-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PJSJNXNz5j1lIzFOYS/z2Zi1XlhGQFJzE9ewYfeMfJdjotClV1vAiwvzEdbPoQiG PnljrO135gSG0iJ96pJAuw== 0000903112-99-001270.txt : 19991115 0000903112-99-001270.hdr.sgml : 19991115 ACCESSION NUMBER: 0000903112-99-001270 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL TRUST INC CENTRAL INDEX KEY: 0001061630 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 946181186 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14788 FILM NUMBER: 99748767 BUSINESS ADDRESS: STREET 1: 605 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126550220 MAIL ADDRESS: STREET 1: BATTLE FOWLER LLP STREET 2: 75 E 55TH ST CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 FORM 10-Q 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 1-14788 ------- Capital Trust, Inc. ------------------- (Exact name of registrant as specified in its charter) Maryland 94-6181186 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 605 Third Avenue, 26th Floor, New York, NY 10016 - ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 655-0220 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Class A Common Stock, New York Stock Exchange $0.01 par value ("Class A Common Stock") 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 as of November 11, 1999 was 21,988,524. EXPLANATORY NOTE - ---------------- Capital Trust, Inc., a Maryland corporation (the "Company"), is the successor to Capital Trust, a California business trust (the "Predecessor"), following consummation of the reorganization on January 28, 1999 whereby the Predecessor ultimately merged with and into the Company. Unless the context otherwise requires, references to the business, assets, liabilities, capital structure, operations and affairs of the Company include those of the Predecessor prior to the reorganization. CAPITAL TRUST, INC. INDEX
Part I. Financial Information Item 1: Financial Statements 1 Consolidated Balance Sheets - September 30, 1999 (unaudited) and December 31, 1998 (audited) 1 Consolidated Statements of Income - Three and Nine months Ended September 30, 1999 and 1998 (unaudited) 2 Consolidated Statements of Changes in Stockholders' Equity - Nine months Ended September 30, 1999 and 1998 (unaudited) 3 Consolidated Statements of Cash Flows - Nine months Ended September 30, 1999 and 1998 (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 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 24
Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 1999 and December 31, 1998 (in thousands)
September 30, December 31, 1999 1998 ------------------- ------------------ Assets (Unaudited) (Audited) Cash and cash equivalents $ 16,837 $ 46,623 Other available-for-sale securities, at fair value - 3,355 Commercial mortgage-backed securities available-for-sale, at fair value 218,288 31,650 Certificated mezzanine investments available-for-sale, at fair value 44,743 45,480 Loans receivable, net of $6,575 and $4,017 reserve for possible credit losses at September 30, 1999 and December 31, 1998, respectively 510,768 620,858 Excess of purchase price over net tangible assets acquired, net 291 308 Deposits and other receivables 722 401 Accrued interest receivable 7,537 8,041 Deferred income taxes 4,446 3,029 Prepaid and other assets 6,686 6,693 --------------- ------------------- Total assets $ 810,318 $ 766,438 =============== =================== Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued expenses $ 7,265 $12,356 Notes payable 3,445 4,247 Credit facilities 329,291 371,754 Term redeemable securities contract 128,786 - Repurchase obligations 34,458 79,402 Deferred origination fees and other revenue 4,053 4,448 ----------------- ----------------- Total liabilities 507,298 472,207 ----------------- ----------------- Company-obligated, mandatorily redeemable, convertible preferred securities of CT Convertible Trust I, holding solely 8.25% junior subordinated debentures of Capital Trust, Inc. ("Convertible Trust Preferred Securities") 146,143 145,544 ----------------- --------------- Stockholders' equity: Class A 9.5% cumulative convertible preferred stock, $0.01 par value, $0.26 cumulative annual dividend, 100,000 shares authorized, 2,278 and 12,268 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively (liquidation preference of $6,127)("Class A Preferred Stock") 23 123 Class B 9.5% cumulative convertible non-voting preferred stock, $0.01 par value, $0.26 cumulative annual dividend, 100,000 shares authorized, 4,043 shares issued and outstanding at September 30, 1999 (liquidation preference of $10,876)("Class B Preferred Stock" and together with Class A Preferred Stock, "Preferred Stock") 40 - Class A common stock, $0.01 par value, 100,000 shares authorized, 21,862 and 18,159 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 219 182 Class B common stock, $0.01 par value, 100,000 shares authorized, 2,294 shares issued and outstanding at September 30, 1999 ("Class B Common Stock") 23 - Restricted Class A Common Stock, $0.01 par value, 127 and 55 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively ("Restricted Class A Common Stock" and together with Class A Common Stock and Class B Common Stock, "Common Stock") 1 1 Additional paid-in capital 189,456 188,816 Unearned compensation (515) (418) Accumulated other comprehensive income/(loss) (5,317) (4,665) Accumulated deficit (27,053) (35,352) ---------------- --------------- Total stockholders' equity 156,877 148,687 ---------------- --------------- Total liabilities and stockholders' equity $ 810,318 $ 766,438 ================ ================
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, 1999 and 1998 (in thousands, except per share data) (unaudited)
Three Months Ended Nine months Ended September 30, September 30, ------------------------------- -------------------------------- 1999 1998 1999 1998 ------------ -------------- -------------- ------------- Income from loans and other investments: Interest and related income $ 22,230 $ 20,782 $ 64,971 $ 42,825 Less: Interest and related expenses 10,701 8,714 28,443 18,311 ----------- -------------- --------------- -------------- Income from loans and other investments, net 11,529 12,068 36,528 24,514 ------------ --------------- --------------- -------------- Other revenues: Advisory and investment banking fees 1,970 829 7,144 9,479 Other interest income 138 261 983 941 Gain on sale of investments - - 35 - ------------ --------------- --------------- -------------- Total other revenues 2,108 1,090 8,162 10,420 ------------ --------------- --------------- ------------- Other expenses: General and administrative 3,341 4,482 12,202 11,743 Other interest expense 89 98 290 309 Depreciation and amortization 89 63 264 171 Provision for possible credit losses 1,040 1,119 3,073 2,359 ------------ ---------------- --------------- -------------- Total other expenses 4,559 5,762 15,829 14,582 ------------ ---------------- --------------- -------------- Income before income taxes and distributions and amortization on Convertible Trust Preferred Securities 9,078 7,396 28,861 20,352 Provision for income taxes 4,287 3,053 13,770 8,312 ------------ ---------------- --------------- -------------- Income before distributions and amortization on Convertible Trust Preferred Securities 4,791 4,343 15,091 12,040 Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit of $1,552, $1,069, $4,656 and $1,069, respectively 1,741 1,199 5,224 1,199 ----------- ---------------- --------------- -------------- Net income 3,050 3,144 9,867 10,841 Less: Preferred Stock dividend and dividend requirement 403 783 1,971 2,351 ----------- --------------- --------------- -------------- Net income allocable to shares of Common Stock $ 2,647 $ 2,361 $ 7,896 $ 8,490 =========== ================ =============== ============== Per share information: Net income per share of Common Stock: Basic $ 0.11 $ 0.13 $ 0.39 $ 0.47 =========== ================ =============== ============= Diluted $ 0.10 0.10 $ 0.32 $ 0.35 =========== ================ =============== ============= Weighted average shares of Common Stock outstanding: Basic 24,287,254 18,217,186 20,340,982 18,218,279 =========== ================ =============== ============== Diluted 30,908,087 30,612,406 30,904,582 30,705,867 ============ ================ =============== ==============
