-----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, JiXhDehKrW4H1aaW0ohlA2W5yq+JUj1qczlxrE97q/AG8w4vM6dpQHlbEgSc63l7 47wx2BZ3CtvFiLXp6Q8OwQ== 0001116679-02-000931.txt : 20020415 0001116679-02-000931.hdr.sgml : 20020415 ACCESSION NUMBER: 0001116679-02-000931 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14788 FILM NUMBER: 02597908 BUSINESS ADDRESS: STREET 1: 410 PARK AVENUE STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2126550220 MAIL ADDRESS: STREET 1: BATTLE FOWLER LLP STREET 2: 75 E 55TH ST CITY: NEW YORK STATE: NY ZIP: 10022 10-K 1 cap10k1201.txt CAPITAL TRUST 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 [ ] 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 -------------- 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") Securities registered pursuant to Section 12(g) of the Act: None 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 the filing requirements for at least the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] MARKET VALUE ------------ Based on the closing sales price of $5.00 per share, the aggregate market value of the outstanding Class A Common Stock held by non-affiliates of the registrant as of March 28, 2002 was $46,812,000. OUTSTANDING STOCK ----------------- As of March 28, 2002 there were 18,853,203 outstanding shares of Class A Common Stock. The Class A Common Stock is listed on the New York Stock Exchange (trading symbol "CT"). Trading is reported in many newspapers as "CapTr". DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Part III incorporates information by reference from the Registrant's definitive proxy statement to be filed with the Commission within 120 days after the close of the Registrant's fiscal year.
- ------------------------------------------------------------------------------ CAPITAL TRUST, INC. - ------------------------------------------------------------------------------ PART I - ------------------------------------------------------------------------------ PAGE Item 1. Business 1 Item 2. Properties 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 - ------------------------------------------------------------------------------ PART II - ------------------------------------------------------------------------------ Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters 7 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 - ------------------------------------------------------------------------------ PART III - ------------------------------------------------------------------------------ Item 10. Directors and Executive Officers of the Registrant 20 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationships and Related Transactions 20 - ------------------------------------------------------------------------------ PART IV - ------------------------------------------------------------------------------ Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21 - ------------------------------------------------------------------------------ Signatures 25 Index to Consolidated Financial Statements F-1
-i- PART I - ------------------------------------------------------------------------------ Item 1. Business - ------------------------------------------------------------------------------ General - ------- Capital Trust, Inc. (the "Company") is an investment management and real estate finance company that makes, for its own account and for funds that it manages, high-yield commercial real estate loans and related investments. The Company serves as the investment manager to CT Mezzanine Partners II LP ("Fund II"), the largest dedicated commercial real estate mezzanine investment fund in the U.S. with total equity commitments of $845 million. The Company continues to pursue a transition from being a balance sheet lender to managing investments on behalf of third parties. The Company's transition to an investment manager commenced in March 2000 when it entered into a venture with Citigroup Investments Inc. ("Citigroup") to co-sponsor, commit to invest capital in, and manage a series of high-yield commercial real estate mezzanine investment funds. Business and Investment Strategy - -------------------------------- The Company's business strategy is to continue to expand its investment management business by sponsoring other real estate related investment funds and, following the investment period for Fund II, other investment funds, including commercial real estate mezzanine investment funds, and thereby generating additional investment management fees and incentive compensation tied to the performance of the portfolios of investments held by new funds under management. The Company also continues to manage its existing portfolio of balance sheet assets originated prior to the Company's strategic transition to the investment management business and remains positioned to selectively add to its balance sheet investments in a diverse array of real estate and investment management/finance-related assets and enterprises, including operating companies. The Company also continues to manage the portfolio of loans and investments held by CT Mezzanine Partners I LLC ("Fund I"), its first commercial real estate mezzanine investment fund jointly sponsored with Citigroup. The Company's current investment strategy is to pursue lending and investment opportunities designed to capitalize on inefficiencies in the real estate capital, mortgage and finance markets. The Company's current investment program emphasizes senior and junior commercial mortgage loans, real estate related corporate mezzanine loans, certificated mezzanine investments, subordinated interests in commercial mortgage-backed securities ("CMBS") and preferred and/or direct equity investments pursuant to which the "mezzanine" financing or capital provided by the Company is generally subordinate to third-party financing, but senior to the owner/operator's equity position. The Company pursues market opportunities, which, if carefully underwritten, structured and monitored, represent attractive investments that pose potentially less risk than direct equity ownership of real property. The Company also believes that the rapid growth of the CMBS market has given rise to opportunities for the Company to selectively acquire non-investment grade classes of such securities, which the Company believes can be priced inefficiently in terms of their risk/reward profile. The Company funds its business development and investment activities with cash flow generated from operations and with borrowings obtained under credit facilities or pursuant to other financing arrangements. The Company believes its existing sources of funds are adequate to meet its equity commitments to Fund II and to fund, as necessary, new balance sheet loan and investment activity. The Company continues to explore alternative sources of capital to fund its business and investment activities, including, but not limited to, other joint ventures, strategic alliances and investment management ventures. 1 Developments During Fiscal Year 2001 - ------------------------------------ During fiscal year 2001, the Company continued to operate and develop its investment management business. The Company continued to originate loans and investments for Fund I until the initial closing on investors' equity commitments to Fund II on April 9, 2001. During 2001, Fund I originated $171 million of loans and investments of which $84 million were sold to Fund II after its initial closing pursuant to the limited partnership agreement. As of December 31, 2001, Fund I held $165 million of loans in its portfolio, all of which are performing in accordance with the terms of the loan agreements except for one loan for $26.0 million which is in default and for which, beginning June 30, 2001, the accrual of interest was suspended. During fiscal year 2001, the Company continued the private offering of interests in Fund II primarily to institutional private equity investors. Fund II effected closings on April 9 and May 29, 2001, following which the fund completed several lending and investment transactions. On August 7, 2001, Fund II effected its final closing of investors' capital commitments. As of the final closing, Fund II was capitalized with total equity commitments of $845 million, including commitments (both limited partner and general partner) from the Company and Citigroup of $49.7 million and $198.9 million, respectively. As of December 31, 2001, Fund II held $485 million of loans and investments in its portfolio, all of which are performing in accordance with their loan or other agreements. The Company expects to earn approximately $9.5 million of management and advisory fees annually from its association with Fund II during the investment period. The Company's wholly-owned subsidiary, CT Investment Management Co. LLC ("CTIMCO"), serves as the investment manager to Fund II and in connection therewith will earn annual investment management fees equal to $8.1 million during the investment period for the fund. CTIMCO also expects to earn $1.4 million of additional annual fees from consulting services to be rendered to Fund II's general partner. Pursuant to the Company's venture agreement with affiliates of Citigroup, in 2001, the Company issued stock purchase warrants to an affiliate of Citigroup which may be exercised to purchase a total of 4,278,467 shares of class A common stock, par value $0.01 per share ("Class A Common Stock"). Combined with the warrants to purchase 4,250,000 shares previously issued, warrants to purchase a total of 8,528,467 shares of Class A Common Stock have been issued to affiliates of Citigroup. All such warrants have an exercise price of $5.00 per share, are currently exercisable and expire on March 8, 2005. The Company's total asset base increased from $644.4 million at December 31, 2000 to $678.8 million at December 31, 2001, primarily as a result of purchases of available-for-sale securities made in response to significant loan satisfactions to maintain compliance with an exemption from being treated as an investment company under the Investment Company Act of 1940 (the "1940-Act"). The Company expects total assets to remain relatively constant, as additional reductions in loan assets from satisfactions will require the Company to purchase similar amounts of 1940-Act qualifying assets. Description of Business - ----------------------- General - ------- The Company is an investment management and real estate finance company that makes, for its own account and for funds that it manages, high-yield commercial real estate loans and related investments. The Company recently entered the investment management business, marking a shift in business from a balance sheet lender to that of an investment manager making substantial co-investments with other investors in funds under management. The Company believes that the investment management business allows the Company to access the private equity markets as a source of capital to fund its business and provides the potential for significant operating leverage allowing the Company to grow earnings and to increase return on equity without simply incurring additional financial risk. Fund II, for which CTIMCO serves as investment manager, is the principal vehicle through which the Company's current investment program is carried out, although when consistent with its obligations to Fund II, the Company may invest for its own balance sheet. Real Estate Lending and Investment Market - ---------------- The Company believes that the stability of commercial real estate property markets, coupled with fundamental and structural changes in the real estate capital markets, primarily related to the growth in CMBS issuance and the financing parameters related thereto, creates significant opportunities for 2 companies specializing in commercial real estate lending and investing. The most significant structural change is the continuing growth of the securitization of commercial mortgage loans, which results in certain borrowers being unable or unwilling to satisfy inflexible credit rating agency guidelines. Further, the continuing consolidation in real estate markets results in a need for fully integrated lenders and investors capable of originating, underwriting, structuring, managing and retaining real estate risk. The Company believes that these significant fundamental and structural changes in the commercial real estate capital markets are creating the need for mezzanine investment capital emphasized in the Company's investment program. Investment Program - ------------------ Whether through its investment management business, or as a principal, the Company seeks to generate returns from a portfolio of leveraged loans and investments. The Company's current investment program emphasizes, but is not limited to, the following general categories of real estate and finance-related assets: o Mortgage Loans. The Company pursues opportunities to originate and fund senior and junior mortgage loans ("Mortgage Loans") to commercial real estate owners and property developers who require interim financing until permanent financing can be obtained. The Company's Mortgage Loans are generally not intended to be permanent in nature, but rather are intended to be relatively short-term in duration, with extension options as deemed appropriate, and typically require a balloon payment of principal at maturity. These types of loans are intended to be higher-yielding loans with higher interest rates and commitment fees. The Company may also originate and fund permanent Mortgage Loans in which the Company intends to sell the senior tranche, thereby creating a Mezzanine Loan. o Mezzanine Loans. The Company originates high-yielding loans that are subordinate to first lien mortgage loans on commercial real estate and are secured either by a second lien mortgage or a pledge of the ownership interests in the borrowing property owner ("Mezzanine Loans"). Typically, Mezzanine Loans provide the capital representing the level between 60% and 90% of property value. Generally, the Company's Mezzanine Loans have a longer anticipated duration than its Mortgage Loans, are not intended to serve as transitional mortgage financing and can represent subordinated investments in real estate operating companies which may take the form of secured or unsecured debt, preferred stock and other hybrid instruments. o Certificated Mezzanine Investments. The Company purchases high-yielding investments that are subordinate to senior secured loans on commercial real estate. Such investments represent interests in debt service from loans secured by the underlying property or property cash flow and are held through a trust and issued in certificate form. These certificated investments carry substantially similar terms and risks as Mezzanine Loans ("Certificated Mezzanine Investments"). o Subordinated Interests. The Company pursues rated and unrated investments in public and private subordinated interests ("Subordinated Interests") in commercial collateralized mortgage obligations ("CMOs") and other CMBS. Subordinated Interests represent the junior, subordinated class which are typically lower rated with non-investment grade ""BB"" or "B" rating agency ratings or are the unrated high-yielding credit support class. o Other Investments. The Company remains positioned to develop an investment portfolio of commercial real estate and investment management/finance-related assets meeting the Company's target risk/return profile. Except as limited by its role as investment manager to funds under management, the Company is not limited in the kinds of commercial real estate and investment management/finance-related assets in which it can invest on balance sheet and believes that it is positioned to expand opportunistically its investment management/finance business. The Company may pursue investments in, among other assets, construction loans, distressed mortgages, foreign real estate and finance-related assets, operating companies, including investment managers and loan origination and loan servicing companies, and fee interests in real property (collectively, "Other Investments"). Any such lending may be on a secured or unsecured basis and will be subject to risks similar to those attendant to investing in the other categories set forth above. 3 The Company's current investment program emphasizes loans and investments that provide unleveraged investment yields within a target range of 500 to 800 basis points above LIBOR. The Company may originate or acquire loans and investments with yields that fall outside of the foregoing targeted investment yield range, but otherwise correspond to the level of risk perceived by the Company to be associated with such loans and investments. The Company has no predetermined limitations or targets for concentration of asset type or geographic location. Instead of adhering to any prescribed limits or targets, the Company makes acquisition decisions through asset and collateral analysis, evaluating investment risks on a case-by-case basis. Sources of Financing and Use of Leverage - ---------------------------------------- The Company seeks to maximize yield through the use of leverage, consistent with maintaining an acceptable level of risk, and therefore finances the loans and investments it holds and manages. The Company leverages assets through, among other things, borrowings under credit facilities, other secured and unsecured borrowings, and financing obtained through repurchase obligations. When the expected benefits outweigh the risks to the Company, such borrowings may have recourse to the Company or the fund in the form of guarantees or other obligations. If changes in market conditions cause the cost of such financing to increase relative to the income that can be derived from investments made with the proceeds thereof, the Company may reduce the amount of leverage it utilizes. Obtaining the leverage required to execute the current business plan requires the Company to maintain interest coverage ratios and other covenants mandated by current market underwriting standards. Sources of financing currently employed by the Company include the following: o Credit Facilities. The Company had two credit facilities under which it could borrow funds to finance its balance sheet loan and investment assets. In February 2002, one of the credit facilities matured and the assets financed thereon were financed under a new term redeemable securities contract as described below. The remaining $100 million credit facility provides the Company with adequate liquidity for its short-term needs. o Term Redeemable Securities Contract. In connection with the Company's original purchase of a CMBS portfolio from a commercial lender (the "BB CMBS Portfolio"), the Company obtained 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 with an affiliate of the seller. Upon maturity of this term redeemable securities contract in February 2002, the Company entered into a new term redeemable securities contract with the same counterparty, which allows for a maximum financing of $75 million. The new term redeemable securities contract has a two-year term with an automatic one-year amortizing extension option, if not otherwise extended. The Company also utilized two new repurchase obligation to finance the remaining assets financed under the original term redeemable securities contract. o Repurchase Obligations. At December 31, 2001, the Company had one existing repurchase obligation (used to finance the available-for-sale securities purchased to remain in compliance with the exemption from being treated as an investment company under the 40-Act) and entered into two new repurchase obligations in February 2002 to finance the remaining assets from the BB CMBS Portfolio. The Company may enter into other such obligations under which the Company would sell assets to a third party with the commitment that the Company repurchase such assets from the purchaser at a fixed price on an agreed date. Repurchase obligations may be characterized as loans to the Company from the other party, with underlying assets securing them. The repurchase price reflects the purchase price plus an agreed market rate of interest, which is generally paid on a monthly basis. Leverage creates an opportunity for increased income, but at the same time creates special risks. For example, leverage magnifies changes in the net worth of the Company or funds under management. Although the amount owed will be fixed, the assets may change in value during the time the debt is outstanding. Leverage creates interest expense that can exceed the revenues from the leveraged assets. To the extent the rate of return derived from assets acquired with borrowed funds exceed the rate of interest expense incurred, net income will be greater than if borrowed funds had not been used. Conversely, if the revenues from the assets acquired with borrowed funds are not sufficient to cover the cost of borrowing, net income will be less than if borrowed funds had not been used. 4 The Company does not intend to exceed for its own balance sheet a debt-to-equity ratio of 5:1 and there may also be limits to the amount of leverage that can be applied to certain assets. The Company expects that future investment funds sponsored by the Company will utilize leverage to enhance yields, although the extent to which leverage will be utilized will depend on the investment parameters of the product offered to investors. At December 31, 2001, the Company's debt-to-equity ratio (treating the Convertible Trust Preferred Securities as a component of equity) was 1.63:1. Interest Rate Management Techniques - ----------------------------------- The Company has engaged in and will continue to engage in a variety of interest rate management techniques for the purpose of managing the effective interest rate of its assets and/or liabilities. These techniques also may be used to attempt to protect against declines in the market value of the Company's assets resulting from general trends in debt markets. Any such transaction is subject to risks and may limit the potential earnings on loans and real estate investments. Such techniques include, but are not limited to, interest rate swaps (the exchange of fixed-rate payments and floating-rate payments) and interest rate caps. The Company employs the use of correlated hedging strategies to limit the effects of changes in interest rates on its operations, including engaging in interest rate swaps and interest rate caps to minimize its exposure to changes in interest rates. The Company has adopted accounting policies under which such derivatives will impact either or both shareholders' equity or net income depending on the extent to which components of interest rate risk are hedged. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Adoption of Statement of Financial Accounting Standards No. 133." Competition - ----------- The Company is engaged in a highly competitive business. The Company competes for loan and investment opportunities with numerous public and private real estate investment vehicles, including financial institutions (such as mortgage banks, pension funds, opportunity funds and REITs) and other institutional investors, as well as individuals. Many competitors are significantly larger than the Company, have well established operating histories and may have access to greater capital and other resources. In addition, the investment management industry is highly competitive and there are numerous well-established competitors possessing substantially greater financial, marketing, personnel and other resources than the Company. The Company competes with other investment management companies in attracting capital for funds under management. Government Regulation - --------------------- The Company's activities, including the financing of its operations, are subject to a variety of federal and state regulations such as those imposed by the Federal Trade Commission and the Equal Credit Opportunity Act. In addition, a majority of states have ceilings on interest rates chargeable to customers in financing transactions. Employees - --------- As of December 31, 2001, the Company employed 21 full-time professionals, one part-time professional and seven other full-time employees. None of the Company's employees are covered by a collective bargaining agreement and management considers the relationship with its employees to be good. 5 - ------------------------------------------------------------------------------ Item 2. Properties - ------------------------------------------------------------------------------ The Company's principal executive and administrative offices are located in approximately 11,885 square feet of office space leased at 410 Park Avenue, 14th Floor, New York, New York 10022 and its telephone number is (212) 655-0220. The lease for such space expires in June 2008. The Company believes that this office space is suitable for its current operations for the foreseeable future. - ------------------------------------------------------------------------------ Item 3. Legal Proceedings - ------------------------------------------------------------------------------ The Company is not a party to any material litigation or legal proceedings, or to the best of its knowledge, any threatened litigation or legal proceedings, which, in the opinion of management, individually or in the aggregate, would have a material adverse effect on its results of operations or financial condition. - ------------------------------------------------------------------------------ Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------------------------ The Company did not submit any matters to a vote of security holders during the fourth quarter. 6 PART II - ------------------------------------------------------------------------------ Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters - ------------------------------------------------------------------------------ The Company's class A common stock, par value $0.01 per share ("Class A Common Stock") is listed on the New York Stock Exchange ("NYSE"). The trading symbol for the Class A Common Stock is "CT". The Company had 1,444 stockholders-of-record at March 28, 2002. The table below sets forth, for the calendar quarters indicated, the reported high and low sale prices of the Class A Common Stock as reported on the NYSE based on published financial sources.
High Low ---- ---- 1999 First Quarter........................................... $6.00 $4.00 Second Quarter.......................................... 5.875 3.75 Third Quarter........................................... 4.9375 3.625 Fourth Quarter.......................................... 5.00 3.875 2000 First Quarter........................................... 4.5625 3.625 Second Quarter.......................................... 4.00 3.25 Third Quarter........................................... 4.625 3.75 Fourth Quarter.......................................... 4.9375 4.125 2001 First Quarter........................................... 4.6875 4.11 Second Quarter.......................................... 6.45 4.25 Third Quarter........................................... 6.50 5.10 Fourth Quarter.......................................... 5.76 4.70
No dividends were paid on the Company's Class A Common Stock or Class B Common Stock in 1999, 2000 or 2001 and the Company does not expect to declare or pay dividends on its Common Stock in the foreseeable future. The Company's current policy with respect to dividends is to reinvest earnings. 7 - ------------------------------------------------------------------------------ Item 6. Selected Financial Data - ------------------------------------------------------------------------------ The following selected financial data has been derived from the Company's historical financial statements as of and for the years ended December 31, 2001, 2000, 1999, 1998, and 1997. Prior to March 8, 2000, the Company did not serve as investment manager for any funds under management and only the Company's historical financial information, as of and for the years ended December 31, 2001 and 2000 reflect any operating results from its investment management business. For these reasons, the Company believes that, except for the information for the years ended December 31, 2001 and 2000, the following information is not indicative of the Company's current business.
Years Ended December 31, ------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ------------ ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: (in thousands, except for per share data) REVENUES: Interest and investment income................... $67,728 $88,433 $89,839 $63,954 $6,445 Income from equity investments in Funds.......... 2,991 1,530 -- -- -- Advisory and investment banking fees............. 277 3,920 17,772 10,311 1,698 Management and advisory fees from Funds.......... 7,664 373 -- -- -- Rental income.................................... -- -- -- -- 307 Gain (loss) on sale of fixed assets and investments -- (64) 35 -- (432) ---------- ------------ ----------- ----------- ----------- Total revenues................................ 78,660 94,192 107,646 74,265 8,018 ---------- ------------ ----------- ----------- ----------- OPERATING EXPENSES: Interest......................................... 26,348 36,931 39,791 27,665 2,379 General and administrative....................... 15,382 15,439 17,345 17,045 9,463 Rental property expenses......................... -- -- -- -- 124 Provision for possible credit losses............. 748 5,478 4,103 3,555 462 Unrealized loss on derivative securities......... 542 -- -- -- -- Depreciation and amortization.................... 909 902 345 249 92 ---------- ------------ ----------- ----------- ----------- Total operating expenses...................... 43,929 58,750 61,584 48,514 12,520 ---------- ------------ ----------- ----------- ----------- Income (loss) before income tax expense and distributions and amortization on Convertible Trust Preferred Securities..................... 34,731 35,442 46,062 25,751 (4,502) Income tax expense............................... 16,882 17,760 22,020 9,367 55 ---------- ------------ ----------- ----------- ----------- Income (loss) before distributions and amortization on Convertible Trust Preferred Securities.................................... 17,849 17,682 24,042 16,384 (4,557) Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit.. 8,479 7,921 6,966 2,941 -- ---------- ------------ ----------- ----------- ----------- NET INCOME (LOSS)................................ 9,370 9,761 17,076 13,443 (4,557) Less: Preferred Stock dividend and dividend requirement........................... 606 1,615 2,375 3,135 1,471 ---------- ------------ ----------- ----------- ----------- Net income (loss) allocable to Common Stock...... $8,764 $8,146 $14,701 $10,308 $(6,028) ========== ============ =========== =========== =========== PER SHARE INFORMATION: Net income (loss) per share of Common Stock: Basic....................................... $ 0.43 $ 0.35 $ 0.69 $ 0.57 $ (0.63) ========== ============ =========== =========== =========== Diluted..................................... $ 0.37 $ 0.33 $ 0.55 $ 0.44 $ (0.63) ========== ============ =========== =========== =========== Weighted average shares of Common Stock outstanding: Basic....................................... 20,166 23,171 21,334 18,209 9,527 ========== ============ =========== =========== =========== Diluted..................................... 36,124 29,692 43,725 30,625 9,527 ========== ============ =========== =========== =========== As of December 31, ------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ------------ ----------- ----------- ----------- BALANCE SHEET DATA: Total assets..................................... $678,800 $644,392 $827,808 $766,438 $317,366 Total liabilities................................ 428,231 338,584 522,925 472,207 174,077 Convertible Trust Preferred Securities........... 147,941 147,142 146,343 145,544 -- Stockholders' equity............................. 102,628 158,666 158,540 148,687 143,289
8 - ------------------------------------------------------------------------------ Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------ Introduction - ------------ The Company is an investment management and real estate finance company that operated principally as a balance sheet lender until the commencement of its transition to the investment management business in March 2000. Prior to July 1997, the Company operated as a REIT, originating, acquiring, operating and holding income-producing real property and mortgage-related investments. The results for the year ended December 31, 1999 reflect the Company's principal balance sheet lending operations. The results for the years ended December 31, 2001 and 2000 reflect both balance sheet lending and the investment management business. The Company is successor to Capital Trust, a California business trust, following consummation of the reorganization on January 28, 1999, pursuant to which the predecessor ultimately merged with and into the Company, which thereafter continued as the surviving Maryland corporation. Each outstanding predecessor class A common share of beneficial interest was converted into one share of class A common stock, par value $0.01 per share ("Class A Common Stock"), and each outstanding predecessor class A 9.5% cumulative convertible preferred share of beneficial interest was converted into one share of class A 9.5% cumulative convertible preferred stock, par value $0.01 per share ("Class A Preferred Stock"), of the Company. As a result, all of the predecessor's previously issued class A common shares of beneficial interest have been reclassified as shares of Class A Common Stock and all of the predecessor's previously issued class A preferred shares of beneficial interest have been reclassified as shares of Class A Preferred Stock. Unless the context otherwise requires, hereinafter references to the business, assets, liabilities, capital structure, operations and affairs of the Company include those of the predecessor prior to the reorganization. At the December 31, 2001, 2000 and 1999 fiscal year ends, the Company had outstanding $150 million aggregate liquidation amount convertible trust preferred securities which were originally issued by the Company's consolidated statutory trust subsidiary, CT Convertible Trust I (the "Trust"), in July 1998 and originally represented an undivided beneficial interest in the assets of the Trust that consisted solely of the Company's $154,650,000 aggregate principal amount 8.25% step up convertible junior subordinated debentures that were concurrently issued and sold to the Trust. The convertible trust preferred securities were modified in May 2000 as discussed below. As part of the Company's transition to the investment management business, the Company entered into a venture with Citigroup to co-sponsor, commit to invest capital in and manage high-yield commercial real estate mezzanine investment funds. Pursuant to the venture agreement, the Company and Citigroup co-sponsored Fund II, the largest commercial real estate mezzanine investment fund in the U.S. with total equity commitments of $845.2 million, and made to it total equity commitments of $49.7 million and $198.9 million, respectively. The Company expects to earn approximately $9.5 million of management and consulting fees annually from its association with Fund II during the investment period. The Company's wholly-owned subsidiary, CTIMCO, serves as the investment manager to Fund II and, in connection therewith, will earn annual investment management fees equal to $8.1 million during the investment period for the fund. CTIMCO also expects to earn $1.4 million of additional annual fees from consulting services to be rendered to Fund II's general partner during the investment period. In connection with the organization of Fund II and in accordance with the venture agreement, in 2000, the Company issued to an affiliate of Citigroup a warrant to purchase 4,250,000 shares of Class A Common Stock. In connection with the closings on investor's equity commitments to Fund II, in 2001, the Company issued to an affiliate of Citigroup warrants to purchase 4,278,467 shares of Class A Common Stock. All such warrants have a $5.00 per share exercise price, are currently exercisable and expire on March 8, 2005. Fund II is now the principal vehicle through which the Company originates or acquires loans and investments in accordance with the Company's current investment program. Now that CTIMCO will conduct the origination and acquisition activities on behalf of Fund II, the Company generally will not originate or acquire loans or CMBS directly for its own balance sheet portfolio with the working capital 9 derived from maturing loans and investments. Since new loans and CMBS investments will be made by CTIMCO for Fund II, the Company will use its available working capital to make contributions to Fund II as and when required. As a result, if the amount of the Company's maturing loans and investments increases significantly before excess capital is invested in Fund II or other funds, or otherwise accretively deployed, the Company may experience shortfalls in revenues and lower earnings until offsetting revenues are derived from funds under management or other sources. The Company expects its total assets to remain relatively constant, as additional reductions in loan assets from satisfactions will require the Company to purchase similar amounts of 40-Act qualifying assets. Pursuant to the venture agreement, the Company agreed, as soon as practicable, subject to certain conditions, to take the steps necessary for it to be treated as a REIT for tax purposes. The earliest that the Company can qualify for election to REIT status will be upon filing its tax return for the year ended December 31, 2002. Based on the composition of its assets and the nature of its income, due in significant part to the successful implementation of the Company's investment management business, the Company does not meet the qualifications to elect to be taxed as a REIT at this time. In light of its success with its investment management business, the Company determined that it was not advisable at this time to pursue the changes to its business and assets that would be necessary for it to qualify for taxation as a REIT. Therefore, the Company requested Citigroup to waive the obligation, which request was granted. The Company continues to pursue alternative strategies for tax efficiency. Balance Sheet Portfolio Developments and Contributions to Funds - --------------------------------------------------------------- In fiscal year 2001, to facilitate compliance with the 1940 Act, the Company purchased $97.5 million of Federal National Mortgage Association fixed rate whole pool mortgage-backed securities that were subsequently sold at their amortized cost of $97.3 million. The Company also purchased $160.4 million of Federal Home Loan Mortgage Corporation Gold fixed rate whole pool mortgage-backed securities. To finance this purchase, the Company entered into eight repurchase obligations that mature in March 2002. The Company sold the six Federal Home Loan Mortgage Corporation Gold fixed rate securities with a market value of $152.8 million at December 31, 2001 for which the Company has a liability to repurchase these assets for $147.9 million. The interest rate in effect for the repurchase obligations at December 31, 2001 was 2.03%. The Company expects to enter into new repurchase obligations at maturity. The Company also expects to continue such investment activity in the future when and if required for compliance purposes. As a consequence of such investment activity, the Company will be required to address financial statement effects of fair value changes in such investments. Since December 31, 2000, the Company funded $13.3 million of commitments under three existing loans. The Company received full satisfaction of five loans and a Certificated Mezzanine Investment totaling $118.0 million and partial repayments on seven loans and a Certificated Mezzanine Investment totaling $17.7 million. At December 31, 2001, the Company had outstanding loans and CMBS totaling approximately $458 million and no additional commitments for funding of outstanding loans. The Company's investment in Fund I at December 31, 2001 is $25.0 million. Since December 31, 2000, the Company has made equity contributions to Fund I of $25.3 million and Fund I has returned $28.8 million of equity. The Company has capitalized costs of $4,752,000 that are being amortized over the anticipated lives of the funds. As of December 31, 2001, Fund I has outstanding loans and investments totaling $165.2 million, all of which are performing in accordance with the terms of their agreements except for one loan for $26.0 million which is in default and for which, beginning June 30, 2001, the accrual of interest was suspended. Since April 9, 2001, the Company has made equity contributions to Fund II of $7.1 million and equity contributions to Fund II's general partner of $2.7 million. The Company's remaining equity commitment to Fund II and its general partner is $42.0 million. The Company has capitalized costs of $3.8 million relating to the formation of Fund II that are being amortized over the anticipated lives of the funds. The Company's investment in Fund II and its general partner at December 31, 2001 is $13.2 million. As of December 31, 2001, Fund II has outstanding loans and investments totaling $485.4 million, all of which are performing in accordance with the terms of their agreements. 