At September 30, 2003, the Company has four investments in Federal Home Loan Mortgage Corporation Gold securities with a face value of $22,632,000. The securities bear interest at a fixed rate of 6.5% of the face value. The Company purchased the securities at a net premium and has $174,000 of the premium remaining to be amortized over the remaining lives of the securities. After premium amortization, the securities bear interest at a blended rate of 6.04%. The securities are carried at a market value of $23,633,000, an $827,000 unrealized gain to their amortized cost. The Company holds eighteen investments in twelve separate issues of CMBS with a face value of $215,512,000 at September 30, 2003. $5,000,000 face value of the CMBS bear interest at a variable rate which averages LIBOR + 2.95% (4.07% at September 30, 2003). The remaining $210,512,000 face value of the CMBS bear interest at fixed rates averaging 7.64% of the face value. The Company purchased the fixed rate CMBS at discounts. The remaining discount to be amortized into income is $23,025,000 over the remaining lives of the securities. After discount amortization, the fixed rate securities bear interest at a blended rate of 11.55%. The securities are carried at market value of $160,937,000, reflecting a $31,550,000 unrealized loss to their amortized cost. On January 31, 2003, the Company purchased Citigroup's 75% interest in CT Mezzanine Partners I LLC ("Fund I") for a purchase price of approximately $38.4 million (including the assumption of liabilities), equal to the book value of the fund. In conjunction with the purchase on January 31, 2003, the Company began consolidating the balance sheet and operations of Fund I in its consolidated financial statements including four loans receivable totaling $50.0 million and $24.1 million of borrowings under a credit facility. In addition to those acquired with the purchase of Citigroup's interest in Fund I, the Company has originated or purchased seven new loans since December 31, 2002 totaling $73.3 million and has no future commitments under any existing loans. The Company has received full satisfaction of four loans totaling $68.8 million and partial repayments on eight loans totaling $4.9 million in 2003. At September 30, 2003, the Company had outstanding loans receivable totaling approximately $171.0 million. At September 30, 2003, the Company has twelve performing loans receivable with a current carrying value of $167,695,000. Two of the loans totaling $73,273,000 bear interest at a fixed blended rate of interest of 11.92%. The ten remaining loans totaling $94,422,000 bear interest at a variable rate of interest averaging LIBOR + 6.50% (7.94% at September 30, 2003 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. During the quarter ended September 30, 2003, the Company received proceeds of $731,000 reducing the carrying value of the loan to $3,269,000. In accordance with the Company's policy for revenue recognition, income recognition has been suspended on this loan and for the nine months ended September 30, 2003, $684,000 of potential interest income has not been recorded. All other loans are performing in accordance with their terms. At September 30, 2003, the Company has investments in Funds of $17,188,000. In addition to the investment, the Company has $6,809,000 of unamortized costs which were capitalized in conjuction with the organization and - 14 -
capital raising of the funds. These costs are being amortized as expenses over the lives of the funds to which they pertain. The Company utilizes borrowings under a committed credit facility and a term redeemable securities contract, along with repurchase obligations to finance its balance sheet assets. At September 30, 2003, after assumption of the debt in conjunction with the purchase of Citigroup's interests in Fund I, the Company was party to two credit facilities with a commercial lender that provided for a total of $150 million of credit. On June 27, 2003, the Company formally combined under one facility the outstanding borrowings under the two facilities and extended the maturity of the $150 million credit facility for two additional years to July 16, 2005 on substantially the same terms. At September 30, 2003, the Company had outstanding borrowings under the credit facility of $33,000,000, and had unused potential credit of $117,000,000, an amount of available credit that provides the Company with adequate liquidity for its short-term needs. The credit facility provides for advances to fund lender-approved loans and investments made by the Company. Borrowings under the credit facility are secured by pledges of assets owned by the Company. Borrowings under the credit facility bear interest at specified rates over LIBOR, which rates may fluctuate, based upon the credit quality 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. The Company pays interest