See accompanying notes to unaudited consolidated financial statements. - 2 - Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Nine months Ended September 30, 1999 and 1998 (in thousands) (unaudited)
Restricted Class A Class B Class A Class B Class A Comprehensive Preferred Preferred Common Common Common Income/(loss) Stock Stock Stock Stock Stock ---------------- -------------------------------------------------------------- Nine months ended September 30, 1998 - -------------------------------------- Balance at December 31, 1997 $ - $ 123 $ - $ 182 $ - $ - Net income 10,841 - - - - - Change in unrealized gain (loss) on available-for-sale securities (2,693) - - - - - Issuance of Class A Common Stock under stock option plan - - - - - - Issuance of restricted Class A Common Stock - - - - - 1 Cancellation of previously issued restricted Class A Common Stock - - - - - - Restricted Class A Common Stock earned - - - - - - Dividends paid on Preferred Stock - - - - - - --------------- --------------------------------------------------------------- Balance at September 30, 1998 $ 8,148 $ 123 $ - $ 182 $ - $ 1 =============== =============================================================== Nine months ended September 30, 1999 - -------------------------------------- Balance at December 31, 1998 $ - $ 123 $ - $ 182 $ - $ 1 Net income 9,867 - - - - - Change in unrealized loss on available-for-sale securities (652) - - - - - Conversion of Class A Common and Preferred Stock to Class B - (40) 4 (23) 23 - Conversion of Class A Preferred Stock to Class A Common Stock - (60) - 60 - - Issuance of Class A Common Stock unit awards - - - - - - Cancellation of previously issued restricted Class A Common Stock - - - - - (1) Issuance of restricted Class A Common Stock - - - - - 1 Restricted Class A Common Stock earned - - - - - - Dividends paid on Preferred Stock - - - - - - --------------- --------------------------------------------------------------- Balance at September 30, 1999 $ 9,215 $ 23 $ 4 $ 219 $ 23 $ 1 =============== ===============================================================
Accumulated Additional Other Paid-In Unearned Comprehensive Accumulated Capital Compensation Income Deficit Total ----------------------------------------------------------------------------------- Nine months ended September 30, 1998 - ----------------------------------------------- Balance at December 31, 1997 $ 188,257 $ - $ 387 $ (45,660) $ 143,289 Net income - - - 10,841 10,841 Change in unrealized gain (loss) on available-for-sale securities - - (2,693) - (2,693) Issuance of Class A Common Stock under stock option plan 10 - - - 10 Issuance of restricted Class A Common Stock 720 (725) - - - Cancellation of previously issued restricted Class A Common Stock (174) 156 - - (18) Restricted Class A Common Stock earned - 115 - - 115 Dividends paid on Preferred Stock - - - (1,568) (1,568) -------------------------------------------------------------------------------- Balance at September 30, 1998 $ 188,817 $ (454) $ (2,306) $ (36,387) $ 149,976 ================================================================================ Nine months ended September 30, 1999 - ----------------------------------------------- Balance at December 31, 1998 $ 188,816 $ (418) $ (4,665) $ (35,352) $ 148,687 Net income - - - 9,867 9,867 Change in unrealized loss on available-for-sale securities - - (652) - (652) Conversion of Class A Common and Preferred Stock to Class B - - - - - Conversion of Class A Preferred Stock to Class A Common Stock - - - - - Issuance of Class A Common Stock unit awards 312 - - - 312 Cancellation of previously issued restricted Class A Common Stock (271) 180 - - (92) Issuance of restricted Class A Common Stock 599 (600) - - - Restricted Class A Common Stock earned - 323 - - 323 Dividends paid on Preferred Stock - - - (1,568) (1,568) -------------------------------------------------------------------------------- Balance at September 30, 1999 $ 189,456 $ (515) $ (5,317) $ (27,053) $ 156,877 ================================================================================
See accompanying notes to unaudited consolidated financial statements. - 3 - Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows Nine months ended September 30, 1999 and 1998 (in thousands) (unaudited)
1999 1998 -------------- ----------------- Cash flows from operating activities: Net income $ 9,867 $ 10,841 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (1,417) - Provision for credit losses 3,073 2,359 Depreciation and amortization 264 171 Restricted Class A Common Stock earned 323 115 Net amortization of premiums and accretion of discounts on loans and investments (624) 1,025 Accretion of discounts on term redeemable securities contract 1,901 137 Net accretion of discounts and fees on Convertible Trust Preferred Securities 599 - Expenses reversed on cancellation of restricted stock previously issued (92) (18) Gain on sale of investments (35) (100) Changes in assets and liabilities: Deposits and other receivables (321) (47) Accrued interest receivable 504 (7,431) Prepaid and other assets (182) (4,095) Deferred origination fees and other revenue (395) 4,685 Accounts payable and accrued expenses (4,779) 2,063 -------------- ----------------- Net cash provided by operating activities 8,686 9,705 -------------- ----------------- Cash flows from investing activities: Purchases of commercial mortgage-backed securities (185,947) (36,335) Principal collections on and proceeds from sale of commercial mortgage-backed securities - 49,591 Purchase of certificated mezzanine investments - (21,583) Principal collections on certificated mezzanine investments 737 328 Origination and purchase of loans receivable (102,593) (500,981) Principal collections on and proceeds from sale of loans receivable 208,937 50,901 Purchases of equipment and leasehold improvements (58) (345) Principal collections and proceeds from sales of available-for-sale securities 3,344 5,841 -------------- ----------------- Net cash used in investing activities (75,580) (452,583) -------------- ----------------- Cash flows from financing activities: Proceeds from repurchase obligations 3,929 41,837 Repayment of repurchase obligations (48,873) (43,590) Proceeds from credit facilities 200,026 564,646 Repayment of credit facilities (242,489) (295,730) Proceeds from notes payable 224 10,000 Repayment of notes payable (1,026) (10,772) Net proceeds from issuance of Convertible Trust Preferred Securities - 145,197 Dividends paid on Class A Preferred Stock (1,568) (1,568) Net proceeds from issuance of shares of Class A Common Stock under stock option plan - 10 Net proceeds from issuance of term redeemable securities contract 126,885 - -------------- ----------------- Net cash provided by financing activities 37,108 410,030 -------------- ----------------- Net decrease in cash and cash equivalents (29,786) (32,848) Cash and cash equivalents at beginning of year 46,623 49,268 -------------- ----------------- Cash and cash equivalents at end of period $ 16,837 $ 16,420 ============== =================
See accompanying notes to unaudited consolidated financial statements. - 4 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 1999 (unaudited) 1. Presentation of Financial Information The accompanying unaudited consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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, 1998. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the nine months ended September 30, 1999, are not necessarily indicative of results that may be expected for the entire year ending December 31, 1999. The accompanying unaudited consolidated interim financial statements of the Company include the accounts of the Company, VIC, Inc., a wholly owned subsidiary that serves as the general partner for Victor Capital Group, L.P. ("Victor Capital"), other wholly-owned subsidiaries of Victor Capital, Natrest Funding I, Inc. (a single purpose entity holding one Mortgage Loan), CT Convertible Trust I (a statutory trust which issued the Convertible Trust Preferred Securities) and CT-BB Funding Corp. (a single purpose entity holding fifteen commercial mortgage-backed securities ("CMBS")). 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 generally accepted accounting principles. Certain prior period amounts have been reclassified to conform to current period classifications. 2. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 3. Earnings Per Share of Class A Common Stock Earnings per share of Common Stock is presented based on the requirements of Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). Basic EPS is computed based on the income applicable to Common Stock (which is net income reduced by the dividends on the Preferred Stock) divided by the weighted-average number of shares of Common Stock outstanding during the period. Diluted EPS is based on the net earnings applicable to Common Stock plus dividends on the Preferred Stock, divided by the weighted average number of shares of Common Stock and potentially dilutive shares of Common Stock that were outstanding during the period. At September 30, 1999, potentially dilutive shares of Common Stock include the shares issuable pursuant to convertible Preferred Stock and dilutive Common Stock unit awards. At September 30, 1998, potentially dilutive shares of Common Stock include shares issuable pursuant to the convertible Preferred Stock and dilutive Common Stock options. The options outstanding during the period ended September 30, 1999 were not dilutive. 4. Supplemental Disclosures for Consolidated Statements of Cash Flows Interest paid on the Company's outstanding debt during the nine months ended September 30, 1999 and 1998 was $36,362,000 and $18,007,000, respectively. Income taxes paid by the Company during the nine months ended September 30, 1999 and 1998 were $13,528,000 and $7,741,000, respectively. 5. Commercial Mortgage-Backed Securities ("CMBS") On March 3, 1999, the Company, through its then newly formed wholly-owned subsidiary, CT-BB Funding Corp., acquired a portfolio of fixed-rate "BB" rated CMBS (the "BB CMBS Portfolio") from an affiliate of the Company's credit provider under the First Credit Facility (as hereinafter defined). The portfolio, which is comprised of 11 separate issues with an aggregate face amount of $246.0 million, was purchased for $196.9 million. In connection with the transaction, an affiliate of the seller provided six-year term financing for 70% of the purchase price at a floating rate above the London Interbank Offered Rate ("LIBOR") and entered into an interest rate swap with the Company for the full duration of the BB CMBS Portfolio securities thereby providing a hedge for interest rate risk. The financing was provided at a rate which was below the current market for similar financings and, as such, the carrying amount of the assets and the debt were reduced by $10.9 million to adjust the yield on the debt to current market terms. The BB CMBS Portfolio securities bear interest at fixed rates that average 7.74% on the face amount and mature at various dates from March 2005 to December 2014. After giving effect to the discounted purchase price and the adjustment of the carrying amount of the assets to bring the debt to current market terms, the weighted average interest rate in effect at September 30, 1999 is 11.16%. - 6 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 6. Loans receivable At September 30, 1999 and December 31, 1998, the Company's loans receivable consisted of the following (in thousands):
September 30, December 31, 1999 1998 ---------------------- ---------------------- (1) Mortgage Loans $ 270,108 $ 305,578 (2) Mezzanine Loans 192,752 317,278 (3) Other loans receivable 54,483 2,019 ---------------------- ---------------------- 517,343 624,875 Less: reserve for possible credit losses (6,575) (4,017) ---------------------- ---------------------- Total loans $ 510,768 $ 620,858 ====================== ======================
At September 30, 1999, the weighted average interest rate in effect, after giving effect to interest rate swaps and including amortization of fees and premiums, for the Company's loans receivable was as follows: (1) Mortgage Loans 10.87% (2) Mezzanine Loans 11.33% (3) Other loans receivable 12.08% Total Loans 11.17% At September 30, 1999, $388,404,000 (or approximately 75%) of the aforementioned loans bear interest at floating rates ranging from LIBOR plus 320 basis points to LIBOR plus 1000 basis points. The remaining $128,939,000 (or approximately 25%) of loans were financed at fixed rates ranging from 9.50% to 12.50%. Since December 31, 1998, the Company originated three Mortgage Loans totaling $45.0 million, one other loan for $52.5 million and funded $5.1 million of commitments under four existing loans. The Company received full satisfaction of seven loans totaling $190.5 million and recorded a write-down of one loan asset by $500,000 and subsequently sold it for $9.5 million, at net book value, during the period. The Company also received $9.0 million of partial repayments on eight loans. At September 30, 1999, the Company had additional commitments for fundings on outstanding loans and certificated mezzanine investments of approximately $32.9 million and had no other letters of intent outstanding for lending transactions. - 7 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 7. Long-Term Debt Credit Facilities At December 31, 1998, the Company was party to a credit agreement with a commercial lender that provided for a three-year $355 million line of credit (the "First Credit Facility"). Effective February 26, 1999, pursuant to an amended and restated credit agreement, the Company extended the expiration of such credit facility from December 2001 to February 2002 with an automatic one-year amortizing extension option, if not otherwise extended. At December 31, 1998, the Company was party to an additional credit agreement with another commercial lender that provided for a $300 million line of credit scheduled to expire in December 1999 (the "Second Credit Facility" together with the First Credit Facility, the "Credit Facilities"). Effective March 30, 1999, pursuant to an amended and restated credit agreement, the Company extended the expiration of such credit facility from December 1999 to June 2000 with an automatic nine-month amortizing extension option, if not otherwise extended. Term Redeemable Securities Contract In connection with the purchase of the BB CMBS Portfolio described in Note 5, an affiliate of the seller provided financing for 70% of the purchase price, or $137.8 million, at a floating rate of LIBOR plus 50 basis points pursuant to a term redeemable securities contract. This rate was below the market rate for similar financings, and, as such, a discount on the term redeemable securities contract was recorded to reduce the carrying amount by $10.9 million, which had the effect of adjusting the yield to current market terms. The debt has a three-year term that expires in February 2002. An affiliate of the seller also entered into an interest rate swap with the Company for the full duration of the BB CMBS Portfolio securities thereby providing a hedge for interest rate risk. The notional values of the swaps were tied to the amount of debt for the term of the debt and then to the assets for the remaining terms of the assets. The market value of the swap at September 30, 1999 was $10,569,000. By entering into the interest rate swap, the Company has effectively converted the term redeemable securities contract to a fixed interest rate of 6.55%. After adjusting the carrying amount and yield to current market terms, the term redeemable securities contract bears interest at a fixed interest rate of 9.73%. - 8 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 8. Stockholders' Equity Prior to August 10, 1999 (the "Conversion Date"), the Company's principal stockholder, Veqtor Finance Company, L.L.C. ("Veqtor"), owned 6,959,593 (or approximately 38%) of the outstanding shares of Class A Common Stock and all 12,267,658 of the outstanding shares of Class A Preferred Stock. Veqtor is controlled by the chairman of the board, the vice chairman and chief executive officer and the vice chairman and chairman of the executive committee of the board of directors of the Company in their capacities as the persons controlling the common members of Veqtor. Prior to Conversion Date, the common members owned approximately 48% and three commercial banks, as preferred members of Veqtor, owned approximately 52% of the equity ownership of Veqtor. On the Conversion Date, in accordance with a commitment made by Veqtor and its common members, Veqtor redeemed the outstanding preferred units in Veqtor held by its preferred members in exchange for their pro rata portion