10 Results of Operations for the Years Ended December 31, 2001 and 2000 - -------------------------------------------------------------------- The Company reported net income allocable to shares of Common Stock of $8,764,000 for the year ended December 31, 2001, an increase of $618,000 from the net income allocable to shares of Common Stock of $8,146,000 for the year ended December 31, 2000. This increase was primarily the result of increased income from equity investments in the Funds and related investment management and consulting fees, reduced Preferred Stock dividends and a reduction in the provision for possible credit losses offset by decreased advisory and investment banking fees and decreased net interest income from loans and other investments as the Company continues its transition to the investment management business. The Company expects additional reductions in interest and related income that may not be offset by increased income from investment management operations. Interest and related income from loans and other investments amounted to $67,333,000 for the year ended December 31, 2001, a decrease of $20,352,000 from the $87,685,000 amount for the year ended December 31, 2000. Average interest earning assets decreased from approximately $681.5 million for the year ended December 31, 2000 to approximately $570.6 million for the year ended December 31, 2001. The average interest rate earned on such assets decreased from 12.8% in 2000 to 11.8% in 2001. During the year ended December 31, 2001, the Company recognized an additional $4.8 million on the early repayment of loans, while during the year ended December 31, 2000, the Company recognized an additional $4.7 million on the early repayment of loans. Without this additional interest income and after adjustment of the 2000 rates for the effect of recognizing net swap payments in interest expense rather than interest income, the earning rate for 2001 would have been 11.0% versus 12.2% for 2000. The decrease in such core-earning rate is due to a decrease in the average LIBOR rate from 6.41% for 2000 to 3.88% for 2001 for the assets earning interest based upon a variable rate. Interest and related expenses amounted to $26,238,000 for the year ended December 31, 2001, a decrease of $10,474,000 from the $36,712,000 amount for the year ended December 31, 2000. The decrease in expense was due to a decrease in the amount of average interest bearing liabilities outstanding from approximately $393.2 million for the year ended December 31, 2000 to approximately $321.8 million for the year ended December 31, 2001, and a decrease in the average rate paid on interest bearing liabilities from 9.2% to 8.2% for the same periods, after adjustment of the 2000 rates for the effect of recognizing net swap payments in interest expense rather than interest income. The decrease in the average rate is not consistent with the decrease in the average LIBOR rate for the same periods due to a change in the mix of interest bearing liabilities. In 2001, a higher percentage of the interest bearing liabilities are at a fixed rate, after adjusting for interest rate swaps, which, in the current low LIBOR rate environment, are at higher rates than that for variable rate interest bearing liabilities. The Company also utilized proceeds from the $150.0 million of Convertible Trust Preferred Securities, which were issued on July 28, 1998 to finance its interest earning assets. During the years ended December 31, 2001 and 2000, the Company recognized $8,479,000 and $7,921,000, respectively, of net expenses related to its outstanding convertible trust preferred securities. This amount consisted of distributions to the holders totaling $15,237,000 and $14,246,000, respectively, and amortization of discount and origination costs totaling $799,000 and $799,000, respectively, during the years ended December 31, 2001 and 2000. This was partially offset by a tax benefit of $7,557,000 and $7,124,000 during the years ended December 31, 2001 and 2000, respectively. As previously disclosed, the terms of the Convertible Trust Preferred Securities were modified effective May 10, 2000. As a result, the blended rate on such securities increased from 8.25% to 10.16% on that date accounting for the increase in expense in 2001. During the year ended December 31, 2001, other revenues increased $4,820,000 to $11,327,000 from $6,507,000 in the same period of 2000. During the second quarter of 2000, Fund I commenced operations and during the second quarter of 2001, Fund II commenced operations. This increase in other revenue is due to increased revenue from the Funds (management and advisory income in addition to the return on investment in the funds) offset by a reduction in advisory and investment banking fees as the Company continues its transition to the investment management business. Investment management and consulting fees from funds under management has increased significantly since the closing of Fund II. The Company earned $5,884,000 of investment management fees from Fund II and $1,015,000 of consulting fees from Fund II GP in 2001. These additional fees account for the majority of the increase in investment management and consulting fees from 2000 to 2001. 11 For the year ended December 31, 2001 and 2000, the Company had earned $2,991,000 and $1,530,000 respectively, on its equity investment in the Funds. The increase in income in 2001 versus 2000 was due primarily to the increased level of investment in the Funds offset by the suspension of interest on a Fund I asset. General and administrative expenses remained relatively consistent amounting to $15,382,000 for the year ended December 31, 2001 versus $15,439,000 for year ended December 31, 2000. In 2000, as the Company transitioned to its new investment management business, it incurred one-time expenses of $2.1 million that were included in general and administrative expenses. The Company employed an average of 27 employees during the year ended December 31, 2001 verses an average of 24 employees during the year ended December 31, 2000. The Company had 28 full-time employees and one part-time employee at December 31, 2001. The decrease in the provision for possible credit losses from $5,478,000 for the year ended December 31, 2000 to $748,000 for the year ended December 31, 2001 was due to the decrease in average earning assets as previously described. The Company did not add to the reserve for possible credit losses during the second, third or fourth quarter of 2001 as the Company believes that the reserve is adequate based on the existing loans and investments in the balance sheet portfolio. For the year ended December 31, 2001 and 2000, the Company accrued income tax expense of $16,882,000 and $17,760,000, respectively, for federal, state and local income taxes. The decrease (from 50.1% to 48.6%) in the effective tax rate was primarily due to lower levels of compensation in excess of deductible limits in the prior year. The preferred stock dividend and dividend requirement arose from previously issued shares of Class A Preferred Stock. Dividends accrued on these shares at a rate of 9.5% per annum on a per share price of $2.69. In the third quarter of 1999, 5,946,825 shares of Class A Preferred Stock were converted into an equal number of shares of Class A Common Stock thereby reducing the number of outstanding shares of Preferred Stock to 6,320,833 and the dividend requirement to $1,615,000 per annum. In 2001, the remaining shares of Preferred Stock were repurchased thereby eliminating the dividend requirement. Results of Operations for the Years Ended December 31, 2000 and 1999 - -------------------------------------------------------------------- The Company reported net income allocable to shares of Common Stock of $8,146,000 for the year ended December 31, 2000, a decrease of $6,555,000 from the net income allocable to shares of Common Stock of $14,701,000 for the year ended December 31, 1999. This change was primarily the result of a decrease in advisory and investment banking fees, partially offset by the additional revenue generated from the investment in and management of Fund I. Interest and related income from loans and other investments amounted to $87,685,000 for the year ended December 31, 2000, a decrease of $905,000 from the $88,590,000 amount for the year ended December 31, 1999. While average interest earning assets decreased from approximately $749.7 million for the year ended December 31, 1999 to approximately $681.5 million for the year ended December 31, 2000, the interest rate earned on such assets increased from 11.8% in 1999 to 12.8% in 2000. During the year ended December 31, 2000, the Company recognized an additional $4,726,000 on the early repayment of seven loans, while during the year ended December 31, 1999, the Company recognized an additional $3,976,000 on the early repayment of five loans. Also in 2000, two loans were in non-accrual status, which reduced interest income by $867,000 for the year ended December 31, 2000. Without this additional interest income (offset by the forgone interest on the non-accrual loans in 2000), the earning rate for 2000 would have been 12.3% versus 11.3% for 1999. This increase is due primarily to an increase in the average LIBOR rate from 5.25% for 1999 to 6.41% for 2000. Interest and related expenses amounted to $36,712,000 for the year ended December 31, 2000, a decrease of $2,742,000 over the $39,454,000 amount for the year ended December 31, 1999. The decrease in expense was due to a decrease in the amount of average interest bearing liabilities outstanding from approximately $471.8 million for the year ended December 31, 1999 to approximately $393.2 million for the year ended December 31, 2000, offset by an increase in the average rate paid on interest bearing liabilities from 8.3% to 9.3% for the same periods. The increase in the average rate is consistent with the increase in the average LIBOR rate for the Company's variable rate liabilities for the same periods. 12 During the years ended December 31, 2000 and 1999, the Company recognized $7,921,000 and $6,966,000, respectively, of net expenses related to the Convertible Trust Preferred Securities. This amount consisted of distributions to the holders totaling $14,246,000 and $12,375,000, respectively, and amortization of discount and origination costs totaling $799,000 and $799,000, respectively, during the years ended December 31, 2000 and 1999. This was partially offset by a tax benefit of $7,124,000 and $6,208,000 during the years ended December 31, 2000 and 1999, respectively. The increase in the amount from 1999 to 2000 was due to the previously discussed increase in the rate paid on the securities from 8.25% to 10.16% effective May 10, 2000. During the year ended December 31, 2000, other revenues decreased $12,549,000 to $6,507,000 from $19,056,000 in the same period of 1999. This decrease was primarily due to the reduction in advisory and investment banking fees generated by Victor Capital and its related subsidiaries. The significant reduction in resources devoted to the Company's investment banking and advisory operations following the transition to its new investment management business during the second quarter of 2000 when Fund I commenced operations, which generated $1,530,000 of income on the Company's equity investment in Fund I and $373,000 of investment management fees in 2000. Other expenses decreased from $22,130,000 for the year ended December 31, 1999 to $22,038,000 for year ended December 31, 2000. As the Company transitioned to its new investment management business, it incurred one-time expenses of $2.1 million that were included in general and administrative expenses and wrote-off the remaining $275,000 of the excess of purchase price for Victor Capital over net tangible assets acquired, net. When these special one-time expenses are removed from other expenses, recurring other expenses for the year ended December 31, 2000 decreased $2.5 million from the same period in the prior year. During March 1999, to reduce general and administrative expenses to a level in line with budgeted business activity, the Company reduced its workforce by approximately 30% and recorded a restructuring charge of $650,000. This, along with a decrease in average staffing levels, primarily accounted for the decrease in recurring general and administrative expenses. During the period ended December 31, 2000, the Company had an average of 24 full time employees as compared to an average of 34 during the period ended December 31, 1999. The increase in the provision for possible credit losses from $4,103,000 for the year ended December 31, 1999 to $5,478,000 for the year ended December 31, 2000 was due to additional reserves taken for non-performing loans at December 31, 2000. For the years ended December 31, 2000 and 1999, the Company accrued income tax expense of $17,760,000 and $22,020,000, respectively, for federal, state and local income taxes. The increase in the effective tax rate (from 47.8% to 50.1%) was primarily due to higher levels of compensation in excess of deductible limits. The preferred stock dividend and dividend requirement arose in 1997 as a result of the Company's issuance of $33 million of 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 into an equal number of shares of Common Stock during the third quarter of 1999 thereby reducing the number of outstanding shares of Preferred Stock to 6,320,833 and the dividend requirement to $1,615,000 per annum. 13 Liquidity and Capital Resources - ------------------------------- At December 31, 2001, the Company had $11,651,000 in cash. The primary sources of liquidity for the Company for 2002 will be cash on hand, cash generated from operations, principal and interest payments received on loans and investments (including loan repayments and the return of capital from Fund I), and additional borrowings under the Company's credit facilities. The Company believes these sources of capital will adequately meet future cash requirements. The Company expects that during 2002, it will use a significant amount of its available capital resources to satisfy its capital contributions required in connection with its remaining $42.0 million equity commitment to Fund II. The Company intends to continue to employ leverage on its existing balance sheet assets to enhance its return on equity. The Company experienced a net increase in cash of $263,000 for the year ended December 31, 2001, compared to the net decrease of $27,394,000 for the year ended December 31, 2000. The use of cash in 2000 was primarily to reduce liabilities and fund equity contributions to Fund I. Cash provided by operating activities during the year ended December 31, 2001 was $12,769,000, compared to $11,878,000 during the same period of 2000. For the year ended December 31, 2001, cash used in investing activities was $40,034,000, compared to $155,552,000 provided by investing activities during the same period in 2000. This change was primarily due to the purchase of available-for-sale securities in 2001. The Company utilized the cash received on loan repayments in both years to reduce borrowings under its credit facilities and entered into repurchase obligations to finance the purchase of available-for-sale securities which accounted for the majority of the $222,352,000 change in the net cash used in financing activities from $194,824,000 in 2000 to the $27,528,000 of cash provided by financing activities in the same period of 2001. In 2000, the Company announced an open market share repurchase program under which the Company may purchase, from time to time, up to four million shares of the Company's Class A Common Stock. During fiscal year 2001, the Company did not purchase any additional shares of the Company's Class A Common Stock pursuant to the repurchase program and has 1,435,600 shares authorized for repurchase remaining under the program. However, during fiscal year 2001, the Company repurchased 830,701 shares of Class A Common Stock, all 2,755,186 outstanding shares of Class B Common Stock and all 6,320,833 outstanding shares of Preferred Stock in three privately negotiated transactions. The Company has and will continue to fund share repurchases with available cash. At December 31, 2001, the Company was party to two credit facilities with commercial lenders that provide for a total of $455 million of credit. One facility provided for a $355 million line of credit that matured in February 2002. The other facility provides for an existing $100 million line of credit that matures in July 2002, with an automatic nine-month amortizing extension option, if not otherwise extended. At December 31, 2001, the Company had outstanding borrowings under the credit facilities of $121,211,000, and had unused potential credit of $319,765,000. The decrease in the amount outstanding under the credit facilities from the amount outstanding at December 31, 2000 was due to the use of cash received on loan repayments to pay down the credit facilities offset by additional borrowings to repurchase stock. In February 2002, the $355 million credit facility matured and the assets financed thereon were financed under a new term redeemable securities contract as described below. The remaining $100 million credit facility provides the Company with adequate liquidity for its short-term needs. The existing credit facility provides for advances to fund lender-approved loans and investments made by the Company. The obligations of the Company under the credit facility are required to be secured by pledges of the assets originated or acquired by the Company with advances under the credit facility. 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. Future repayments and redrawdowns of amounts previously subject to the drawdown fee will not require the Company to pay any additional fees. 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. At December 31, 2001, the Company also has one outstanding note payable for $977,000, outstanding borrowings on its term redeemable securities contract of $137,132,000 and outstanding repurchase obligations of $147,880,000. In connection with the maturity of the credit facility and the term redeemable securities contract in February 2002, the Company entered into a new term redeemable securities contract with the same counterparty, which allows for a maximum financing of $75 million. The new term 14 redeemable securities contract has a two-year term with an automatic one-year amortizing extension option, if not otherwise extended. The Company also entered into two new repurchase obligations with new counterparties to finance the remaining assets financed under the original term redeemable securities contract in February 2002. The Company's convertible trust preferred securities were modified in May 2000 in a transaction pursuant to which the outstanding securities were canceled and new variable step up convertible trust preferred securities with an aggregate liquidation amount of $150 million ("Convertible Trust Preferred Securities") were issued to the holders of the canceled securities in exchange therefore, and the original underlying convertible debentures were canceled and new 8.25% step up convertible junior subordinated debentures in the aggregate principal amount of $92,524,000 (the "Convertible Debentures") and new 13% step up non-convertible junior subordinated debentures in the aggregate principal amount of $62,126,000 (the "Non-Convertible Debentures" and together with the Convertible Debentures, the "Debentures") were issued to the Trust, as the holder of the canceled bonds, in exchange therefore. The liquidation amount of the Convertible Trust Preferred Securities is divided into $89,742,000 of convertible amount (the "Convertible Amount") and $60,258,000 of non-convertible amount (the "Non-Convertible Amount"), the distribution, redemption and, as applicable, conversion terms of which, mirror the interest, redemption and, as applicable, the conversion terms of the Convertible Debentures and the Non-Convertible Debentures, respectively, held by the Trust. Distributions on the Convertible Trust Preferred Securities are payable quarterly in arrears on each calendar quarter-end and correspond to the payments of interest made on the Debentures, the sole assets of the Trust. Distributions are payable only to the extent payments are made in respect to the Debentures. The Convertible Trust Preferred Securities initially bear a blended coupon rate of 10.16% per annum which rate will vary as the proportion of the outstanding Convertible Amount to the outstanding Non-Convertible Amount changes and will step up in accordance with the coupon rate step up terms applicable to the Convertible Amount and the Non-Convertible Amount. The Convertible Amount bears a coupon rate of 8.25% per annum through March 31, 2002 and increases on April 1, 2002 to the greater of (i) 10.00% per annum, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter or (ii) a percentage per annum equal to the quarterly dividend paid on a common share multiplied by four and divided by $7.00. The Convertible Amount is convertible into shares of Class A Common Stock, in increments of $1,000 in liquidation amount, at a conversion price of $7.00 per share. The Convertible Amount is redeemable by the Company, in whole or in part, on or after September 30, 2004. The Non-Convertible Amount bears a coupon rate of 13.00% per annum through September 30, 2004, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter. The Non-Convertible Amount is redeemable by the Company, in whole or in part, at any time. Adoption of Statement of Financial Accounting Standards No. 133 - --------------------------------------------------------------- On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the consolidated balance sheets and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either shareholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. As of January 1, 2001, the adoption of the new standard results in an adjustment of $574,000 to accumulated other comprehensive loss. Financial reporting for hedges characterized as fair value hedges and cash flow hedges are different. For those hedges characterized as a fair value hedge, the changes in fair value of the hedge and the hedged item are reflected in earnings each quarter. In the case of the fair value hedge, the Company is hedging the component of interest rate risk that can be directly controlled by the hedging instrument, and it is this portion of the hedged assets that is recognized in earnings. The non-hedged balance is classified as an available-for-sale security consistent with SFAS No. 115, and is reported in accumulated other comprehensive income. For those hedges characterized as cash flow hedges, the unrealized gains/losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income or in earnings, depending on the type of hedging relationship. In 15 accordance with SFAS No. 133, on December 31, 2001, the derivative financial instruments were reported at their fair value as other assets and interest rate hedge liabilities of $82,000 and $9,987,000, respectively. The Company is exposed to credit loss in the event of non-performance by the counterparties (banks whose securities are rated investment grade) to the interest rate swap and cap agreements, although it does not anticipate such non-performance. The counterparties would bear the interest rate risk of such transactions as market interest rates increase. If an interest rate swap or interest rate cap is sold or terminated and cash is received or paid, the gain or loss is deferred and recognized when the hedged asset is sold or matures. Impact of September 11, 2001 and Terrorism Insurance - ---------------------------------------------------- The terrorist attacks on The World Trade Centers in New York City, the Pentagon in Washington, D.C. and in Pennsylvania on September 11, 2001, have disrupted the U.S. Financial markets and have negatively impacted the U.S. economy in general. Any future terrorist attacks and the anticipation of any such attacks, or the consequences of the military or other response by the U.S. and its allies, may have a further adverse impact on the U.S. financial markets and the economy. It is not possible to predict the severity of the effect that such future events would have on the U.S. financial markets and economy. Although it is too early to determine fully how these events will impact the Company, it is possible that the economic impact of the terrorist attacks will adversely affect the credit quality of some of the Company's loans and investments. Some of the Company's loans and investments are more susceptible to the adverse effects than others, such as the hotel loans, which experienced a significant reduction in occupancy rates following the attacks. While the Company's asset base is diversified and the Company employs a variety of techniques to enhance the credit quality of the assets, such as dedicated cash reserves, letters of credit and guarantees, the Company may suffer losses as a result of the adverse impact of the attacks, or of future attacks and these losses may adversely impact the Company's financial performance. In addition, the events of September 11 have created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against a terrorist attacks at commercially reasonable rates, if at all. The issue is exacerbated by the fact that most insurance policies (and the terrorism insurance that has traditionally been a part of such policies) expire on December 31 of each year and most secured loans typically require comprehensive terrorism insurance. The absence of suitable insurance coverage will likely affect the general real estate lending market, lending volume and the market's overall liquidity. In turn, real estate valuations may be impacted, particularly for asset types seen as vulnerable to attack, including: central business district office buildings, certain regional malls and assets located near sites perceived as high-risk being the most sensitive. The lack of resolution regarding affordable long-term terrorism insurance coverage for all property types combined with the general slow-down of the U.S. economy may negatively impact existing loans and investments and may reduce the number of suitable investment opportunities available to Fund II and the pace at which its investments are made. A reduction in asset originations could adversely affect the Company's ability to grow earnings. Impact of Inflation - ------------------- The Company's operating results depend in part on the difference between the interest income earned on its interest-earning assets and the interest expense incurred in connection with its interest-bearing liabilities. Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation or otherwise can affect the Company's income by affecting the spread between the Company's interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of the Company's interest-earning assets and its ability to realize gains from the sale of assets and the average life of the Company's interest-earning assets. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond the control of the Company. The Company employs the use of correlated hedging strategies to limit the effects of changes in interest rates on its operations, including engaging in interest rate swaps and interest rate caps to minimize its exposure to changes in interest rates. There can be no assurance that the Company will be able to adequately protect against the foregoing risks or that the Company will ultimately realize an economic benefit from any hedging contract into which it enters. 16 Note on Forward-Looking Statements - ---------------------------------- Except for historical information contained herein, this annual report on Form 10-K 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 to this Form 10-K 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-K. 17 - -------------------------------------------------------------------------------- Item 7A. 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 December 31, 2001. For financial assets and debt obligations, the table presents cash flows to the expected maturity and weighted average interest rates based upon the current carrying values. For interest rate swaps, the table presents notional amounts and weighted average fixed pay and variable receive interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. Weighted-average variable rates are based on rates in effect as of the reporting date.
Expected Maturity Dates ------------------------------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Assets: (dollars in thousands) Available-for sale securities Fixed Rate $ 14,265 $ 13,853 $ 16,061 $ 14,114 $ 12,370 $ 81,841 $152,504 $152,789 Average interest rate 6.46% 6.46% 6.46% 6.46% 6.46% 6.46% 6.46% CMBS Fixed Rate - - - $ 12,047 $ 7,811 $226,159 $246,017 $174,729 Average interest rate - - - 10.24% 14.66% 12.96% 12.88% Variable Rate - $ 36,509 - - - - $ 36,509 $ 35,539 Average interest rate - 8.52% - - - - 8.52% Loans receivable Fixed Rate - - - - - $ 89,231 $ 89,231 $ 90,585 Average interest rate - - - - - 11.66% 11.66% Variable Rate $107,664 $ 10,417 $ 31,542 $ 15,166 $ 667 $ 6,555 $172,011 $170,237 Average interest rate 8.36% 9.67% 9.77% 8.26% 7.63% 7.63% 8.66% Liabilities: Credit Facilities Variable Rate - $121,211 - - - - $121,211 $121,211 Average interest rate - 5.18% - - - - 5.18% Term Redeemable Securities Contract Variable Rate $137,812 - - - - - $137,812 $137,132 Average interest rate 5.35% - - - - - 5.35% Repurchase obligations Variable Rate $147,880 - - - - - $147,880 $147,880 Average interest rate 2.03% - - - - - 2.03% Convertible Trust Preferred Securities Fixed Rate - - - $150,000 - - $150,000 $147,941 Average interest rate - - - 10.84% - - 10.84% Interest rate swaps - $ 18,547 - $137,812 - $ 48,375 $204,734 $ (9,987) Average fixed pay rate - 6.04% - 6.05% - 6.06% 6.05% Average variable receive rate - 2.14% - 1.93% - 2.14% 2.00%
18 - ------------------------------------------------------------------------------ Item 8. Financial Statements and Supplementary Data - ------------------------------------------------------------------------------ The financial statements required by this item and the reports of the independent accountants thereon required by Item 14(a)(2) appear on pages F-2 to F-37. See accompanying Index to the Consolidated Financial Statements on page F-1. The supplementary financial data required by Item 302 of Regulation S-K appears in Note 25 to the consolidated financial statements. ------------------------------------------------------------------------------ Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------------------ None 19 PART III - ------------------------------------------------------------------------------ Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------------------------ The information regarding the Company's trustees is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than April 30, 2002, with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act. - ------------------------------------------------------------------------------ Item 11. Executive Compensation - ------------------------------------------------------------------------------ The information required by Item 402 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than April 30, 2002, with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act. - ------------------------------------------------------------------------------ Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------------ The information required by Item 403 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than April 30, 2002, with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act. - ------------------------------------------------------------------------------ Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------------------------------ The information required by Item 404 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than April 30, 2002, with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act. 20 PART IV - ------------------------------------------------------------------------------ Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (a) (1) Financial Statements See the accompanying Index to Financial Statement Schedule on page F-1. (a) (2) Consolidated Financial Statement Schedules None. All schedules have been omitted because they are not applicable or because the required information is shown in the consolidated financial statements or notes thereto. (a) (3) Exhibits EXHIBIT INDEX Exhibit Number Description -------- ----------- 2.1 Agreement and Plan of Merger, by and among Capital Trust, Capital Trust, Inc. and the Captrust Limited Partnership, dated as of November 12, 1999 (filed as Exhibit 2.1 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). o3.1 Charter of the Capital Trust, Inc. 3.2 Amended and Restated By-Laws of Capital Trust, Inc. (filed as Exhibit 3.2 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). 10.2 Non-Negotiable Notes of Capital Trust payable to John R. Klopp, Craig M. Hatkoff and Valentine Wildove & Company, Inc. (filed as Exhibit 10.2 to Capital Trust's Current Report on Form 8-K (File No. 1-8063) filed on July 30, 1997 and incorporated herein by reference). +10.3.a Capital Trust, Inc. Amended and Restated 1997 Long-Term Incentive Stock Plan ("Incentive Stock Plan") (filed as Exhibit 10.1 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). +10.3.b Amendment No. 1 to Incentive Stock Plan (filed as Exhibit 10.3.b to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on April 2, 2001 and incorporated herein by reference). +10.4 Capital Trust, Inc. Amended and Restated 1997 Non-Employee Director Stock Plan (filed as Exhibit 10.2 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). +10.5 Capital Trust, Inc. 1998 Employee Stock Purchase Plan (filed as Exhibit 10.3 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). +10.6 Capital Trust, Inc. 1998 Non-Employee Stock Purchase Plan (filed as Exhibit 10.4 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). 21 Exhibit Number Description -------- ----------- +10.7 Capital Trust, Inc. Stock Purchase Loan Plan (filed as Exhibit 10.5 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). +10.8 Employment Agreement, dated as of July 15, 1997, by and between Capital Trust and John R. Klopp (filed as Exhibit 10.5 to Capital Trust's Registration Statement on Form S-1 (File No. 333-37271) filed on October 6, 1997 and incorporated herein by reference). +10.9 Termination Agreement, dated as of December 29, 2000, by and between Capital Trust, Inc. and Craig M. Hatkoff (filed as Exhibit 10.9 to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on April 2, 2001 and incorporated herein by reference). +10.10 Consulting Agreement, dated as of January 1, 2001, by and between Capital Trust, Inc. and Craig M. Hatkoff (filed as Exhibit 10.10 to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on April 2, 2001 and incorporated herein by reference). 10.11 Agreement of Lease dated as of May 3, 2000, between 410 Park Avenue Associates, L.P., owner, and Capital Trust, Inc., tenant (filed as Exhibit 10.11 to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on April 2, 2001 and incorporated herein by reference). 10.12 Amended and Restated Credit Agreement, dated as of January 1, 1998, between Capital Trust and German American Capital Corporation ("GACC") (filed as Exhibit 10.1 to Capital Trust's Current Report on Form 8-K (File No. 1-8063) filed on March 18, 1998 and incorporated herein by reference), as amended by First Amendment to Amended and Restated Credit Agreement, dated as of June 22, 1998, between Capital Trust and GACC (filed as Exhibit 10.3 to Capital Trust's Quarterly Report on Form 10-Q (File No. 1-8063) filed on August 14, 1998 and incorporated herein by reference), as amended by Second Amendment to Amended and Restated Credit Agreement, dated as of July 23, 1998, between Capital Trust and GACC (filed as Exhibit 10.10 to Capital Trust, Inc.'s Amendment No. 2 to Registration Statement on Form S-4 (File No. 333-52619) filed on October 23, 1998 and incorporated herein by reference) as amended by the Third Amendment to Amended and Restated Credit Agreement, dated as of July 23, 1998, between Capital Trust, Inc. and GACC (filed as Exhibit 10.12b to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on March 31, 1999 and incorporated herein by reference). +10.13.a Employment Agreement, dated as of August 15, 1998, by and between Capital Trust and Stephen D. Plavin ("Plavin Employment Agreement") (filed as Exhibit 10.15 to Capital Trust, Inc.'s Amendment No. 2 to Registration Statement on Form S-4 (File No. 333-37271) filed on October 23, 1998 and incorporated herein by reference). +10.13.b Amendment to Plavin Employment Agreement (filed as Exhibit 10.3 to Capital Trust, Inc.'s Quarterly Report on Form 10-Q (File No. 1-14788) filed on November 14, 2001 and incorporated herein by reference). 10.14.a Amended and Restated Master Loan and Security Agreement, dated as of February 8, 2001, between Capital Trust, Inc. and Morgan Stanley Dean Witter Mortgage Capital Inc. (filed as Exhibit 10.14 to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on April 2, 2001 and incorporated herein by reference). o10.14.b First Amendment to Amended and Restated Master Loan and Security Agreement, dated as of July 16, 2001, between Capital Trust, Inc. and Morgan Stanley Dean Witter Mortgage Capital Inc. 10.15.a Amended and Restated CMBS Loan Agreement, dated as of February 8, 2001, between Capital Trust, Inc. and Morgan Stanley & Co. International Limited (filed as Exhibit 10.15 to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on April 2, 2001 and incorporated herein by reference). o10.15.b First Amendment to Amended and Restated CMBS Loan Agreement, dated as of July 16, 2001, between Capital Trust, Inc. and Morgan Stanley & Co. International Limited. 22 Exhibit Number Description -------- ----------- +10.16 Consulting Agreement, dated as of January 1, 1999, by and between Capital Trust, Inc. and Martin L. Edelman (filed as Exhibit 10.16 to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on April 2, 2001 and incorporated herein by reference). 10.17 Venture Agreement amongst Travelers Limited Real Estate Mezzanine Investments I, LLC, Travelers General Real Estate Mezzanine Investments II, LLC, Travelers Limited Real Estate Mezzanine Investments II, LLC, CT-F1, LLC, CT-F2-GP, LLC, CT-F2-LP, LLC, CT Investment Management Co., LLC and Capital Trust, Inc., dated as of March 8, 2000 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.18 Limited Liability Company Agreement of CT Mezzanine Partners I LLC, by and among Travelers Limited Real Estate Mezzanine Investments I, LLC and CT-F1, LLC, dated as of March 8, 2000 (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.19 Limited Liability Company Agreement of CT MP II LLC, by and among Travelers General Real Estate Mezzanine Investments II, LLC and CT-F2-GP, LLC, dated as of March 8, 2000 (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.20.a Fund I Class A Common Stock Warrant Agreement, by Capital Trust, Inc. granting warrant to Travelers Limited Real Estate Mezzanine Investment I, LLC, dated as of March 8, 2000 (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). o10.20.b Fund II Purchase Warrant for Class A Common Stock, by Capital Trust, Inc. granting warrant to Travelers General Real Estate Mezzanine Investments II, LLC, dated as of April 9, 2001. o10.20.c Fund II Purchase Warrant for Class A Common Stock, by Capital Trust, Inc. granting warrant to Travelers General Real Estate Mezzanine Investments II, LLC, dated as of May 29, 2001. o10.20.d Fund II Purchase Warrant for Class A Common Stock, by Capital Trust, Inc. granting warrant to Travelers General Real Estate Mezzanine Investments II, LLC, dated as of August 7, 2001. 10.21 Guaranty of Payment, by Capital Trust, Inc. in favor of Travelers Limited Real Estate Mezzanine Investments I, LLC, Travelers General Real Estate Mezzanine Investments II, LLC and Travelers Limited Real Estate Mezzanine Investments II, LLC, dated as of March 8, 2000 (filed as Exhibit 10.6 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.22 Guaranty of Payment, by The Travelers Insurance Company in favor of Capital Trust, Inc., CT-F1, LLC, CT-F2-GP, LLC, CT-F2-LP, LLC and CT Investment Management Co., LLC, dated as of March 8, 2000 (filed as Exhibit 10.8 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.23 Investment Management Agreement, by and among CT Investment Management Co., LLC, CT MP II LLC and CT Mezzanine Partners II L.P., dated as of March 8, 2000 (filed as Exhibit 10.9 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.24 Registration Rights Agreement, by and among Capital Trust, Inc., Travelers Limited Real Estate Mezzanine Investments I, LLC, Travelers General Real Estate Mezzanine Investments II, LLC and Travelers Limited Real Estate Mezzanine Investments II, LLC, dated as of March 8, 2000 (filed as Exhibit 10.10 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 23 Exhibit Number Description -------- ----------- 10.25 Modification Agreement, dated as of May 10, 2000, by and among Capital Trust, Inc., John R. Klopp and Sheli Z. Rosenberg, as Regular Trustees for CT Convertible Trust I, Vornado Realty L.P., Vornado Realty Trust, EOP Operating Limited Partnership, Equity Office Properties Trust, and State Street Bank and Trust Company, as trustee for General Motors Employes Global Group Pension Trust (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.26 Certificate of Trust of CT Convertible Trust I (filed as Exhibit 4.1 to Capital Trust's Current Report on Form 8-K (File No. 1-8063) filed on August 6, 1998 and incorporated herein by reference). 10.27 Amended and Restated Indenture, dated as of May 10, 2000, between Capital Trust, Inc. and Wilmington Trust Company (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.28 Amended and Restated Declaration of Trust, dated and effective as of May 10, 2000, by the Trustees (as defined therein), the Sponsor (as defined therein) and by the holders, from time to time, of undivided beneficial interests in the Trust (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.29 Amended and Restated Preferred Securities Guarantee Agreement, dated as of May 10, 2000, by Capital Trust, Inc. and Wilmington Trust Company, as trustee, for the benefit of the Holders (as defined therein) from time to time of the Preferred Securities (as defined therein) of CT Convertible Trust I (filed as Exhibit 10.5 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.30 Guarantee Agreement, dated as of May 10, 2000, executed and delivered by Capital Trust, Inc., for the benefit of the Holders (as defined therein) from time to time of the Common Securities (as defined therein) of CT Convertible Trust I (filed as Exhibit 10.6 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.31 Registration Rights Agreement, dated as of July 28, 1998, among Capital Trust, Vornado Realty L.P., EOP Limited Partnership, Mellon Bank N.A., as trustee for General Motors Hourly-Rate Employes Pension Trust, and Mellon Bank N.A., as trustee for General Motors Salaried Employes Pension Trust (filed as Exhibit 10.2 to Capital Trust's Current Report on Form 8-K (File No. 1-8063) filed on August 6, 1998 and incorporated herein by reference). o21.1 Subsidiaries of Capital Trust, Inc. o23.1 Consent of Ernst & Young LLP o99.1 Risk Factors - -------------------- + Represents a management contract or compensatory plan or arrangement. o Filed herewith. (a) (4) Report on Form 8-K - -------- ------------------ During the fiscal quarter ended December 31, 2001, the Registrant filed the following Current Report on Form 8-K: None 24 SIGNATURES ---------- Pursuant to the requirements of Section 13 or Section 15(d) 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.