on the facility at specified rates over LIBOR based upon each asset included in the obligation. Based upon advances in place at September 30, 2003, the effective rate on the credit facility is LIBOR + 2.25% (3.37% at September 30, 2003). The Company has capitalized costs of $1,332,000 which are being amortized over the remaining life of the facility (21.5 months at September 30, 2003). After amortizing these costs to interest expense, the all-in effective borrowing cost on the facility is 5.59% based upon the amount currently outstanding on the credit facility. On September 30, 2003, the Company was party to a $75 million term redeemable securities contract. The term redeemable securities contract has a two-year term, maturing in February 2004, with an automatic one-year amortizing extension option, if not otherwise extended. The Company has borrowings against the term redeemable securities contract of $12,089,000 at September 30, 2003. The Company pays interest on the term redeemable securities contract at specified rates over LIBOR based upon each asset included in the obligation. Based upon advances in place at September 30, 2003, the blended rate on the term redeemable securities contract is LIBOR + 1.91% (3.03% at September 30, 2003). The Company has capitalized costs of $164,000 which are being amortized over the remaining life of the term redeemable securities contract (5 months at September 30, 2003). After amortizing these costs to interest expense, the all-in effective borrowing cost on the facility is 6.26% based upon the amount currently outstanding on the term redeemable securities contract. In May 2003, the Company entered into a new master repurchase agreement with a securities dealer that provides for the Company to finance up to $50,000,000, which was upsized to $100,000,000 in August 2003, by selling with a repurchase obligation specific assets to the counterparty. As of September 30, 2003, the Company has utilized the master repurchase agreement to finance the purchase of four loans during the second and third quarters of 2003. In the third quarter of 2003, the Company entered into another repurchase obligation in connection with the purchase of a loan and CMBS securities. In connection with the foregoing, at September 30, 2003, the Company has sold a loan and CMBS with a book and market value of $9,950,000 and has a liability to repurchase these assets for $8,210,000. The repurchase agreements are matched to the term of the underlying loan and CMBS that mature between August 2004 and January 2005 and bear interest at specified rates over LIBOR based upon each asset included in the obligation. At September 30, 2003, the Company has total outstanding repurchase obligations of $146,922,000. Based upon advances in place at September 30, 2003, the blended rate on the repurchase obligations is LIBOR + 1.06% (2.17% at September 30, 2003). The Company has capitalized costs of $494,000 which are being amortized over the remaining life 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 is 2.67%. The Company expects to enter into new repurchase obligations at their maturity. The Company is party to two cash flow interest rate swaps with a total notional value of $109 million. These cash flow interest rate swaps effectively convert floating rate debt to fixed rate debt, which is utilized to finance assets which earn interest at fixed rates. At September 30, 2003, the Company receives LIBOR flat (1.12% at September 30, 2003) and pays an average rate of 4.24%. The market value of the swaps at September 30, 2003 is a - 15 -
liability of $838,000, which is recorded as interest rate hedge liabilities and accumulated other comprehensive loss on the balance sheet of the Company. The Company also utilizes the outstanding Convertible Trust Preferred Securities to finance its balance sheet assets. The remaining $89,742,000 liquidation amount outstanding on this obligation bears 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 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 interest at that rate. The Convertible Trust Preferred Securities 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 the Company, in whole or in part, on or after September 30, 2004. In March 2003, the Company repurchased 66,427 shares of Class A Common stock under the open market share repurchase program from the Company's former chief financial officer at a price of $14.25 per share. After the repurchase, the Company has 666,339 shares remaining authorized for repurchase under the program. In 2001 and 2002, in connection with the organization of Fund I and CT Mezzanine Partners II LP ("Fund II"), the Company issued to affiliates of Citigroup warrants to purchase 2,842,822 shares of Class A Common Stock. At December 31, 2002, all such warrants had a $15.00 per share exercise price, were exercisable and were to expire on March 8, 2005. In January 