of the Company's stock owned by Veqtor. Due to the regulatory status of the redeemed preferred members as bank holding companies or affiliates thereof, prior to effecting the transfer of stock upon the redemption, Veqtor was obligated to convert 2,293,784 shares of Class A Common Stock into an equal number of shares of Class B Common Stock and 4,043,248 shares of Class A Preferred Stock into an equal number of shares of Class B Preferred Stock. Pursuant to charter provisions relating to compliance with the Bank Holding Company Act of 1956, as amended ("BHCA"), bank holding companies or their affiliates can own no more than 4.9% of the voting stock of the Company. Therefore, in connection with the redemption, the redeemed preferred members received 1,292,103 shares of Class A Common Stock, 2,293,784 shares of non-voting Class B Common Stock, 2,277,585 shares of Class A Preferred Stock and 4,043,248 shares of non-voting Class B Preferred Stock. The Class B Common Stock and the Class B Preferred Stock are identical and have the same rights as the Class A Common Stock and the Class B Preferred Stock, respectively, except that neither the Class B Common Stock nor the Class B Preferred Stock have voting rights except as provided by law, and, subject to compliance with the BHCA, the Class B Common Stock and the Class B Preferred Stock are convertible on a one share for one share basis into Class A Common Stock and Class A Preferred Stock, respectively. After the Conversion Date, the common members of Veqtor own 100% of the equity ownership of Veqtor. On September 30, 1999, in accordance with a commitment made by Veqtor and its common members, all 5,946,825 shares of Class A Preferred Stock were, upon exercise of existing conversion rights, converted into an equal number of shares of Class A Common Stock. As a result of this conversion, the Company's annual dividend on Preferred Stock has been reduced from $3,135,000 to $1,615,000. As a result of the foregoing redemption and subsequent conversion transactions, as of September 30, 1999, Veqtor continued to own 9,320,531 (or approximately 42.4%) of the outstanding shares of Class A Common Stock. - 9 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 9. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The provision for income taxes for the nine months ended September 30, 1999 and 1998, is comprised as follows (in thousands): 1999 1998 ------------------ ----------------- Current Federal $ 9,030 $ 4,516 State 3,236 1,995 Local 2,921 1,801 Deferred Federal (856) - State (295) - Local (266) - ------------------ ----------------- Provision for income taxes $ 13,770 $ 8,312 ================== ================= The Company has federal net operating loss carryforwards ("NOLs") as of September 30, 1999 of approximately $11.9 million. Such NOLs expire through 2012. The Company also has a federal capital loss carryover of approximately $1.6 million that can be used to offset future capital gains. Due to CalREIT Investors Limited Partnership's ("CRIL") purchase of 6,959,593 Common Shares from the Company's former parent in January 1997 and another prior ownership change, a substantial portion of the NOLs are limited for federal income tax purposes to approximately $1.4 million annually. Any unused portion of such annual limitation can be carried forward to future periods. The reconciliation of income tax computed at the U.S. federal statutory tax rate (35%) to the effective income tax rate for the nine months ended September 30, 1999 and 1998, are as follows (in thousands):
1999 1998 ------------------------------- -------------------------------- $ % $ % --------------- --------------- ---------------- --------------- Federal income tax at statutory rate $ 10,101 35.0% $ 7,123 35.0% State and local taxes, net of federal tax benefit 3,623 12.6% 2,505 12.3% Utilization of net operating loss carryforwards (368) (1.3)% (1,275) (6.3)% Compensation in excess of deductible limits 362 1.2% - - % Other 52 0.2% (41) (0.2)% =============== =============== ================================ $ 13,770 47.7% $ 8,312 40.8% =============== =============== ================================
- 10 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 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 September 30, 1999 and December 31, 1998 are as follows (in thousands):
September 30, December 31, 1999 1998 ----------------------- ----------------------- Net operating loss carryforward $ 4,191 $ 4,559 Reserves on other assets and for possible credit losses 6,069 4,621 Other 88 119 ----------------------- ----------------------- Deferred tax assets 10,348 9,299 Valuation allowance (5,902) (6,270) ----------------------- ----------------------- $ 4,446 $ 3,029 ======================= =======================
The Company recorded a valuation allowance to reserve a portion of its net deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, this valuation allowance will be adjusted in future years, as appropriate. However, the timing and extent of such future adjustments can not presently be determined. - 11 - Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 10. Employee Benefit Plans 1997 Long-Term Incentive Stock Plan During the nine months ended September 30, 1999, the Company issued an aggregate of 352,000 options to acquire shares of Class A Common Stock with an exercise price of $6.00 per share (a price higher than the fair market value based on reported trading prices on the dates of the grant). The Company also issued 104,167 restricted shares of Class A Common Stock which vest one third on each of the following dates: January 30, 2000, January 30, 2001 and January 30, 2002. The Company also reserved for issuance 52,083 performance based restricted shares of Class A Common Stock which will be issued upon the achievement of stock price performance goals and thereafter will vest over specified vesting periods. The following table summarizes the option activity under the incentive stock plan for the nine months ended September 30, 1999:
Weighted Average Exercise Price Options Exercise Price Per Share Outstanding per Share --------------------- ------------------------------ ---------------------- Outstanding at January 1, 1999 1,269,084 $6.00 - $11.38 $ 8.46 Granted in 1999 352,000 $6.00 6.00 Exercised in 1999 - - - Canceled in 1999 (318,334) $6.00 - $11.38 8.47 --------------------- ---------------------- Outstanding at September 30, 1999 1,302,750 $6.00 - $10.00 $ 7.80 ===================== ======================
At September 30, 1999, 499,405 of the options are exercisable. At September 30, 1999, the outstanding options have various remaining contractual exercise periods ranging from 7.75 to 9.50 years with a weighted average life of 8.50 years. 11. Segment Reporting In 1998, the Company adopted Statement of Financial Accounting Standards No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). SFAS No. 131 is based on reporting information the way that management organizes its segments within the Company for making operating decisions and assessing performance. During the first quarter of 1999, the Company reorganized the structure of its internal organization by merging its Lending/Investment and Advisory segments and thereby no longer managing its operations as separate segments. Previously, the Company operated as two segments: Lending/Investment and Advisory. Restatement of prior periods is not presented as the Company did not apply SFAS No. 131 to interim financial statements in the initial year of its application. - 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. Recent Ownership and Capital Stock Changes - ------------------------------------------ Prior to August 10, 1999 (the "Conversion Date"), the Company's principal stockholder, Veqtor Finance Company, L.L.C. ("Veqtor"), owned 6,959,593 (or approximately 38%) of the outstanding shares of Class A Common Stock and all 12,267,658 of the outstanding shares of Class A Preferred Stock. Veqtor is controlled by the chairman of the board, the vice chairman and chief executive officer and the vice chairman and chairman of the executive committee of the board of directors of the Company in their capacities as the persons controlling the common members of Veqtor. Prior to Conversion Date, the common members owned approximately 48% and three commercial banks, as preferred members of