April 1, 2002 /s/ John R. Klopp - --------------------------- ----------------- Date John R. Klopp Vice Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. April 1, 2002 /s/ Samuel Zell - ---------------------- ----------------- Date Samuel Zell Chairman of the Board of Directors April 1, 2002 /s/ John R. Klopp - ---------------------- ----------------- Date John R. Klopp Vice Chairman and Chief Executive Officer and Director April 1, 2002 /s/ Edward L. Shugrue III - ----------------------- ------------------------- Date Edward L. Shugrue III Managing Director and Chief Financial Officer April 1, 2002 /s/ Brian H. Oswald - ----------------------- ------------------- Date Brian H. Oswald, Chief Accounting Officer April 1, 2002 /s/ Jeffrey A. Altman - ----------------------- --------------------- Date Jeffrey A. Altman, Director April 1, 2002 /s/ Thomas E. Dobrowski - ----------------------- ----------------------- Date Thomas E. Dobrowski, Director April 1, 2002 /s/ Martin L. Edelman - ----------------------- --------------------- Date Martin L. Edelman, Director April 1, 2002 /s/ Gary R. Garrabrant - ----------------------- ---------------------- Date Gary R. Garrabrant, Director April 1, 2002 /s/ Craig M. Hatkoff - ----------------------- -------------------- Date Craig M. Hatkoff, Director April 1, 2002 /s/ Susan W. Lewis - ----------------------- ------------------ Date Susan W. Lewis, Director April 1, 2002 /s/ Sheli Z. Rosenberg - ----------------------- ---------------------- Date Sheli Z. Rosenberg, Director April 1, 2002 /s/ Steven Roth - ----------------------- --------------------- Date Steven Roth, Director April 1, 2002 /s/ Lynne B. Sagalyn - ----------------------- -------------------- Date Lynne B. Sagalyn, Director April 1, 2002 /s/ Michael D. Watson - ----------------------- --------------------- Date Michael Watson, Director
25 Index to Consolidated Financial Statements Report of Independent Auditors...........................................F-2 Audited Financial Statements Consolidated Balance Sheets as of December 31, 2001 and 2000.............F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999.........................................F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999.........................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.........................................F-6 Notes to Consolidated Financial Statements...............................F-7 F-1 Report of Independent Auditors The Board of Directors Capital Trust, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Capital Trust, Inc. and Subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York February 14, 2002 except for note 26, as to which the date is February 28, 2002 F-2 Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2001 and 2000 (in thousands)
2001 2000 -------------------- -------------------- Assets Cash and cash equivalents $ 11,651 $ 11,388 Available-for-sale securities, at fair value 152,789 - Commercial mortgage-backed securities available-for-sale, at fair value 210,268 215,516 Certificated mezzanine investment available-for-sale, at fair value - 22,379 Loans receivable, net of $13,695 and $12,947 reserve for possible credit losses at December 31, 2001 and December 31, 2000, respectively 248,088 349,089 Equity investment in CT Mezzanine Partners I LLC ("Fund I"), CT Mezzanine Partners II LP ("Fund II") and CT MP II LLC ("Fund II GP") (together "Funds") 38,229 26,011 Deposits and other receivables 1,192 211 Accrued interest receivable 4,614 7,241 Deferred income taxes 9,763 8,719 Prepaid and other assets 2,206 3,838 -------------------- -------------------- Total assets $ 678,800 $ 644,392 ==================== ==================== Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued expenses $ 9,842 $ 10,329 Notes payable 977 2,647 Credit facilities 121,211 173,641 Term redeemable securities contract 137,132 133,235 Repurchase obligations 147,880 16,569 Deferred origination fees and other revenue 1,202 2,163 Interest rate hedge liabilities 9,987 - -------------------- -------------------- Total liabilities 428,231 338,584 -------------------- -------------------- Company-obligated, mandatory redeemable, convertible trust preferred securities of CT Convertible Trust I, holding $89,742 of convertible 8.25% junior subordinated debentures and $60,258 of non-convertible 13.00% junior subordinated debentures of Capital Trust, Inc. ("Convertible Trust Preferred Securities") 147,941 147,142 -------------------- -------------------- Stockholders' equity: Class A 9.5% cumulative convertible preferred stock, $0.01 par value, $0.26 cumulative annual dividend, no shares authorized, issued or outstanding at December 31, 2001 and 12,639 shares authorized, 2,278 shares issued and outstanding at December 31, 2000 ("Class A Preferred Stock") - 23 Class B 9.5% cumulative convertible non-voting preferred stock, $0.01 par value, $0.26 cumulative annual dividend, no shares authorized, issued or outstanding at December 31, 2001 and 12,639 shares authorized, 4,043 shares issued and outstanding at December 31, 2000 ("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, 18,332 and 18,967 shares issued and outstanding at December 31, 2001 and 2000, respectively 183 190 Class B common stock, $0.01 par value, 100,000 shares authorized, no shares issued and outstanding at December 31, 2001 and 2,755 shares issued and outstanding at December 31, 2000 ("Class B Common Stock") - 28 Restricted Class A Common Stock, $0.01 par value, 396 and 264 shares issued and outstanding at December 31, 2001 and December 31, 2000, respectively ("Restricted Class A Common Stock" and together with Class A Common Stock and Class B Common Stock, "Common Stock") 4 3 Additional paid-in capital 136,805 181,507 Unearned compensation (583) (468) Accumulated other comprehensive loss (29,909) (10,152) Accumulated deficit (3,872) (12,505) -------------------- -------------------- Total stockholders' equity 102,628 158,666 -------------------- -------------------- Total liabilities and stockholders' equity $ 678,800 $ 644,392 ==================== ====================
See accompanying notes to consolidated financial statements. F-3 Capital Trust, Inc. and Subsidiaries Consolidated Statements of Operations For the Years Ended December 31, 2001, 2000 and 1999 (in thousands, except per share data)
2001 2000 1999 ---------------- ---------------- ----------------- Income from loans and other investments: Interest and related income $ 67,333 $ 87,685 $ 88,590 Less: Interest and related expenses (26,238) (36,712) (39,454) ---------------- ---------------- ----------------- Income from loans and other investments, net 41,095 50,973 49,136 ---------------- ---------------- ----------------- Other revenues: Management and advisory fees from Funds managed 7,664 373 - Income from equity investments in Funds 2,991 1,530 - Advisory and investment banking fees 277 3,920 17,772 Other interest income 395 748 1,249 Gain / (loss) on sale of fixed assets and investments - (64) 35 ---------------- ---------------- ----------------- Total other revenues 11,327 6,507 19,056 ---------------- ---------------- ----------------- Other expenses: General and administrative 15,382 15,439 17,345 Other interest expense 110 219 337 Depreciation and amortization 909 902 345 Unrealized loss on derivative securities 542 - - Provision for possible credit losses 748 5,478 4,103 ---------------- ---------------- ----------------- Total other expenses 17,691 22,038 22,130 ---------------- ---------------- ----------------- Income before income taxes and distributions and amortization on Convertible Trust Preferred Securities 34,731 35,442 46,062 Provision for income taxes 16,882 17,760 22,020 ---------------- ---------------- ----------------- Income before distributions and amortization on Convertible Trust Preferred Securities 17,849 17,682 24,042 Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit of $7,557, $7,124 and $6,208 for the years ended December 31, 2001, 2000 and 1999, respectively 8,479 7,921 6,966 ---------------- ---------------- ----------------- Net income 9,370 9,761 17,076 Less: Preferred Stock dividend 606 1,615 2,375 ---------------- ---------------- ----------------- Net income allocable to Common Stock $ 8,764 $ 8,146 $ 14,701 ================ ================ ================= Per share information: Net earnings per share of Common Stock Basic $ 0.43 $ 0.35 $ 0.69 ================ ================ ================= Diluted $ 0.37 $ 0.33 $ 0.55 ================ ================ ================= Weighted average shares of Common Stock outstanding Basic 20,166,319 23,171,057 21,334,412 ================ ================ ================= Diluted 36,124,105 29,691,927 43,724,731 ================ ================ =================
See accompanying notes to consolidated financial statements. F-4 Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
Restricted Class A Class B Class A Class B Class A Additional Comprehensive Preferred Preferred Common Common Common Paid-In Income/(Loss) Stock Stock Stock Stock Stock Capital ----------------- ----------------------------------------------------------------- Balance at January 1, 1999 $ - $ 123 $ - $ 182 $ - $ 1 $ 188,816 Net income 17,076 - - - - - - Change in unrealized loss on available-for-sale securities, net of related income taxes (5,499) - - - - - - Conversion of Class A Common and Preferred Stock to Class B Common and Preferred Stock - (40) 40 (23) 23 - - Conversion of Class A Preferred Stock to Class A Common Stock - (60) - 60 - - - Issuance of Class A Common Stock unit awards - - - - - - 312 Cancellation of previously issued restricted Class A Common Stock - - - - - (1) (271) Issuance of restricted Class A Common Stock - - - - - 1 599 Restricted Class A Common Stock earned - - - - - - - Dividends paid on Preferred Stock - - - - - - - ----------------- ----------------------------------------------------------------- Balance at December 31, 1999 $ 11,577 $ 23 $ 40 $ 219 $ 23 $ 1 $ 189,456 ================= Net income 9,761 - - - - - - Change in unrealized loss on available-for-sale securities, net of related income taxes 12 - - - - - - Conversion of Class A Common Stock to Class B Common Stock - - - (5) 5 - - Issuance of warrants to purchase shares of Class A Common Stock - - - - - - 1,360 Issuance of Class A Common Stock unit awards - - - 1 - - 624 Cancellation of previously issued restricted Class A Common Stock - - - - - (1) (279) Issuance of restricted Class A Common Stock - - - - - 3 947 Restricted Class A Common Stock which vested and was issued as unrestricted Class A Common Stock - - - - - - - Restricted Class A Common Stock earned - - - - - - - Dividends paid on Preferred Stock - - - - - - - Repurchase and retirement of shares of Class A Common Stock previously outstanding - - - (25) - - (10,601) ----------------- ----------------------------------------------------------------- Balance at December 31, 2000 $ 9,773 $ 23 $ 40 $ 190 $ 28 $ 3 $ 181,507 ================= Net income 9,370 - - - - - - Transition adjustment for recognition of derivative financial instruments - - - - - - - Unrealized loss on derivative financial instruments, net of related income taxes (2,963) - - - - - - Unrealized loss on available-for-sale securities, net of related income taxes (16,220) - - - - - - Issuance of warrants to purchase shares of Class A Common Stock - - - - - - 3,276 Issuance of Class A Common Stock unit awards - - - 1 - - 624 Issuance of restricted Class A Common Stock - - - - - 2 1,023 Restricted Class A Common Stock earned - - - - - - - Vesting of restricted Class A Common Stock to unrestricted Class A Common Stock - - - 1 - (1) - Dividends paid on Preferred Stock - - - - - - - Repurchase and retirement of shares of Class A Common Stock previously outstanding - (23) (40) (9) (28) - (49,625) ----------------- ----------------------------------------------------------------- Balance at December 31, 2001 $ (9,813) $ - $ - $ 183 $ - $ 4 $ 136,805 ================= =================================================================
Accumulated Other Unearned Comprehensive Accumulated Compensation Income/(Loss) Deficit Total ---------------------------------------------------------- Balance at January 1, 1999 $ (418) $ (4,665) $ (35,352) $ 148,687 Net income - - 17,076 17,076 Change in unrealized loss on available-for-sale securities, net of related income taxes - (5,499) - (5,499) Conversion of Class A Common and Preferred Stock to Class B Common and Preferred Stock - - - - Conversion of Class A Preferred Stock to Class A Common Stock - - - - Issuance of Class A Common Stock unit awards - - - 312 Cancellation of previously issued restricted Class A Common Stock 180 - - (92) Issuance of restricted Class A Common Stock (600) - - - Restricted Class A Common Stock earned 431 - - 431 Dividends paid on Preferred Stock - - (2,375) (2,375) ---------------------------------------------------------- Balance at December 31, 1999 $ (407) $ (10,164) $ (20,651) $ 158,540 Net income - - 9,761 9,761 Change in unrealized loss on available-for-sale securities, net of related income taxes - 12 - 12 Conversion of Class A Common Stock to Class B Common Stock - - - - Issuance of warrants to purchase shares of Class A Common Stock - - - 1,360 Issuance of Class A Common Stock unit awards - - - 625 Cancellation of previously issued restricted Class A Common Stock 182 - - (98) Issuance of restricted Class A Common Stock (950) - - - Restricted Class A Common Stock which vested and was issued as unrestricted Class A Common Stock - - - - Restricted Class A Common Stock earned 707 - - 707 Dividends paid on Preferred Stock - - (1,615) (1,615) Repurchase and retirement of shares of Class A Common Stock previously outstanding - - - (10,626) ---------------------------------------------------------- Balance at December 31, 2000 $ (468) $ (10,152) $ (12,505) $ 158,666 Net income - - 9,370 9,370 Transition adjustment for recognition of derivative financial instruments - (574) - (574) Unrealized loss on derivative financial instruments, net of related income taxes - (2,963) - (2,963) Unrealized loss on available-for-sale securities, net of related income taxes - (16,220) - (16,220) Issuance of warrants to purchase shares of Class A Common Stock - - - 3,276 Issuance of Class A Common Stock unit awards - - - 625 Issuance of restricted Class A Common Stock (1,025) - - - Restricted Class A Common Stock earned 910 - - 910 Vesting of restricted Class A Common Stock to unrestricted Class A Common Stock - - - - Dividends paid on Preferred Stock - - (737) (737) Repurchase and retirement of shares of Class A Common Stock previously outstanding - - - (49,725) ---------------------------------------------------------- Balance at December 31, 2001 $ (583) $ (29,909) $ (3,872) $ 102,628 ==========================================================
See accompanying notes to consolidated financial statements. F-5 Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
2001 2000 1999 ---------------- ---------------- ----------------- Cash flows from operating activities: Net income $ 9,370 $ 9,761 $ 17,076 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (1,044) (3,351) (2,339) Provision for credit losses 748 5,478 4,103 Depreciation and amortization 909 902 345 Income from equity investments in Funds (2,991) (1,530) - Unrealized loss on hedged and derivative securities 542 - - Restricted Class A Common Stock earned 910 707 431 Amortization of premiums and accretion of discounts on loans and investments, net (2,853) (2,683) (1,032) Accretion of discount on term redeemable securities contract 3,897 3,593 2,757 Accretion of discounts and fees on Convertible Trust Preferred Securities, net 799 799 799 Gain on sale of investments - - (35) Loss on sale of fixed assets - 64 - Expenses reversed on cancellation of restricted stock previously issued - (98) (92) Changes in assets and liabilities: Deposits and other receivables (981) 322 (132) Accrued interest receivable 2,627 2,287 (1,487) Prepaid and other assets 1,659 353 2,417 Deferred origination fees and other revenue (961) (1,248) (1,037) Accounts payable and accrued expenses 138 (3,478) 2,388 ---------------- ---------------- ----------------- Net cash provided by operating activities 12,769 11,878 24,162 ---------------- ---------------- ----------------- Cash flows from investing activities: Purchases of available-for-sale securities (257,877) - - Principal collections on and proceeds from sales of available-for-sale securities 103,038 - 3,344 Purchases of commercial mortgage-backed securities - - (185,947) Cash received on commercial mortgage-backed securities recorded as discount - 1,446 - Advances on and purchases of certificated mezzanine investments - - (985) Principal collections on certificated mezzanine investments 22,379 23,053 1,033 Origination and purchase of loans receivable (13,319) (14,192) (103,732) Principal collections on and proceeds from sales of loans receivable 112,585 169,227 209,792 Equity investments in Funds (35,599) (36,606) - Return of capital from Funds 28,942 13,107 - Purchases of equipment and leasehold improvements (183) (495) (57) Proceeds from sale of equipment - 12 - ---------------- ---------------- ----------------- Net cash provided by (used in) investing activities (40,034) 155,552 (76,552) ---------------- ---------------- ----------------- Cash flows from financing activities: Proceeds from repurchase obligations 251,503 - 3,929 Repayment of repurchase obligations (120,192) (12,134) (54,626) Proceeds from credit facilities 191,870 56,000 214,246 Repayment of credit facilities (244,300) (225,622) (242,737) Repayment of notes payable (891) (827) (773) Net proceeds from issuance of term redeemable securities contract - - 126,885 Dividends paid on Class A Preferred Stock (737) (1,615) (2,375) Repurchase and retirement of shares of Common and Preferred Stock previously outstanding (49,725) (10,626) - ---------------- ---------------- ----------------- Net cash provided by (used in) financing activities 27,528 (194,824) 44,549 ---------------- ---------------- ----------------- Net increase / (decrease) in cash and cash equivalents 263 (27,394) (7,841) Cash and cash equivalents at beginning of year 11,388 38,782 46,623 ---------------- ---------------- ----------------- Cash and cash equivalents at end of year $ 11,651 $ 11,388 $ 38,782 ================ ================ =================
See accompanying notes to consolidated financial statements. F-6 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1998 1. Organization Capital Trust, Inc. (the "Company") is an investment management and real estate finance company designed to take advantage of high-yielding lending and investment opportunities in commercial real estate and related assets. The Company's business strategy is to continue to expand its investment management business by sponsoring other real estate related investment funds. The Company's current investment program emphasizes senior and junior commercial mortgage loans, certificated mezzanine investments, direct equity investments and subordinated interests in commercial mortgage-backed securities ("CMBS"). The Company also continues to manage its existing portfolio of balance sheet assets originated prior to the Company's transition to the investment management business. The Company is successor to Capital Trust, a California business trust, following consummation of the reorganization on January 28, 1999, pursuant to which the predecessor ultimately merged with and into the Company, which thereafter continued as the surviving Maryland corporation. Each outstanding predecessor class A common share of beneficial interest was converted into one share of class A common stock, par value $0.01 per share ("Class A Common Stock"), and each outstanding predecessor class A 9.5% cumulative convertible preferred share of beneficial interest was converted into one share of class A 9.5% cumulative convertible preferred stock, par value $0.01 per share ("Class A Preferred Stock"), of the Company. As a result, all of the predecessor's previously issued class A common shares of beneficial interest have been reclassified as shares of Class A Common Stock and all of the predecessor's previously issued class A preferred shares of beneficial interest have been reclassified as shares of Class A Preferred Stock. Unless the context otherwise requires, hereinafter references to the business, assets, liabilities, capital structure, operations and affairs of the Company include those of the predecessor prior to the reorganization. 2. Venture with Citigroup Investments Inc. As part of the Company's transition to the investment management business, on March 8, 2000, the Company entered into a venture with affiliates of Citigroup Investments Inc. (collectively "Citigroup") pursuant to which they agreed, among other things, to co-sponsor, commit to invest capital in, and manage a series of high-yield commercial real estate mezzanine investment opportunity funds. Pursuant to the governing venture agreement, the Company and Citigroup formed CT Mezzanine Partners I LLC ("Fund I") in March 2000, to which a Citigroup affiliate and a wholly owned subsidiary of the Company, as members thereof, made capital commitments of $150 million and $50 million, respectively. Pursuant to the venture agreement, the Company and Citigroup co-sponsored the second commercial real estate mezzanine investment fund, CT Mezzanine Partners II LP ("Fund II"), which effected its final closing on third party investor equity commitments in August 2001. Fund II has total equity commitments of $845.2 million including $49.7 million and $198.9 million made by the Company and Citigroup, respectively. A wholly owned subsidiary of the Company, CT Investment Management Co., LLC ("CTIMCO"), serves as the exclusive investment manager to Fund I and Fund II. Based upon the $845.2 million aggregate capital commitments made at the initial and subsequent closings, the Company expects to earn approximately $9.5 million of management and advisory fees annually from its association with Fund II during the investment period. CTIMCO serves as the investment manager to Fund II and in connection therewith will earn annual investment management fees equal to $8.1 million during the investment period for the fund. CTIMCO also expects to earn $1.4 million of additional annual fees from consulting services to be rendered to Fund II's general partner. In connection with the organization of Fund I, the Company issued a warrant to purchase 4.25 million shares of Class A Common Stock. In connection with the closings on investor equity commitments to Fund II, the Company issued to Citigroup warrants to purchase 4,278,467 shares of its Class A Common Stock. In total, the Company has issued to Citigroup four warrants to purchase 8,528,467 shares of its Class A Common Stock which have a $5.00 per share exercise price, are currently exercisable and expire on March 8, 2005. The Company has no further obligations to issue additional warrants to Citigroup at December 31, 2001. F-7 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company include the accounts of the Company, CTIMCO (as described in Note 2) CT-F1, LLC (a wholly owned subsidiary and direct member and equity owner of Fund I), CT-F2-LP, LLC (a wholly owned subsidiary and limited partner of Fund II), CT-F2-GP, LLC (a wholly owned subsidiary and direct member and equity owner of Fund II GP), CT-BB Funding Corp. (a wholly owned subsidiary which purchased fifteen CMBS securities as described in Note 5), CT Convertible Trust I (as described in Note 14), Natrest Funding I, Inc. (a wholly owned single purpose subsidiary which held one Mortgage Loan) and VIC, Inc., which together with the Company wholly owns Victor Capital Group, L.P. ("Victor Capital") and other related subsidiaries including: VCG Montreal Management, Inc., Victor Asset Management Partners, L.L.C., VP Metropolis Services, L.L.C., and 970 Management, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. During the year ended December 31, 2000, the Company dissolved the following subsidiaries: Natrest Funding I, Inc., Victor Asset Management Partners, L.L.C., VP Metropolis Services, L.L.C., and 970 Management, LLC. Revenue Recognition Interest income for the Company's mortgage and other loans and investments is recognized over the life of the investment using the effective interest method and recognized on the accrual basis. Fees received in connection with loan commitments, net of direct expenses, are deferred until the loan is advanced and are then recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. Anticipated exit fees are also recognized over the term of the loan as an adjustment to yield. Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Fees from investment management services are recognized when earned on an accrual basis. Fees from professional advisory services are generally recognized at the point at which all Company services have been performed and no significant contingencies exist with respect to entitlement to payment. Fees from asset management services are recognized as services are rendered. Reserve for Possible Credit Losses The provision for possible credit losses is the charge to income to increase the reserve for possible credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and product diversification, the size of the portfolio and current economic conditions. Based upon these factors, the Company establishes the provision for possible credit losses by category of asset. When it is probable that the Company will be unable to collect all amounts contractually due, the account is considered impaired. Where impairment is indicated, a valuation write-down or write-off is measured based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs. Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to the reserve for credit losses. F-8 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued Cash and Cash Equivalents The Company classifies highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents. At December 31, 2001, cash equivalents of approximately $11.9 million consisted of an overnight investment in JP Morgan commercial paper. At December 31, 2000, cash equivalents of approximately $11.4 million consisted of an investment in a money market fund that invests in U.S. Treasury bills. The Company had no bank balances in excess of federally insured amounts at December 31, 2001 and 2000. The Company has not experienced any losses on its demand deposits, commercial paper or money market investments. Available-for-Sale Securities Available-for-sale securities are reported on the consolidated balance sheet at fair value with any corresponding temporary change in value reported as an unrealized gain or loss (if assessed to be temporary), as a component of comprehensive income in stockholders' equity, net of related income taxes. Commercial Mortgage-Backed Securities ("CMBS") Commercial mortgage-backed securities available-for-sale are reported on the consolidated balance sheets at fair value with any corresponding temporary change in value resulting in an unrealized gain/(loss) being reported as a component of accumulated other comprehensive income/(loss) in the stockholders' equity section of the balance sheet, net of related income taxes. Income from CMBS is recognized based on the effective interest method using the anticipated yield over the expected life of the investments. Changes in yield resulting from prepayments are recognized over the remaining life of the investment. The Company recognizes impairment on its CMBS whenever it determines that the impact of expected future credit losses, as currently projected, exceeds the impact of the expected future credit losses as originally projected. Impairment losses are determined by comparing the current fair value of a CMBS to its existing carrying amount, the difference being recognized as a loss in the current period in the consolidated statements of operations of the period in which the loss is identified. Reduced estimates of credit losses are recognized as an adjustment to yield over the remaining life of the portfolio. Certificated Mezzanine Investments Certificated mezzanine investments available-for-sale are reported on the consolidated balance sheets at fair value with any corresponding temporary change in value resulting in an unrealized gain (loss) being reported as a component of accumulated other comprehensive income/(loss) in the stockholders' equity section of the balance sheet, net of related income taxes. See Note 6. Equity investment in CT Mezzanine Partners I LLC ("Fund I"), CT Mezzanine Partners II LP ("Fund II") and CT MP II LLC ("Fund II GP") (together "Funds") As the Funds are not majority owned or controlled by the Company, the Company does not consolidate the Funds in its consolidated financial statements. The Company accounts for its interest in the Funds on the equity method of accounting. As such, the Company reports a percentage the earnings of the Funds equal to its ownership percentage on a single line item in the consolidated statement of operations as income from equity investments in the Funds. F-9 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued Derivative Financial Instruments In the normal course of business, the Company uses a variety of derivative financial instruments to manage, or hedge, interest rate risk. The Company requires derivative financial instruments to be effective in reducing its interest rate risk exposure. This effectiveness is essential for qualifying for hedge accounting. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the derivative instrument matures or is settled. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market each period. The Company uses interest rate swaps to effectively convert variable rate debt to fixed rate debt for the financed portion of fixed rate assets. The differential to be paid or received on these agreements is recognized as an adjustment to the interest expense related to debt and is recognized on the accrual basis. The Company also uses interest rate caps to reduce its exposure to interest rate changes on investments. The Company will receive payments on an interest rate cap should the variable rate for which the cap was purchased exceed a specified threshold level and will be recorded as an adjustment to the interest income related to the related earning asset. To determine the fair values of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. The swap and cap agreements are generally held to maturity and the Company does not use derivative financial instruments for trading purposes. Equipment and Leasehold Improvements, Net Equipment and leasehold improvements, net, are stated at original cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method based on the estimated lives of the depreciable assets. Amortization is computed over the remaining terms of the related leases. Expenditures for maintenance and repairs are charged directly to expense at the time incurred. Expenditures determined to represent additions and betterments are capitalized. Cost of assets sold or retired and the related amounts of accumulated depreciation are eliminated from the accounts in the year of sale or retirement. Any resulting profit or loss is reflected in the consolidated statement of operations. Sales of Real Estate The Company complies with the provisions of the FASB's Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate." Accordingly, the recognition of gains is deferred until such transactions have complied with the criteria for full profit recognition under the statement. The Company had deferred gains of $239,000 at December 31, 1999, which were written off during the year ended December 31, 2000 when the related loan was determined to be uncollectible. Deferred Debt Issuance Costs The Company capitalizes costs incurred related to the issuance of long-term debt. These costs are deferred and amortized on a straight-line basis over the life of the related debt, which approximates the level-yield method, and recognized as a component of interest expense. F-10 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued Income Taxes The Company records its income taxes in accordance with the FASB's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying statutory tax rates for future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years and for carryforwards that are useable in future years. A valuation allowance is recognized if it is more likely than not that some portion of the deferred asset will not be recognized. When evaluating whether a valuation allowance is appropriate, SFAS No. 109 requires a company to consider such factors as previous operating results, future earning potential, tax planning strategies and future reversals of existing temporary differences. The valuation allowance is increased or decreased in future years based on changes in these criteria. Pursuant to its venture agreement with Citigroup, the Company was obligated to take the steps necessary for it to be taxed as a Real Estate Investment Trust ("REIT") for the 2002 tax year. Based on the composition of its assets and the nature of its income due in significant part to the successful implementation of the Company's investment management business, the Company does not meet the qualifications to elect to be taxed as a REIT at this time. In light of its success with its investment management business, the Company does not believe that it is advisable at this time to pursue the changes to its business and assets that would be necessary for it to qualify for taxation as a REIT and therefore requested Citigroup waive the obligation, which request was granted by Citigroup. The Company continues to pursue alternative strategies for tax efficiency. Amortization of the Excess of Purchase Price Over Net Tangible Assets Acquired The Company recognized the excess of purchase price over net tangible assets acquired in a business combination accounted for as a purchase transaction and is amortizing it on a straight-line basis over a period of 15 years. The carrying value of the excess of purchase price over net tangible assets acquired was analyzed quarterly by the Company based upon the expected revenue and profitability levels of the acquired enterprise to determine whether the value and future benefit may indicate a decline in value. If the Company determined that there had been a decline in the value of the acquired enterprise, the Company would have written down the value of the excess of purchase price over net tangible assets acquired to the revised fair value. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Income Effective January 1, 1998, the Company adopted the FASB's Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). The statement changes the reporting of certain items currently reported in the stockholders' equity section of the balance sheet and establishes standards for reporting of comprehensive income and its components in a full set of general-purpose financial statements. Total comprehensive income/(loss) was ($9,813,000), $9,773,000 and $11,577,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The primary component of comprehensive income other than net income was the unrealized gain (loss) on derivative financial instruments and available-for-sale securities, net of related income taxes. F-11 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued Earnings per Share of Common Stock Earnings per share of Common Stock are presented based on the requirements of the FASB's Statement of Accounting Standards No. 128 ("SFAS No. 128"). Basic EPS is computed based on the income applicable to Common Stock (which is net income or loss 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, if dilutive, dividends on the Preferred Stock and interest paid on Convertible Trust Preferred Securities, net of tax benefit, 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 December 31, 2001, potentially dilutive shares of Common Stock include the convertible Preferred Stock, dilutive Common Stock warrants and options and future commitments for stock unit awards. At December 31, 2000, potentially dilutive shares of Common Stock include the convertible Preferred Stock, Convertible Trust Preferred Securities and future commitments for stock unit awards. At December 31, 1999, potentially dilutive shares of Common Stock include the convertible Preferred Stock and dilutive Common Stock options. Reclassifications Certain reclassifications have been made in the presentation of the 2000 and 1999 consolidated financial statements to conform to the 2001 presentation. Segment Reporting As the Company manages its operations as one segment, separate segment reporting is not presented for 2001, 2000 and 1999, as the financial information for that segment is the same as the information in the consolidated financial statements. 4. Available-for-Sale Securities At December 31, 2001, the Company's available-for-sale securities consisted of the following (in thousands):
Gross Amortized Unrealized Estimated --------------------- Cost Gains Losses Fair Value ----------------------------------------------- Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 $ 9,309 $ - $ 107 $ 9,202 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 59,574 - 733 58,841 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 8,086 - 93 7,993 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 19,014 - 220 18,794 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 56,570 - 659 55,911 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 2,072 - 24 2,048 ----------------------------------------------- $ 154,625 $ - $ 1,836 $ 152,789 ===============================================
The Company purchased these securities on September 28, 2001 at a premium to yield 6.07% with an anticipated average life of 5.15 years with financing provided by the seller through a repurchase agreement. F-12 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Available-for-Sale Securities, continued At December 31, 2000, the Company held no available-for sale securities. During the year ended December 31, 1999, the Company sold its then entire portfolio of available-for sale securities at a gain of $35,000 over their amortized cost. The cost of securities sold was determined using the specific identification method. 5. Commercial Mortgage-Backed Securities The Company pursues rated and unrated investments in public and private subordinated interests ("Subordinated Interests") in CMBS. Because of a decision to sell a held-to-maturity security in 1998, the Company transferred all of its investments in commercial mortgage-backed securities from held-to-maturity securities to available-for-sale and continues to classify the CMBS as such. During the year ended December 31, 1998, the Company purchased $36,509,000 face amount of interests in three subordinated CMBS issued by a financial asset securitization investment trust for $36,335,000. In April 2000, the Company received $1.4 million of additional discount from the issuer of the securities in settlement of a dispute with the issuer. At December 31, 2001, the securities had an amortized cost of $35,923,000 and a market value of $35,539,000. These securities bear interest at floating rates, for which the weighted average interest rate in effect, after fair value adjustment at December 31, 2001, is 8.52%, and mature in January 2003. At December 31, 2001, the Company has deferred acquisition costs on these securities of $17,000 that are being amortized as a reduction of interest income on a basis to realize a level yield over the life of the investment. 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 an existing credit facility lender. 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 securities thereby providing a hedge for interest rate risk. The financing was provided at a rate that 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 have an average face rate of 7.74% on the face amount and mature at various dates from March 2005 to January 2013. After giving effect to the discounted purchase price, the fair value adjustment 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 for the BB CMBS Portfolio at December 31, 2001 was 12.57%. 6. Certificated Mezzanine Investment The Company purchased a high-yielding mezzanine investment that is subordinate to senior secured loans on a commercial real estate asset. This investment represent interests in debt service from loans or property cash flow and was issued in certificate form. This certificated investment carried substantially similar terms and risks as the Company's Mezzanine Loans. The certificated mezzanine investment is a floating rate security that is carried at market value of $22,379,000 on December 31, 2000. As the market value and amortized cost were the same on December 31, 2000, no unrealized gain or loss was recorded. The certificated mezzanine investment outstanding at December 31, 2000 was satisfied in June 2001. F-13 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Loans Receivable The Company currently pursues lending opportunities designed to capitalize on inefficiencies in the real estate capital, mortgage and finance markets. The Company has classified its loans receivable into the following general categories: o Mortgage Loans. The Company originates and funds senior and junior mortgage loans ("Mortgage Loans") to commercial real estate owners and property developers who require interim financing until permanent financing can be obtained. The Company's Mortgage Loans are generally not intended to be permanent in nature, but rather are intended to be of a relatively short-term duration, with extension options as deemed appropriate, and typically require a balloon payment of principal at maturity. The Company may also originate and fund permanent Mortgage Loans in which the Company intends to sell the senior tranche, thereby creating a Mezzanine Loan (as defined below). o Mezzanine Loans. The Company originates high-yielding loans that are subordinate to first lien mortgage loans on commercial real estate and are secured either by a second lien mortgage or a pledge of the ownership interests in the borrowing property owner ("Mezzanine Loans"). Generally, the Company's Mezzanine Loans have a longer anticipated duration than its Mortgage Loans, are not intended to serve as transitional mortgage financing and can represent subordinated investments in real estate operating companies which may take the form of secured or unsecured debt, preferred stock and other hybrid instruments. o Other Loans Receivable. This classification includes loans originated during the Company's prior operations as a REIT and other loans and investments not meeting the above criteria. At December 31, 2001 and 2000, the Company's loans receivable consisted of the following (in thousands):
2001 2000 ------------------- ------------------- Mortgage Loans $ 69,998 $ 135,651 Mezzanine Loans 142,160 179,356 Other loans receivable 49,625 47,029 ------------------- ------------------- 261,783 362,036 Less: reserve for possible credit losses (13,695) (12,947) ------------------- ------------------- Total loans $ 248,088 $ 349,089 =================== ===================
One Mortgage Loan receivable with a principal balance of $8,000,000 reached maturity on July 15, 2000 and has not been repaid with respect to principal and interest. In accordance with the Company's policy for revenue recognition, income recognition has been suspended on this loan and for the years ended December 31, 2001 and 2000, $1,144,000 and $791,000, respectively, of potential interest income has not been recorded. During the year ended December 31, 2000, one other loan receivable, originated by the former management of the Company's predecessor REIT operations, with a net investment of $136,000, was past-due more than 90 days and was written-off. The net investment prior to the write-off included the loan balance of $915,000 offset by $779,000 of non-recourse financing of the asset. After the write-off, both the loan receivable and the non-recourse financing are carried at $779,000 until the non-recourse note payable was foreclosed upon on January 17, 2001 (see note 11). The loan was originated during the Company's prior operations as a REIT to facilitate the disposal of a previously foreclosed-upon asset. In accordance with the Company's policy for revenue recognition, income recognition was suspended on this loan and for the year ended December 31, 2000, $76,000 of potential interest income has not been recorded. At December 31, 2000, one Mezzanine Loan with a principal balance of $13,018,000 was in default as the loan matured on December 1, 2000. At December 31, 2000, the loan was earning a variable interest rate of LIBOR + 9.00%. The loan was repaid in full with interest on March 21, 2001. F-14 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Loans, continued During the year ended December 31, 2001, the Company provided $13,319,000 of additional fundings on three loans originated in prior periods and has no outstanding commitments at December 31, 2001. At December 31, 2001, the weighted average interest rate in effect, including amortization of fees and premiums, for the Company's performing loans receivable was as follows: Mortgage Loans 9.28% Mezzanine Loans 10.36% Other loans receivable 9.81% Total Loans 9.99% At December 31, 2001, $164,011,000 (65%) of the aforementioned performing loans bear interest at floating rates ranging from LIBOR plus 525 basis points to LIBOR plus 875 basis points. The remaining $89,772,000 (35%) of loans bear interest at fixed rates ranging from 11.62% to 12.00%. The range of maturity dates and weighted average maturity at December 31, 2001 of the Company's performing loans receivable was as follows:
Weighted Average Range of Maturity Dates Maturity ----------------------------------------- ------------- Mortgage Loans March 2002 to December 2002 4 Months Mezzanine Loans August 2003 to July 2009 64 Months Other loans receivable January 2004 25 Months Total Loans March 2002 to July 2009 42 Months
In addition, one of the loans for $49,625,000 has borrower extension rights for an additional year. At December 31, 2001, there are two loans to a related group of borrowers totaling $74.5 million or approximately 11% of total assets. There are no other loans to a single borrower or to related groups of borrowers that exceed ten percent of total assets. Approximately 60% of all performing loans are secured by properties in New York. Approximately 60% of all performing loans are secured by office buildings and approximately 31% are secured by corporate pledges. These credit concentrations are adequately collateralized as of December 31, 2001. In connection with the aforementioned loans, at December 31, 2001 and 2000, the Company has deferred origination fees, net of direct costs of $1,220,000 and $2,157,000, respectively, that are being amortized into income over the life of the loan. At December 31, 2001 and 2000, the Company has also recorded $372,000 and $2,017,000, respectively, of exit fees, which will be collected at the loan pay-off. These fees are recorded as interest income on a basis to realize a level yield over the life of the loans. As of December 31, 2001, performing loans totaling $253,783,000 are pledged as collateral for borrowings on the Company's credit facilities. The Company has established a reserve for possible credit losses on loans receivable as follows (in thousands):
2001 2000 1999 -------------- -------------- -------------- Beginning balance $ 12,947 $ 7,605 $ 4,017 Provision for possible credit losses 748 5,478 4,103 Amounts charged against reserve for possible credit losses - (136) (515) -------------- -------------- -------------- Ending balance $ 13,695 $ 12,947 $ 7,605 ============== ============== ==============
F-15 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Equity investment in Funds CT Mezzanine Partners LLC ("Fund I") As part of the venture with Citigroup, as described in Note 2, the Company has an equity investment in Fund I during the years ended December 31, 2001 and 2000. The activity for the equity investment in Fund I for the years ended December 31, 2001 and 2000 is as follows (in thousands): 2001 2000 -------------- -------------- Beginning balance $ 26,011 $ - Capital contributions to Fund I 25,331 33,214 Company portion of Fund I income 2,934 1,530 Costs capitalized for investment in Fund I - 4,752 Amortization of capitalized costs (477) (378) Distributions from Fund I (28,816) (13,107) -------------- -------------- Ending balance $ 24,983 $ 26,011 ============== ============== As of December 31, 2001, Fund I has loans outstanding totaling $165,227,000, all of which are performing in accordance with the terms of the loan agreements except for one loan for $26.0 million which is in default and for which the accrual of interest has been suspended. For the years ended December 31, 2001 and 2000, the Company received $765,000 and $373,000, respectively, of fees for management of Fund I. CT Mezzanine Partners II LP ("Fund II") The Company made equity investments in Fund II during the year ended December 31, 2001. The Company accounts for Fund II on the equity method of accounting as the Company has a 50% ownership interest in the general partner of Fund II. The activity for the equity investment in Fund II is as follows (in thousands): 2001 -------------- Beginning balance $ - Capital contributions to Fund II 7,097 Company portion of Fund II income 54 Costs capitalized for investment in Fund II 3,776 Amortization of capitalized costs (229) Distributions from Fund II (127) -------------- Ending balance $ 10,571 ============== As of December 31, 2001, Fund II has loans and investments outstanding totaling $485,385,000, all of which are performing in accordance with the terms of the loan agreements. In addition, the Company received $5,884,000 of fees for management of Fund II. F-16 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Equity investment in Funds, continued CT MP II LLC ("Fund II GP") CT MP II LLC ("Fund II GP") serves as the general partner for Fund II. Fund II GP is owned 50% by the Company and 50% by Citigroup. The Company made equity investments in Fund II GP during the year ended December 31, 2001. The activity for the equity investment in Fund II GP is as follows (in thousands): 2001 -------------- Beginning balance $ - Capital contributions to Fund II GP 2,671 Company portion of Fund II GP income 4 Distributions from Fund II GP - -------------- Ending balance $ 2,675 ============== In addition, the Company earned $1,015,000 of consulting fees from Fund II GP for which, the receivable is included in prepaid and other assets. In accordance with the amended and restated agreement of limited partnership of CT Mezzanine Partners II, LP, Fund II GP may earn incentive compensation when certain returns are achieved for the limited partners of Fund II which will be accrued if and when earned. 9. Excess of Purchase Price Over Net Tangible Assets Acquired On July 15, 1997, the Company consummated the acquisition of the real estate investment banking, advisory and asset management businesses of Victor Capital and certain affiliated entities. The acquisition had been accounted for under the purchase method of accounting. The excess of the purchase price of the acquisition in excess of net tangible assets acquired approximated $342,000. The Company recognized the excess of purchase price over net tangible assets acquired in a business combination accounted for as a purchase transaction and had been amortizing it on a straight-line basis over a period of 15 years. The carrying value of the excess of purchase price over net tangible assets acquired was analyzed quarterly by the Company based upon the expected revenue and profitability levels of the acquired enterprise to determine whether the value and future benefit may indicate a decline in value. In April 2000, the Company increased its level of resources devoted to its new investment management business and reduced resources devoted to its investment banking and advisory operations. As a result, the Company determined that there has been a decline in the value of the acquired enterprise and the Company wrote off the remaining value of the excess of purchase price over net tangible assets acquired. This additional $275,000 write-off was recorded as additional amortization expense in the year ended December 31, 2000. F-17 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Equipment and Leasehold Improvements At December 31, 2001 and 2000, equipment and leasehold improvements, net, are summarized as follows (in thousands):
Period of Depreciation or Amortization 2001 2000 ------------------------- -------------- ---------------- Office and computer equipment 1 to 3 years $ 568 $ 492 Furniture and fixtures 5 years 146 143 Leasehold improvements Term of leases 385 297 -------------- ---------------- 1,099 932 Less: accumulated depreciation (576) (389) -------------- ---------------- $ 523 $ 543 ============== ================
Depreciation and amortization expense on equipment and leasehold improvements, which are computed on a straight-line basis totaled $203,000, $238,000 and $322,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Equipment and leasehold improvements are included at their depreciated cost in prepaid and other assets in the consolidated balance sheets. 11. Notes Payable At December 31, 2001 and 2000, the Company has notes payable aggregating $977,000 and $2,647,000, respectively. In connection with the acquisition of Victor Capital and affiliated entities, the Company issued $5.0 million of non-interest bearing unsecured notes ("Acquisition Notes") to the sellers, both of whom are directors of the Company and one who serves as the current chief executive officer of the Company. The notes are payable in ten semi-annual payments of $500,000. The Acquisition Notes were originally discounted to $3,908,000 based on an imputed interest rate of 9.5%. At December 31, 2001, the Acquisition Notes have two remaining semi-annual payments maturing July 1, 2002. The net present value of the remaining payments on the Acquisition Notes at December 31, 2001 and 2000, amounted to $977,000 and $1,868,000, respectively. The Company was also indebted under a non-recourse note payable due to a life insurance company at December 31, 2000. This note was secured by a loan receivable for a property that was sold in 1997. The note bore interest at 9.50% per annum with principal and interest payable monthly until August 7, 2017, when the entire unpaid principal balance and any unpaid interest was due. The life insurance company has the right to call the entire note due and payable upon ninety days prior written notice. At December 31, 2000, the balance of the note payable amounted to $779,000. The Company's borrower defaulted on its payment obligation under the loan receivable securing the note payable in June 2000. As the note payable is non-recourse, the Company terminated its payments to the life insurance company and was in default on the note payable at December 31, 2000. The Company determined not to pursue foreclosure on the defaulted loan receivable and allowed the loan receivable to be foreclosed upon on January 17, 2001, whereupon the non-recourse debt was extinguished. F-18 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Long-Term Debt Credit Facilities Effective September 30, 1997, the Company entered into a credit agreement with a commercial lender that provided for a three-year $150 million line of credit . Effective January 1, 1998, pursuant to an amended and restated credit agreement, the Company increased the available credit under this facility to $250 million and subsequently further amended the credit agreement to increase the facility to $300 million effective June 22, 1998 and $355 million effective July 23, 1998. The Company incurred an initial commitment fee upon the signing of the credit agreement and the credit agreement calls for additional commitment fees when the total borrowing under the credit facility exceeds $75 million, $150 million, $250 million and $300 million. 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. On June 8, 1998, the Company entered into a second credit agreement with another commercial lender that provides for a $300 million line of credit with an original expiration date in December 1999 . The Company incurred an initial commitment fee upon the signing of this credit facility. 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. Effective June 30, 2000, pursuant to an amended and restated credit agreement, the Company extended the expiration of such credit facility from June 2000 to June 2001 with an automatic nine-month amortizing extension option, if not otherwise extended. Effective July 16, 2001, pursuant to an amended and restated credit agreement, the Company reduced the amount of credit under this credit facility to $100 million and extended the expiration of such credit facility from September 2001 to July 2002 with an automatic nine-month amortizing extension option, if not otherwise extended. The credit facilities provide for advances to fund lender-approved loans and investments made by the Company ("Funded Portfolio Assets"). The obligations of the Company under the credit facilities are secured by pledges of the Funded Portfolio Assets acquired with advances under the credit facilities. Borrowings under the credit facilities bear interest at specified rates over LIBOR, which rates may fluctuate, based upon the credit quality of the Funded Portfolio Assets. Future repayments and redrawdowns of amounts previously subject to the drawdown fee will not require the Company to pay any additional fees. The credit facilities provide for margin calls on asset-specific borrowings in the event of asset quality and/or market value deterioration as determined under the credit facilities. The credit facilities contain customary representations and warranties, covenants and conditions and events of default. The credit facilities also contain a covenant obligating the Company to avoid undergoing an ownership change that results in Craig M. Hatkoff, John R. Klopp or Samuel Zell no longer retaining their senior offices and directorships with the Company and practical control of the Company's business and operations. The providers of the credit facilities have notified the Company that the resignation of Craig M. Hatkoff on December 29, 2000 is not an event of non-compliance with the foregoing covenant. At December 31, 2001, the Company has borrowed $29,076,000 against the $355 million credit facility at an average borrowing rate (including amortization of fees incurred and capitalized) of 6.13%. The Company has pledged assets of $87,879,000 as collateral for the borrowing against such credit facility. At December 31, 2001, the Company has borrowed $92,135,000 against the $100 million credit facility at an average borrowing rate (including amortization of fees incurred and capitalized) of 4.88%. The Company has pledged assets of $201,442,000 as collateral for the borrowing against such credit facility. On December 31, 2001, the unused amount of potential credit under the credit facilities was $319,765,000. F-19 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Long-Term Debt, continued Repurchase Obligations During 2001, the Company had entered into three repurchase agreements. Two repurchase agreements were satisfied during the year ended December 31, 2001 and the other was outstanding at December 31, 2001. The first repurchase agreement, with a securities dealer, arose in connection with the purchase of a Certificated Mezzanine Investment. At December 31, 2000, the Company has sold such asset with a book value of $22,379,000, which approximates market value, and has a liability to repurchase this asset for $16,569,000. This repurchase agreement was extended to May 2001 during the year ended December 31, 2000 and satisfied in June 2001 with the proceeds of the loan repayment. The liability balance bore interest at a specified rate over LIBOR. The second repurchase agreement, with a securities dealer, arose in connection with the purchase of a available-for-sale securities in June 2001. The repurchase agreement was settled in July 2001 when the securities were sold. The third repurchase agreement, with Morgan Stanley, arose in connection with the purchase of a available-for-sale securities in September 2001. At December 31, 2001, the Company has sold such asset with a book and market value of $152,789,000 and has a liability to repurchase this asset for $147,880,000. This repurchase agreement has a maturity date in March 2002. The liability balance bears interest at LIBOR. The interest rate in effect for the repurchase obligation outstanding at December 31, 2001 was 2.03% and the interest rate in effect for the repurchase obligation outstanding at December 31, 2000 was 8.32%. 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 has been amortized to $679,000), which had the effect of adjusting the yield to current market terms. The debt has a three-year term that expires in February 2002. By entering into interest rate swaps, 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 9.54%. 13. Derivative Financial Instruments On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the consolidated balance sheets and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either shareholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. As of January 1, 2001, the adoption of the new standard resulted in an adjustment of $574,000 to accumulated other comprehensive loss and other liabilities. F-20 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. Derivative Financial Instruments, continued In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including those for the use of derivatives. For interest rate exposures, derivatives are used primarily to align rate movements between interest rates associated with the Company's loans and other financial assets with interest rates on related debt financing, and manage the cost of borrowing obligations. The Company does not use derivatives for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments, nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives. To manage interest rate risk, the Company may employ options, forwards, interest rate swaps, caps and floors or a combination thereof depending on the underlying exposure. To reduce overall interest cost, the Company uses interest rate instruments, typically interest rate swaps, to convert a portion of its variable rate debt to fixed rate debt. Interest rate differentials that arise under these swap contracts are recognized as interest expense over the life of the contracts. The following table summarizes the notional value and fair value of the Company's derivative financial instruments, principally swap contracts at December 31, 2001. The notional value provides an indication of the extent of the Company's involvement in these instruments at that time, but does not represent exposure to credit, interest rate or foreign exchange market risks.