2003, the Company purchased all of the warrants outstanding from the affiliates of Citigroup for $2.1 million. On June 18, 2003, the Company issued 1,075,000 shares of Class A Common Stock in a private placement made to thirty-two separate investors, led by certain institutional clients advised by Lend Lease Rosen Real Estate Securities, LLC. Net proceeds to the Company were $17.1 million after payment of offering costs and fees to Conifer Securities, LLC, placement agent for the Company. At September 30, 2003, the Company has 6,509,067 shares of its Class A Common Stock outstanding. Investment Management Overview - ------------------------------ The Company operated principally as a balance sheet investor until the start of its investment management business in March 2000 when it entered into a venture with affiliates of Citigroup Alternative Investments, LLC ("Citigroup") to co-sponsor and invest capital in a series of high-yield commercial real estate mezzanine investment funds managed by the Company. Pursuant to the venture agreement, the Company and Citigroup have co-sponsored Fund I, Fund II and CT Mezzanine Partners III, Inc. ("Fund III"). The Company has capitalized costs of $6,809,000, net, from the formation of the Funds that are being amortized over the remaining anticipated lives of the Funds. Fund I commenced its investment operations in May 2000 with equity capital supplied solely by the Company (25%) and Citigroup (75%). 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, the Company purchased from affiliates of Citigroup their 75% interest in Fund I for $38.4 million (including the assumption of liabilities). As of January 31, 2003, the Company began consolidating the operations of Fund I in its consolidated financial statements. Fund II had its initial closing 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 the Company and Citigroup, respectively. The balance of the equity commitments were made by third-party private equity investors, including public and corporate pension plans, endowment funds, financial institutions and high net worth individuals. 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 ("CTIMCO"), a wholly-owned subsidiary of the Company, 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), CTIMCO began earning annual base management fees of 1.287% of invested capital. Based upon Fund II's invested capital at September 30, 2003 (the date upon which the calculation for the next quarter is based), CTIMCO will earn base management fees of $718,000 for the quarter ending December 31, 2003. - 16 -
The Company and Citigroup, through their 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 the Company and Citigroup. The Company intends to pay 25% of its share of the Fund II incentive management fees as long-term incentive compensation to its employees. No such incentive fees have been earned at September 30, 2003 and as such, no amount has been accrued as income for such potential fees in the Company's 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 October 1, 2003 at the recorded book value (net of the allowance for possible credit losses) and the fund equity and income were distributed, the Company would record approximately $4.7 million of incentive income. Since December 31, 2002, the Company has made equity contributions to Fund II of $5.5 million and equity contributions to Fund II's general partner of $757,000. The Company does not anticipate making any additional equity contributions to Fund II or its general partner. The Company's net investment in Fund II and its general partner at September 30, 2003 is $15.2 million. As of September 30, 2003, Fund II has 27 outstanding loans and investments totaling $607.8 million, all of which are performing in accordance with the terms of their agreements. On June 2, 2003, Fund III effected its initial closing and on August 8, 2003, its final closing, raising a total of $425.0 million in equity commitments. The Company and Citigroup made equity commitments of $20.0 million (4.7%) and $80.0 million (18.8%), respectively, with the balance made by third-party private equity investors. Since the initial closing, the Company has made equity investments in Fund III of $2,000,000 and has capitalized costs totaling $903,000, which are being amortized over the remaining anticipated life of Fund III. As of September 30, 2003, Fund III had closed five investments totaling $148.5 million of which $146.6 million remains outstanding at September 30, 2003. CTIMCO 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, the Company will earn annual base management fees of $6.0 million during the investment period, through the service of its subsidiary, CTIMCO, as investment manager to Fund III. The Company and Citigroup 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. The Company and Citigroup will receive 62.5% and 37.5%, respectively, of the