Veqtor, owned approximately 52% of the equity ownership of Veqtor. On the Conversion Date, in accordance with a commitment made by Veqtor and its common members, Veqtor redeemed the outstanding preferred units in Veqtor held by its preferred members in exchange for their pro rata portion of the Company's stock owned by Veqtor. Due to the regulatory status of the redeemed preferred members as bank holding companies or affiliates thereof, prior to effecting the transfer of stock upon the redemption, Veqtor was obligated to convert 2,293,784 shares of Class A Common Stock into an equal number of shares of Class B Common Stock and 4,043,248 shares of Class A Preferred Stock into an equal number of shares of Class B Preferred Stock. Pursuant to charter provisions relating to compliance with the Bank Holding Company Act of 1956, as amended ("BHCA"), bank holding companies or their affiliates can own no more than 4.9% of the voting stock of the Company. Therefore, in connection with the redemption, the redeemed preferred members received 1,292,103 shares of Class A Common Stock, 2,293,784 shares of non-voting Class B Common Stock, 2,277,585 shares of Class A Preferred Stock and 4,043,248 shares of non-voting Class B Preferred Stock. The Class B Common Stock and the Class B Preferred Stock are identical and have the same rights as the Class A Common Stock and the Class B Preferred Stock, respectively, except that the Class B Common Stock and the Class B Preferred Stock do not have voting rights and, subject to compliance with the BHCA, the Class B Common Stock and the Class B Preferred Stock are convertible on a one share for one share basis into Class A Common Stock and Class A Preferred Stock, respectively. After the Conversion Date, the common members of Veqtor owned 100% of the equity ownership of Veqtor. On September 30, 1999, in accordance with a commitment made by Veqtor and its common members, all 5,946,825 shares of Class A Preferred Stock were, upon exercise of existing conversion rights, converted into an equal number of shares of Class A Common Stock. - 13 - As a result of this conversion, the Company's annual dividend on preferred sock has been reduced from $3,135,000 to $1,615,000. Overview of Financial Condition - ------------------------------- During the first quarter of 1999, the Company, through its then newly formed wholly-owned subsidiary, CT-BB Funding Corp., acquired a portfolio (the "BB CMBS Portfolio") of "BB" rated commercial mortgage-backed securities ("CMBS") from an affiliate of the Company's credit provider under the First Credit Facility (as hereinafter defined). The portfolio, which is comprised of 11 separate issues with an aggregate face amount of $246.0 million, was purchased for $196.9 million. In connection with the transaction, an affiliate of the seller provided three-year term financing for 70% of the purchase price at a floating rate above the London Interbank Offered Rate ("LIBOR") and entered into an interest rate swap with the Company for the full duration of the BB CMBS Portfolio thereby providing a hedge for interest rate risk. The financing was provided at a rate which was below the current market for similar financings and, as such, the carrying amounts of the assets and the debt were reduced by $10.9 million which had the effect of adjusting the yield on the debt to current market terms. These securities bear interest at various fixed rates, which, when including the amortization of the discount, average 11.16%. Since December 31, 1998, the Company originated three Mortgage Loans totaling $45.0 million, one other loan for $52.5 million and funded $5.1 million of commitments under four existing loans. The Company received full satisfaction of seven loans totaling $190.5 million and recorded a write-down of one loan asset by $500,000 and subsequently sold it for $9.5 million, at net book value, during the period. The Company also received $9.0 million of partial repayments on eight loans. At September 30, 1999, the Company had outstanding loans, certificated mezzanine investments and investments in CMBS totaling approximately $780 million and additional commitments for fundings on outstanding loans and certificated mezzanine investments of approximately $32.9 million. During the nine months ended September 30, 1999, the Company sold all of its other available-for-sale securities that had an amortized cost of $2,764,000 for a $35,000 gain. In connection with the sale, the Company satisfied the repurchase obligation outstanding relating to these assets for $2,526,000. In connection with the sale of a loan described above, a repurchase obligation outstanding at December 31, 1998 for $7.5 million was satisfied. Two other repurchase obligations outstanding at December 31, 1998 totaling $27.0 million were satisfied by the transfer of the liabilities associated with the two related assets to the Credit Facilities (as hereinafter defined). A fourth repurchase obligation outstanding at December 31, 1998 for $10.5 million was settled for cash. At September 30, 1999, the Company was party to two repurchase obligations relating to assets sold by the Company with an aggregate carrying amount of $44.8 million, which approximates the assets' market value, and has liabilities to repurchase these assets for $34.5 million. The average interest rate in effect for all repurchase obligations at September 30, 1999 is 6.80%. - 14 - At December 31, 1998, the Company was a party to a credit agreement with a commercial lender that provided for a three-year $355 million line of credit (the "First Credit Facility"). Concurrent with the BB CMBS Portfolio transaction, the First Credit Facility's maturity was extended to February 28, 2002 with an automatic one-year amortizing extension option, if not otherwise extended. At December 31, 1998, the Company was a party to a credit agreement with another commercial lender that provided for a $300 million line of credit (the "Second Credit Facility" and together with the First Credit Facility, the "Credit Facilities"). During the first quarter of 1999, the Company extended the expiration date of its Second Credit Facility from December 1999 to June 2000 with an automatic nine-month amortizing extension option, if not otherwise extended. At September 30, 1999, the Company had $329.3 million outstanding under the Credit Facilities. The decrease of $41.5 million in the amount outstanding under the Credit Facilities from the amount outstanding at December 31, 1998 was due to the significant loan repayments received, offset by the cash utilized in the BB CMBS Portfolio purchase, cash utilized in loan originations and cash utilized to satisfy the repurchase obligation which matured. As of September 30, 1999, certain of the Company's loans and other investments have been hedged with interest rate swaps so that the assets and the corresponding liabilities were matched at floating rates over LIBOR and certain of the Company's liabilities have been hedged so that the liabilities and the corresponding CMBS were matched at fixed rates. During the nine months ended September 30, 1999, the Company terminated two swaps and partially terminated a third swap in connection with the payoff of a loan and the sale of a loan resulting in a payment of $323,000. At September 30, 19999, the Company was party to interest rate swap agreements for notional amounts totaling approximately $238.4 million with financial institution counterparties whereby the Company swapped fixed-rate instruments, with average interest rates of approximately 6.01%, for floating rate instruments with interest rates at LIBOR. The agreements mature at varying times from September 2001 to July 2014. The Company is exploring strategic acquisitions and joint ventures in order to bolster its capital position, expand its business platform, grow its portfolio of interest earning assets, and to take advantage of potential consolidation opportunities in the sector. As a result, although the Company believes that the current lending environment is very favorable and the Company is able to originate and/or acquire loans and investments that meet its targeted risk/yield profile, the Company has made the strategic decision to manage its portfolio of loans and investments at its current level of approximately $800 million. In the short term, the Company plans to continue to originate