Interest Hedge Type Notional Value Rate Maturity Fair Value - ----------- -------------------- ----------------- --------------- ----------- --------------- Swap Fair Value Hedge $137,812,000 6.045% 2014 $ (6,450,000) Swap Cash Flow Hedge 11,250,000 6.580% 2006 (882,000) Swap Cash Flow Hedge 37,125,000 5.905% 2008 (1,679,000) Swap Cash Flow Hedge 18,547,000 6.035% 2003 (976,000) Cap Cash Flow Hedge 18,750,000 11.250% 2007 82,000
Financial reporting for hedges characterized as fair value hedges and cash flow hedges are different. For those hedges characterized as a fair value hedge, the changes in fair value of the hedge and the hedged item are reflected in earnings each quarter. In the case of the fair value hedge listed above, the Company is hedging the component of interest rate risk that can be directly controlled by the hedging instrument, and it is this portion of the hedged assets that is recognized in earnings. The non-hedged balance is classified as an available-for-sale security consistent with SFAS No. 115, and is reported in accumulated other comprehensive income. For those hedges characterized as cash flow hedges, the unrealized gains/losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income or in earnings, depending on the type of hedging relationship. On December 31, 2001, the derivative financial instruments were reported at their fair value as other assets and interest rate hedge liabilities of $82,000 and $9,987,000, respectively. During the year ended December 31, 2001, the Company recognized a gain of $47,000 for the change in time value for qualifying interest rate hedges. The time value is a component of fair value that must be recognized in earnings, and is shown in the consolidated statement of operations as unrealized loss on derivative securities. F-21 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. Derivative Financial Instruments, continued The fair value hedge in the above table was undertaken by the Company to sustain the value of its CMBS holdings. This fair value hedge, when viewed in conjunction with the fair value of the securities, is sustaining the value of those securities as interest rates rise and fall. During the twelve months ended December 31, 2001, the Company recognized a loss of $5,479,000 for the decrease in the value of the swap which was substantially offset by a gain of $4,890,000 for the change in the fair value of the securities attributed to the hedged risk resulting in a $589,000 charge to unrealized loss on derivative securities on the consolidated statement of operations. The Company utilizes cash flow hedges in order to better control interest costs on variable rate debt transactions. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars, and forwards are considered cash flow hedges. During the year ended December 31, 2001, the fair value of the cash flow swaps decreased by $2.9 million, which was deferred into other comprehensive loss and will be released to earnings over the remaining lives of the swaps. Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This reclassification is consistent with the timing of when the hedged items are also recognized in earnings. Within the next twelve months, the Company estimates that $2.5 million currently held in accumulated other comprehensive income will be reclassified to earnings, with regard to the cash flow hedges. 14. Convertible Trust Preferred Securities On July 28, 1998, the Company privately placed originally issued 150,000 8.25% step up convertible trust preferred securities (liquidation amount $1,000 per security) with an aggregate liquidation amount of $150 million. The convertible trust preferred securities were originally issued by the Company's consolidated statutory trust subsidiary, CT Convertible Trust I (the "Trust") and represented an undivided beneficial interest in the assets of the Trust that consisted solely of the Company's 8.25% step up convertible junior subordinated debentures in the aggregate principal amount of $154,650,000 that were concurrently sold and originally issued to the Trust. Distributions on the convertible trust preferred securities were payable quarterly in arrears on each calendar quarter-end and correspond to the payments of interest made on the convertible debentures, the sole assets of the Trust. Distributions were payable only to the extent payments were made in respect to the convertible debentures. The Company received $145,207,000 in net proceeds, after original issue discount of 3% from the liquidation amount of the convertible trust preferred securities and transaction expenses, pursuant to the above transactions, which were used to pay down the Company's credit facilities. The convertible trust preferred securities were convertible into shares of Class A Common Stock at an initial rate of 85.47 shares of Class A Common Stock per $1,000 principal amount of the convertible debentures held by the Trust (which is equivalent to a conversion price of $11.70 per share of Class A Common Stock). On May 10, 2000, the Company modified the terms of the $150 million aggregate liquidation amount convertible trust preferred securities. F-22 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. Convertible Trust Preferred Securities, continued In connection with the modification, the then outstanding convertible trust preferred securities were canceled and new variable step up convertible trust preferred securities with an aggregate liquidation amount of $150,000,000 were issued to the holders of the canceled securities in exchange therefore, and the original underlying convertible debentures were canceled and new 8.25% step up convertible junior subordinated debentures in the aggregate principal amount of $92,524,000 and new 13% step up non-convertible junior subordinated debentures in the aggregate principal amount of $62,126,000 were issued to the Trust, as the holder of the canceled bonds, in exchange therefore. The liquidation amount of the new convertible trust preferred securities is divided into $89,742,000 of convertible amount (the "Convertible Amount") and $60,258,000 of non-convertible amount (the "Non-Convertible Amount"), the distribution, redemption and, as applicable, conversion terms of which, mirror the interest, redemption and, as applicable, conversion terms of the new convertible debentures and the new non-convertible debentures, respectively, held by the Trust. Distributions on the new convertible trust preferred securities are payable quarterly in arrears on each calendar quarter-end and correspond to the payments of interest made on the new debentures, the sole assets of the Trust. Distributions are payable only to the extent payments are made in respect to the new debentures. The new convertible trust preferred securities initially bear a blended coupon rate of 10.16% per annum which rate will vary as the proportion of outstanding Convertible Amount to the outstanding Non-Convertible Amount changes and will step up in accordance with the coupon rate step up terms applicable to the Convertible Amount and the Non-Convertible Amount. The Convertible Amount bears a coupon rate of 8.25% per annum through March 31, 2002 and increases on April 1, 2002 to the greater of (i) 10.00% per annum, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter or (ii) a percentage per annum equal to the quarterly dividend paid on a common share multiplied by four and divided by $7.00. The Convertible Amount is convertible into shares of Class A Common Stock, in increments of $1,000 in liquidation amount, at a conversion price of $7.00 per share. The Convertible Amount is redeemable by the Company, in whole or in part, on or after September 30, 2004. The Non-Convertible Amount bears a coupon rate of 13.00% per annum through September 30, 2004, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter. The Non-Convertible Amount is redeemable by the Company, in whole or in part, at any time. For financial reporting purposes, the Trust is treated as a subsidiary of the Company and, accordingly, the accounts of the Trust are included in the consolidated financial statements of the Company. Intercompany transactions between the Trust and the Company, including the original convertible and new debentures, have been eliminated in the consolidated financial statements of the Company. The original convertible trust preferred securities and the new convertible trust preferred securities are presented as a separate caption between liabilities and stockholders' equity ("Convertible Trust Preferred Securities") in the consolidated balance sheet of the Company. Distributions on the original convertible trust preferred securities and the new convertible trust preferred securities are recorded, net of the tax benefit, in a separate caption immediately following the provision for income taxes in the consolidated statements of operations of the Company. F-23 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Stockholders' Equity Authorized Capital Upon consummation of the reorganization (see Note 1), each outstanding Class A Common Share of the predecessor was converted into one share of Class A Common Stock of the Company, and each outstanding Class A Preferred Share of the predecessor was converted into one share of Class A Preferred Stock of the Company. As a result, all of the predecessor's previously issued Class A Common Shares have been reclassified as shares of Class A Common Stock and all of the predecessor's previously issued Class A Preferred Shares have been reclassified as shares of Class A Preferred Stock. The Company has the authority to issue up to 300,000,000 shares of stock, consisting of (i) 100,000,000 shares of Class A Common Stock, (ii) 100,000,000 shares of class B common stock, par value $0.01 per share ("Class B Common Stock"), and (iii) 100,000,000 shares of preferred stock. The board of directors is generally authorized to issue additional shares of authorized stock without stockholders' approval. Common Stock Except as described herein or as required by law, all shares of Class A Common Stock and shares of Class B Common Stock are identical and entitled to the same dividend, distribution, liquidation and other rights. The Class A Common Stock are voting shares entitled to vote on all matters presented to a vote of stockholders, except as provided by law or subject to the voting rights of any outstanding Preferred Stock. The shares of Class B Common Stock do not have voting rights and are not counted in determining the presence of a quorum for the transaction of business at any meeting of the stockholders of the Company. Holders of record of shares of Class A Common Stock and shares of Class B Common Stock on the record date fixed by the Company's board of directors are entitled to receive such dividends as may be declared by the board of directors subject to the rights of the holders of any outstanding preferred stock. Each share of Class A Common Stock is convertible at the option of the holder thereof into one share of Class B Common Stock and, subject to certain conditions; each share of Class B Common Stock is convertible at the option of the holder thereof into one share of Class A Common Stock. Preferred Stock In connection with the reorganization, the Company created two classes of Preferred Stock, Class A Preferred Stock and the class B 9.5% cumulative convertible non-voting preferred stock ("Class B Preferred Stock"). As described above, upon consummation of the reorganization, the predecessor's outstanding Class A Preferred Shares were converted into shares of the Company's Class A Preferred Stock. Following the reorganization, certain shares of Class A Preferred Stock were converted into shares of Class B Preferred Stock and certain shares of Class A Common Stock were converted into shares of Class B Common Stock. F-24 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Stockholders' Equity, continued Except as described herein or as required by law, both classes of Preferred Stock were identical and entitled to the same dividend, distribution, liquidation and other rights. The holders of the Class A Preferred Stock were entitled to vote together with the holders of the Class A Common Stock as a single class on all matters submitted to a vote of stockholders. Each share of Class A Preferred Stock entitled the holder thereof to a number of votes per share equal to the number of shares of Class A Common Stock into which such shares of Class A Preferred Stock was then convertible. Except as described herein, the holders of Class B Preferred Stock did not have voting rights and were not counted in determining the presence of a quorum for the transaction of business at a stockholders' meeting. The affirmative vote of the holders of a majority of the outstanding Preferred Stock, voting together as a separate single class, except in certain circumstances, had the right to approve any merger, consolidation or transfer of all or substantially all of the assets of the Company. Holders of the Preferred Stock were entitled to receive, when and as declared by the board of directors, cash dividends per share at the rate of 9.5% per annum on a per share price of $2.69. Such dividends accrued (whether or not declared) and, to the extent not paid for any dividend period, were cumulative. Dividends on the authorized Preferred Stock were payable, when and as declared, semi-annually, in arrears, on December 26 and June 25 of each year. Each share of Class A Preferred Stock was convertible at the option of the holder thereof into an equal number of shares of Class B Preferred Stock, or into a number of shares Class A Common Stock equal to the ratio of (x) $2.69 plus an amount equal to all dividends per share accrued and unpaid thereon as of the date of such conversion to (y) the conversion price in effect as of the date of such conversion. Each share of Class B Preferred Stock was convertible at the option of the holder thereof, subject to certain conditions, into an equal number of shares of Class A Preferred Stock or into a number of shares of Class B Common Stock equal to the ratio of (x) $2.69 plus an amount equal to all dividends per share accrued and unpaid thereon as of the date of such conversion to (y) the conversion price in effect as of the date of such conversion. In December 2001, following the repurchase of all of the outstanding shares of Preferred Stock (as discussed below), the Company amended its charter to eliminate from authorized capital the previously designated Class A Preferred Stock and Class B Preferred Stock and increase the authorized shares of preferred stock to 100,000,000. As of December 31, 1998, there were 12,267,658 shares of Class A Preferred Stock issued and outstanding, no shares of Class B Preferred Stock were issued and outstanding, 18,158,816 shares of Class A Common Stock were issued and outstanding and no shares of Class B Common Stock were issued and outstanding. The 12,267,658 shares of Class A Preferred Stock outstanding at December 31, 1998 were originally issued and purchased by Veqtor on July 15, 1997 for an aggregate purchase price of approximately $33 million (see Note 1). Until August 10, 1999 (the "Conversion Date"), Veqtor owned 6,959,593 of the outstanding shares of Class A Common Stock and all 12,267,658 of the outstanding shares of Class A Preferred Stock. Veqtor was then controlled by the chairman of the board, the vice chairman and chief executive officer and the then 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 the Conversion Date, the common members owned approximately 48% of the equity ownership of Veqtor and three commercial banks, as preferred members of Veqtor, owned the remaining 52% of the equity ownership of Veqtor. Common and Preferred Stock Outstanding During March 2000, the Company commenced an open market share repurchase program under which the Company was authorized to purchase, from time to time, up to four million shares of Class A Common Stock. As of December 31, 2001, the Company had purchased and retired, pursuant to the program, 2,564,400 shares of Class A Common Stock at an average price of $4.14 per share (including commissions). F-25 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Stockholders' Equity, continued The Company has no further obligations to issue additional warrants to Citigroup at December 31, 2001. The value of the warrants at the issuance dates, $4,636,000, was capitalized and will be amortized over the anticipated lives of the Mezzanine Funds. In two privately negotiated transactions closed in April 2001, the Company repurchased for $29,138,000, 630,701 shares of Class A Common Stock, 1,520,831 shares of Class B Common Stock, 1,518,390 shares of Class A Preferred Stock and 2,274,110 shares of Class B Preferred Stock. In addition, in a privately negotiated transaction closed in August 2001, the Company repurchased for $21.0 million, 200,000 shares of Class A Common Stock, 1,234,355 shares of Class B Common Stock, 759,195 shares of Class A Preferred Stock and 1,769,138 shares of Class B Preferred Stock. The Company has repurchased all of its outstanding Preferred Stock and eliminated the related dividend. Earnings per Share The following table sets forth the calculation of Basic and Diluted EPS for the years ended December 31, 2001 and 2000:
Year Ended December 31, 2001 Year Ended December 31, 2000 --------------------------------------------- -------------------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount ---------------- ---------------- ----------- ---------------- -------------- ----------- Basic EPS: Net earnings per share of Common Stock $ 8,764,000 20,166,319 $ 0.43 $ 8,146,000 23,171,057 $ 0.35 =========== =========== Effect of Dilutive Securities: Options outstanding for the purchase of Common Stock -- 96,432 -- 37 Warrants outstanding for the purchase of Common Stock -- 420,947 -- -- Future commitments for stock unit awards for the issuance of Common Stock -- 50,000 -- 200,000 Convertible Trust Preferred Securities exchangeable for shares of Common Stock 4,120,000 12,820,513 -- -- Convertible Preferred Stock 606,000 2,569,894 1,615,000 6,320,833 ---------------- ---------------- ---------------- -------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $ 13,490,000 36,124,105 $ 0.37 $ 9,761,000 29,691,927 $ 0.33 ================ ================ =========== ================ ============== ===========
F-26 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Stockholders' Equity, continued The following table sets forth the calculation of Basic and Diluted EPS for the year ended December 31, 1999:
Year Ended December 31, 1999 ---------------------------------------------- Per Share Net Income Shares Amount ---------------- ----------------------------- Basic EPS: Net earnings per share of Common Stock $ 14,701,000 21,334,412 $ 0.69 ============ Effect of Dilutive Securities: Options outstanding for the purchase of Common Stock -- -- Future commitments for stock unit awards for the issuance of Common -- 300,000 Stock Convertible Trust Preferred Securities exchangeable for shares of Common Stock 6,966,000 12,820,513 Convertible Preferred Stock 2,375,000 9,269,806 ---------------- ----------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $ 24,042,000 43,724,731 $ 0.55 ================ =============== ============
16. General and Administrative Expenses General and administrative expenses for the years ended December 31, 2001, 2000 and 1999 consist of (in thousands):
2001 2000 1999 ------------------ ------------------- ------------------- Salaries and benefits $ 11,082 $ 11,280 $ 12,914 Professional services 1,545 1,170 2,352 Other 2,755 2,989 2,079 ------------------ ------------------- ------------------- Total $ 15,382 $ 15,439 $ 17,345 ================== =================== ===================
17. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The provision for income taxes for the years ended December 31, 2001, 2000 and 1999 is comprised as follows (in thousands):
2001 2000 1999 --------------- --------------- --------------- Current Federal $ 10,642 $ 12,561 $ 14,538 State 3,811 4,493 5,176 Local 3,473 4,057 4,673 Deferred Federal (732) (2,025) (1,430) State (72) (697) (492) Local (240) (629) (445) --------------- --------------- --------------- Provision for income taxes $ 16,882 $ 17,760 $ 22,020 =============== =============== ===============
F-27 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 17. Income Taxes, continued The Company has federal net operating loss carryforwards ("NOLs") as of December 31, 2001 of approximately $15.4 million. Such NOLs expire through 2021. Due to an ownership change 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 years ended December 31, 2001, 2000 and 1999 are as follows (in thousands):
2001 2000 1999 ----------------------- ------------------------ ------------------------ $ % $ % $ % ----------- ----------- ----------- ------------ ----------- ------------ Federal income tax at statutory rate $ 12,156 35.0% $ 12,405 35.0% $ 16,122 35.0% State and local taxes, net of federal tax benefit 4,532 13.1% 4,696 13.3% 5,793 12.6% Utilization of net operating loss (490) (1.4)% (490) (1.4)% (495) (1.1)% carryforwards Compensation in excess of deductible limits 642 1.8% 851 2.4% 566 1.2% Other 42 0.1% 298 0.8% 34 0.1% ----------- ----------- ----------- ------------ ------------------------ $ 16,882 48.6% $ 17,760 50.1% $ 22,020 47.8% =========== =========== =========== ============ ========================
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 are as follows (in thousands):
December 31, --------------------------------- 2001 2000 --------------- --------------- Net operating loss carryforward $ 5,394 $ 3,298 Reserves on other assets and for possible credit losses 6,340 9,047 Other 2,434 1,411 --------------- --------------- Deferred tax assets 14,168 13,756 Valuation allowance (4,405) (5,037) --------------- --------------- $ 9,763 $ 8,719 =============== ===============
The Company recorded a valuation allowance to reserve a portion of its net deferred assets in accordance with 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 cannot presently be determined. 18. Employee Benefit Plans Employee 401(k) and Profit Sharing Plan In 1999, the Company instituted a 401(k) and profit sharing plan that allows eligible employees to contribute up to 15% of their salary into the plan on a pre-tax basis, subject to annual limits. The Company has committed to make contributions to the plan equal to 3% of all eligible employees' compensation subject to annual limits and may make additional contributions based upon earnings. The Company's contribution expense for the years ended December 31, 2001, 2000 and 1999, was $196,000, $187,000 and $191,000, respectively. F-28 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 18. Employee Benefit Plans, continued 1997 Long-Term Incentive Stock Plan The Company's 1997 Amended and Restated Long-Term Incentive Stock Plan (the "Incentive Stock Plan") permits the grant of nonqualified stock option ("NQSO"), incentive stock option ("ISO"), restricted stock, stock appreciation right ("SAR"), performance unit, performance stock and stock unit awards. A maximum of 1,353,753 shares of Class A Common Stock may be issued during the fiscal year 2002 pursuant to awards under the Incentive Stock Plan and the Director Stock Plan (as defined below) in addition to the shares subject to awards outstanding under the two plans at December 31, 2001. The maximum number of shares that may be subject to awards to any employee during the term of the plan may not exceed 500,000 shares and the maximum amount payable in cash to any employee with respect to any performance period pursuant to any performance unit or performance stock award is $1.0 million. The ISOs shall be exercisable no more than ten years after their date of grant and five years after the grant in the case of a 10% stockholder and vest over a period of three years with one-third vesting at each anniversary date. Payment of an option may be made with cash, with previously owned Class A Common Stock, by foregoing compensation in accordance with performance compensation committee or compensation committee rules or by a combination of these. Restricted stock may be granted under the Incentive Stock Plan with performance goals and periods of restriction as the board of directors may designate. The performance goals may be based on the attainment of certain objective and/or subjective measures. In 2001, 2000 and 1999, the Company issued 227,780 shares, 230,304 shares and 104,167 shares, respectively, of restricted stock. 62,374 shares were canceled in 2000 and 32,500 shares were canceled in 1999 upon the resignation of employees prior to vesting. The shares of restricted stock issued in 2001 vest one-third on each of the following dates: February 1, 2002, February 1, 2003 and February 1, 2004. The shares of restricted stock issued in 2000 vest one-third on each of the following dates: February 1, 2001, February 1, 2002 and February 1, 2003. The shares of restricted stock issued in 1999 vest one-third on each of the following dates: February 2, 2000, February 2, 2001 and February 2, 2002. The Company also granted 52,083 shares of performance based restricted stock in 1999 for which none of the performance goals have been met and the shares have not been issued. The Incentive Stock Plan also authorizes the grant of stock units at any time and from time to time on such terms as shall be determined by the board of directors or administering compensation committee. Stock units shall be payable in Class A Common Stock upon the occurrence of certain trigger events. The terms and conditions of the trigger events may vary by stock unit award, by the participant, or both. The following table summarizes the activity under the Incentive Stock Plan for the years ended December 31, 2001, 2000 and 1999:
Weighted Average Options Exercise Price Exercise Price Outstanding per Share 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 Canceled in 1999 (387,167) $6.00 - $11.38 8.06 --------------- ------------------- Outstanding at December 31, 1999 1,233,917 $6.00 - $10.00 7.89 Granted in 2000 467,250 $4.125 - $6.00 4.94 Canceled in 2000 (281,667) $4.125 - $10.00 7.34 --------------- ------------------- Outstanding at December 31, 2000 1,419,500 $4.125 - $10.00 7.04 Granted in 2001 454,500 $4.50 - $5.50 4.62 Canceled in 2001 (142,333) $4.125 - $10.00 6.83 --------------- ------------------- Outstanding at December 31, 2001 1,731,667 $4.125 - $10.00 $ 6.42 =============== ===================
F-29 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 18. Employee Benefit Plans, continued At December 31, 2001, 2000 and 1999, 1,011,824, 745,505 and 487,761, respectively, of the options were exercisable. At December 31, 2001, the outstanding options have various remaining contractual lives ranging from 0.50 to 9.43 years with a weighted average life of 7.13 years. 1997 Non-Employee Director Stock Plan The Company's 1997 Amended and Restated Long-Term Director Stock Plan (the "Director Stock Plan") permits the grant of NQSO, restricted stock, SAR, performance unit, stock and stock unit awards. A maximum of 1,353,753 shares of Class A Common Stock may be issued during the fiscal year 2001 pursuant to awards under the Director Stock Plan and the Incentive Stock Plan, in addition to the shares subject to awards outstanding under the two plans at December 31, 2001. The board of directors shall determine the purchase price per share of Class A Common Stock covered by a NQSO granted under the Director Stock Plan. Payment of a NQSO may be made with cash, with previously owned shares of Class A Common Stock, by foregoing compensation in accordance with board rules or by a combination of these payment methods. SARs may be granted under the plan in lieu of NQSOs, in addition to NQSOs, independent of NQSOs or as a combination of the foregoing. A holder of a SAR is entitled upon exercise to receive shares of Class A Common Stock, or cash or a combination of both, as the board of directors may determine, equal in value on the date of exercise to the amount by which the fair market value of one share of Class A Common Stock on the date of exercise exceeds the exercise price fixed by the board on the date of grant (which price shall not be less than 100% of the market price of a share of Class A Common Stock on the date of grant) multiplied by the number of shares in respect to which the SARs are exercised. Restricted stock may be granted under the Director Stock Plan with performance goals and periods of restriction as the board of directors may designate. The performance goals may be based on the attainment of certain objective and/or subjective measures. The Director Stock Plan also authorizes the grant of stock units at any time and from time to time on such terms as shall be determined by the board of directors. Stock units shall be payable in shares of Class A Common Stock upon the occurrence of certain trigger events. The terms and conditions of the trigger events may vary by stock unit award, by the participant, or both. The following table summarizes the activity under the Director Stock Plan for the years ended December 31, 2001, 2000 and 1999:
Weighted Average Options Exercise Price Exercise Price Outstanding per Share per Share --------------- -------------------------- ------------------- Outstanding at January 1, 1999 255,000 $6.00-$10.00 9.22 Granted in 1999 - $ - - --------------- ------------------- Outstanding at December 31, 1999 255,000 $6.00-$10.00 9.22 Granted in 2000 - $ - - ------------------- --------------- Outstanding at December 31, 2000 255,000 $6.00-$10.00 9.22 Granted in 2001 - $ - - --------------- ------------------- Outstanding at December 31, 2001 255,000 $6.00-$10.00 $ 9.22 =============== ===================
At December 31, 2001, 2000 and 1999, 255,000, 186,668 and 101,688, respectively, of the options were exercisable. At December 31, 2001, the outstanding options have a remaining contractual life of 5.54 years to 6.08 years with a weighted average life of 5.98 years. F-30 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 18. Employee Benefit Plans, continued Accounting for Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by the FASB in October 1996. SFAS No. 123 encourages the adoption of a new fair-value based accounting method for employee stock-based compensation plans. SFAS No. 123 also permits companies to continue accounting for stock-based compensation plans as prescribed by APB Opinion No. 25. However, companies electing to continue accounting for stock-based compensation plans under APB Opinion No. 25, must make pro forma disclosures as if the company adopted the cost recognition requirements under SFAS No. 123. The Company has continued to account for stock-based compensation under APB Opinion No. 25. Accordingly, no compensation cost has been recognized for the Incentive Stock Plan or the Director Stock Plan in the accompanying consolidated statements of operations as the exercise price of the stock options granted thereunder equaled the market price of the underlying stock on the date of the grant. Pro forma information regarding net income and net earnings per common share has been estimated at the date of the grant using the Black-Scholes option-pricing model based on the following assumptions: 2001 2000 1999 -------------- --------------- -------------- Risk-free interest rate 4.75% 6.65% 5.2% Volatility 25.0% 40.0% 40.0% Dividend yield 0.0% 0.0% 0.0% Expected life (years) 5.0 5.0 5.0 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the Company's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The weighted average fair value of each stock option granted during the years ended December 31, 2001, 2000 and 1999 were $1.47, $1.58 and $2.41, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the years ended December 31, 2001, 2000 and 1999 is as follows (in thousands, except for net earnings (loss) per share of common stock):
2001 2000 1999 ----------------------- ------------------------ ------------------------ As As As reported Pro forma reported Pro forma reported Pro forma ----------- ----------- ----------- ------------ ----------- ------------ Net income $ 9,370 $ 9,043 $ 9,761 $ 9,287 $ 17,076 $ 16,274 Net earnings per share of common stock: Basic $ 0.43 $ 0.42 $ 0.35 $ 0.33 $ 0.69 $ 0.62 Diluted $ 0.37 $ 0.36 $ 0.33 $ 0.31 $ 0.55 $ 0.53
The pro forma information presented above is not representative of the effect stock options will have on pro forma net income or earnings per share for future years. F-31 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 19. Fair Values of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based upon estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount of cash on hand and money market funds is considered to be a reasonable estimate of fair value. Available-for-sale securities: The fair value was determined based upon the market value of the securities. Commercial mortgage-backed securities: The fair value was obtained by obtaining quotes from a market maker in the security. Certificated mezzanine investments: The fair value was obtained by obtaining a quote from a market maker in the security. Loans receivable, net: The fair values were estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics. Interest rate cap agreement: The fair value was estimated based upon the amount at which similar financial instruments would be valued. Credit facilities: The credit facilities are at floating rates of interest for which the spread over LIBOR is at rates that are similar to those in the market currently. Therefore, the carrying value is a reasonable estimate of fair value. Repurchase obligations: The repurchase obligations, which are generally short term in nature, bear interest at a floating rate and the book value is a reasonable estimate of fair value. Term redeemable securities contract: The fair value was estimated based upon the amount at which similar privately placed financial instruments would be valued. Convertible Trust Preferred Securities: The fair value was estimated based upon the amount at which similar privately placed financial instruments would be valued. Interest rate swap agreements: The fair values were estimated based upon the amount at which similar financial instruments would be valued. F-32 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 19. Fair Values of Financial Instruments, continued The carrying amounts of all assets and liabilities approximate the fair value except as follows (in thousands):