total incentive management fees. The Company expects to distribute a portion of its share of the Fund III incentive management fees as long-term incentive compensation to its employees. Results of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 - -------------------------------------------------------------------------------- The Company reported net income of $9,917,000 for the nine months ended September 30, 2003, an increase of $5,674,000 from the net income of $4,243,000 for the nine months ended September 30, 2002. This increase was primarily the result of a reduction in income taxes in 2003 in connection with the REIT election, the elimination of the net unrealized loss on derivative securities and the corresponding hedged risk on CMBS securities by settling the fair value hedge in December 2002 and entering into a new cash flow hedge, and the increase in income from equity investments in Funds. These increases were partially offset by a recapture of the allowance for possible credit losses, an advisory fee earned, sales of investments and the reduction of the maturity of fair value hedges resulting in net gains, all of which occurred in 2002 and did not recur in 2003. Other offsets to the increase included a reduction in management and advisory fees from Funds and a reduction in net income from loans and investments. The Company reported net income of $4,786,000 for the three months ended September 30, 2003, an increase of $3,233,000 from the net income of $1,553,000 for the three months ended September 30, 2002. This increase was primarily the result of a reduction in income taxes in 2003 with the REIT election and an increase in net income from loans and investments. These increases were partially offset by a reduction in income from equity investments in Funds and an advisory fee earned in 2002, which did not recur in 2003. - 17 -
Interest and related income from loans and other investments amounted to $29,384,000 for the nine months ended September 30, 2003, a decrease of $8,607,000 from the $37,991,000 amount for the nine months ended September 30, 2002. Average interest-earning assets decreased from approximately $505.0 million for the nine months ended September 30, 2002 to approximately $358.3 million for the nine months ended September 30, 2003. The average interest rate earned on such assets increased from 10.1% in 2002 to 11.0% in 2003. During the nine months ended September 30, 2003 and September 30, 2002, the Company recognized $2,804,000 and $1,490,000, respectively, in additional income on the early repayment of loans and investments. Without this additional interest income, the earning rate for the 2003 period would have been 9.9% versus 9.7% for the 2002 period. LIBOR rates averaged 1.2% for the nine months ended September 30, 2003 and 1.8% for the nine months ended September 30, 2002, a decrease of 0.6%. The portion of the Company's average assets that earn interest at fixed-rates did not decrease proportionately to the decrease in assets that earn interest at variable rates in 2003, which served to offset the decrease in earnings from the decrease in the average LIBOR rate. Interest and related income from loans and other investments amounted to $11,757,000 for the three months ended September 30, 2003, an increase of $721,000 from the $11,036,000 amount for the three months ended September 30, 2002. Average interest-earning assets decreased from approximately $404.1 million for the three months ended September 30, 2002 to approximately $369.4 million for the three months ended September 30, 2003. The average interest rate earned on such assets increased from 10.8% in 2002 to 12.6% in 2003. During the three months ended September 30, 2003 and September 30, 2002, the Company recognized $2,437,000 and $1,120,000, respectively, in additional income on the early repayment of loans and investments. Without this additional interest income, the earning rate for the 2003 period would have been 10.0% versus 9.7% for the 2002 period. LIBOR rates averaged 1.1% for the three months ended September 30, 2003 and 1.8% for the three months ended September 30, 2002, a decrease of 0.7%. The portion of the Company's average assets that earn interest at fixed- rates did not decrease proportionately to the decrease in assets that earn interest at variable rates in 2003, which served to offset the decrease in earnings from the decrease in the average LIBOR rate. The Company utilizes the credit facility, the term redeemable securities contract, and repurchase obligations to finance its interest-earning assets. Interest and related expenses amounted to $7,369,000 for the nine months ended September 30, 2003, a decrease of $6,651,000 from the $14,020,000 amount for the nine months ended September 30, 2002. The decrease in expense was due to a decrease in the amount of average interest-bearing liabilities outstanding from