and/or acquire new loans and investments sufficient to keep its portfolio of interest earning assets static and therefore does not expect in the short term the substantial increases in income from loans and investments corresponding to the substantial growth in interest earning assets that have occurred in recent years. The Company believes that by maintaining its investment portfolio at its current level, it will have sufficient sources of liquidity available to facilitate potential strategic acquisitions and/or joint ventures. No assurance can be given as to the successful negotiation and completion or the timing of such transactions. - 15 - Comparison of the Nine and Three Months Ended September 30, 1999 to the - ----------------------------------------------------------------------- Nine and Three Months Ended September 30, 1998 ---------------------------------------------- The Company reported net income allocable to shares of Common Stock of $7,896,000 for the nine months ended September 30, 1999, a decrease of $594,000 from the net income allocable to shares of Common Stock of $8,490,000 for the nine months ended September 30, 1998. This change was primarily the result of reduced advisory and investment banking fees partially off-set by a reduction in the preferred stock dividend requirement and an increase in the income from loans and other investments, net. The Company reported net income allocable to shares of Common Stock of $2,647,000 for the three months ended September 30, 1999, an increase of $286,000 from the net income allocable to shares of Common Stock of $2,361,000 for the three months ended September 30, 1998. This change was primarily the result of a reduction in the preferred stock dividend requirement. Income from loans and other investments, net, amounted to $36,528,000 for the nine months ended September 30, 1999, an increase of $12,014,000 over the $24,514,000 amount for the nine months ended September 30, 1998. This increase was primarily due to the increase in the amount of average interest earning assets from approximately $468.8 million earning 12.2% for the nine months ended September 30, 1998 to approximately $740.5 million earning 11.7% for the nine months ended September 30, 1999. This decrease in the interest rate earned in 1999 from that earned in 1998 was mainly due to a decrease in LIBOR partially offset by an increase in additional interest and fees which were recognized upon the early termination of loans by the borrowers. LIBOR averaged 5.6% for the nine months ended September 30, 1998 and averaged 5.1% for the nine months ended September 30, 1999. Early terminations, which generated additional interest income of $3.2 million during the nine months ended September 30, 1998 and $4.0 million during the nine months ended September 30, 1999, had the effect of raising the average interest rate by 0.9% during the nine months ended September 30, 1998 and 0.7% during the nine months ended September 30, 1999. The increase in revenues was partially offset by an increase in the amount of average interest bearing liabilities from approximately $299.8 million at an average rate of 8.2% for the nine months ended September 30, 1998 to approximately $463.9 million at an average rate of 8.2% for the nine months ended September 30, 1999. Income from loans and other investments, net, amounted to $11,529,000 for the three months ended September 30, 1999, a decrease of $539,000 over the $12,068,000 amount for the three months ended September 30, 1998. This decrease was primarily due to the decrease in the average earning rate on interest earning assets from 12.5% for the three months ended September 30, 1998 to 11.2% for the three months ended September 30, 1999 and an increase in the amount of average interest bearing liabilities from approximately $417.8 million at an average rate of 8.3% for the three months ended September 30, 1998 to approximately $494.7 million at an average rate of 8.6% for the three months ended September 30, 1999. This decrease was offset by an increase in the amount of average interest earning assets from approximately $659.0 million for the three months ended September 30, 1998 to approximately $788.1 million for the three months ended September 30, 1999. This decrease in the interest rate earned in 1999 from that earned in 1998 was mainly due to a decrease in LIBOR and a decrease in additional interest and fees which were recognized upon the early termination of loans by the borrowers. LIBOR averaged 5.6% for the three months ended September 30, 1998 and averaged 5.3% for the three months ended September 30, 1999. Early terminations, which generated - 16 - additional interest income of $1.5 million during the three months ended September 30, 1998 (versus zero income in the same period of 1999) had the effect of raising the average interest rate by 0.9% during the three months ended September 30, 1998. In addition, the Company also utilized proceeds from the $150.0 million of Convertible Trust Preferred Securities that were issued on July 28, 1998 to finance its interest earning assets. During the three and nine months ended September 30, 1999, the Company recognized $1,741,000 and $5,224,000, respectively, of net expenses related to these securities. During the three and nine months ended September 30, 1998, the Company recognized $1,199,000 of net expenses related to these securities. Distributions to the holders totaled $3,094,000 and $9,281,000 for the three and nine months ended September 30, 1999, respectively, and $2,131,000 for the three and nine months ended September 30, 1998. Amortization of discount and origination costs totaled $199,000 and $599,000, respectively, during the three and nine months ended September 30, 1999 and $137,000 for the three and nine months ended September 30, 1998. This was partially offset by a tax benefit of $1,552,000 and $4,656,000, respectively during the three and nine months ended September 30, 1999 and $1,069,000 for the three and nine months ended September 30, 1998. During the nine months ended September 30, 1999, other revenues decreased $2,258,000 to $8,162,000 over the same period in 1998. The increase during the three months ended September 30, 1999 over the same period in 1998 was $1,018,000 to $2,108,000. The changes for the three and nine months ended September 30, 1999 was primarily due to the timing and size of advisory and investment banking fees generated by Victor Capital and its related subsidiaries. Other expenses increased from $14,582,000 for the nine months ended September 30, 1998 to $15,829,000 for nine months ended September 30, 1999 and decreased from $5,762,000 for the three months ended September 30, 1998 to $4,559,000 for three months ended September 30, 1999. The largest components of other expenses are employee salaries and related costs and the provision for possible credit losses. In March 1999, to reduce general and administrative expenses to a level in line with budgeted business activity, the Company reduced its workforce by approximately 30% and recorded a restructuring charge of $650,000. This charge along with the higher number of employees in the first quarter accounted for the increase in general and administrative expenses for the nine months ended September 30, 1999 as compared to the same period in 1998. The reduction in workforce was the primary factor in the reduced general and administrative expenses for the three months ended September 30, 1999. For the three months ended September 30, 1999, the Company had an average of 30 employees as compared to 47 for the same period in 1998. For the nine months ended September 30, 1999, the Company had an average of 35 employees as compared to 41 for the same period in 1998. The Company had 30 full time employees at September 30, 1999. The increase in the provision for possible credit losses from $2,359,000 for the nine months ended September 30, 1998 to $3,073,000 for the nine months ended September 30, 1999 was due to the increase in average earning assets as previously described. For the nine months ended September 30, 1999 and 1998, the Company accrued income tax expense of $13,770,000 and $8,312,000, respectively, for federal, state and local income taxes. For the three months ended September 30, 1999 and 1998, the Company accrued income tax expense of $4,287,000 and $3,053,000, respectively, for