December 31, 2001 December 31, 2000 ------------------------------- ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------------- ------------- ------------- ------------- Financial Assets: Loans receivable, net $ 248,088 $ 247,127 $ 349,089 $ 342,446 Available-for-sale securities 152,789 152,789 - - CMBS 210,268 210,268 215,516 216,487 Interest rate hedge liabilities (9,987) (9,987) - (971) Interest rate cap agreement 82 82 36 57 Unrecognized Financial Instruments: Interest Rate Swap Agreements N/A N/A - (574)
20. Supplemental Schedule of Non-Cash and Financing Activities Interest paid on the Company's outstanding debt for 2001, 2000 and 1999 was $38,290,000, $48,531,000 and $49,103,000, respectively. Income taxes paid by the Company in 2001, 2000 and 1999 were $11,583,000, $15,612,000 and $17,165,000, respectively. 21. Transactions with Related Parties The Company entered into a consulting agreement, dated as of January 1, 1998, with a director of the Company. The consulting agreement had an initial term of one year, which was subsequently extended to December 31, 2001. Pursuant to the agreement, the director provides consulting services for the Company including new business identification, strategic planning and identifying and negotiating mergers, acquisitions, joint ventures and strategic alliances. During each of the years ended December 31, 2001, 2000 and 1999, the Company incurred expenses of $96,000 in connection with this agreement. Effective January 1, 2001, the Company entered into a consulting agreement with a director. The consulting agreement has an initial term of two years and is terminable by either party with 30 days notice. Under the agreement, the consultant is to be paid $15,000 per month for which the consultant provides services for the Company including serving on the management committees for Fund I, Fund II and any subsequent funds and any other tasks and assignments requested by the chief executive officer. During the year ended December 31, 2001, the Company incurred expenses of $180,000 in connection with this agreement. The Company pays EGI, an affiliate under common control of the chairman of the board of directors, for certain corporate services provided to the Company. These services include consulting on legal matters, tax matters, risk management, and investor relations. During the years ended December 31, 2001, 2000 and 1999, the Company incurred $100,000, $85,000 and $86,000, respectively, of expenses in connection with these services. During the years ended December 31, 2000 and 1999, the Company, through two of its acquired subsidiaries, earned asset management fees pursuant to agreements with entities in which two of the executive officers and directors of the Company have an equity interest and serve as officers, members or as a general partner thereof. During the years ended December 31, 2000 and 1999, the Company earned $16,000 and $391,000, respectively, from such agreements, which have been included in the consolidated statements of operations. F-33 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 22. Commitments and Contingencies Leases The Company leases premises and equipment under operating leases with various expiration dates. Minimum annual rental payments at December 31, 2001 are as follows (in thousands): Years ending December 31: 2002 $ 838 2003 839 2004 927 2005 909 2006 909 Thereafter 1,363 --------------- $ 5,785 =============== Rent expense for office space and equipment amounted to $852,000, $1,017,000 and $470,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Litigation In the normal course of business, the Company is subject to various legal proceedings and claims, the resolution of which, in management's opinion, will not have a material adverse effect on the consolidated financial position or the results of operations of the Company. Employment Agreements The Company had employment agreements with two of its executive officers in 2001, one of which expired on February 1, 2002. The employment agreement with the chief executive officer provides for five-year terms of employment commencing as of July 15, 1997. Such agreement contains extension options that extend such agreements automatically unless terminated by notice, as defined, by either party. The employment agreement provides for a base annual salary of $500,000, which has been increased to $600,000, and will be increased each calendar year to reflect increases in the cost of living and will otherwise be subject to increase at the discretion of the board of directors. The executive officer is also entitled to annual incentive cash bonuses to be determined by the board of directors based on individual performance and the profitability of the Company and are participants in the Incentive Stock Plan and other employee benefit plans of the Company. The employment agreement with the chief operating officer provided for a term of employment commencing as of August 15, 1998 and expiring on January 2, 2002, and provides for an automatic extension, subject to certain notice provisions. The employment agreement provided for a base annual salary of $350,000, which was increased each calendar year to reflect increases in the cost of living. The employment agreement also provided for annual incentive cash bonuses for calendar years 1999 through 2001 to be determined by the board of directors based on individual performance and the profitability of the Company, provided that the minimum of each of said three annual incentive bonuses shall be no less than $750,000. The executive was entitled to participate in employee benefit plans of the Company at levels determined by the board of directors and commensurate with his position and receives Company provided life and disability insurance. In accordance with the agreement, the executive was granted, pursuant to the Incentive Stock Plan, options to purchase 100,000 shares of Class A Common Stock with an exercise price of $9.00 immediately vested and exercisable as of the date of the agreement. The Company also agreed to grant, pursuant to the Incentive Stock Plan, fully vested shares of Class A Common Stock, 50,000 shares on January 1, 1999 and 100,000 shares on each of the three successive anniversaries thereof. F-34 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 22. Commitments and Contingencies, continued Effective May 7, 2001, the Company revised the terms of this employment agreement with the executive officer. Pursuant to the revised employment agreement, the executive officer was granted options to purchase 50,000 shares of Class A Common Stock concurrent with the signing of the agreement with an exercise price of $5.00 per share which vest one third on each of the following dates: May 7, 2002, May 7, 2003 and May 7, 2004. Under the terms of the revised employment agreement, the executive officer received 50,000 fully vested shares of Class A Common Stock and a cash payment of $250,000 on February 1, 2002 in lieu of 100,000 fully vested shares of Class A Common Stock which were to be issued on January 1, 2002 under the terms of the employment agreement in effect prior to the revision. The revised employment agreement expired on February 1, 2002. 23. Segment Reporting As the Company manages its operations as one segment, separate segment reporting is not presented for 2001, 2000 and 1999 as the financial information for that segment is the same as the information in the consolidated financial statements. 24. Risk Factors The Company's assets are subject to various risks that can affect results, including the level and volatility of prevailing interest rates and credit spreads, adverse changes in general economic conditions and real estate markets, the deterioration of credit quality of borrowers and the risks associated with the ownership and operation of real estate. Any significant compression of the spreads of the interest rates earned on interest-earning assets over the interest rates paid on interest-bearing liabilities could have a material adverse effect on the Company's operating results as could adverse developments in the availability of desirable loan and investment opportunities and the ability to obtain and maintain targeted levels of leverage and borrowing costs. Adverse changes in national and regional economic conditions can have an effect on real estate values increasing the risk of undercollateralization to the extent that the fair market value of properties serving as collateral security for the Company's assets are reduced. Numerous factors, such as adverse changes in local market conditions, competition, increases in operating expenses and uninsured losses, can affect a property owner's ability to maintain or increase revenues to cover operating expenses and the debt service on the property's financing and, consequently, lead to a deterioration in credit quality or a loan default and reduce the value of the Company's assets. In addition, the yield to maturity on the Company's CMBS assets are subject to the default and loss experience on the underlying mortgage loans, as well as by the rate and timing of payments of principal. If there are realized losses on the underlying loans, the Company may not recover the full amount, or possibly, any of its initial investment in the affected CMBS asset. To the extent there are prepayments on the underlying mortgage loans as a result of refinancing at lower rates, the Company's CMBS assets may be retired substantially earlier than their stated maturities leading to reinvestment in lower yielding assets. There can be no assurance that the Company's assets will not experience any of the foregoing risks or that, as a result of any such experience, the Company will not suffer a reduced return on investment or an investment loss. F-35 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 25. Summary of Quarterly Results of Operations (Unaudited) The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2001, 2000 and 1999 (in thousands except per share data):
March 31 June 30 September 30 December 31 --------------- --------------- --------------- --------------- 2001 - ---- Revenues $ 19,180 $ 19,849 $ 20,824 $ 18,807 Net income $ 1,724 $ 2,675 $ 2,899 $ 2,072 Preferred Stock dividends $ 404 $ 125 $ 77 $ - Net income per share of Common Stock: Basic $ 0.06 $ 0.13 $ 0.15 $ 0.11 Diluted $ 0.06 $ 0.10 $ 0.11 $ 0.10 2000 - ---- Revenues $ 24,220 $ 23,722 $ 22,553 $ 23,697 Net income $ 2,919 $ 1,154 $ 2,417 $ 3,271 Preferred Stock dividends $ 404 $ 404 $ 404 $ 403 Net income per share of Common Stock: Basic $ 0.10 $ 0.03 $ 0.09 $ 0.13 Diluted $ 0.09 $ 0.03 $ 0.08 $ 0.10 1999 - ---- Revenues $ 25,865 $ 22,930 $ 24,338 $ 34,513 Net income $ 3,792 $ 3,025 $ 3,050 $ 7,209 Preferred Stock dividends $ 784 $ 784 $ 403 $ 404 Net income per share of Common Stock: Basic $ 0.16 $ 0.12 $ 0.11 $ 0.28 Diluted $ 0.12 $ 0.10 $ 0.10 $ 0.20
F-36 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 26. Subsequent Events On February 28, 2002, Company's $355 million credit facility matured and the Term Redeemable Securities Contract became due and settled, upon which event the Company entered into a new term redeemable securities contract and two new repurchase obligations. The new term redeemable securities contract was utilized to finance certain of the assets that were previously financed with the maturing credit facility and Term Redeemable Securities Contract. The new term redeemable securities contract, which allows for a maximum financing of $75 million, is recourse to the Company. The new term redeemable securities contract has a two-year term with an automatic one-year amortizing extension option, if not otherwise extended. The Company incurred an initial commitment fee of $750,000 upon the signing of the new term redeemable securities contract and the Company pays interest at specified rates over LIBOR. The new term redeemable securities contract contains customary representations and warranties, covenants and conditions and events of default. An affiliate of the counterparty to the new term redeemable securities contract also holds an interest rate swap with the Company for the full duration of the BB CMBS Portfolio, thereby providing a hedge for interest rate risk. This agreement had a mutual put option for the value of the hedge exercisable in February 2002. This mutual put has been extended for an additional three years to February 2005. The notional values of the swap, $137,812,000 at December 31, 2001, increased under the terms of the original swap agreement to $169,090,000 in February 2002. One of the new repurchase obligations, with a AAA-rated counterparty, was utilized to finance CMBS securities that were previously financed with the maturing credit facility and original Term Redeemable Securities Contract. At the closing, the Company sold CMBS assets with a book and market value of $109,220,000 and has a liability to repurchase these assets for $76,455,000 and is non-recourse to the Company. This repurchase obligation has a one year term and the liability balance bears interest at specified rates over LIBOR based upon each asset included in the obligation. The other new repurchase agreement, with a securities dealer, was also utilized to finance CMBS securities that were previously financed with the maturing credit facility and original Term Redeemable Securities Contract. At the closing, the Company sold CMBS assets with a book and market value of $44,752,000 and has a liability to repurchase these assets for $28,056,000 and is non-recourse to the Company. This repurchase obligation has a 30-day rolling term and the liability balance bears interest at specified rates over LIBOR based upon each asset included in the obligation. F-37 EX-10 3 exh10-14b.txt EXHIBIT 10.14.B Exhibit 10.14.b FIRST AMENDMENT TO AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT FOR A CREDIT FACILITY IN AN AMOUNT UP TO $100,000,000 Dated as of July 16, 2001 Between CAPITAL TRUST, INC. as Borrower and MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC. as Lender ================================================================================ TABLE OF CONTENTS Page 1. Amendments...........................................................1 2. Representations and Warranties.......................................8 3. No Default...........................................................8 4. Ratification, Confirmation and Assumption............................8 5. Binding Effect; No Waiver; No Partnership; Counterparts..............9 6. Further Agreements...................................................9 7. Governing Law........................................................9 8. Continuing Effect....................................................9 9. Conditions Precedent.................................................9 EXHIBIT A Form of Second Amended and Restated Promissory Note i FIRST AMENDMENT TO AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT dated as of July 16, 2001 (this "Agreement") between CAPITAL TRUST, INC., a Maryland corporation ("Borrower"), and MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC. ("Lender") to Amended and Restated Master Loan and Security Agreement dated as of February 8, 2001 between Borrower and Lender, the (the "Original Loan and Security Agreement"). Capitalized terms used herein without definition have the meanings given to them in the Original Loan Agreement. The Original Loan Agreement, as amended by this Agreement, and as such agreement otherwise from time to time has been or hereafter may be amended, modified, extended, and supplemented, is hereinafter referred to as the "Loan and Security Agreement." PRELIMINARY STATEMENT Pursuant to the Original Loan and Security Agreement Lender may make loans to fund Borrower's acquisition of Eligible Collateral from time to time subject to the terms and conditions of the Original Loan and Security Agreement. Lender and Borrower desire to amend the Original Loan and Security Agreement in order to, inter alia, extend the term and alter the Maximum Credit and terms and conditions applicable to such modifications. NOW, THEREFORE, in consideration of the mutual promises herein contained the parties hereto hereby agree as follows: 1. Amendments. The Original Loan and Security Agreement is hereby amended as follows: (a) Defined Terms. Subsection 1.01 of the Original Loan and Security Agreement is hereby amended by: (i) the deletion in its entirety of the definition of the term "Affiliate Credit Facility" and the substitution therefor of the following: "Affiliate Credit Facility" shall mean any one or more agreements between Lender, or an Affiliate of Lender, and Affiliates of Borrower (including, without limitation, that certain (i) Master Loan and Security Agreement dated as of September 19, 2000 between CT Mezzanine Partners I LLC and Lender as amended pursuant to that certain First Amendment to Master Loan and Security Agreement dated as of December 29, 2000 and further amended pursuant to that certain Second Amendment to Master Loan and Security Agreement dated as of February 8, 2001 and further amended pursuant to that certain Third Amendment dated as of July 16, 2001 (ii) that certain CMBS Loan Agreement dated as of September 19, 2000 between CT Mezzanine Partners I LLC and MSIL as amended pursuant to that certain First Amendment to CMBS Loan Agreement dated as of February 8, 2001 as further amended pursuant to that certain Second Amendment dated as of July 16, 2001, (iii) that certain Master Loan and Security Agreement dated as of July 16, 2001 between Lender and CTMP II Funding Corp. (MS), and (iv) CMBS Loan Agreement dated as of July 16, 2001 between MSIL and CTMP II Funding Corp. (MS)), pursuant to which such Affiliate of Borrower shall incur Indebtedness to Lender or such Affiliate of Lender and including, without limitation, any other loan agreement or repurchase agreement between Lender, or an Affiliate of Lender, and an Affiliate of Borrower. (ii) the deletion in its entirety of the definition of the term "Amortization Period" and the substitution therefor of the following: "Amortization Period" shall mean, if the Termination Date shall be extended in accordance with the terms hereof, the period from and after July 16, 2002 to, but not including, March 16, 2003. (iii) the deletion of the words "June 30, 2002" in subsection (B) of the definition of the term "Eurodollar Rate Spread" and the substitution therefor with the words "July 16, 2002." (iv) the deletion in its entirety of the definition of the term "Maximum Credit" and the substitution therefor of the following: "Maximum Credit" shall mean One Hundred Million Dollars ($100,000,000.00) or such increased or decreased amount as may be permitted, or otherwise required, pursuant to Section 2.01 (a). (v) the deletion in its entirety of the definition of the term "Note" and the substitution therefor of the following: "Note" shall mean the promissory note provided for by Section 2.02(a) hereof for Loans and any promissory note delivered in substitution or exchange therefor, in each case as the same shall be modified, amended, supplemented or extended and in effect from time to time including, without limitation, that certain Second Amended and Restated Promissory Note dated as of July 16, 2001 by Borrower to Lender given in substitution for, and replacement of, that certain Amended and Restated Promissory Note dated as of June 8, 1998 by Borrower to Lender given in substitution for, and replacement of, that certain Promissory Note dated as of June 8, 1998 by Borrower to Lender. (vi) the deletion in its entirety of the definition of the term "Termination Date" and the substitution therefor of the following: "Termination Date" shall mean July 16, 2002 or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law; provided, however, that in the event that (i) this Agreement shall not have been earlier terminated and (ii) no Default shall have occurred and be continuing on July 16, 2002, the Termination Date shall be automatically extended to March 15, 2003. (b) Loans. Paragraph (a) of subsection 2.01 of the Original Loan and Security Agreement is hereby amended by the deletion in the first sentence thereof of the words "June 30, 2001" and the substitution therefor of the words "July 16, 2002." (c) Subsection 2.02 (a) of the Original Loan and Security Agreement is hereby deleted in its entirety and the following subsection shall be inserted in lieu thereof: "(a) The Loans made by Lender shall be evidenced by a single promissory note of Borrower substantially in the form of Exhibit A hereto, dated the date hereof, payable to Lender in the principal amount of One Hundred Million Dollars ($100,000,000.00), as otherwise duly completed. Notwithstanding the foregoing, provided that no Default or Event of Default shall have occurred and be continuing hereunder or under any Affiliate Credit Facility, Borrower may request, upon no less than ten (10) Business Days prior written notice delivered to Lender, that the aggregate credit available to Borrower hereunder, under the CMBS Loan Agreement and under any Affiliate Credit Agreement be reallocated among such credit agreements; provided, however, that in no event shall the Maximum Credit plus (i) the aggregate of the Maximum Credit hereunder and the Maximum Credit (as such term is defined in the CMBS Loan Agreement) under the CMBS Loan Agreement plus (ii) the aggregate Maximum Credit (as such term is defined in any Affiliate Credit Facility) under any existing Affiliate Credit Facility, exceed Four Hundred Million Dollars ($400,000,000.00). In the event (i) that the Maximum Credit is increased or decreased as a result of a reallocation of the Maximum Credit available hereunder or under any Affiliate Credit Facility, Borrower shall deliver to Lender a substitute Note evidencing such increase or decrease and such other documents, certificates and amendments as Lender shall request. Lender shall have the right to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise and shall have the right to sell participating interests in such Note; provided, however, that Lender must retain (i) in excess of fifty percent (50%) ownership interest in the Note and (ii) have control over all decisions with respect to loan pricing and the exercise of remedies with respect to each item of Collateral; and provided, further, however, that Lender may subject up to one hundred percent (100%) of the Loans made hereunder to a repurchase agreement." (d) Subsection 3.01(a) of the Original Loan and Security Agreement is hereby deleted in its entirety and the following subsection shall be inserted in lieu thereof: "(a) Borrower hereby promises to repay in full on the Termination Date the aggregate outstanding principal amount of the Loans; provided, however, in the event the Termination Date shall be extended to March 16, 2003 pursuant to the terms hereof, Borrower promises to repay such aggregate principal amount of the Loans outstanding on July 16, 2002 by the payment on the first Business Day of each month during the Amortization Period beginning with August 1, 2002 and on the Termination Date, as extended (each, an "Installment Date") of an amount equal to the quotient of (x) the aggregate principal amount of the Loans outstanding as at July 16, 2002 divided by (y) nine (9) (such schedule of payments, the "Amortization Schedule"); provided, further, that in the event that Borrower shall repay any portion of the outstanding principal in an amount in excess of the amount then due and payable in accordance with the Amortization Schedule, the Amortization Schedule shall be recalculated such that Borrower shall repay the principal amount of the Loans outstanding on the date of such repayment (after taking such repayment into account) by the payment on each Installment Date remaining in the Amortization Period of an amount equal to the quotient of (x) the aggregate principal amount of the Loans outstanding on the date of such repayment (after taking such repayment into account) divided by (y) the number of Installment Dates remaining during the Amortization Period. Any repayment of the principal of the Loans made by Borrower to Lender subsequent to an Installment Date shall be credited at the time of such payment and applied to the payment due on next succeeding Installment Date." (e) Subsections 3.04a(i), (a)(ii)(y) and (c) of the Original Loan and Security Agreement shall be hereby amended by the deletion of the number "4224" in all places it appears in such subsections and replaced with "W-8EC1" and further amended by the deletion of the words "Form 1001" in all places it appears in such subsections and replaced with "Form W-8BEN". (f) Section 4.08 of the Original Loan and Security Agreement shall be hereby amended by the deletion of the term "9-504(1)" in such section and replaced with "9-608(a)(1)(C)." 2. Representations and Warranties. Borrower hereby makes to Lender the representations and warranties set forth in Section 6 of the Original Loan Agreement, as amended by this Agreement. 3. Binding Effect; No Waiver; No Partnership; Counterparts. The provisions of the Original Loan Agreement and this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Nothing herein contained shall be deemed or construed (a) to constitute a waiver of any right of Lender under the Loan Agreement, as amended, or (b) to create a partnership or joint venture between any of the parties hereto. For the purpose of facilitating the execution of this Agreement as herein provided, this Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts when taken together shall constitute but one and the same instrument. 4. Further Agreements. Borrower agrees to execute and deliver such additional documents, instruments or agreements as may be reasonably requested by Lender and as may be necessary or appropriate to effectuate the purposes of this Agreement. 5. Governing Law. This Agreement shall be governed by the laws of the State of New York. 6. Continuing Effect. Except as modified by this Agreement, all terms of the Original Loan Agreement shall remain in full force and effect. Each and all references to the "Loan Agreement" in the Loan Documents shall mean the Loan Agreement as amended hereby. 7. Conditions Precedent. It is a condition precedent to the effectiveness of this Agreement that each of the following shall have occurred: (a) each party hereto shall have executed and delivered this Agreement; (b) Lender shall have received from Borrower an officer's certificate dated the date hereof in the form required under Section 5.02(b) of the Loan Agreement which shall be true, correct and complete both before and after giving effect to this Agreement; and (c) Lender shall have received from Borrower's counsel, or counsels, opinions acceptable to Lender. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the date first above written. BORROWER -------- CAPITAL TRUST, INC. By: /s/ Edward L. Shugrue III ------------------------------------------- Name: Edward L. Shugrue III Title: Chief Financial Officer Address for Notices: -------------------- 410 Park Avenue, 14th Floor New York, New York 10022 Attention: Edward L. Shugrue III Chief Financial Officer Telecopier No.: (212) 655-0044 Telephone No: (212) 655-0225 With a copy to: Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, New York 10022 Attention: John A. Cahill, Esq. Telecopier No.: (212) 319-4090 Telephone No.: (212) 318-6260 LENDER ------ MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC. By: /s/ Marc Flamino ------------------------------------------- Name: Marc Flamino Title: Vice President Address for Notices: -------------------- 1585 Broadway New York, New York 10036 Attention: Mr. Marc Flamino, Whole Loan Operations Mortgage-Backed Securities Department, Fixed-Income Division Telecopier No.: (212) 761-0093 Telephone No.: (212) 761-4243 With a copy to: Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, New York 10166-0153 Attention: Frederick B. Utley, III, Esq. Telecopier No.: (212) 878-8375 Telephone No.: (212) 878-8356 EXHIBIT A --------- [FORM OF SECOND AMENDED AND RESTATED PROMISSORY NOTE] $ 100,000,000.00 as of June 8, 1998 New York, New York SECOND AMENDED AND RESTATED PROMISSORY NOTE dated as of July 16, 2001 (this "Note") made by CAPITAL TRUST, INC., a Maryland corporation ("Borrower"), to MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC., a New York corporation ("Lender") in substitution for, and replacement of, the Amended and Restated Promissory Note dated as of June 8, 1998 (the "Original Note") made by Borrower to Lender pursuant to that certain Amended and Restated Master Loan and Security Agreement dated as of February 8, 2001 (the "Original Loan and Security Agreement") between Borrower and Lender. PRELIMINARY STATEMENT Borrower and Lender have entered into that certain Amended and Restated Master Loan and Security Agreement dated as of February 8, 2001 as amended pursuant to that certain First Amendment to Amended and Restated Master Loan and Security Agreement dated as of July 16, 2001 (as further amended, supplemented or otherwise modified and in effect from time to time, collectively, the "Loan Agreement"). In connection therewith, Borrower has agreed to enter into this Note in substitution for, and replacement of, the Original Note. NOW THEREFORE, FOR VALUE RECEIVED, Borrower hereby promises to pay to the order of Lender, at the principal office of Lender at 1585 Broadway, New York, New York, 10036, in lawful money of the United States, and in immediately available funds, the principal sum of ONE HUNDRED MILLION DOLLARS ($100,000,000.00) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by Lender to Borrower under the Loan Agreement), on the dates and in the principal amounts provided in the Loan Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Loan Agreement. The date, amount and interest rate of each Loan made by Lender to Borrower, and each payment made on account of the principal thereof, shall be recorded by Lender on its books and, prior to any transfer of this Note, endorsed by Lender on the schedule attached hereto or any continuation thereof; provided, that the failure of Lender to make any such recordation or endorsement shall not affect the obligations of Borrower to make a payment when due of any amount owing under the Loan Agreement or hereunder in respect of the Loans made by Lender. This Note is the Note referred to in the Loan Agreement, and evidences Loans made by Lender thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Loan Agreement. This Note amends and restates in its entirety the Original Note and is given as a continuation and extension, and not a novation, release or satisfaction, of the Original Note. The issuance and delivery of this Amended and Restated Promissory Note does not create or evidence any principal indebtedness other than the principal indebtedness evidenced by the Original Note. Borrower hereby acknowledges and agrees that simultaneously with Borrower's execution and delivery of this Note to Lender, Lender has delivered to Borrower the Original Note. Borrower hereby represents, warrants and covenants that, as of the date hereof, (a) Borrower has no cause of action at law or in equity against Lender (including, without limitation, any offset, defense, deduction or counterclaim) with respect to any of such obligations and (b) the principal amount due and owing under this Note is $10,322,033.90. Borrower agrees to pay all Lender's costs of collection and enforcement (including reasonable attorneys' fees and disbursements of Lender's counsel) in respect of this Note when incurred, including, without limitation, reasonable attorneys' fees through appellate proceedings. Notwithstanding the pledge of the Collateral, Borrower hereby acknowledges, admits and agrees that Borrower's obligations under this Note are recourse obligations of Borrower to which Borrower pledges its full faith and credit. Borrower, and any endorsers or guarantors hereof, (a) severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Note, (b) expressly agree that this Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further Collateral, the release of any Collateral for this Note, the release of any party primarily or secondarily liable hereon, and (c) expressly agree that it will not be necessary for Lender, in order to enforce payment of this Note, to first institute or exhaust Lender's remedies against Borrower or any other party liable hereon or against any Collateral for this Note. No extension of time for the payment of this Note, or any installment hereof, made by agreement by Lender with any person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of Borrower, even if Borrower is not a party to such agreement; provided, however, that Lender and Borrower, by written agreement between them, may affect the liability of Borrower. Any reference herein to Lender shall be deemed to include and apply to every subsequent holder of this Note. Reference is made to the Loan Agreement for provisions concerning optional and mandatory prepayments, Collateral, acceleration and other material terms affecting this Note. This Note shall be governed by and construed under the laws of the State of New York (without reference to choice of law doctrine) whose laws Borrower expressly elects to apply to this Note. Borrower agrees that any action or proceeding brought to enforce or arising out of this Note may be commenced in the Supreme Court of the State of New York, Borough of Manhattan, or in the District Court of the United States for the Southern District of New York. CAPITAL TRUST, INC., a Maryland corporation By: ----------------------------- Name: Edward L. Shugrue III Title: Chief Financial Officer SCHEDULE OF LOANS This Amended and Restated Promissory Note evidences Loans made under the within-described Loan Agreement to Borrower, on the dates, in the principal amounts and bearing interest at the rates set forth below, and subject to the payments and prepayments of principal set forth below.