approximately $279.5 million for the nine months ended September 30, 2002 to approximately $206.1 million for the nine months ended September 30, 2003, and a decrease in the average rate on interest-bearing liabilities from 6.7% to 4.8% for the same periods. The decrease in the average rate is substantially due to the decrease in swap levels and rates and the increased use of repurchase agreements as a percentage of total debt in the 2003 period at lower spreads to LIBOR than the credit facilities utilized in the 2002 period. Interest and related expenses amounted to $2,616,000 for the three months ended September 30, 2003, a decrease of $1,141,000 from the $3,757,000 amount for the three months ended September 30, 2002. The decrease in expense was due to a decrease in the average rate on interest-bearing liabilities from 8.8% for the three months ended September 30, 2002 to 5.0% for the three months ended September 30, 2003, partially offset by an increase in the amount of average interest-bearing liabilities outstanding from approximately $169.9 million to approximately $207.2 million. The decrease in the average rate is substantially due to the decrease in swap levels and rates and the increased use of repurchase agreements as a percentage of total debt in the 2003 period at lower spreads to LIBOR than the credit facilities utilized in the 2002 period. The Company also utilizes the outstanding Convertible Trust Preferred Securities to finance its interest-earning assets. During the nine months ended September 30, 2003 and 2002, the Company recognized $7,089,000 and $7,186,000, respectively, of net expenses related to its outstanding Convertible Trust Preferred Securities. This amount consisted of distributions to the holders totaling $6,731,000 and $12,195,000, respectively, and amortization of discount and origination costs totaling $358,000 and $1,186,000, respectively, during the nine months ended September 30, 2003 and 2002. In the 2002 period, this total was partially offset by a tax benefit of $6,195,000. Due to the Company's election to be taxed as a REIT, there is no tax benefit for the expense in the 2003 period. The decrease in the distribution amount and amortization of discount and origination costs resulted from the elimination of the distributions and discount and fees on the $60.3 million Non-Convertible Amount, which was repaid on September 30, 2002. - 18 -
During the three months ended September 30, 2003 and 2002, the Company recognized $2,363,000 and $2,669,000, respectively, of net expenses related to its outstanding Convertible Trust Preferred Securities. This amount consisted of distributions to the holders totaling $2,244,000 and $4,184,000, respectively, and amortization of discount and origination costs totaling $119,000 and $786,000, respectively, during the three months ended September 30, 2003 and 2002. In the 2002 period, this total was partially offset by a tax benefit of $2,301,000. Due to the Company's election to be taxed as a REIT, there is no tax benefit for the expense in the 2003 period. The decrease in the distribution amount and amortization of discount and origination costs resulted from the elimination of the distributions and discount and fees on the Non-Convertible Amount, which was repaid on September 30, 2002. Other revenues decreased $4,044,000 from $10,968,000 for the nine months ended September 30, 2002 to $6,924,000 for the nine months ended September 30, 2003. During the nine months ended September 30, 2002, the Company sold investments and reduced the maturity of its fair value hedge, which resulted in a gain of $1,651,000 and earned a $2.0 million fee from the Company's final advisory assignment. On January 1, 2003, the general partner of Fund II (owned by affiliates of the Company and Citigroup) voluntarily reduced by 50% the management fees charged to Fund II for the remainder of the investment period due to a lower than expected level of deployment of the Fund's capital. This, along with the reduction in income when the Company began charging management fees on invested capital for Fund II, partially offset by the management fees charged to Fund III, reduced the Company's management and advisory fees from Funds by $1.8 million for the period. In 2002, Fund I increased its allowance for possible credit losses by establishing a specific reserve for the single non-performing loan it was carrying. The loss from equity investments in Funds during the nine months ended September 30, 2002 was primarily due to this additional expense. Other revenues decreased $3,047,000 from $5,807,000 for the three months ended September 30, 2002 to $2,760,000 for the three months ended September 30, 2003. The decrease in other revenue was primarily the result of a $2.0 million fee earned from the Company's final advisory assignment in 2002 and the decrease in income from equity investments in