federal, state and local income taxes. - 17 - The increase in the effective tax rate (from 40.8% to 47.7% for the nine month period and from 41.3% to 47.2% for the three month period) was primarily due to a decrease in the net operating loss carryforwards available to offset taxable income. For the three and nine months ended September 30, 1998, net operating loss carryforwards reduced the effective tax rate by 5.7% and 6.3%, respectively, due to significant losses generated in 1997 that were not limited for utilization in 1998. For the three and nine months ended September 30, 1999, the reduction was only 1.4% and 1.3%, respectively, as all of the losses generated in 1997 were utilized in 1998. The preferred stock dividend and dividend requirement arose in 1997 as a result of the Company's issuance of $33 million of shares of Class A Preferred Stock on July 15, 1997. Dividends accrued on these shares at a rate of 9.5% per annum on a per share price of $2.69 for the 12,267,658 shares outstanding or $3,135,000 per annum through the second quarter of 1999. As discussed above, 5,946,825 shares of Preferred Stock were converted to an equal number of shares of Common Stock during the third quarter of 1999 thereby reducing to 6,320,833 the number of outstanding shares of Preferred Stock and the dividend requirement to $403,000 for the third quarter. Liquidity and Capital Resources - ------------------------------- At September 30, 1999, the Company had $16,837,000 in cash. The primary sources of liquidity for the Company for the remainder of 1999, which the Company believes will adequately meet future operating liquidity and capital resource requirements, will be cash on hand, cash generated from operations, interest and principal payments received on its investments and loans and additional borrowings under the Credit Facilities. The Company experienced a net decrease in cash of $29,786,000 for the nine months ended September 30, 1999, compared to the net decrease of $32,848,000 for the nine months ended September 30, 1998. The net use of cash in the first three quarters of 1999 was primarily due to the purchase of the BB CMBS Portfolio (net of the proceeds from the term redeemable securities contract) and loan originations off-set by additional borrowings while the net use of cash in the first three quarters of 1998 was due to the utilization of the proceeds of the Class A Common Stock offering completed in the fourth quarter of 1997 in making loans and other investments off-set by additional borrowings. Cash provided by operating activities during the nine months ended September 30, 1999 decreased by $1,019,000 to $8,686,000, from $9,705,000 during the same period of 1998. For the nine months ended September 30, 1999, cash used in investing activities was $75,580,000, a decrease of $377,003,000 from $452,583,000 used during the same period in 1998 that was primarily a result of the significant repayments received on loans and other investments and reduced loan origination activity since December 31, 1998. The decrease in cash provided by financing activities, which decreased $372,922,000 to $37,108,000 from $410,030,000, was due primarily to reduced levels of new borrowings and significant repayments of borrowings under the Credit Facilities. At September 30, 1999, the Company had two outstanding notes payable totaling $3,445,000, outstanding borrowings under the Credit Facilities of $329,291,000, outstanding borrowings on the term redeemable securities contract of $128,786,000 and outstanding repurchase obligations of $34,458,000. At September 30, 1999, the Company had $319,138,000 of borrowing capacity available under the Credit Facilities. - 18 - Year 2000 Information General Description of the Year 2000 Issue and the Nature and Effects of the Year 2000 on Information Technology ("IT") and Non-IT Systems The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar business activities. Based upon recent assessments, the Company determined that it was required to replace certain of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company believes that with the replacement of the previously existing software and certain hardware, the Year 2000 Issue can be mitigated. However, if certain replacements are not made, or not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company's plan to resolve the Year 2000 Issue involves the following four phases: assessment, remediation, testing and implementation. To date, the Company has completed all phases of the plan for its in-house systems that could be significantly affected by the Year 2000 Issue. In addition, the Company will continue to gather information about the Year 2000 compliance status of its significant service providers to monitor their compliance. Status of Progress in Becoming Year 2000 Compliant, Including Timetable for Completion of Each Remaining Phase The Company believes it is 100% Year 2000 compliant with its in-house IT systems (both software and hardware). The testing phase of the project was completed during the quarter ended March 31, 1999. Nature and Level of Importance of Third Parties and their Exposure to the Year 2000 Issue The Company's loan servicing function is performed by an independent third party. This service includes the calculation of interest and principal for the Company's loans receivable, the processing of bills to the Company's customers and the maintenance of lock boxes and escrow accounts on behalf of borrowers. The vendor has advised the Company that it is Year 2000 compliant for loan servicing. The Company has queried its significant service providers that do not share information systems with the Company (external agents). To date, the Company is not aware of any external agent with a Year 2000 Issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that any external agents used by the Company will be Year 2000 compliant. The inability of external agents to complete their Year 2000 Issue resolution process in a timely manner could materially impact the Company. The effect of non-compliance by external agents is not determinable. - 19 - Costs of Year 2000 Compliance The Company utilized both internal and external resources to replace, test, and implement the software and operating equipment for Year 2000 modifications. The project was completed during the quarter ended March 31, 1999 and the Company incurred approximately $225,000 ($30,000 expensed and $195,000 capitalized for new systems and equipment) related to all phases of the Year 2000 project which was funded through operating cash flow. The Company does not expect any additional project costs. Risks of Year 2000 The Company believes it has an effective program in place to resolve the Year 2000 Issue and has completed all the necessary phases of the Year 2000 program for its in-house IT systems. While the Company has completed its project, disruptions in the economy generally resulting from Year 2000 Issue could materially adversely affect the Company. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company currently has contingency plans in the event that the noted third parties do not complete their Year 2000 compliance. 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 current business plan, business strategy and portfolio management. 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, as amended, for the 1998 fiscal year, 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, changes in interest rates, continued loan performance and repayment and the maintenance of loan loss allowance levels. The Company disclaims any intention or obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. - 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 and variable-rate liabilities to fixed-rate liabilities for proper matching with variable-rate liabilities and 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. - 21 - The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates at September 30, 1999. For financial assets and debt obligations, the table presents cash flows and weighted average interest rates based on the contractual maturity dates. For interest rate swaps, the table presents notional amounts and weighted average fixed pay and variable receive interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. Weighted-average variable rates are based on rates in effect as of the reporting date.