- -------------------------------------------------------------------------------------------------------------------- Name of Date Made Principal Interest Amount Paid Unpaid Cumulative Notation Collateral Amount of Rate or Prepaid Principal Total Unpaid Made by of Loan Amount Principal Amount - -------------------------------------------------------------------------------------------------------------------- 7/16/01 1,467,273.64 6.11% * 1,467,273.64 1,467,273.64 PW
*The respective amounts shown in the columns entitled "Principal Amount of Loan" and "Cumulative Total Unpaid Principal Amount" reflect the respective net unpaid principal amounts inclusive of all advances and repayments to, and including, the date hereof in respect of the indicated collateral. EX-10 4 exh10-15b.txt EXHIBIT 10.15.B Exhibit 10.15.b ================================================================================ FIRST AMENDMENT TO AMENDED AND RESTATED CMBS LOAN AGREEMENT FOR A CREDIT FACILITY IN AN AMOUNT UP TO $100,000,000 Dated as of July 16, 2001 Between CAPITAL TRUST, INC. as Borrower and MORGAN STANLEY & CO. INTERNATIONAL LIMITED as Lender ================================================================================ TABLE OF CONTENTS Page 1. Amendments.........................................................1 2. Representations and Warranties.....................................8 3. No Default.........................................................8 4. Ratification, Confirmation and Assumption..........................8 5. Binding Effect; No Waiver; No Partnership; Counterparts............8 6. Further Agreements.................................................9 7. Governing Law......................................................9 8. Continuing Effect..................................................9 9. Conditions Precedent...............................................9 EXHIBIT A Form of Second Amended and Restated Promissory Note FIRST AMENDMENT TO CMBS LOAN AGREEMENT dated as of July 16, 2001 (this "Agreement") between CAPITAL TRUST, INC., a Maryland corporation ("Borrower"), and MORGAN STANLEY & CO. INTERNATIONAL LIMITED ("Lender") to CMBS Loan Agreement dated as of February 8, 2001 between Capital Trust, Inc., a Maryland corporation ("Borrower") and Lender, (the "Original Loan Agreement"). Capitalized terms used herein without definition have the meanings given to them in the Original Loan Agreement. The Original Loan Agreement, as amended by this Agreement, and as such agreement otherwise from time to time has been or hereafter may be amended, modified, extended, and supplemented, is hereinafter referred to as the "Loan Agreement." PRELIMINARY STATEMENT Pursuant to the Original Loan Agreement Lender may make loans to fund Borrower's acquisition of Eligible Collateral from time to time subject to the terms and conditions of the Original Loan Agreement. Lender and Borrower desire to amend the Original Loan Agreement in order to inter alia, extend the term and alter the Maximum Credit and terms and conditions applicable to such modifications. NOW, THEREFORE, in consideration of the mutual promises herein contained the parties hereto hereby agree as follows: 1. Amendments. The Original Loan Agreement is hereby amended as follows: (a) Defined Terms. Subsection 1.01 of the Original Loan Agreement is hereby amended by: (i) the deletion in its entirety of the definition of the term "Affiliate Credit Facility" and the substitution therefor of the following: "Affiliate Credit Facility" shall mean any one or more agreements between Lender, or an Affiliate of Lender, and Affiliates of Borrower (including, without limitation, that certain (i) Master Loan and Security Agreement dated as of September 19, 2000 between CT Mezzanine Partners I LLC and Lender as amended pursuant to that certain First Amendment to Master Loan and Security Agreement dated as of December 29, 2000 and further amended pursuant to that certain Second Amendment to Master Loan and Security Agreement dated as of February 8, 2001 and further amended pursuant to that certain Third Amendment dated as of July 16, 2001 (ii) that certain CMBS Loan Agreement dated as of September 19, 2000 between CT Mezzanine Partners I LLC and MSIL as amended pursuant to that certain First Amendment to CMBS Loan Agreement dated as of February 8, 2001 as further amended pursuant to that certain Second Amendment dated as of July 16, 2001, (iii) that certain Master Loan and Security Agreement dated as of July 16, 2001 between Lender and CTMP II Funding Corp. (MS), and (iv) CMBS Loan Agreement dated as of July 16, 2001 between MSIL and CTMP II Funding Corp. (MS)), pursuant to which such Affiliate of Borrower shall incur Indebtedness to Lender or such Affiliate of Lender and including, without limitation, any other loan agreement or repurchase agreement between Lender, or an Affiliate of Lender, and an Affiliate of Borrower. (ii) the deletion in its entirety of the definition of the term "Amortization Period" and the substitution therefor of the following: "Amortization Period" shall mean, if the Termination Date shall be extended in accordance with the terms hereof, the period from and after July 16, 2002 to, but not including, March 16, 2003. (iii) the deletion of the words "June 30, 2002" in subsection (B) of the definition of the term "Eurodollar Rate Spread" and the substitution therefor with the words "July 16, 2002." (iv) the deletion in its entirety of the definition of the term "Maximum Credit" and the substitution therefor of the following: "Maximum Credit" shall mean One Hundred Million Dollars ($100,000,000.00) or such increased or decreased amount as may be permitted, or otherwise required, pursuant to Section 2.02 (a). (v) the deletion in its entirety of the definition of the term "Note" and the substitution therefor of the following: "Note" shall mean the promissory note provided for by Section 2.02 (a) hereof for Loans and any promissory note delivered in substitution or exchange therefor, in each case as the same shall be modified, amended, supplemented or extended and in effect from time to time including, without limitation, that certain Second Amended and Restated Promissory Note dated as of July 16, 2001 by Borrower to Lender given in substitution for, and replacement of, that certain Amended and Restated Promissory Note dated as of June 8, 1998 by Borrower to Lender given in substitution for, and replacement of, that certain Promissory Note dated as of June 8, 1998 by Borrower to Lender. (vi) the deletion in its entirety of the definition of the term "Termination Date" and the substitution therefor of the following: "Termination Date" shall mean July 16, 2002 or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law; provided, however, that in the event that (i) this Agreement shall not have been earlier terminated and (ii) no Default shall have occurred and be continuing on July 16, 2002, the Termination Date shall be automatically extended to March 16, 2003. (b) Loans. Paragraph (a) of subsection 2.01 of the Original Loan Agreement is hereby amended by the deletion in the first sentence thereof of the words "June 30, 2001" and the substitution therefor of the words "July 16, 2002." (c) Subsection 2.02 (a) of the Original Loan Agreement is hereby deleted in its entirety and the following subsection shall be inserted in lieu thereof: "(a) The Loans made by Lender shall be evidenced by a single promissory note of Borrower substantially in the form of Exhibit A hereto, dated the date hereof, payable to Lender in the principal amount of One Hundred Million Dollars ($100,000,000.00), as otherwise duly completed. Notwithstanding the foregoing, provided that no Default or Event of Default shall have occurred and be continuing hereunder or under any Affiliate Credit Facility, Borrower may request, upon no less than ten (10) Business Days prior written notice delivered to Lender, that the aggregate credit available to Borrower hereunder, under the Conduit Loan Agreement and under any Affiliate Credit Agreement be reallocated among such credit agreements; provided, however, that in no event shall the Maximum Credit plus (i) the aggregate of the Maximum Credit hereunder and the Maximum Credit (as such term is defined in the Conduit Loan Agreement) under the Conduit Loan Agreement plus (ii) the aggregate Maximum Credit (as such term is defined in any Affiliate Credit Facility) under any existing Affiliate Credit Facility, exceed Four Hundred Million Dollars ($400,000,000.00). In the event (i) that the Maximum Credit is increased or decreased as a result of a reallocation of the Maximum Credit available hereunder or under any Affiliate Credit Facility, Borrower shall deliver to Lender a substitute Note evidencing such increase or decrease and such other documents, certificates and amendments as Lender shall request. Lender shall have the right to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise and shall have the right to sell participating interests in such Note; provided, however, that Lender must retain (i) in excess of fifty percent (50%) ownership interest in the Note and (ii) have control over all decisions with respect to loan pricing and the exercise of remedies with respect to each item of Collateral; and provided, 2 further, however, that Lender may subject up to one hundred percent (100%) of the Loans made hereunder to a repurchase agreement." (d) Subsections 3.01(a) of the Original Loan Agreement is hereby deleted in its entirety and the following subsection shall be inserted in lieu thereof: "(a) Borrower hereby promises to repay in full on the Termination Date the aggregate outstanding principal amount of the Loans; provided, however, in the event the Termination Date shall be extended to March 16, 2003 pursuant to the terms hereof, Borrower promises to repay such aggregate principal amount of the Loans outstanding on July 16, 2002 by the payment on the first Business Day of each month during the Amortization Period beginning with August 1, 2002 and on the Termination Date, as extended (each, an "Installment Date") of an amount equal to the quotient of (x) the aggregate principal amount of the Loans outstanding as at July 16, 2002 divided by (y) nine (9) (such schedule of payments, the "Amortization Schedule"); provided, further, that in the event that Borrower shall repay any portion of the outstanding principal in an amount in excess of the amount then due and payable in accordance with the Amortization Schedule, the Amortization Schedule shall be recalculated such that Borrower shall repay the principal amount of the Loans outstanding on the date of such repayment (after taking such repayment into account) by the payment on each Installment Date remaining in the Amortization Period of an amount equal to the quotient of (x) the aggregate principal amount of the Loans outstanding on the date of such repayment (after taking such repayment into account) divided by (y) the number of Installment Dates remaining during the Amortization Period. Any repayment of the principal of the Loans made by Borrower to Lender subsequent to an Installment Date shall be credited at the time of such payment and applied to the payment due on next succeeding Installment Date." (e) Subsections 3.04 (a)(i) and (a)(ii)(y) of the Original Loan Agreement shall be hereby amended by the deletion of the number "4224" in all places it appears in such subsections and replaced with "W-8EC1" and further amended by the deletion of the words "Form 1001" in all places it appears in such subsections and replaced with "Form W-8BEN". (f) Section 4.08 of the Original Loan Agreement shall be hereby amended by the deletion of the term "9-504(1)" in such section and replaced with "9-608(a)(1)(C)." 2. Representations and Warranties. Borrower hereby makes to Lender the representations and warranties set forth in Section 6 of the Original Loan Agreement, as amended by this Agreement. 3. Binding Effect; No Waiver; No Partnership; Counterparts. The provisions of the Original Loan Agreement and this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Nothing herein contained shall be deemed or construed (a) to constitute a waiver of any right of Lender under the Loan Agreement, as amended, or (b) to create a partnership or joint venture between any of the parties hereto. For the purpose of facilitating the execution of this Agreement as herein provided, this Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts when taken together shall constitute but one and the same instrument. 3 4. Further Agreements. Borrower agrees to execute and deliver such additional documents, instruments or agreements as may be reasonably requested by Lender and as may be necessary or appropriate to effectuate the purposes of this Agreement. 5. Governing Law. This Agreement shall be governed by the laws of the State of New York. 6. Continuing Effect. Except as modified by this Agreement, all terms of the Original Loan Agreement shall remain in full force and effect. Each and all references to the "Loan Agreement" in the Loan Documents shall mean the Loan Agreement as amended hereby. 7. Conditions Precedent. It is a condition precedent to the effectiveness of this Agreement that each of the following shall have occurred: (a) each party hereto shall have executed and delivered this Agreement; (b) Lender shall have received from Borrower an officer's certificate dated the date hereof in the form required under Section 5.02(b) of the Loan Agreement which shall be true, correct and complete both before and after giving effect to this Agreement; and (c) Lender shall have received from Borrower's counsel, or counsels, opinions acceptable to Lender. 4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the date first above written. BORROWER -------- CAPITAL TRUST, INC. By: /s/ Edward L. Shugrue III ----------------------------------------- Name: Edward L. Shugrue III Title: Chief Financial Officer Address for Notices: ------------------- 410 Park Avenue, 14th Floor New York, New York 10022 Attention: Edward L. Shugrue III Chief Financial Officer Telecopier No.: (212) 655-0044 Telephone No: (212) 655-0225 With a copy to: Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, New York 10022 Attention: John A. Cahill, Esq. Telecopier No.: (212) 319-4090 Telephone No.: (212) 318-6260 LENDER ------ MORGAN STANLEY & CO. INTERNATIONAL LIMITED By: /s/ Edward W. McAleer ----------------------------------------- Name: Edward W. McAleer Title: Executive Director Address for Notices: ------------------- 1585 Broadway New York, New York 10036 Attention: Mr. Marc Flamino, Whole Loan Operations Mortgage-Backed Securities Department, Fixed-Income Division Telecopier No.: (212) 761-0093 Telephone No.: (212) 761-4243 With a copy to: Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, New York 10166-0153 Attention: Frederick B. Utley, III, Esq. Telecopier No.: (212) 878-8375 Telephone No.: (212) 878-8356 5 EXHIBIT A --------- [FORM OF SECOND AMENDED AND RESTATED PROMISSORY NOTE] $ 100,000,000.00 as of June 30, 1998 New York, New York SECOND AMENDED AND RESTATED PROMISSORY NOTE dated as of June 30, 1998 (this "Note") made by CAPITAL TRUST, INC., a Maryland corporation ("Borrower"), to MORGAN STANLEY & CO. INTERNATIONAL LIMITED ("Lender") in substitution for, and replacement of, the Amended and Restated Promissory Note dated as of June 30, 1998 (the "Original Note") made by Borrower to Lender pursuant to that certain Amended and Restated CMBS Loan Agreement dated as of February 8, 2001 (the "Original Loan Agreement") between Borrower and Lender. PRELIMINARY STATEMENT --------------------- Borrower and Lender have entered into that certain Amended and Restated CMBS Loan Agreement dated as of February 8, 2001 as amended pursuant to that certain First Amendment to Amended and Restated CMBS Loan Agreement dated as of July 16, 2001 (as further amended, supplemented or otherwise modified and in effect from time to time, collectively, the "Loan Agreement"). In connection therewith, Borrower has agreed to enter into this Note in substitution for, and replacement of, the Original Note. NOW THEREFORE, FOR VALUE RECEIVED, Borrower hereby promises to pay to the order of Lender, at the principal office of Lender at 1585 Broadway, New York, New York, 10036, in lawful money of the United States, and in immediately available funds, the principal sum of ONE HUNDRED MILLION DOLLARS ($100,000,000.00) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by Lender to Borrower under the Loan Agreement), on the dates and in the principal amounts provided in the Loan Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Loan Agreement. The date, amount and interest rate of each Loan made by Lender to Borrower, and each payment made on account of the principal thereof, shall be recorded by Lender on its books and, prior to any transfer of this Note, endorsed by Lender on the schedule attached hereto or any continuation thereof; provided, that the failure of Lender to make any such recordation or endorsement shall not affect the obligations of Borrower to make a payment when due of any amount owing under the Loan Agreement or hereunder in respect of the Loans made by Lender. This Note is the Note referred to in the Loan Agreement and evidences Loans made by Lender thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Loan Agreement. This Note amends and restates in its entirety the Original Note and is given as a continuation and extension, and not a novation, release or satisfaction, of the Original Note. The A-1 issuance and delivery of this Note does not create or evidence any principal indebtedness other than the principal indebtedness evidenced by the Original Note. Borrower hereby acknowledges and agrees that simultaneously with Borrower's execution and delivery of this Note to Lender, Lender has delivered to Borrower the Original Note. Borrower hereby represents, warrants and covenants that, as of the date hereof, (a) Borrower has no cause of action at law or in equity against Lender (including, without limitation, any offset, defense, deduction or counterclaim) with respect to any of such obligations and (b) the principal amount due and owing under this Note is $1,667,966.10. Borrower agrees to pay all Lender's costs of collection and enforcement (including reasonable attorneys' fees and disbursements of Lender's counsel) in respect of this Note when incurred, including, without limitation, reasonable attorneys' fees through appellate proceedings. Notwithstanding the pledge of the Collateral, Borrower hereby acknowledges, admits and agrees that Borrower's obligations under this Note are recourse obligations of Borrower to which Borrower pledges its full faith and credit. Borrower, and any endorsers or guarantors hereof, (a) severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Note, (b) expressly agree that this Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further Collateral, the release of any Collateral for this Note, the release of any party primarily or secondarily liable hereon, and (c) expressly agree that it will not be necessary for Lender, in order to enforce payment of this Note, to first institute or exhaust Lender's remedies against Borrower or any other party liable hereon or against any Collateral for this Note. No extension of time for the payment of this Note, or any installment hereof, made by agreement by Lender with any person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of Borrower, even if Borrower is not a party to such agreement; provided, however, that Lender and Borrower, by written agreement between them, may affect the liability of Borrower. A-2 Any reference herein to Lender shall be deemed to include and apply to every subsequent holder of this Note. Reference is made to the Loan Agreement for provisions concerning optional and mandatory prepayments, Collateral, acceleration and other material terms affecting this Note. This Note shall be governed by and construed under the laws of the State of New York (without reference to choice of law doctrine) whose laws Borrower expressly elects to apply to this Note. Borrower agrees that any action or proceeding brought to enforce or arising out of this Note may be commenced in the Supreme Court of the State of New York, Borough of Manhattan, or in the District Court of the United States for the Southern District of New York. CAPITAL TRUST, INC., a Maryland corporation By: ----------------------------- Name: Edward L. Shugrue III Title: Chief Financial Officer A-3 SCHEDULE OF LOANS This Amended and Restated Promissory Note evidences Loans made under the within-described Loan Agreement to Borrower, on the dates, in the principal amounts and bearing interest at the rates set forth below, and subject to the payments and prepayments of principal set forth below.
- -------------------------------------------------------------------------------------------------------------------- Name of Date Made Principal Interest Amount Paid Unpaid Cumulative Notation Collateral Amount of Rate or Prepaid Principal Total Unpaid Made by of Loan Amount Principal Amount - -------------------------------------------------------------------------------------------------------------------- 7/16/01 29,750,000.00 6.49% * 29,750,000.00 29,750,000.00 PW
*The respective amounts shown in the columns entitled "Principal Amount of Loan" and "Cumulative Total Unpaid Principal Amount" reflect the respective net unpaid principal amounts inclusive of all advances and repayments to, and including, the date hereof in respect of the indicated collateral. A-4 EX-10 5 exh10-20b.txt EXHIBIT 10.20.B Exhibit 10.20.b The warrants represented by this certificate and the securities issuable upon exercise thereof have not been registered under the Securities Act of 1933 or the securities laws of any state. Neither such warrants nor such securities may be sold, pledged, hypothecated or otherwise transferred without such registration, except upon delivery to the Company of such evidence as may be satisfactory to counsel for the Company to the effect that any such transfer shall not be in violation of the Securities Act of 1933 or applicable state securities laws or any rule or regulation promulgated thereunder. CAPITAL TRUST, INC. Fund II Purchase Warrant for Class A Common Stock FOR VALUE RECEIVED, Capital Trust, Inc., a Maryland corporation (the "Company"), hereby grants, pursuant hereto (this "Warrant"), to Travelers General Real Estate Mezzanine Investments II, LLC, a Delaware limited liability company, or its permitted assigns, the right to purchase from the Company, at any time or from time to time commencing on the date hereof and prior to 5:00 p.m., Eastern Time, on March 8, 2005, up to three million, fifteen thousand and six hundred (3,015,600) (subject to adjustment as provided herein) fully paid and non-assessable shares of class A common stock, par value $.01 per share, of the Company for five dollars ($5.00) per share (subject to adjustment as provided herein) for an aggregate purchase price (assuming full exercise) of fifteen million and seventy-eight thousand dollars ($15,078,000) (not subject to adjustment). Hereinafter, (i) said class A common stock, par value $.01 per share, of the Company, is referred to as the "Common Stock," (ii) the shares of the Common Stock purchasable hereunder or under any other Warrant (as hereinafter defined) are referred to as the "Warrant Shares," (iii) the aggregate purchase price payable for the Warrant Shares purchasable hereunder is referred to as the "Aggregate Exercise Price," (iv) the price payable for each of the Warrant Shares is referred to as the "Per-Share Exercise Price," (v) this Warrant, and all warrants hereafter issued in exchange for, in substitution for or upon transfer of this Warrant are referred to as the "Warrants" and (vi) the holder of this Warrant is referred to as the "Holder." Definitions of other capitalized terms used herein are set forth in Section 15 hereof. The Aggregate Exercise Price is not subject to adjustment. 1. Exercise of Warrant. (a) Cash Exercise. This Warrant may be exercised in whole at any time, or in part from time to time, commencing on the date hereof and prior to 5:00 p.m., Eastern Time, on March 8, 2005 or March 8, 2008 if the period during which this Warrant may be exercised is extended pursuant to Section 4 (the "Exercise Period") by the Holder by the surrender of this Warrant (with the subscription form at the end hereof duly executed) to the Company at the address set forth in Section 11 hereof, together with proper payment of the Aggregate Exercise Price, or the proportionate part thereof if this Warrant is exercised in part, with payment for the Warrant Shares made by wire transfer of immediately available funds or certified or official bank check payable to the order of the Company. If this Warrant is exercised in part, it must be exercised for a number of whole shares of Common Stock. (b) Cashless Exercise. At any time during the Exercise Period, the Holder may, at its option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this subsection, by surrendering this Warrant to the Company at the address set forth in Section 11 hereof, accompanied by a notice stating such Holder's intent to effect such exchange ("Notice of Exchange"), the number of Warrant Shares corresponding to the portion of the Warrant to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Exchange Date"). In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the Per-Share Exercise Price then in effect by (B) the current market price (determined as provided in subsection (e) of Section 3) per share of Common Stock on the Exchange Date. (c) After any partial exercise or exchange, the Holder will be entitled to receive a new Warrant covering the Warrant Shares as to which this Warrant has not been exercised or exchanged and setting forth the proportionate part of the Aggregate Exercise Price applicable to such Warrant Shares. (d) As soon as practicable, but within ten (10) days following the surrender of this Warrant and the receipt of payment of the Aggregate Exercise Price, or the proportionate part thereof, as the case may be, pursuant to subsection (a) or subsection (b), the Company, within seven (7) days, (i) will issue a certificate or certificates in the name of the Holder for the largest number of whole shares of Common Stock to which the 2 Holder shall be entitled by the exercise (full or partial, in accordance with the subscription form) or exchange of this Warrant; (ii) will, if this Warrant is exercised in whole, in lieu of any fractional share of Common Stock to which the Holder shall be otherwise entitled, pay to the Holder cash in an amount equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors shall determine), and (iii) will deliver the other securities and properties receivable upon the exercise or exchange of this Warrant, or the proportionate part thereof if this Warrant is exercised or exchanged in part, pursuant to the provisions of this Warrant. 2. Reservation of Warrant Shares; Listing. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued shares of Common Stock, for the purpose of effecting the exercise of Warrants, the full number of shares of Common Stock then issuable upon the exercise of all outstanding Warrants. Throughout the period of time during which this Warrant may be exercised, the Company shall use its commercially reasonable efforts to keep the Warrant Shares authorized for listing on the New York Stock Exchange or on any other successor national securities exchange or other relevant market on which the Common Stock is listed, admitted to trading or traded. 3. Protection Against Dilution. The Per-Share Exercise Price and the number of Warrant Shares purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time as set forth in this Section 3. Whenever the Per-Share Exercise Price is adjusted by operation of this Section 3, the number of Warrant Shares to be delivered upon exercise of the Warrants shall be adjusted as provided in subsection (n) hereof. (a) In case the Company shall, while any of the Warrants are outstanding, (i) pay a dividend or make any other distribution with respect to shares of Common Stock in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, (iii) combine outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of stock of the Company (other than the reclassifications covered by subsection (d)), the Per-Share Exercise Price shall be adjusted to be equal to a fraction, the numerator of which shall be the Aggregate Exercise Price and the denominator of which shall be the number of shares of Common Stock or other stock of the Company that the Holder would have owned immediately following such action had such Warrant been exercised immediately prior thereto or, in the case of a dividend, distribution, subdivision, combination or reclassification with respect to which a record date has been established, prior to such record date. An adjustment made pursuant to this subsection shall be made 3 immediately prior to the opening of business on the day following (x) the date of the payment of the dividend or distribution (retroactive to the record date) or (y) the effective date in the case of a subdivision, combination or reclassification (retroactive to the record date, if any). If the Board of Directors shall declare any dividend or distribution or resolve to take any action referred to in this subsection, it shall provide written notice thereof to the Holder not less than 10 days prior to the record date fixed for determining the stockholders entitled to participate therein. (b) In case the Company shall, while any of the Warrants are outstanding, issue rights or warrants to purchase, or securities convertible into or exchangeable for, Common Stock ("Rights") to any holders of its outstanding shares of Common Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for, purchase, convert or exchange shares of Common Stock at a price per share less than the current market price per share of Common Stock (as determined pursuant to subsection (e) below) on the record date mentioned below, provided the purchase price is less than the Per-Share Exercise Price theretofore in effect, the Per-Share Exercise Price shall be adjusted so that the same shall equal the amount determined by multiplying the Per-Share Exercise Price theretofore in effect by a fraction the numerator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Rights plus the number of shares which the aggregate offering price would purchase at such current market price, and the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Rights plus the number of additional shares of Common Stock offered for subscription or purchase. "Aggregate offering price," as used in the preceding sentence, shall mean the amount received or receivable by the Company in consideration of the issuance or sale of Rights plus any additional consideration payable to the Company upon exercise thereof, in each case with reference to the total number of shares of Common Stock offered for subscription or purchase. Such adjustment shall be made immediately prior to the opening of business on the day following the date of issuance of Rights, retroactive to the record date for the determination of stockholders entitled to receive Rights. (c) In case the Company shall, by dividend or otherwise, distribute to any holders of its outstanding shares of Common Stock evidences of its indebtedness, shares of any class or series of its stock, assets, securities convertible into or exchangeable for any of its stock or rights or warrants to subscribe for or purchase any of its securities (excluding any Rights referred to in subsection (b), any dividend or other distribution paid exclusively in cash and any dividend or other distribution referred to in subsection (a) of this Section 3), the Per-Share Exercise Price shall be reduced so that the same shall equal the price determined by multiplying the Per-Share Exercise Price theretofore in effect by a fraction the numerator of which shall be the current market price (determined as provided in subsection (e)) per share of Common Stock on the record date referred to below less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate (as defined below) setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures), on the record date referred to below, of the portion of the evidences of indebtedness, shares of stock, assets, convertible or exchangeable securities, rights or warrants (including fractions) so distributed with respect to each share of Common Stock and the denominator of which shall be such current market price per share of Common Stock. Such adjustment shall be made immediately prior to the opening of business on the day following the date on which any such distribution is made, retroactive to the record date for the determination of stockholders entitled to receive such distribution. In the event that no such dividend or other distribution is so paid or made, the Per-Share Exercise Price shall again be adjusted to be the Per-Share Exercise Price which would then be in effect if such dividend or other distribution had not occurred. If the Board of Directors determines the fair market value of any distribution for purposes of this subsection (c) by reference to the actual or when-issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share of Common Stock (determined as provided in subsection (e)). (d) In the case of any capital reorganization of the Company or reclassification of the Common Stock, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in the case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of the Warrant. Notice of any such reorganization, reclassification, consolidation, merger, exchange, sale or conveyance shall be mailed to the Holder not less than 30 days prior to such event. The above provisions of this subsection (d) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or 5 conveyances. The Company shall require the issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of the Warrant to be responsible for all of the agreements and obligations of the Company hereunder. (e) For the purpose of any computation under subsection (b) of Section 1, or subsection (b) or (c) of this section, the current market price per share of Common Stock on any date in question shall be deemed to be the average of the daily Closing Prices for the five (5) Trading Day period ending on the earlier of the day in question and, if applicable, the last Trading Day before the "ex" date with respect to the issuance or distribution requiring such computation; provided, however, that if more than one event occurs that would require an adjustment pursuant to subsections (a) through (d), inclusive, the Board of Directors shall in good faith make such adjustments to the Closing Prices during such five (5) Trading Day period as it reasonably deems appropriate to effectuate the intent of the adjustment provisions in this Section 3, in which case any such determination by the Board of Directors shall be conclusive unless the Holder shall within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures. For purposes of this paragraph, the term "ex" date means the first date on which the shares of Common Stock trade regular way, without the right to receive such issuance or distribution, on the New York Stock Exchange or on such successor securities exchange as the shares of Common Stock may be listed on or in the relevant market from which the Closing Prices were obtained. (f) No adjustment in the Per-Share Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Per-Share Exercise Price; provided, however, that any adjustments which by reason of this subsection (g) are not required to be made shall be carried forward and taken into account in determining whether any subsequent adjustment shall be required. (g) If any action would require adjustment of the Per-Share Exercise Price pursuant to more than one of the provisions described above, only one adjustment shall be made and such adjustment shall be the amount of adjustment that has the highest absolute value to the Holder. (h) Except as stated above, the Per-Share Exercise Price will not be adjusted for the issuance of shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock, or carrying the right to purchase any of the foregoing. (i) In case the Company shall, by dividend or otherwise, declare or make a distribution on the shares of Common Stock referred to in Section 3(c), the Holder, upon the exercise thereof subsequent to the close of business on the date fixed for 6 the determination of stockholders entitled to receive such distribution and prior to the effectiveness of the Per-Share Exercise Price adjustment in respect of such distribution, shall also be entitled to receive, for each share of Common Stock for which the Warrant is exercised, the portion of the evidences of indebtedness, shares of stock, assets, securities convertible into or exchangeable for any of its stock, or rights or warrants to subscribe for or purchase any of its securities (including fractions) so distributed with respect to each share of Common Stock; provided, however, that, at the election of the Company with respect to all Holders so exercising, the Company may, in lieu of distributing to such Holder any portion of such distribution not consisting of cash or securities of the Company, pay such Holder an amount in cash equal to the fair market value thereof (as determined in good faith by the Board of Directors, whose determination shall be conclusive unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures). If any exercise of a Warrant described in the immediately preceding sentence occurs prior to the payment date for a distribution to holders of shares of Common Stock which the Holder of a Warrant so exercised is entitled to receive in accordance with the immediately preceding sentence, the Company may elect to distribute to such Holder a due bill for the evidences of indebtedness, shares of stock, assets, securities convertible into or exchangeable for any of its stock, or rights or warrants to subscribe for or purchase any of its securities to which such Holder is so entitled, provided, that such due bill (a) meets any applicable requirements of the principal national securities exchange or other market on which the shares of Common Stock are then traded and (b) requires payment or delivery of such evidences of indebtedness, shares of stock, assets, securities convertible into or exchangeable for any of its stock, or rights or warrants to subscribe for or purchase any of its securities no later than the date of payment or delivery thereof to holders of Common Stock receiving such distribution. (j) Whenever the Per-Share Exercise Price is adjusted as provided in this Section 3 and upon any modification of the rights of the Holder in accordance with this Section 3, the Company shall promptly prepare a certificate signed by the chief financial officer or the treasurer setting forth the adjusted Per-Share Exercise Price and showing in reasonable detail the facts requiring such adjustment or modification and the manner of computing the same ("Adjustment Certificate") and cause copies of such certificate to be mailed to the Holder. (k) If the Board of Directors shall authorize and the Company shall declare any dividend or other distribution with respect to the Common Stock other than a distribution exclusively in cash, the Company shall mail notice thereof to the Holder not less than ten (10) days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. 7 (l) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of stock or other securities, the Board of Directors shall in good faith determine the allocation of the adjusted Per-Share Exercise Price between or among such classes of stock or other securities (whose determination shall be conclusive unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures). (m) Upon the expiration of any rights, options, warrants or conversion privileges with respect to the issuance of which an adjustment to the Per-Share Exercise Price had been made, if such shall not have been exercised, the Per-Share Exercise Price, to the extent this Warrant has not then been exercised, shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) on the basis of (A) the Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion privileges, and (B) such shares of Common Stock, if any, that were issued or sold for the consideration actually received by the Company upon such exercise plus the consideration, if any, actually received by the Company for the issuance, sale or grant of all such rights, options, warrants or conversion privileges whether or not exercised; provided, however, that no such readjustment shall have the effect of increasing the Per-Share Exercise Price by an amount in excess of the amount of the adjustment initially made in respect of the issuance, sale or grant of such rights, options, warrants or conversion privileges. (n) Whenever the Per-Share Exercise Price is adjusted as provided pursuant to this Section 3, the number of Warrant Shares purchasable upon the exercise of this Warrant shall be adjusted by multiplying such number of Warrant Shares immediately prior to such adjustment by a fraction, the numerator of which shall be the Per-Share Exercise Price immediately prior to such adjustment, and the denominator of which shall be the Per-Share Exercise Price immediately thereafter. (o) In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Board of Directors shall in good faith determine the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Warrants (whose determination shall be conclusive, unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made 8 pursuant to the Appraisal Procedures) and shall promptly make the adjustments described therein. 4. Put Right. If, at any time during the period commencing on March 8, 2004 and expiring on March 8, 2005, (a) the average daily per-share Closing Price of the Common Stock (the "Average Price") during any period of ninety (90) consecutive Trading Days preceding and including the date of measurement (the "Measurement Date") is greater than the Per-Share Exercise Price in effect on the Measurement Date (the "Measurement Date Exercise Price"), and (b) the number of shares of Common Stock held by stockholders other than the shares of Common Stock held by CT Management Stockholders and the Associated Stockholders as of the close of business on the Measurement Date is less than twenty-five million (25,000,000) (as adjusted for any stock dividend, stock split, combination or similar recapitalization), then the Initial Holder and/or any Related Holder(s), as the case may be (and not any other Holder) shall have the right (the "Put Right") to require the Company to purchase, subject to the following sentence, the Warrant(s), in whole or in part, held by the Initial Holder and/or the Related Holder. If the Initial Holder and/or any Related Holder, as the case may be, elect(s) to exercise the Put Right, then such Holder(s) shall surrender this Warrant to the Company at the address set forth in Section 11 hereof, accompanied by written notice (the "Put Notice") to the Company of the election of the Holder(s) to require the purchase of the Warrant(s) or a part thereof as specified in the Put Notice (any such part to be expressed in terms of a portion of the number of whole Warrant Shares corresponding to the portion of the Warrant(s) to be purchased) (the "Put Portion") and the Company shall, within sixty (60) days after the Put Notice is given, either as determined in its sole discretion: (x) purchase the Put Portion at the Put Purchase Price and, if only a part of a Holder's Warrant is purchased pursuant to an exercise of the Put Right, issue and deliver to such Holder a new Warrant covering the balance of the shares remaining subject to this Warrant (i.e., those Warrant Shares not included in the Put Portion) and setting forth the proportionate part of the Aggregate Exercise Price applicable to such balance of Warrant Shares; or (y) elect not to purchase the Put Portion and provide written notice to such Holder that the Exercise Period shall be extended to continue until March 8, 2008 whereupon this Warrant may continue to be exercised through such date without any further action by the Company or such Holder. If the Company elects not to purchase the Put Portion pursuant to clause (y) of the foregoing sentence, the Company shall issue and deliver to such Holder a new Warrant reflecting the extended Exercise Period and the Put Right governed in this Section 4 shall terminate and be of no further force and effect without any further action by the Company or such Holder. The "Put Purchase Price" shall be the amount equal to the product obtained by multiplying (x) the amount by which the Average Price exceeds the Measurement Date Exercise 10 Price and (y) the number of shares of Common Stock for which the Put Portion is exercisable as of the date the Put Notice is given. The Company may elect to pay the Put Purchase Price in cash or in the form of an assignment of the Company's Interest(s) in the Fund(s) or Fund Control Persons, or in any combination of cash and such an assignment, with an aggregate value equal to the Put Purchase Price. The fair market value of any Interest(s) in the Fund(s) or Fund Control Person(s) to be assigned in accordance with the foregoing shall be determined in accordance with the Appraisal Procedures. The Company shall, in connection with any assignment(s) of such Interest(s), execute and deliver written assignment(s) and any additional documents requested by such exercising Holder to complete, confirm or perfect the assignment of the assigned Interests. 5. Acceleration of Exercise Period. Notwithstanding the provisions of Section 1, prior to the commencement of the Exercise Period, this Warrant may be exercised in whole or part immediately upon the date of commencement of a third party tender offer for more than 33% of the shares of Common Stock outstanding on the date of commencement of such tender offer. 6. Fully Paid Stock; Taxes. The shares of the Common Stock represented by each and every certificate for Warrant Shares delivered upon the exercise of this Warrant shall at the time of such delivery, be duly authorized, validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights or rights of first refusal. The Company shall pay all documentary, stamp or similar taxes and other similar governmental charges that may be imposed with respect to the issuance or delivery of any shares of Common Stock upon exercise of the Warrants (other than income taxes); provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Holder or any Related Holder, no such delivery shall be made unless the person requesting the same has paid to the Company the amount of transfer taxes or charges incident thereto, if any. 7. HSR. To the extent required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") following any exercise or exchange of this Warrant pursuant to subsections (a) or (b) of Section 1 by the Holder and prior to the issuance and delivery of the certificates for the shares of Common Stock required thereby, the Company and the Holder shall cooperate in the preparation of, and file with the United States Federal Trade Commission and the United States Department of Justice, the notification and report form required for such and any supplemental or additional information which may be reasonably requested in connection therewith pursuant to the HSR Act and shall comply in all material respects with the requirements of the HSR Act. The fees to be paid in connection with any such filing under the HSR Act shall be paid by the Holder. 10 8. Transfer; Etc. (a) This Warrant may be transferred by execution of the form of assignment attached hereto or a substantially equivalent assignment form. Until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. (b) This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Securities Act of 1933 and the applicable state securities "blue sky" laws, and is so transferable only upon the books of the Company which it shall cause to be maintained for such purpose. (c) All Warrants issued upon the transfer or assignment of this Warrant or part thereof or upon a partial exercise, exchange or purchase of this Warrant will be dated the same date as this Warrant, and all rights of the holder thereof shall be identical to those of the Holder. 9. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 10. Warrant Holder Not Stockholder. This Warrant does not confer upon the Holder any right to vote on or consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, nor any other rights or liabilities as a stockholder, prior to the exercise hereof; this Warrant does, however, require certain notices to the Holder as set forth herein. 11. Communication. Any notice or other communication to be given hereunder shall be given by hand delivery, by overnight carrier, in each case at the addresses set forth in this section, and shall be deemed to have been given when received. The Company or the Holder may change its address for receiving notices by giving written notice of such change to the other. 11 If to the Company, to: Capital Trust, Inc. 605 Third Avenue, 26th Floor New York, New York 10016 Attn: Chief Financial Officer If to the Holder, to: Travelers General Real Estate Mezzanine Investments II, LLC 205 Columbus Blvd., 9PB Hartford, CT 06183-2030 Attn: Duane Nelson, Esq. Real Estate Investment Number: 12833 12. Headings. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 13. Applicable Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. 14. Amendment, Waiver, etc. Except as expressly provided herein, neither this Warrant nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that any provisions hereof may be amended, waived, discharged or terminated upon the written consent of the Company and the majority in interest of the Holders. 