funds. General and administrative expenses decreased $893,000 to $10,497,000 for the nine months ended September 30, 2003 from $11,390,000 for the nine months ended September 30, 2002 and decreased $178,000 to $3,804,000 for the three months ended September 30, 2003 from $3,982,000 for three months ended September 30, 2002. The decrease in general and administrative expenses was primarily due to reduced employee compensation. The Company employed an average of 25 employees during the nine months ended September 30, 2003 and 27 during the nine months ended September 30, 2002. The Company had 25 full-time employees at September 30, 2003. During the nine months ended September 30, 2002, the Company recaptured $2,963,000 of its previously established allowance for possible credit losses. The Company deemed this recapture necessary due to the substantial reduction in the loan portfolio and a general reduction in the default risk of the loans remaining based upon current conditions. At September 30, 2003, the Company believes that the reserve of $6,672,000 is adequate based on the existing loans in the balance sheet portfolio. The Company intends 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, the Company generally is not subject to federal income tax. To maintain qualification as a REIT, the Company must distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate rates. The Company may also be subject to certain state and local taxes on its income and property. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. At September 30, 2003, the Company was in compliance with all REIT requirements and as such, has only provided for income tax expense on taxable income attributed to its taxable REIT subsidiaries in 2003. Liquidity and Capital Resources - ------------------------------- At September 30, 2003, the Company had $10,179,000 in cash. The primary sources of liquidity for the Company for 2003 will be cash on hand, cash generated from operations, principal and interest payments received on loans and investments and additional borrowings under the Company's credit facilities. The Company believes these sources of capital are adequate to meet future cash requirements. The Company expects that during 2003, it will use a significant amount of its available capital resources to satisfy capital contributions required in connection with Fund III and to originate new loans and investments for its balance sheet. The Company intends to continue to employ leverage on its balance sheet assets to enhance its return on equity. - 19 -
The Company experienced a net decrease in cash of $7,000 for the nine months ended September 30, 2003, compared to the net decrease of $2,920,000 for the nine months ended September 30, 2002. Cash provided by operating activities during the nine months ended September 30, 2003 was $10,524,000, compared to $4,630,000 provided during the same period of 2002. For the nine months ended September 30, 2003, cash provided by investing activities was $12,766,000, compared to $255,943,000 during the same period in 2002 as the Company experienced lower levels of loan and investment repayments in the 2003 period than the 2002 period and began making loans for its balance sheet in 2003. The Company utilized the cash received on loan repayments in both years to reduce borrowings under its credit facilities and term redeemable securities contract that along with the proceeds from the private placement of 1,075,000 shares of the Company's Common Stock accounted for the majority of the change in the net cash used in financing activities from $263,493,000 in 2002 to the $23,297,000 in the same period of 2003. During the investment periods for Fund I and Fund II, the Company generally did not originate or acquire loans or CMBS directly for its own balance sheet portfolio. Now that the Fund II investment period has ended, the Company is originating loans and investments for its own account as permitted by the provisions of Fund III. The Company will also use its available working capital to make contributions to Fund III or any other funds as and when required by the equity commitments made by the Company to such funds. If repayments of the Company's existing balance sheet loans and investments increase significantly before excess capital is invested in new funds, or otherwise accretively deployed, the Company may experience a reduction in revenues and lower earnings until offsetting revenues are derived from funds under management or other sources. For the remainder of 2003, the Company does not expect a decrease in total assets, as the Company expects to purchase or originate additional assets during the remainder of the year. At September 30, 2003, the Company has outstanding borrowings under the credit facility of $33,000,000, outstanding borrowings on the term redeemable securities contract of $12,089,000 and outstanding repurchase obligations totaling $146,922,000. The terms of these agreements are described in the Balance Sheet Overview section of this Management Discussion and Analysis. At September 30, 2003, the Company has pledged assets that enable it to borrow an additional $25.3 million and has $230.2 million of credit available for the financing of new and existing unpledged assets pursuant to these facilities. 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 the Company believes 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 the Company's Annual Report on Form 10-K, filed on March 28, 2003 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. - 20 -