Expected Maturity Dates --------------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (dollars in thousands) Assets: CMBS Fixed Rate - - - $193,673 - - $ 193,673 $ 184,542 Average interest rate - - - 11.16% - - 11.16% Variable Rate - - - - $ 36,509 - $ 36,509 $ 32,202 Average interest rate - - - - 11.45% - 11.45% Certificated Mezzanine Investments Variable Rate - $ 44,743 - - - - $ 44,743 $ 44,743 Average interest rate - 10.14% - - - - 10.14% Loans receivable Fixed Rate - - $ 28,000 $ 3,000 - $ 96,929 $ 127,929 $ 126,779 Average interest rate - - 12.59% 12.50% - 11.41% 11.69% Variable Rate $61,799 $114,711 $132,736 $ 52,500 - $ 26,500 $ 388,247 $ 374,118 Average interest rate 12.65% 10.24% 10.81% 12.17% - 11.15% 11.14% Liabilities: Credit facilities Variable Rate - $153,603 - $ 175,688 - - $ 329,291 $ 329,291 Average interest rate - 8.49% - 7.77% - - 8.11% Term redeemable securities contract Variable Rate - - - $ 137,812 - - $ 137,812 $ 128,786 Average interest rate - - - 9.02% - - 9.02% Repurchase obligations Variable Rate $ 34,458 - - - - - $ 34,458 $ 34,458 Average interest rate 6.80% - - - - - 6.80% Convertible Trust Preferred Securities Fixed Rate - - - - - $150,000 $ 150,000 $ 146,143 Average interest rate - - - - - 9.02% 9.02% Interest rate swaps - - $ 28,000 $ 137,812 $ 19,310 $ 53,250 $ 238,372 $ 12,748 Average fixed pay rate - - 5.79% 6.05% 6.04% 6.01% 6.01% Average variable receive rate - - 5.37% 5.38% 5.38% 5.37% 5.38%
- 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 Exhibit Number Description 11.1 Statements regarding computation of earnings (loss) per share 27.1 Financial Data Schedules (b) Reports on Form 8-K During the fiscal quarter ended September 30, 1999, the Company filed the following Current Reports on Form 8-K: None - 23 - 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 Date: November 11, 1999 /s/ John R. Klopp ------------------- ----------------- John R. Klopp Chief Executive Officer /s/ Edward L. Shugrue III ------------------------ Edward L. Shugrue III Managing Director and Chief Financial Officer - 24 - EX-11.1 2 STATEMENT REGARDING COMPUTATION OF EARNINGS Exhibit 11.1 Capital Trust, Inc. and Subsidiaries Form 10-Q Statement Regarding Computation of Earnings per Share
Nine months Ended September 30, 1999 Nine months Ended September 30, 1998 ---------------------------------------------------- -------------------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount ---------------- ---------------- ------------ ---------------- ----------------- ------------- Basic EPS: Net earnings per share of Common Stock $ 7,896,000 20,340,982 $ 0.39 $ 8,490,000 18,218,279 $ 0.47 ============ ============= Effect of Dilutive Securities Options outstanding for the purchase of Class A Common Stock -- -- -- 219,930 Future commitments for stock unit awards for the issuance of Class A Common Stock -- 300,000 -- -- Convertible Preferred Stock 1,971,000 10,263,600 2,351,000 12,267,658 --------------- ---------------- ---------------- ----------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $ 9,867,000 30,904,582 $ 0.32 $ 10,841,000 30,705,867 $ 0.35 =============== ================ ============ ================ ==================== ============= Three Months Ended September 30, 1999 Three Months Ended September 30, 1998 --------------------------------------------- --------------------------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount --------------- ---------------- ------------ --------------- ---------------- ------------- Basic EPS: Net earnings per share of Common Stock $ 2,647,000 24,287,254 $ 0.11 $ 2,361,000 18,217,186 $ 0.13 ============ ============= Effect of Dilutive Securities Options outstanding for the purchase of Class A Common Stock -- -- -- 127,562 Future commitments for stock unit awards for the issuance of Class A Common Stock -- 300,000 --- -- Convertible Preferred Stock 403,000 6,320,833 783,000 12,267,658 --------------- ---------------- --------------- ---------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $ 3,050,000 30,908,087 $ 0.10 $ 3,144,000 30,612,406 $ 0.10 =============== ================ ============ =============== ================ =============
EX-27.1 3 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL EXTRACTED FROM THE FINANCIAL STATEMENTS OF CAPITAL TRUST FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 16,837 263,031 517,343 6,575 0 0 1,004 566 810,318 7,265 495,980 146,143 0 243 156,634 810,318 0 73,162 0 51,108 0 3,073 0 18,981 9,114 9,867 0 0 0 9,867 0.39 0.32
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