15. Certain Definitions. "Appraisal Procedures" has the meaning set forth in the Venture Agreement. "Associated Stockholders" has the meaning set forth in the Venture Agreement. "Board of Directors" means the board of directors of the Company. "Closing Price", with respect to any security on any day, means the last reported sale price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the NYSE Composite Tape, or, if such security is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such security is listed or admitted to trading, or, if such security is not listed or admitted to trading on a national securities exchange, on the NASDAQ Stock Market of the National Association of Securities Dealers, Inc., 12 or, if such security is not quoted or admitted to trading on such quotation system, on the principal quotation system on which such security is listed or admitted to trading or quoted, or, if not listed or admitted to trading or quoted on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security in the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or, if not so available in such manner, as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors (or any committee duly authorized by the Board of Directors) for that purpose or, if not so available in such manner, as otherwise determined in good faith by the Board of Directors (or any committee duly authorized by the Board of Directors). "CT Management Stockholders" has the meaning set forth in the Venture Agreement. "Fund" has the meaning set forth in the Venture Agreement. "Fund Control Person" has the meaning set forth in the Venture Agreement. "Initial Holder" means CT-F1, LLC, a Delaware limited liability company. "Interest" means (i) rights to distributions from the Fund(s), including but not limited to, the "carried interest" or "promote," and (ii) rights to management fees. "Related Holder(s)" means any Holder who is Citigroup Inc. or any of its direct or indirect wholly owned entities or Travelers Property Casualty Corp. or any of its direct or indirect wholly owned entities. "Trading Day" means a day on which any securities are traded on the national securities exchange or quotation system used to determine the Closing Price. "Venture Agreement" means that certain venture agreement, dated as of the date hereof, by and between the Company, CT-F1, LLC, a Delaware limited liability company, CT-F2-GP, LLC, a Delaware limited liability company, CT-F2-LP, LLC, a Delaware limited liability company, CT Investment Management Co., LLC, a Delaware limited liability company, Travelers Limited Real Estate Mezzanine Investments I, LLC, a Delaware limited liability company, Travelers General Real Estate Mezzanine Investments II, LLC, a Delaware limited liability company and Travelers Limited Real Estate Mezzanine Investments II, LLC, a Delaware limited liability company. 13 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed this 9th day of April, 2001. CAPITAL TRUST, INC. By: /s/ Edward L. Shugrue III -------------------------------- Edward L. Shugrue III Managing Director, Chief Financial Officer and Treasurer SUBSCRIPTION The undersigned, ___________________, pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase ____________________ shares of the Common Stock, par value $.01 per share, of Capital Trust, Inc. covered by said Warrant, and makes payment therefor in full at the price per share provided by said Warrant. Dated:_______________ Signature:___________________________ Address:____________________________ ASSIGNMENT FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto ____________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________, attorney, to transfer said Warrant on the books of Capital Trust, Inc. Dated:_______________ Signature:___________________________ Address:____________________________ PARTIAL ASSIGNMENT FOR VALUE RECEIVED _______________ hereby assigns and transfers unto ____________________ the right to purchase _______ shares of Common Stock, par value $.01 per share, of Capital Trust, Inc. covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint ____________________, attorney, to transfer such part of said Warrant on the books of Capital Trust, Inc. Dated:_______________ Signature:___________________________ Address:____________________________ EX-10 6 exh10-20c.txt EXHIBIT 10.20.C Exhibit 10.20.c The warrants represented by this certificate and the securities issuable upon exercise thereof have not been registered under the Securities Act of 1933 or the securities laws of any state. Neither such warrants nor such securities may be sold, pledged, hypothecated or otherwise transferred without such registration, except upon delivery to the Company of such evidence as may be satisfactory to counsel for the Company to the effect that any such transfer shall not be in violation of the Securities Act of 1933 or applicable state securities laws or any rule or regulation promulgated thereunder. CAPITAL TRUST, INC. Fund II Purchase Warrant for Class A Common Stock FOR VALUE RECEIVED, Capital Trust, Inc., a Maryland corporation (the "Company"), hereby grants, pursuant hereto (this "Warrant"), to Travelers General Real Estate Mezzanine Investments II, LLC, a Delaware limited liability company, or its permitted assigns, the right to purchase from the Company, at any time or from time to time commencing on the date hereof and prior to 5:00 p.m., Eastern Time, on March 8, 2005, up to Two Hundred Thirty Six Thousand Two Hundred and Thirty Three (236,233) (subject to adjustment as provided herein) fully paid and non-assessable shares of class A common stock, par value $.01 per share, of the Company for five dollars ($5.00) per share (subject to adjustment as provided herein) for an aggregate purchase price (assuming full exercise) of One Million One Hundred Eighty One Thousand One Hundred and Sixty Five ($1,181,165) Dollars (not subject to adjustment). Hereinafter, (i) said class A common stock, par value $.01 per share, of the Company, is referred to as the "Common Stock," (ii) the shares of the Common Stock purchasable hereunder or under any other Warrant (as hereinafter defined) are referred to as the "Warrant Shares," (iii) the aggregate purchase price payable for the Warrant Shares purchasable hereunder is referred to as the "Aggregate Exercise Price," (iv) the price payable for each of the Warrant Shares is referred to as the "Per-Share Exercise Price," (v) this Warrant, and all warrants hereafter issued in exchange for, in substitution for or upon transfer of this Warrant are referred to as the "Warrants" and (vi) the holder of this Warrant is referred to as the "Holder." Definitions of other capitalized terms used herein are set forth in Section 15 hereof. The Aggregate Exercise Price is not subject to adjustment. 1. Exercise of Warrant. (a) Cash Exercise. This Warrant may be exercised in whole at any time, or in part from time to time, commencing on the date hereof and prior to 5:00 p.m., Eastern Time, on March 8, 2005 or March 8, 2008 if the period during which this Warrant may be exercised is extended pursuant to Section 4 (the "Exercise Period") by the Holder by the surrender of this Warrant (with the subscription form at the end hereof duly executed) to the Company at the address set forth in Section 11 hereof, together with proper payment of the Aggregate Exercise Price, or the proportionate part thereof if this Warrant is exercised in part, with payment for the Warrant Shares made by wire transfer of immediately available funds or certified or official bank check payable to the order of the Company. If this Warrant is exercised in part, it must be exercised for a number of whole shares of Common Stock. (b) Cashless Exercise. At any time during the Exercise Period, the Holder may, at its option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this subsection, by surrendering this Warrant to the Company at the address set forth in Section 11 hereof, accompanied by a notice stating such Holder's intent to effect such exchange ("Notice of Exchange"), the number of Warrant Shares corresponding to the portion of the Warrant to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Exchange Date"). In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the Per-Share Exercise Price then in effect by (B) the current market price (determined as provided in subsection (e) of Section 3) per share of Common Stock on the Exchange Date. (c) After any partial exercise or exchange, the Holder will be entitled to receive a new Warrant covering the Warrant Shares as to which this Warrant has not been exercised or exchanged and setting forth the proportionate part of the Aggregate Exercise Price applicable to such Warrant Shares. (d) As soon as practicable, but within ten (10) days following the surrender of this Warrant and the receipt of payment of the Aggregate Exercise Price, or the proportionate part thereof, as the case may be, pursuant to subsection (a) or subsection (b), the Company, within seven (7) days, (i) will issue a certificate or certificates in the name of the Holder for the largest number of whole shares of Common Stock to which the 2 Holder shall be entitled by the exercise (full or partial, in accordance with the subscription form) or exchange of this Warrant; (ii) will, if this Warrant is exercised in whole, in lieu of any fractional share of Common Stock to which the Holder shall be otherwise entitled, pay to the Holder cash in an amount equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors shall determine), and (iii) will deliver the other securities and properties receivable upon the exercise or exchange of this Warrant, or the proportionate part thereof if this Warrant is exercised or exchanged in part, pursuant to the provisions of this Warrant. 2. Reservation of Warrant Shares; Listing. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued shares of Common Stock, for the purpose of effecting the exercise of Warrants, the full number of shares of Common Stock then issuable upon the exercise of all outstanding Warrants. Throughout the period of time during which this Warrant may be exercised, the Company shall use its commercially reasonable efforts to keep the Warrant Shares authorized for listing on the New York Stock Exchange or on any other successor national securities exchange or other relevant market on which the Common Stock is listed, admitted to trading or traded. 3. Protection Against Dilution. The Per-Share Exercise Price and the number of Warrant Shares purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time as set forth in this Section 3. Whenever the Per-Share Exercise Price is adjusted by operation of this Section 3, the number of Warrant Shares to be delivered upon exercise of the Warrants shall be adjusted as provided in subsection (n) hereof. (a) In case the Company shall, while any of the Warrants are outstanding, (i) pay a dividend or make any other distribution with respect to shares of Common Stock in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, (iii) combine outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of stock of the Company (other than the reclassifications covered by subsection (d)), the Per-Share Exercise Price shall be adjusted to be equal to a fraction, the numerator of which shall be the Aggregate Exercise Price and the denominator of which shall be the number of shares of Common Stock or other stock of the Company that the Holder would have owned immediately following such action had such Warrant been exercised immediately prior thereto or, in the case of a dividend, distribution, subdivision, combination or reclassification with respect to which a record date has been established, prior to such record date. An adjustment made pursuant to this subsection shall be made 3 immediately prior to the opening of business on the day following (x) the date of the payment of the dividend or distribution (retroactive to the record date) or (y) the effective date in the case of a subdivision, combination or reclassification (retroactive to the record date, if any). If the Board of Directors shall declare any dividend or distribution or resolve to take any action referred to in this subsection, it shall provide written notice thereof to the Holder not less than 10 days prior to the record date fixed for determining the stockholders entitled to participate therein. (b) In case the Company shall, while any of the Warrants are outstanding, issue rights or warrants to purchase, or securities convertible into or exchangeable for, Common Stock ("Rights") to any holders of its outstanding shares of Common Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for, purchase, convert or exchange shares of Common Stock at a price per share less than the current market price per share of Common Stock (as determined pursuant to subsection (e) below) on the record date mentioned below, provided the purchase price is less than the Per-Share Exercise Price theretofore in effect, the Per-Share Exercise Price shall be adjusted so that the same shall equal the amount determined by multiplying the Per-Share Exercise Price theretofore in effect by a fraction the numerator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Rights plus the number of shares which the aggregate offering price would purchase at such current market price, and the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Rights plus the number of additional shares of Common Stock offered for subscription or purchase. "Aggregate offering price," as used in the preceding sentence, shall mean the amount received or receivable by the Company in consideration of the issuance or sale of Rights plus any additional consideration payable to the Company upon exercise thereof, in each case with reference to the total number of shares of Common Stock offered for subscription or purchase. Such adjustment shall be made immediately prior to the opening of business on the day following the date of issuance of Rights, retroactive to the record date for the determination of stockholders entitled to receive Rights. (c) In case the Company shall, by dividend or otherwise, distribute to any holders of its outstanding shares of Common Stock evidences of its indebtedness, shares of any class or series of its stock, assets, securities convertible into or exchangeable for any of its stock or rights or warrants to subscribe for or purchase any of its securities (excluding any Rights referred to in subsection (b), any dividend or other distribution paid exclusively in cash and any dividend or other distribution referred to in subsection (a) of this Section 3), the Per-Share Exercise Price shall be reduced so that the same shall equal the price determined by multiplying the Per-Share Exercise Price theretofore in effect by a fraction the numerator of which shall be the current market price (determined as provided in subsection (e)) per share of Common Stock on the record date 4 referred to below less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate (as defined below) setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures), on the record date referred to below, of the portion of the evidences of indebtedness, shares of stock, assets, convertible or exchangeable securities, rights or warrants (including fractions) so distributed with respect to each share of Common Stock and the denominator of which shall be such current market price per share of Common Stock. Such adjustment shall be made immediately prior to the opening of business on the day following the date on which any such distribution is made, retroactive to the record date for the determination of stockholders entitled to receive such distribution. In the event that no such dividend or other distribution is so paid or made, the Per-Share Exercise Price shall again be adjusted to be the Per-Share Exercise Price which would then be in effect if such dividend or other distribution had not occurred. If the Board of Directors determines the fair market value of any distribution for purposes of this subsection (c) by reference to the actual or when-issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share of Common Stock (determined as provided in subsection (e)). (d) In the case of any capital reorganization of the Company or reclassification of the Common Stock, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in the case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of the Warrant. Notice of any such reorganization, reclassification, consolidation, merger, exchange, sale or conveyance shall be mailed to the Holder not less than 30 days prior to such event. The above provisions of this subsection (d) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or 5 conveyances. The Company shall require the issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of the Warrant to be responsible for all of the agreements and obligations of the Company hereunder. (e) For the purpose of any computation under subsection (b) of Section 1, or subsection (b) or (c) of this section, the current market price per share of Common Stock on any date in question shall be deemed to be the average of the daily Closing Prices for the five (5) Trading Day period ending on the earlier of the day in question and, if applicable, the last Trading Day before the "ex" date with respect to the issuance or distribution requiring such computation; provided, however, that if more than one event occurs that would require an adjustment pursuant to subsections (a) through (d), inclusive, the Board of Directors shall in good faith make such adjustments to the Closing Prices during such five (5) Trading Day period as it reasonably deems appropriate to effectuate the intent of the adjustment provisions in this Section 3, in which case any such determination by the Board of Directors shall be conclusive unless the Holder shall within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures. For purposes of this paragraph, the term "ex" date means the first date on which the shares of Common Stock trade regular way, without the right to receive such issuance or distribution, on the New York Stock Exchange or on such successor securities exchange as the shares of Common Stock may be listed on or in the relevant market from which the Closing Prices were obtained. (f) No adjustment in the Per-Share Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Per-Share Exercise Price; provided, however, that any adjustments which by reason of this subsection (g) are not required to be made shall be carried forward and taken into account in determining whether any subsequent adjustment shall be required. (g) If any action would require adjustment of the Per-Share Exercise Price pursuant to more than one of the provisions described above, only one adjustment shall be made and such adjustment shall be the amount of adjustment that has the highest absolute value to the Holder. (h) Except as stated above, the Per-Share Exercise Price will not be adjusted for the issuance of shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock, or carrying the right to purchase any of the foregoing. (i) In case the Company shall, by dividend or otherwise, declare or make a distribution on the shares of Common Stock referred to in Section 3(c), the Holder, upon the exercise thereof subsequent to the close of business on the date fixed for 6 the determination of stockholders entitled to receive such distribution and prior to the effectiveness of the Per-Share Exercise Price adjustment in respect of such distribution, shall also be entitled to receive, for each share of Common Stock for which the Warrant is exercised, the portion of the evidences of indebtedness, shares of stock, assets, securities convertible into or exchangeable for any of its stock, or rights or warrants to subscribe for or purchase any of its securities (including fractions) so distributed with respect to each share of Common Stock; provided, however, that, at the election of the Company with respect to all Holders so exercising, the Company may, in lieu of distributing to such Holder any portion of such distribution not consisting of cash or securities of the Company, pay such Holder an amount in cash equal to the fair market value thereof (as determined in good faith by the Board of Directors, whose determination shall be conclusive unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures). If any exercise of a Warrant described in the immediately preceding sentence occurs prior to the payment date for a distribution to holders of shares of Common Stock which the Holder of a Warrant so exercised is entitled to receive in accordance with the immediately preceding sentence, the Company may elect to distribute to such Holder a due bill for the evidences of indebtedness, shares of stock, assets, securities convertible into or exchangeable for any of its stock, or rights or warrants to subscribe for or purchase any of its securities to which such Holder is so entitled, provided, that such due bill (a) meets any applicable requirements of the principal national securities exchange or other market on which the shares of Common Stock are then traded and (b) requires payment or delivery of such evidences of indebtedness, shares of stock, assets, securities convertible into or exchangeable for any of its stock, or rights or warrants to subscribe for or purchase any of its securities no later than the date of payment or delivery thereof to holders of Common Stock receiving such distribution. (j) Whenever the Per-Share Exercise Price is adjusted as provided in this Section 3 and upon any modification of the rights of the Holder in accordance with this Section 3, the Company shall promptly prepare a certificate signed by the chief financial officer or the treasurer setting forth the adjusted Per-Share Exercise Price and showing in reasonable detail the facts requiring such adjustment or modification and the manner of computing the same ("Adjustment Certificate") and cause copies of such certificate to be mailed to the Holder. (k) If the Board of Directors shall authorize and the Company shall declare any dividend or other distribution with respect to the Common Stock other than a distribution exclusively in cash, the Company shall mail notice thereof to the Holder not less than ten (10) days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. 7 (l) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of stock or other securities, the Board of Directors shall in good faith determine the allocation of the adjusted Per-Share Exercise Price between or among such classes of stock or other securities (whose determination shall be conclusive unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures). (m) Upon the expiration of any rights, options, warrants or conversion privileges with respect to the issuance of which an adjustment to the Per-Share Exercise Price had been made, if such shall not have been exercised, the Per-Share Exercise Price, to the extent this Warrant has not then been exercised, shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) on the basis of (A) the Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion privileges, and (B) such shares of Common Stock, if any, that were issued or sold for the consideration actually received by the Company upon such exercise plus the consideration, if any, actually received by the Company for the issuance, sale or grant of all such rights, options, warrants or conversion privileges whether or not exercised; provided, however, that no such readjustment shall have the effect of increasing the Per-Share Exercise Price by an amount in excess of the amount of the adjustment initially made in respect of the issuance, sale or grant of such rights, options, warrants or conversion privileges. (n) Whenever the Per-Share Exercise Price is adjusted as provided pursuant to this Section 3, the number of Warrant Shares purchasable upon the exercise of this Warrant shall be adjusted by multiplying such number of Warrant Shares immediately prior to such adjustment by a fraction, the numerator of which shall be the Per-Share Exercise Price immediately prior to such adjustment, and the denominator of which shall be the Per-Share Exercise Price immediately thereafter. (o) In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Board of Directors shall in good faith determine the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Warrants (whose determination shall be conclusive, unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made 8 pursuant to the Appraisal Procedures) and shall promptly make the adjustments described therein. 4. Put Right. If, at any time during the period commencing on March 8, 2004 and expiring on March 8, 2005, (a) the average daily per-share Closing Price of the Common Stock (the "Average Price") during any period of ninety (90) consecutive Trading Days preceding and including the date of measurement (the "Measurement Date") is greater than the Per-Share Exercise Price in effect on the Measurement Date (the "Measurement Date Exercise Price"), and (b) the number of shares of Common Stock held by stockholders other than the shares of Common Stock held by CT Management Stockholders and the Associated Stockholders as of the close of business on the Measurement Date is less than twenty-five million (25,000,000) (as adjusted for any stock dividend, stock split, combination or similar recapitalization), then the Initial Holder and/or any Related Holder(s), as the case may be (and not any other Holder) shall have the right (the "Put Right") to require the Company to purchase, subject to the following sentence, the Warrant(s), in whole or in part, held by the Initial Holder and/or the Related Holder. If the Initial Holder and/or any Related Holder, as the case may be, elect(s) to exercise the Put Right, then such Holder(s) shall surrender this Warrant to the Company at the address set forth in Section 11 hereof, accompanied by written notice (the "Put Notice") to the Company of the election of the Holder(s) to require the purchase of the Warrant(s) or a part thereof as specified in the Put Notice (any such part to be expressed in terms of a portion of the number of whole Warrant Shares corresponding to the portion of the Warrant(s) to be purchased) (the "Put Portion") and the Company shall, within sixty (60) days after the Put Notice is given, either as determined in its sole discretion: (x) purchase the Put Portion at the Put Purchase Price and, if only a part of a Holder's Warrant is purchased pursuant to an exercise of the Put Right, issue and deliver to such Holder a new Warrant covering the balance of the shares remaining subject to this Warrant (i.e., those Warrant Shares not included in the Put Portion) and setting forth the proportionate part of the Aggregate Exercise Price applicable to such balance of Warrant Shares; or (y) elect not to purchase the Put Portion and provide written notice to such Holder that the Exercise Period shall be extended to continue until March 8, 2008 whereupon this Warrant may continue to be exercised through such date without any further action by the Company or such Holder. If the Company elects not to purchase the Put Portion pursuant to clause (y) of the foregoing sentence, the Company shall issue and deliver to such Holder a new Warrant reflecting the extended Exercise Period and the Put Right governed in this Section 4 shall terminate and be of no further force and effect without any further action by the Company or such Holder. The "Put Purchase Price" shall be the amount equal to the product obtained by multiplying (x) the amount by which the Average Price exceeds the Measurement Date Exercise 9 Price and (y) the number of shares of Common Stock for which the Put Portion is exercisable as of the date the Put Notice is given. The Company may elect to pay the Put Purchase Price in cash or in the form of an assignment of the Company's Interest(s) in the Fund(s) or Fund Control Persons, or in any combination of cash and such an assignment, with an aggregate value equal to the Put Purchase Price. The fair market value of any Interest(s) in the Fund(s) or Fund Control Person(s) to be assigned in accordance with the foregoing shall be determined in accordance with the Appraisal Procedures. The Company shall, in connection with any assignment(s) of such Interest(s), execute and deliver written assignment(s) and any additional documents requested by such exercising Holder to complete, confirm or perfect the assignment of the assigned Interests. 5. Acceleration of Exercise Period. Notwithstanding the provisions of Section 1, prior to the commencement of the Exercise Period, this Warrant may be exercised in whole or part immediately upon the date of commencement of a third party tender offer for more than 33% of the shares of Common Stock outstanding on the date of commencement of such tender offer. 6. Fully Paid Stock; Taxes. The shares of the Common Stock represented by each and every certificate for Warrant Shares delivered upon the exercise of this Warrant shall at the time of such delivery, be duly authorized, validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights or rights of first refusal. The Company shall pay all documentary, stamp or similar taxes and other similar governmental charges that may be imposed with respect to the issuance or delivery of any shares of Common Stock upon exercise of the Warrants (other than income taxes); provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Holder or any Related Holder, no such delivery shall be made unless the person requesting the same has paid to the Company the amount of transfer taxes or charges incident thereto, if any. 7. HSR. To the extent required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") following any exercise or exchange of this Warrant pursuant to subsections (a) or (b) of Section 1 by the Holder and prior to the issuance and delivery of the certificates for the shares of Common Stock required thereby, the Company and the Holder shall cooperate in the preparation of, and file with the United States Federal Trade Commission and the United States Department of Justice, the notification and report form required for such and any supplemental or additional information which may be reasonably requested in connection therewith pursuant to the HSR Act and shall comply in all material respects with the requirements of the HSR Act. The fees to be paid in connection with any such filing under the HSR Act shall be paid by the Holder. 10 8. Transfer; Etc. (a) This Warrant may be transferred by execution of the form of assignment attached hereto or a substantially equivalent assignment form. Until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. (b) This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Securities Act of 1933 and the applicable state securities "blue sky" laws, and is so transferable only upon the books of the Company which it shall cause to be maintained for such purpose. (c) All Warrants issued upon the transfer or assignment of this Warrant or part thereof or upon a partial exercise, exchange or purchase of this Warrant will be dated the same date as this Warrant, and all rights of the holder thereof shall be identical to those of the Holder. 9. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 10. Warrant Holder Not Stockholder. This Warrant does not confer upon the Holder any right to vote on or consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, nor any other rights or liabilities as a stockholder, prior to the exercise hereof; this Warrant does, however, require certain notices to the Holder as set forth herein. 11. Communication. Any notice or other communication to be given hereunder shall be given by hand delivery, by overnight carrier, in each case at the addresses set forth in this section, and shall be deemed to have been given when received. The Company or the Holder may change its address for receiving notices by giving written notice of such change to the other. 11 If to the Company, to: Capital Trust, Inc. 605 Third Avenue, 26th Floor New York, New York 10016 Attn: Chief Financial Officer If to the Holder, to: Travelers General Real Estate Mezzanine Investments II, LLC 205 Columbus Blvd., 9PB Hartford, CT 06183-2030 Attn: Duane Nelson, Esq. Real Estate Investment Number: 12833 12. Headings. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 13. Applicable Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. 14. Amendment, Waiver, etc. Except as expressly provided herein, neither this Warrant nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that any provisions hereof may be amended, waived, discharged or terminated upon the written consent of the Company and the majority in interest of the Holders. 15. Certain Definitions. "Appraisal Procedures" has the meaning set forth in the Venture Agreement. "Associated Stockholders" has the meaning set forth in the Venture Agreement. "Board of Directors" means the board of directors of the Company. "Closing Price", with respect to any security on any day, means the last reported sale price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the NYSE Composite Tape, or, if such security is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such security is listed or admitted to trading, or, if such security is not listed or admitted to trading on a national securities exchange, on the NASDAQ Stock Market of the National Association of Securities Dealers, Inc., 12 or, if such security is not quoted or admitted to trading on such quotation system, on the principal quotation system on which such security is listed or admitted to trading or quoted, or, if not listed or admitted to trading or quoted on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security in the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or, if not so available in such manner, as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors (or any committee duly authorized by the Board of Directors) for that purpose or, if not so available in such manner, as otherwise determined in good faith by the Board of Directors (or any committee duly authorized by the Board of Directors). "CT Management Stockholders" has the meaning set forth in the Venture Agreement. "Fund" has the meaning set forth in the Venture Agreement. "Fund Control Person" has the meaning set forth in the Venture Agreement. "Initial Holder" means CT-F1, LLC, a Delaware limited liability company. "Interest" means (i) rights to distributions from the Fund(s), including but not limited to, the "carried interest" or "promote," and (ii) rights to management fees. "Related Holder(s)" means any Holder who is Citigroup Inc. or any of its direct or indirect wholly owned entities or Travelers Property Casualty Corp. or any of its direct or indirect wholly owned entities. "Trading Day" means a day on which any securities are traded on the national securities exchange or quotation system used to determine the Closing Price. "Venture Agreement" means that certain amended and restated venture agreement, dated as of April 9, 2001, by and between the Company, CT-F1, LLC, a Delaware limited liability company, CT-F2-GP, LLC, a Delaware limited liability company, CT-F2-LP, LLC, a Delaware limited liability company, CT Investment Management Co., LLC, a Delaware limited liability company, Travelers Limited Real Estate Mezzanine Investments I, LLC, a Delaware limited liability company, Travelers General Real Estate Mezzanine Investments II, LLC, a Delaware limited liability company and Travelers Limited Real Estate Mezzanine Investments II, LLC, a Delaware limited liability company. 13 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed this 29th day of May, 2001. CAPITAL TRUST, INC. By: /s/ Edward L. Shugrue III ------------------------------ Edward L. Shugrue III Managing Director, Chief Financial Officer and Treasurer SUBSCRIPTION The undersigned, ___________________, pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase ____________________ shares of the Common Stock, par value $.01 per share, of Capital Trust, Inc. covered by said Warrant, and makes payment therefor in full at the price per share provided by said Warrant. Dated:_______________ Signature:___________________________ Address:____________________________ ASSIGNMENT FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto ____________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________, attorney, to transfer said Warrant on the books of Capital Trust, Inc. Dated:_______________ Signature:___________________________ Address:____________________________ PARTIAL ASSIGNMENT FOR VALUE RECEIVED _______________ hereby assigns and transfers unto ____________________ the right to purchase _______ shares of Common Stock, par value $.01 per share, of Capital Trust, Inc. covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint ____________________, attorney, to transfer such part of said Warrant on the books of Capital Trust, Inc. Dated:_______________ Signature:___________________________ Address:____________________________ EX-10 7 exh10-20d.txt EXHIBIT 10.20.D Exhibit 10.20.d The warrants represented by this certificate and the securities issuable upon exercise thereof have not been registered under the Securities Act of 1933 or the securities laws of any state. Neither such warrants nor such securities may be sold, pledged, hypothecated or otherwise transferred without such registration, except upon delivery to the Company of such evidence as may be satisfactory to counsel for the Company to the effect that any such transfer shall not be in violation of the Securities Act of 1933 or applicable state securities laws or any rule or regulation promulgated thereunder. CAPITAL TRUST, INC. Fund II Purchase Warrant for Class A Common Stock FOR VALUE RECEIVED, Capital Trust, Inc., a Maryland corporation (the "Company"), hereby grants, pursuant hereto (this "Warrant"), to Travelers General Real Estate Mezzanine Investments II, LLC, a Delaware limited liability company, or its permitted assigns, the right to purchase from the Company, at any time or from time to time commencing on the date hereof and prior to 5:00 p.m., Eastern Time, on March 8, 2005, up to one million twenty six thousand six hundred and thirty four (1,026,634) (subject to adjustment as provided herein) fully paid and non-assessable shares of class A common stock, par value $.01 per share, of the Company for five dollars ($5.00) per share (subject to adjustment as provided herein) for an aggregate purchase price (assuming full exercise) of five million one hundred thirty three thousand one hundred and seventy ($5,133,170) Dollars (not subject to adjustment). Hereinafter, (i) said class A common stock, par value $.01 per share, of the Company, is referred to as the "Common Stock," (ii) the shares of the Common Stock purchasable hereunder or under any other Warrant (as hereinafter defined) are referred to as the "Warrant Shares," (iii) the aggregate purchase price payable for the Warrant Shares purchasable hereunder is referred to as the "Aggregate Exercise Price," (iv) the price payable for each of the Warrant Shares is referred to as the "Per-Share Exercise Price," (v) this Warrant, and all warrants hereafter issued in exchange for, in substitution for or upon transfer of this Warrant are referred to as the "Warrants" and (vi) the holder of this Warrant is referred to as the "Holder." Definitions of other capitalized terms used herein are set forth in Section 15 hereof. The Aggregate Exercise Price is not subject to adjustment. 1. Exercise of Warrant. (a) Cash Exercise. This Warrant may be exercised in whole at any time, or in part from time to time, commencing on the date hereof and prior to 5:00 p.m., Eastern Time, on March 8, 2005 or March 8, 2008 if the period during which this Warrant may be exercised is extended pursuant to Section 4 (the "Exercise Period") by the Holder by the surrender of this Warrant (with the subscription form at the end hereof duly executed) to the Company at the address set forth in Section 11 hereof, together with proper payment of the Aggregate Exercise Price, or the proportionate part thereof if this Warrant is exercised in part, with payment for the Warrant Shares made by wire transfer of immediately available funds or certified or official bank check payable to the order of the Company. If this Warrant is exercised in part, it must be exercised for a number of whole shares of Common Stock. (b) Cashless Exercise. At any time during the Exercise Period, the Holder may, at its option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this subsection, by surrendering this Warrant to the Company at the address set forth in Section 11 hereof, accompanied by a notice stating such Holder's intent to effect such exchange ("Notice of Exchange"), the number of Warrant Shares corresponding to the portion of the Warrant to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Exchange Date"). In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the Per-Share Exercise Price then in effect by (B) the current market price (determined as provided in subsection (e) of Section 3) per share of Common Stock on the Exchange Date. (c) After any partial exercise or exchange, the Holder will be entitled to receive a new Warrant covering the Warrant Shares as to which this Warrant has not been exercised or exchanged and setting forth the proportionate part of the Aggregate Exercise Price applicable to such Warrant Shares. (d) As soon as practicable, but within ten (10) days following the surrender of this Warrant and the receipt of payment of the Aggregate Exercise Price, or the proportionate part thereof, as the case may be, pursuant to subsection (a) or subsection (b), the Company, within seven (7) days, (i) will issue a certificate or certificates in the name of the Holder for the largest number of whole shares of Common Stock to which the 2 Holder shall be entitled by the exercise (full or partial, in accordance with the subscription form) or exchange of this Warrant; (ii) will, if this Warrant is exercised in whole, in lieu of any fractional share of Common Stock to which the Holder shall be otherwise entitled, pay to the Holder cash in an amount equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors shall determine), and (iii) will deliver the other securities and properties receivable upon the exercise or exchange of this Warrant, or the proportionate part thereof if this Warrant is exercised or exchanged in part, pursuant to the provisions of this Warrant. 2. Reservation of Warrant Shares; Listing. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued shares of Common Stock, for the purpose of effecting the exercise of Warrants, the full number of shares of Common Stock then issuable upon the exercise of all outstanding Warrants. Throughout the period of time during which this Warrant may be exercised, the Company shall use its commercially reasonable efforts to keep the Warrant Shares authorized for listing on the New York Stock Exchange or on any other successor national securities exchange or other relevant market on which the Common Stock is listed, admitted to trading or traded. 3. Protection Against Dilution. The Per-Share Exercise Price and the number of Warrant Shares purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time as set forth in this Section 3. Whenever the Per-Share Exercise Price is adjusted by operation of this Section 3, the number of Warrant Shares to be delivered upon exercise of the Warrants shall be adjusted as provided in subsection (n) hereof. (a) In case the Company shall, while any of the Warrants are outstanding, (i) pay a dividend or make any other distribution with respect to shares of Common Stock in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, (iii) combine outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of stock of the Company (other than the reclassifications covered by subsection (d)), the Per-Share Exercise Price shall be adjusted to be equal to a fraction, the numerator of which shall be the Aggregate Exercise Price and the denominator of which shall be the number of shares of Common Stock or other stock of the Company that the Holder would have owned immediately following such action had such Warrant been exercised immediately prior thereto or, in the case of a dividend, distribution, subdivision, combination or reclassification with respect to which a record date has been established, prior to such record date. An adjustment made pursuant to this subsection shall be made 3 immediately prior to the opening of business on the day following (x) the date of the payment of the dividend or distribution (retroactive to the record date) or (y) the effective date in the case of a subdivision, combination or reclassification (retroactive to the record date, if any). If the Board of Directors shall declare any dividend or distribution or resolve to take any action referred to in this subsection, it shall provide written notice thereof to the Holder not less than 10 days prior to the record date fixed for determining the stockholders entitled to participate therein. (b) In case the Company shall, while any of the Warrants are outstanding, issue rights or warrants to purchase, or securities convertible into or exchangeable for, Common Stock ("Rights") to any holders of its outstanding shares of Common Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for, purchase, convert or exchange shares of Common Stock at a price per share less than the current market price per share of Common Stock (as determined pursuant to subsection (e) below) on the record date mentioned below, provided the purchase price is less than the Per-Share Exercise Price theretofore in effect, the Per-Share Exercise Price shall be adjusted so that the same shall equal the amount determined by multiplying the Per-Share Exercise Price theretofore in effect by a fraction the numerator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Rights plus the number of shares which the aggregate offering price would purchase at such current market price, and the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Rights plus the number of additional shares of Common Stock offered for subscription or purchase. "Aggregate offering price," as used in the preceding sentence, shall mean the amount received or receivable by the Company in consideration of the issuance or sale of Rights plus any additional consideration payable to the Company upon exercise thereof, in each case with reference to the total number of shares of Common Stock offered for subscription or purchase. Such adjustment shall be made immediately prior to the opening of business on the day following the date of issuance of Rights, retroactive to the record date for the determination of stockholders entitled to receive Rights. (c) In case the Company shall, by dividend or otherwise, distribute to any holders of its outstanding shares of Common Stock evidences of its indebtedness, shares of any class or series of its stock, assets, securities convertible into or exchangeable for any of its stock or rights or warrants to subscribe for or purchase any of its securities (excluding any Rights referred to in subsection (b), any dividend or other distribution paid exclusively in cash and any dividend or other distribution referred to in subsection (a) of this Section 3), the Per-Share Exercise Price shall be reduced so that the same shall equal the price determined by multiplying the Per-Share Exercise Price theretofore in effect by a fraction the numerator of which shall be the current market price (determined as provided in subsection (e)) per share of Common Stock on the record date 4 referred to below less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate (as defined below) setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures), on the record date referred to below, of the portion of the evidences of indebtedness, shares of stock, assets, convertible or exchangeable securities, rights or warrants (including fractions) so distributed with respect to each share of Common Stock and the denominator of which shall be such current market price per share of Common Stock. Such adjustment shall be made immediately prior to the opening of business on the day following the date on which any such distribution is made, retroactive to the record date for the determination of stockholders entitled to receive such distribution. In the event that no such dividend or other distribution is so paid or made, the Per-Share Exercise Price shall again be adjusted to be the Per-Share Exercise Price which would then be in effect if such dividend or other distribution had not occurred. If the Board of Directors determines the fair market value of any distribution for purposes of this subsection (c) by reference to the actual or when-issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share of Common Stock (determined as provided in subsection (e)). (d) In the case of any capital reorganization of the Company or reclassification of the Common Stock, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in the case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been exercised immediately prior to the effective date of such reorganization, reclassification consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of the Warrant. Notice of any such reorganization, reclassification, consolidation, merger, exchange, sale or conveyance shall be mailed to the Holder not less than 30 days prior to such event. The above provisions of this subsection (d) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or 5 conveyances. The Company shall require the issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of the Warrant to be responsible for all of the agreements and obligations of the Company hereunder. (e) For the purpose of any computation under subsection (b) of Section 1, or subsection (b) or (c) of this section, the current market price per share of Common Stock on any date in question shall be deemed to be the average of the daily Closing Prices for the five (5) Trading Day period ending on the earlier of the day in question and, if applicable, the last Trading Day before the "ex" date with respect to the issuance or distribution requiring such computation; provided, however, that if more than one event occurs that would require an adjustment pursuant to subsections (a) through (d), inclusive, the Board of Directors shall in good faith make such adjustments to the Closing Prices during such five (5) Trading Day period as it reasonably deems appropriate to effectuate the intent of the adjustment provisions in this Section 3, in which case any such determination by the Board of Directors shall be conclusive unless the Holder shall within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures. For purposes of this paragraph, the term "ex" date means the first date on which the shares of Common Stock trade regular way, without the right to receive such issuance or distribution, on the New York Stock Exchange or on such successor securities exchange as the shares of Common Stock may be listed on or in the relevant market from which the Closing Prices were obtained. (f) No adjustment in the Per-Share Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Per-Share Exercise Price; provided, however, that any adjustments which by reason of this subsection (g) are not required to be made shall be carried forward and taken into account in determining whether any subsequent adjustment shall be required. (g) If any action would require adjustment of the Per-Share Exercise Price pursuant to more than one of the provisions described above, only one adjustment shall be made and such adjustment shall be the amount of adjustment that has the highest absolute value to the Holder. (h) Except as stated above, the Per-Share Exercise Price will not be adjusted for the issuance of shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock, or carrying the right to purchase any of the foregoing. (i) In case the Company shall, by dividend or otherwise, declare or make a distribution on the shares of Common Stock referred to in Section 3(c), the Holder, upon the exercise thereof subsequent to the close of business on the date fixed for 6 the determination of stockholders entitled to receive such distribution and prior to the effectiveness of the Per-Share Exercise Price adjustment in respect of such distribution, shall also be entitled to receive, for each share of Common Stock for which the Warrant is exercised, the portion of the evidences of indebtedness, shares of stock, assets, securities convertible into or exchangeable for any of its stock, or rights or warrants to subscribe for or purchase any of its securities (including fractions) so distributed with respect to each share of Common Stock; provided, however, that, at the election of the Company with respect to all Holders so exercising, the Company may, in lieu of distributing to such Holder any portion of such distribution not consisting of cash or securities of the Company, pay such Holder an amount in cash equal to the fair market value thereof (as determined in good faith by the Board of Directors, whose determination shall be conclusive unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures). If any exercise of a Warrant described in the immediately preceding sentence occurs prior to the payment date for a distribution to holders of shares of Common Stock which the Holder of a Warrant so exercised is entitled to receive in accordance with the immediately preceding sentence, the Company may elect to distribute to such Holder a due bill for the evidences of indebtedness, shares of stock, assets, securities convertible into or exchangeable for any of its stock, or rights or warrants to subscribe for or purchase any of its securities to which such Holder is so entitled, provided, that such due bill (a) meets any applicable requirements of the principal national securities exchange or other market on which the shares of Common Stock are then traded and (b) requires payment or delivery of such evidences of indebtedness, shares of stock, assets, securities convertible into or exchangeable for any of its stock, or rights or warrants to subscribe for or purchase any of its securities no later than the date of payment or delivery thereof to holders of Common Stock receiving such distribution. (j) Whenever the Per-Share Exercise Price is adjusted as provided in this Section 3 and upon any modification of the rights of the Holder in accordance with this Section 3, the Company shall promptly prepare a certificate signed by the chief financial officer or the treasurer setting forth the adjusted Per-Share Exercise Price and showing in reasonable detail the facts requiring such adjustment or modification and the manner of computing the same ("Adjustment Certificate") and cause copies of such certificate to be mailed to the Holder. (k) If the Board of Directors shall authorize and the Company shall declare any dividend or other distribution with respect to the Common Stock other than a distribution exclusively in cash, the Company shall mail notice thereof to the Holder not less than ten (10) days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. 