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 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 the Company's financial instruments that are sensitive to changes in interest rates at September 30, 2003. 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 ---------------------------------------------------------------------- 2003 2004 2005 2006 2007 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Assets: (dollars in thousands) Available-for-sale securities Fixed Rate $ 2,145 $ 8,087 $ 5,126 $ 3,012 $ 1,768 $ 2,494 $ 22,632 $ 23,633 Average interest rate 6.04% 6.04% 6.04% 6.04% 6.04% 6.04% 6.04% CMBS Fixed Rate -- -- -- $ 7,811 $ 135 $202,566 $210,512 $155,937 Average interest rate -- -- -- 9.90% 8.19% 11.64% 11.56% Variable Rate -- $ 5,000 -- -- -- -- $ 5,000 $ 5,000 Average interest rate -- 4.07% -- -- -- -- 4.07% Loans receivable Fixed Rate -- -- -- -- $ 24,195 $ 49,078 $ 73,273 $ 84,268 Average interest rate -- -- -- -- 11.78% 11.98% 11.92% Variable Rate $10,968 $ 6,923 $ 12,654 $ 915 $ 14,452 $ 51,835 $ 97,747 $ 96,133 Average interest rate 9.71% 3.02% 6.94% 6.58% 8.92% 7.70% 7.67% Liabilities: Credit Facilities Variable Rate -- -- $ 33,000 -- -- -- $ 33,000 $ 33,000 Average interest rate -- -- 5.59% -- -- -- 5.59% Term redeemable securities contract Variable Rate -- $ 12,089 -- -- -- -- $ 12,089 $ 12,089 Average interest rate -- 6.26% -- -- -- -- 6.26% Repurchase obligations Variable Rate $22,909 $120,053 $ 3,960 -- -- -- $146,922 $146,922 Average interest rate 1.10% 2.99% 2.12% -- -- -- 2.67% Convertible Trust Preferred Securities Fixed Rate -- -- -- $89,742 -- -- $89,742 $ 89,346 Average interest rate -- -- -- 10.58% -- -- 10.58% Interest rate swaps Notional amounts -- -- -- -- -- $109,000 $109,000 $ (838) Average fixed pay rate -- -- -- -- -- 4.24% 4.24% Average variable receive rate -- -- -- -- -- 1.12% 1.12% </TABLE> - 21 -
ITEM 4. Disclosure Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation of the effectiveness of the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q was made under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q the Company's disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by the Company in reports filed or submitted under the 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 the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Controls There was no change in our "internal control over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. - 22 -
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 10.1 Consulting Services Agreement, dated as of January 1, 2003, by and between CT Investment Management Co., LLC and Craig M. Hatkoff. 10.2 Master Repurchase Agreement, dated as of May 28, 2003, between Goldman Sachs Mortgage Company and Capital Trust, Inc. 10.3 First Amendment to the Master Repurchase Agreement, dated as of August 26, 2003, between Goldman Sachs Mortgage Company and Capital Trust, Inc. 10.4 Amended and Restated Master Loan and Security Agreement, dated as of June 27, 2003, between Capital Trust, Inc., CT Mezzanine Partners I LLC and Morgan Stanley Mortgage Capital Inc. 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 11 to the consolidated financial statements contained in this report). 31.1 Certification of John R. Klopp, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Brian H. Oswald, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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. 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 28, 2003 and incorporated herein by reference). - 23 -
(b) Reports on Form 8-K During the fiscal quarter ended September 30, 2003, the Company filed the following Current Reports on Form 8-K: (1) Current Report on Form 8-K, dated August 15, 2003, as filed with the Commission on August 15, 2003, reporting under Item 9 "Regulation FD Disclosure" the Company's issuance of a press release reporting the Company's financial results for its fiscal quarter ended June 30, 2003. - 24 -
SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITAL TRUST, INC. November 6, 2003 /s/ John R. Klopp - ---------------- ----------------- Date John R. Klopp Chief Executive Officer /s/ Brian H. Oswald ------------------- Brian H. Oswald Chief Financial Officer - 25 -