7 (l) If, as a result of an adjustment made pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of stock or other securities, the Board of Directors shall in good faith determine the allocation of the adjusted Per-Share Exercise Price between or among such classes of stock or other securities (whose determination shall be conclusive unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made pursuant to the Appraisal Procedures). (m) Upon the expiration of any rights, options, warrants or conversion privileges with respect to the issuance of which an adjustment to the Per-Share Exercise Price had been made, if such shall not have been exercised, the Per-Share Exercise Price, to the extent this Warrant has not then been exercised, shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) on the basis of (A) the Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion privileges, and (B) such shares of Common Stock, if any, that were issued or sold for the consideration actually received by the Company upon such exercise plus the consideration, if any, actually received by the Company for the issuance, sale or grant of all such rights, options, warrants or conversion privileges whether or not exercised; provided, however, that no such readjustment shall have the effect of increasing the Per-Share Exercise Price by an amount in excess of the amount of the adjustment initially made in respect of the issuance, sale or grant of such rights, options, warrants or conversion privileges. (n) Whenever the Per-Share Exercise Price is adjusted as provided pursuant to this Section 3, the number of Warrant Shares purchasable upon the exercise of this Warrant shall be adjusted by multiplying such number of Warrant Shares immediately prior to such adjustment by a fraction, the numerator of which shall be the Per-Share Exercise Price immediately prior to such adjustment, and the denominator of which shall be the Per-Share Exercise Price immediately thereafter. (o) In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Board of Directors shall in good faith determine the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Warrants (whose determination shall be conclusive, unless the Holder shall, within five (5) days of receipt of the Adjustment Certificate setting forth the adjustment made, request that the determination be made 8 pursuant to the Appraisal Procedures) and shall promptly make the adjustments described therein. 4. Put Right. If, at any time during the period commencing on March 8, 2004 and expiring on March 8, 2005, (a) the average daily per-share Closing Price of the Common Stock (the "Average Price") during any period of ninety (90) consecutive Trading Days preceding and including the date of measurement (the "Measurement Date") is greater than the Per-Share Exercise Price in effect on the Measurement Date (the "Measurement Date Exercise Price"), and (b) the number of shares of Common Stock held by stockholders other than the shares of Common Stock held by CT Management Stockholders and the Associated Stockholders as of the close of business on the Measurement Date is less than twenty-five million (25,000,000) (as adjusted for any stock dividend, stock split, combination or similar recapitalization), then the Initial Holder and/or any Related Holder(s), as the case may be (and not any other Holder) shall have the right (the "Put Right") to require the Company to purchase, subject to the following sentence, the Warrant(s), in whole or in part, held by the Initial Holder and/or the Related Holder. If the Initial Holder and/or any Related Holder, as the case may be, elect(s) to exercise the Put Right, then such Holder(s) shall surrender this Warrant to the Company at the address set forth in Section 11 hereof, accompanied by written notice (the "Put Notice") to the Company of the election of the Holder(s) to require the purchase of the Warrant(s) or a part thereof as specified in the Put Notice (any such part to be expressed in terms of a portion of the number of whole Warrant Shares corresponding to the portion of the Warrant(s) to be purchased) (the "Put Portion") and the Company shall, within sixty (60) days after the Put Notice is given, either as determined in its sole discretion: (x) purchase the Put Portion at the Put Purchase Price and, if only a part of a Holder's Warrant is purchased pursuant to an exercise of the Put Right, issue and deliver to such Holder a new Warrant covering the balance of the shares remaining subject to this Warrant (i.e., those Warrant Shares not included in the Put Portion) and setting forth the proportionate part of the Aggregate Exercise Price applicable to such balance of Warrant Shares; or (y) elect not to purchase the Put Portion and provide written notice to such Holder that the Exercise Period shall be extended to continue until March 8, 2008 whereupon this Warrant may continue to be exercised through such date without any further action by the Company or such Holder. If the Company elects not to purchase the Put Portion pursuant to clause (y) of the foregoing sentence, the Company shall issue and deliver to such Holder a new Warrant reflecting the extended Exercise Period and the Put Right governed in this Section 4 shall terminate and be of no further force and effect without any further action by the Company or such Holder. The "Put Purchase Price" shall be the amount equal to the product obtained by multiplying (x) the amount by which the Average Price exceeds the Measurement Date Exercise 9 Price and (y) the number of shares of Common Stock for which the Put Portion is exercisable as of the date the Put Notice is given. The Company may elect to pay the Put Purchase Price in cash or in the form of an assignment of the Company's Interest(s) in the Fund(s) or Fund Control Persons, or in any combination of cash and such an assignment, with an aggregate value equal to the Put Purchase Price. The fair market value of any Interest(s) in the Fund(s) or Fund Control Person(s) to be assigned in accordance with the foregoing shall be determined in accordance with the Appraisal Procedures. The Company shall, in connection with any assignment(s) of such Interest(s), execute and deliver written assignment(s) and any additional documents requested by such exercising Holder to complete, confirm or perfect the assignment of the assigned Interests. 5. Acceleration of Exercise Period. Notwithstanding the provisions of Section 1, prior to the commencement of the Exercise Period, this Warrant may be exercised in whole or part immediately upon the date of commencement of a third party tender offer for more than 33% of the shares of Common Stock outstanding on the date of commencement of such tender offer. 6. Fully Paid Stock; Taxes. The shares of the Common Stock represented by each and every certificate for Warrant Shares delivered upon the exercise of this Warrant shall at the time of such delivery, be duly authorized, validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights or rights of first refusal. The Company shall pay all documentary, stamp or similar taxes and other similar governmental charges that may be imposed with respect to the issuance or delivery of any shares of Common Stock upon exercise of the Warrants (other than income taxes); provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Holder or any Related Holder, no such delivery shall be made unless the person requesting the same has paid to the Company the amount of transfer taxes or charges incident thereto, if any. 7. HSR. To the extent required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") following any exercise or exchange of this Warrant pursuant to subsections (a) or (b) of Section 1 by the Holder and prior to the issuance and delivery of the certificates for the shares of Common Stock required thereby, the Company and the Holder shall cooperate in the preparation of, and file with the United States Federal Trade Commission and the United States Department of Justice, the notification and report form required for such and any supplemental or additional information which may be reasonably requested in connection therewith pursuant to the HSR Act and shall comply in all material respects with the requirements of the HSR Act. The fees to be paid in connection with any such filing under the HSR Act shall be paid by the Holder. 10 8. Transfer; Etc. (a) This Warrant may be transferred by execution of the form of assignment attached hereto or a substantially equivalent assignment form. Until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. (b) This Warrant may not be sold, transferred, assigned or hypothecated by the Holder except in compliance with the provisions of the Securities Act of 1933 and the applicable state securities "blue sky" laws, and is so transferable only upon the books of the Company which it shall cause to be maintained for such purpose. (c) All Warrants issued upon the transfer or assignment of this Warrant or part thereof or upon a partial exercise, exchange or purchase of this Warrant will be dated the same date as this Warrant, and all rights of the holder thereof shall be identical to those of the Holder. 9. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 10. Warrant Holder Not Stockholder. This Warrant does not confer upon the Holder any right to vote on or consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, nor any other rights or liabilities as a stockholder, prior to the exercise hereof; this Warrant does, however, require certain notices to the Holder as set forth herein. 11. Communication. Any notice or other communication to be given hereunder shall be given by hand delivery, by overnight carrier, in each case at the addresses set forth in this section, and shall be deemed to have been given when received. The Company or the Holder may change its address for receiving notices by giving written notice of such change to the other. 11 If to the Company, to: Capital Trust, Inc. 605 Third Avenue, 26th Floor New York, New York 10016 Attn: Chief Financial Officer If to the Holder, to: Travelers General Real Estate Mezzanine Investments II, LLC 205 Columbus Blvd., 9PB Hartford, CT 06183-2030 Attn: Duane Nelson, Esq. Real Estate Investment Number: 12833 12. Headings. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 13. Applicable Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. 14. Amendment, Waiver, etc. Except as expressly provided herein, neither this Warrant nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that any provisions hereof may be amended, waived, discharged or terminated upon the written consent of the Company and the majority in interest of the Holders. 15. Certain Definitions. "Appraisal Procedures" has the meaning set forth in the Venture Agreement. "Associated Stockholders" has the meaning set forth in the Venture Agreement. "Board of Directors" means the board of directors of the Company. "Closing Price", with respect to any security on any day, means the last reported sale price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the NYSE Composite Tape, or, if such security is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such security is listed or admitted to trading, or, if such security is not listed or admitted to trading on a national securities exchange, on the NASDAQ Stock Market of the National Association of Securities Dealers, Inc., 12 or, if such security is not quoted or admitted to trading on such quotation system, on the principal quotation system on which such security is listed or admitted to trading or quoted, or, if not listed or admitted to trading or quoted on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security in the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or, if not so available in such manner, as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors (or any committee duly authorized by the Board of Directors) for that purpose or, if not so available in such manner, as otherwise determined in good faith by the Board of Directors (or any committee duly authorized by the Board of Directors). "CT Management Stockholders" has the meaning set forth in the Venture Agreement. "Fund" has the meaning set forth in the Venture Agreement. "Fund Control Person" has the meaning set forth in the Venture Agreement. "Initial Holder" means CT-F1, LLC, a Delaware limited liability company. "Interest" means (i) rights to distributions from the Fund(s), including but not limited to, the "carried interest" or "promote," and (ii) rights to management fees. "Related Holder(s)" means any Holder who is Citigroup Inc. or any of its direct or indirect wholly owned entities or Travelers Property Casualty Corp. or any of its direct or indirect wholly owned entities. "Trading Day" means a day on which any securities are traded on the national securities exchange or quotation system used to determine the Closing Price. "Venture Agreement" means that certain amended and restated venture agreement, dated as of April 9, 2001, by and between the Company, CT-F1, LLC, a Delaware limited liability company, CT-F2-GP, LLC, a Delaware limited liability company, CT-F2-LP, LLC, a Delaware limited liability company, CT Investment Management Co., LLC, a Delaware limited liability company, Travelers Limited Real Estate Mezzanine Investments I, LLC, a Delaware limited liability company, Travelers General Real Estate Mezzanine Investments II, LLC, a Delaware limited liability company and Travelers Limited Real Estate Mezzanine Investments II, LLC, a Delaware limited liability company. 13 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed this 7th day of August, 2001. CAPITAL TRUST, INC. By:/s/ Edward L. Shugrue III -------------------------------- Edward L. Shugrue III Managing Director, Chief Financial Officer and Treasurer SUBSCRIPTION The undersigned, ___________________, pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase ____________________ shares of the Common Stock, par value $.01 per share, of Capital Trust, Inc. covered by said Warrant, and makes payment therefor in full at the price per share provided by said Warrant. Dated:_______________ Signature:___________________________ Address:____________________________ ASSIGNMENT FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto ____________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________, attorney, to transfer said Warrant on the books of Capital Trust, Inc. Dated:_______________ Signature:___________________________ Address:____________________________ PARTIAL ASSIGNMENT FOR VALUE RECEIVED _______________ hereby assigns and transfers unto ____________________ the right to purchase _______ shares of Common Stock, par value $.01 per share, of Capital Trust, Inc. covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint ____________________, attorney, to transfer such part of said Warrant on the books of Capital Trust, Inc. Dated:_______________ Signature:___________________________ Address:____________________________ EX-21 8 exh21-1.txt EXHIBIT 21.1 Exhibit 21.1
- -------------------------------------------------------------------------------- JURISDICTION OF D/B/A ENTITY INCORPORATION JURISDICTION ------ ------------- ------------ - -------------------------------------------------------------------------------- Victor Capital Group, L.P. Delaware - -------------------------------------------------------------------------------- VIC, Inc. Delaware Vic NY - -------------------------------------------------------------------------------- VCG Montreal Management, Inc. New York - -------------------------------------------------------------------------------- IPJ Funding Corp Delaware - -------------------------------------------------------------------------------- CT Convertible Trust I Delaware - -------------------------------------------------------------------------------- CT-BB Funding Corp. Delaware - -------------------------------------------------------------------------------- CT-F1, LLC Delaware - -------------------------------------------------------------------------------- CT-F2-GP, LLC Delaware - -------------------------------------------------------------------------------- CT-F2-LP, LLC Delaware - -------------------------------------------------------------------------------- CT Investment Management Co., LLC Delaware - --------------------------------------------------------------------------------
EX-23 9 exh23-1.txt EXHIBIT 23.1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-39743 and No. 333-72725) pertaining to the Amended and Restated 1997 Long Term Incentive Stock Plan, and Amended and Restated 1997 Non-Employee Director Stock Plan of Capital Trust, Inc. of our report dated February 14, 2002 except for note 26, as to which the date is February 28, 2002, with respect to the consolidated financial statements of Capital Trust, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2001. /s/ Ernst & Young LLP New York, New York April 1, 2002 EX-99 10 captrust991.txt EXHIBIT 99.1 EXHIBIT 99.1 FORWARD-LOOKING INFORMATION AND RISK FACTORS The Company's Annual Report on Form l0-K for the year ended December 31, 2001, the Company's 2001 Annual Report to Shareholders, any Quarterly Report on Form 10-Q or Current Report on Form 8-K of the Company, or any other oral or written statements made by or on behalf of the Company, may contain 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. The actual results of the Company may differ significantly from any results expressed or implied by these forward-looking statements. Factors that might cause such a difference include but are not limited to, (a) the general political, economic and competitive conditions, in the United States, (b) the level and volatility of prevailing interest rates and credit spreads, adverse changes in general economic conditions and real estate markets, the deterioration of credit quality of borrowers and the risks associated with the ownership and operation of real estate, (c) a significant compression of the spreads of the interest rates earned on interest-earning assets over the interest rates paid on interest-bearing liabilities that adversely affects operating results, (d) adverse developments in the availability of desirable loan and investment opportunities and the ability to obtain and maintain targeted levels of leverage and borrowing costs, (e) adverse changes in local market conditions, competition, increases in operating expenses and uninsured losses, affecting a property owner's ability to cover operating expenses and the debt service on financing provided by the Company, (f) authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission; and the risk factors set forth below. Risk Factors Related to Our Business Because we have recently commenced our investment management business, we are subject to risks and uncertainties associated with developing and operating a new business, and we may not achieve from this new business the investment returns that we expect. Our investment management business commenced in March 2000 and therefore does not have a proven track record of results upon which to evaluate our performance. We will encounter risks and difficulties as we proceed to develop and operate our new business. In order to achieve our goals as an investment manager, we must: o manage our mezzanine funds successfully by investing a majority of our fund capital in suitable investments that meet the funds' specified investment criteria, o reorient and incent our management and professional staff to the task of developing and operating the investment management business, o structure, sponsor and capitalize future real estate related funds and other investment products under our management that provide investors with attractive investment opportunities, and o convince third party investors that an investment in our future funds will meet their investment objectives and will generate attractive returns. There can be no assurance that we will successfully develop and operate our investment management business to achieve the investment returns we expect. Our success in developing and operating the investment management business will depend in part on the demand for real estate related investment opportunities such as those provided by our mezzanine funds and other real estate related funds and other investment products. Our ability to develop, operate and sustain our investment management business will depend in part on the strength of the market for private equity investments generally and the demand for real estate related private equity investments in particular. Markets for real estate related investments can be materially and adversely affected by factors beyond our control, including volatility in the global capital markets, adverse changes in general economic conditions, an unfavorable market for real estate and competition from other investment opportunities available to third party investors. We will face substantial competition from established participants in the private equity market as we offer the mezzanine and other real estate related funds to third party investors. We are a recent entrant into the investment management business. As we offer our mezzanine and other real estate related funds as investment opportunities to third party investors, we will face significant competition from established Wall Street investment banking firms and large financial institutions which have proven track records in marketing and managing private equity investment funds and are otherwise competitively advantaged because they have access to pre-existing third party investor networks into which they can channel competing investment opportunities. If our competitors offer investment products that are competitive with the mezzanine and other fund investments offered by us, we will find it more difficult to attract investors and to capitalize our mezzanine and other real estate related funds. Our success in deploying our mezzanine funds' capital to originate or acquire a targeted portfolio of assets will depend on the availability of, and the degree of competition for, attractive investments. Our operating results will be dependent upon the availability of, as well as our ability to identify, consummate, manage and realize, high yielding real estate investment opportunities. If we are not successful in investing all available equity capital for our funds, it will reduce the potential revenues we earn following our funds' investment period when our management fee base shifts from the amount of capital commitments to the amount of invested assets. We may expend significant time and resources in identifying and consummating targeted investments. In general, the availability of desirable high yielding real estate opportunities and, consequently, our funds' investment returns will be affected by the level and volatility of interest rates, by conditions in the financial markets and by general economic conditions. No assurance can be given that we will be successful in identifying and consummating investments which satisfy our rate of return objectives or that such investments, once consummated, will perform as anticipated. We will be engaged in a competitive business and will be competing for attractive investments with traditional lending sources as well as existing funds, or funds formed in the future, with similar investment objectives. Our loans and investments will expose us to a high degree of risk associated with investing in commercial real estate related assets. Real estate historically has experienced significant fluctuations and cycles in value that may result in reductions in the value of real estate related investments. The performance and value of our loans and investments once originated or acquired by us will depend on many factors beyond our control. The ultimate performance and value of our investments will be subject to the varying degrees of risk generally incident to the ownership and operation of the commercial property which collateralize or support our investments. The ultimate performance and value of our loans and investments depends upon the commercial property owner's ability to operate the property so that it produces the revenues and cash flow needed to pay the interest and principal due to us on the loans and investments. Revenues and cash flow may be adversely affected by: o changes in national economic conditions, o changes in local real estate market conditions due to changes in national or local economic conditions or changes in neighborhood characteristics, competition from other properties offering the same or similar services, o changes in interest rates and in the availability of mortgage financing on favorable terms, o the impact of present or future environmental legislation and compliance with environmental laws, o the ongoing need for capital improvements (particularly in older structures), o changes in real estate tax rates and other operating expenses, o adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes, hurricanes and other natural disasters, acts of war or terrorism, which may result in uninsured losses, o adverse changes in zoning laws, and o other factors that are beyond our control and the control of the commercial property owners. In the event that any of the properties underlying our loans and investments experience any of the foregoing events or occurrences, the value of, and return on, such investments would be negatively impacted. Our balance sheet asset portfolio continues to become more concentrated in mark-to market mortgage backed securities and related hedges which subjects us to greater swings in equity and income as we record balance sheet gains and losses on such assets. Our venture agreement with Citigroup restricts our ability to originate new assets for our balance sheet. Our balance sheet portfolio therefore continues to become more concentrated in mark-to-market mortgage backed securities as non-mark-to-market loans mature or are paid off early. In an environment of lower interest rates, there is a risk that our existing loans will pay off early. We have adopted accounting policies under which such derivatives will impact either or both shareholders' equity or net income depending on the extent to which components of interest rate risk are hedged. For those hedges characterized as a fair value hedge, the changes in fair value of the hedge and the hedged item are reflected in earnings each quarter. For those hedges characterized as cash flow hedges, the unrealized gains/losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income or in earnings, depending on the type of hedging relationship. The more concentrated our balance sheet becomes in mark-to-market assets, the greater the potential for swings in equity and income as we record gains and losses on such assets on our balance sheet. If interest rates fluctuate and affect significantly the market value of such mark-to-market assets the corresponding reductions or increases in equity and income may be significant. We may not achieve our targeted rate of return on our investments. We will originate or acquire investments based on our estimates or projections of internal rates of return and current returns, which in turn are based on, among other considerations, assumptions regarding the performance of assets, the amount and terms of available financing and the manner and timing of dispositions, including possible asset recovery and remediation strategies, all of which are subject to significant uncertainty. In addition, events or conditions that have not been anticipated may occur and may have a significant effect on the actual rate of return received on an investment. We may not be able to obtain the level of leverage necessary to optimize our return on investment. If we do incur significant leverage, we will be subject to the risks of holding leveraged investments. Our return on investment will depend, in part, upon our ability to grow our funds' portfolio of invested assets through the use of leverage. Our ability to obtain the necessary leverage on attractive terms will ultimately depend upon our ability to maintain interest coverage ratios meeting market underwriting standards which will vary according to lenders' assessments of our and our funds' creditworthiness and the terms of the borrowings. The failure to obtain and/or maintain leverage at desired levels, or to obtain leverage on attractive terms, could have a material adverse effect on our funds' performance. Moreover, we are dependent upon a few lenders to provide the primary credit facilities for our origination or acquisition of loans and investments. Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leveraging magnifies changes in the net worth of our funds. We expect that our funds will leverage assets only when there is an expectation that leverage will enhance returns, although there can be no assurance that the use of leverage will prove to be beneficial. Where pledged assets are marked-to-market, a decline in market value may require us to pledge additional collateral to secure our borrowings. Moreover, there can be no assurance that our funds will be able to meet their debt service obligations and, to the extent that they cannot, they risk the loss of some or all of their assets or a financial loss if they are required to liquidate assets at a commercially inopportune time. We are dependent upon our senior management team to develop and operate our investment management business. Our ability to develop and operate our investment management business depends to a substantial extent on the experience, relationships and expertise of our senior management and key employees. There can be no assurance that these individuals will remain in our employ. The employment agreement with our chief executive officer, John R. Klopp, following the expected extension thereof, expires in 2003, unless further extended. The loss of the services of our senior management and key employees could have a material adverse effect on the our operations. We will be exposed to the risks involved with making subordinated investments. Our mezzanine funds' investments will involve the additional risks attendant to investments consisting of subordinated loan positions. In many cases, management of our investments and our remedies with respect thereto, including the ability to foreclose on the collateral securing such investments, will be subject to the rights of senior lenders and the rights as set forth in certain intercreditor agreements. Our mezzanine funds, loans and investments may be subject to fluctuations in interest rates which may not be adequately protected, or protected at all, by our hedging strategies. We intend our mezzanine funds to make loans with "floating" interest rates to protect against fluctuations in interest rates. However, the funds may from time to time make fixed rate loans. In such cases, the funds may employ various hedging strategies to limit the effects of changes in interest rates on its operations, including engaging in interest rate swaps, caps, floors and other interest rate exchange contracts. No strategy can completely insulate the funds from the risks associated with interest rate changes and there is a risk that they may provide no protection at all. Hedging transactions involve certain additional risks such as the legal enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract or a rise in transaction costs. There can be no assurance that our funds will be able to enter into hedging transactions or that such hedging transactions will adequately protect the funds against the foregoing risks. In addition, hedges which are not under applicable accounting guidance appropriately correlated with a fixed rate loan will impact our income as gains and losses on such hedges are recorded. Our loans and investments may be illiquid which will constrain our ability to vary our portfolio of investments. Real estate investments are relatively illiquid. Such illiquidity may limit our ability to vary our funds' portfolio of investments in response to changes in economic and other conditions. Illiquidity may result from the absence of an established market for investments as well as the legal or contractual restrictions on their resale. In addition, illiquidity may result from the decline in value of a property securing one of the funds' investments. There can be no assurance that the fair market value of any of the real property serving as security will not decrease in the future, leaving the funds' investment under-collateralized or not collateralized at all. We may invest in troubled assets which are subject to a higher degree of financial risk. We may make investments in non-performing or other troubled assets that involve a higher degree of financial risk and there can be no assurance that our investment objectives will be realized or that there will be any return on investment. Furthermore, investments in properties operating in work-out modes or under bankruptcy protection laws may, in certain circumstances, be subject to additional potential liabilities that could exceed the value of an investor's original investment, including equitable subordination and/or disallowance of claims or lender liability. We may not have control over certain of our loans and investments. Our ability to manage our portfolio of loans and investments will be subject to the form in which they are made. In certain situations, our funds may: o acquire only a minority interest, o co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests, o rely on independent third party management or strategic partners with respect to the management of an asset, or o acquire only a participation in an asset underlying an investment. Therefore, we may not be able to exercise control over the loan or investment. Such financial assets may involve risks not present in investments where third party controlling investors or third parties are not involved. For example, a third party partner or co-venturer may have financial difficulties resulting in a negative impact on such asset, may have economic or business interests or goals which are inconsistent with ours and those of the funds, or may be in a position to take action contrary to the funds' investment objectives. In addition, our funds may, in certain circumstances, be liable for the actions of its third party partners or co-venturers. Our mezzanine and other funds will be subject to the risk of defaults by third party investors on their capital commitments. The capital commitments made by third party investors to our mezzanine and other funds represent promises by those investors to contribute cash to the funds from time to time as investments are made by the funds. We will therefore be subject to general credit risks that the investors may default on their capital commitments. If defaults occur, we may not be able to close loans and investments we have identified and negotiated, which could materially and adversely affect the fund's investment program or make us liable for breach of contract, in either case to the detriment of our franchise in the private equity market. We must manage our portfolio and the portfolios of our funds in a manner that allows us to rely on an exclusion from registration under the Investment Company Act of 1940 in order to avoid the consequences of regulation under this Act. We rely on an exclusion from registration as an investment company afforded by Section 3(c)(5)(C) of the Investment Company Act. Under this exclusion, we are required to maintain, on the basis of positions taken by the SEC staff in interpretive and no-action letters, a minimum of 55% of the value of the total assets of our portfolio in "mortgages and other liens on and interests in real estate." We refer to this category of investments herein as "Qualifying Interests." In addition, we must maintain an additional minimum of 25% of the value of our total assets in Qualifying Interests or other real estate-related assets. Because registration as an investment company would have a material adverse effect on us and our share price, since it would significantly affect our ability to engage in certain transactions or to organize ourselves in the manner we currently do, we intend to maintain our qualification for this exclusion from registration. If our portfolio did not comply with the requirements of the exclusion we rely upon, we could be forced to alter our portfolio by selling or otherwise disposing of a substantial portion of the assets that are not Qualifying Interests or by acquiring significant position in assets that are Qualifying Interests. Altering our portfolio in this manner may have a material adverse effect on our investment if we are forced to dispose of or acquire assets in an unfavorable market. Risk Factors Relating to Our Stock Because a limited number of shareholders, including members of our management team, own a substantial number of our shares, decisions made by them may be detrimental to your interests. By virtue of their direct and indirect share ownership, John R. Klopp, a director and our president and chief executive officer, Craig M. Hatkoff, a director and former officer, and a trust for the benefit of our chairman of the board, Samuel Zell, have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to shareholders for approval, including the election of our directors, amendments to our charter, mergers, sales of assets and other acquisitions or sales. The influence exerted by these shareholders over the company's affairs might not be consistent with the interests of other shareholders. We cannot assure you that these shareholders will not exercise their influence over us in a manner detrimental to your interests. As of March 2002, these shareholders collectively own and control 7,985,181 shares of our class A common stock representing approximately 42% of our outstanding class A common stock as of that date. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our class A common stock. The exercise of the outstanding warrants held by affiliates of Citigroup Investments Inc. or the conversion of the outstanding convertible trust preferred securities held by EOP Operating Limited Partnership, Vornado Realty, L.P. and the General Motors Employes Global Group Pension Trust could result in other significant concentrated holdings of class A common stock. The Citigroup affiliates may acquire 8,528,467 shares of our class A common stock upon exercise of their warrants. EOP Operating Limited Partnership, Vornado Realty, L.P. and General Motors Employes Global Group Pension Trust may each acquire 4,273,424 shares of our class A common stock. Officers, directors or other related persons of these securityholders serve on our board of directors and therefore have the power to significantly influence our affairs. If these securityholders acquire a significant ownership position, they may acquire the ability to influence the outcome of matters submitted for shareholder approval. Some provisions of our charter and bylaws and Maryland law may deter takeover attempts, which may limit the opportunity of our shareholders to sell their shares at a favorable price. Some of the provisions of our charter and bylaws and Maryland law discussed below could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders, by providing them with the opportunity to sell their shares at a premium to the then current market price. Issuance of Preferred Stock Without Shareholder Approval. Our charter authorizes our board of directors to authorize and issue up to 100,000,000 shares of preferred stock, up to 100,000,000 shares of class A common stock and up to 100,000,000 shares of class B common stock. Our charter also authorizes our board of directors, without shareholder approval, to classify or reclassify any unissued shares of our common stock and preferred stock into other classes or series of stock and to increase the aggregate number of shares of stock of any class or series that may be issued. The board therefore has the power to increase the number of shares of preferred stock we may issue without shareholder approval. Preferred stock may be issued in one or more series, the terms of which may be determined without further action by shareholders. These terms may include preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption. No shares of preferred stock are currently outstanding and we have no present plans for the issuance of any preferred stock. The issuance of any preferred stock, however, could materially adversely affect the rights of holders of our common stock, and therefore could reduce its value. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The power of the board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current shareholders' control. Advance Notice Bylaw. Our bylaws contain advance notice procedures for the introduction of business and the nomination of directors. These provisions could discourage proxy contests and make it more difficult for you and other shareholders to elect shareholder-nominated directors and to propose and approve shareholder proposals opposed by management. Maryland Takeover Statutes. We are subject to the Maryland Business Combination Act which might enable our management to resist an unsolicited takeover of our company. The statute substantially restricts the ability of third parties who acquire, or seek to acquire, control of our company to complete mergers and other business combinations without the approval of our board of directors even if such transaction would be beneficial to shareholders. "Business combinations" between such a third party acquiror and our company are prohibited if the acquiror becomes an "interested shareholder" by obtaining beneficial ownership of 10 percent or more of shareholder voting power. If our board of directors approved in advance the transaction that would otherwise give rise to the acquiror attaining such status, the acquiror would not become an interested shareholder and, as a result, it could enter into a business combination with us. Our board of directors could choose not to negotiate with an acquirer if the board determined in its business judgment that considering such an acquisition was not in the strategic interests of our company. Even after the lapse of the five-year prohibition period, any business combination with an interested shareholder must be recommended by our board of directors and approved by the affirmative vote of at least: o 80% of the votes entitled to be cast by shareholders and o two-thirds of the votes entitled to be cast by shareholders other than the interested shareholder and affiliates and associates thereof. The super-majority vote requirements do not apply if the transaction complies with a minimum price requirement prescribed by the statute. Our board of directors has exempted any business combination involving family partnerships controlled separately by John R. Klopp and Craig M. Hatkoff and a limited liability company controlled by a trust for the benefit of Samuel Zell. Our board of directors also adopted resolutions, subject to certain conditions, to approve our venture agreement with affiliates of Citigroup Investments Inc. which exempt such affiliates from the status of interested shareholders. As a result, the persons described above may enter into business combinations with us without compliance with the super-majority vote requirements and the other provisions of the statute. We are also subject to the Maryland Unsolicited Takeovers Act which permits our board of directors, among other things, to elect on our company's behalf to stagger the terms of directors, to increase the shareholder vote required to remove a director and to provide that shareholder-requested meetings may be called only upon the request of shareholders entitled to cast at least a majority of the votes entitled to be cast at the meeting. Such an election would significantly restrict the ability of third parties to wage a proxy fight for control of our board of directors as a means of advancing a takeover offer. If an acquirer was discouraged from offering to acquire us, or prevented from successfully completing a hostile acquisition, you could lose the opportunity to sell your shares at a favorable price. -----END PRIVACY-ENHANCED MESSAGE-----