-----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, ISnQmZ467TVeF0MfnHPBAU9D7hkbE0NXZQncZumUD9l/ViaTdqKkAIp0vyAyvZtN 858viHLhmD0mOj3cdZOHzg== 0001116679-03-001050.txt : 20030328 0001116679-03-001050.hdr.sgml : 20030328 20030328151532 ACCESSION NUMBER: 0001116679-03-001050 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL TRUST INC CENTRAL INDEX KEY: 0001061630 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946181186 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14788 FILM NUMBER: 03624867 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 cap10-k.txt 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, 2002 [ ] 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes __ No X - MARKET VALUE ------------ The aggregate market value of the outstanding Class A Common Stock held by non-affiliates of the registrant was approximately $46,051,000 as of June 28, 2002 (the last business day of the registrant's most recently completed second fiscal quarter) based on the closing sale price on the New York Stock Exchange on that date. OUTSTANDING STOCK ----------------- As of March 27, 2003 there were 16,278,563 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 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 - ------------------------------------------------------------------------------- PART II - ------------------------------------------------------------------------------- Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 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 Item 14. Controls and Procedures 20 - ------------------------------------------------------------------------------- PART IV - ------------------------------------------------------------------------------- Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21 - ------------------------------------------------------------------------------- Signatures 25 Certifications 26 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 specializes in providing structured capital solutions to owner/operators of commercial real estate. In December 2002, the Company's board of directors authorized an election to be taxed as a real estate investment trust ("REIT") for the 2003 tax year. The Company will continue to make, for its own account and as investment manager for the account of funds under management, loans and debt-related investments in various types of commercial real estate assets and operating companies. Business and Investment Strategy - -------------------------------- The Company was created to take advantage of opportunities resulting from the rapid evolution of the real estate capital markets. Since its inception in 1997, the Company has designed and developed a fully integrated platform to provide flexible, value-added financing for large single properties, multiple-asset portfolios and real estate operating companies. The Company's current investment program emphasizes senior and junior mortgage loans, mezzanine loans secured by pledges of equity interests in the property owners, subordinated tranches of commercial mortgage backed securities ("CMBS"), and preferred and other direct equity investments. In general, the Company's investments are subordinate to other third-party senior financing, but senior to the owner/operator's equity in the property. The Company is co-sponsor and exclusive investment manager of CT Mezzanine Partners II LP ("Fund II"), which ultimately raised total equity commitments of $845 million. 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 commercial real estate mezzanine investment funds. The Company believes that these funds will generate additional investment management fees and incentive compensation tied to the performance of their portfolios of investments. The Company continues to manage its existing portfolio of balance sheet assets originated prior to the commencement of its investment management business and is positioned to selectively add to the Company's balance sheet investments by investing in a diverse array of real estate and investment management/finance-related assets and enterprises, including operating companies. 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. REIT Election - ------------- The Company intends to make the necessary election to be taxed as a REIT for the 2003 tax year. The Company will not undergo any fundamental changes in its business and will continue to make, for its own account and as investment manager for the account of funds under management, loans and debt-related investments in various types of commercial real estate and related assets. To the extent necessary, the Company will modify its investment program to originate or acquire loans and investments to produce a portfolio that meets the asset and income tests necessary to maintain the Company's qualification as a REIT. In order to accommodate the Company's REIT status, the legal structure of future investment funds sponsored by the Company may be different from the legal structure of the Company's existing investment funds. 1 One of the requirements to qualify as a REIT is the elimination of all of the Company's accumulated "earnings and profits" from all non-REIT qualifying years in which the Company operated as a regular corporation. The Company believes that it eliminated all such earnings and profits by actions taken in December 2002. The Company did so by triggering losses through the settlement of certain derivative hedging instruments, the disposition of a non-performing asset and the write-down of another non-performing asset. In order to qualify as a REIT, five or fewer individuals may own no more than 50% of the class A common stock, par value $0.01 per share ("Class A Common Stock"), of the Company. As a means of facilitating compliance with such qualification, stockholders controlled by John R. Klopp, the chief executive officer and a director of the Company, Craig M. Hatkoff, a director of the Company, and trusts for the benefit of the family of Samuel Zell, the chairman of the board of directors of the Company, each sold 500,000 shares of Class A Common Stock to Stichting Pensioenfonds ABP in a transaction that closed on February 7, 2003. Following this transaction, the Company's largest five individual stockholders own in the aggregate less than 50% of the Company's Class A Common Stock. In connection with this transaction, the Company entered into a registration rights agreement with Stichting Pensioenfonds ABP pursuant to which the Company agreed to register for resale the purchaser's shares of Class A Common Stock. In connection with the intended REIT election, the Company has consolidated all of its management activities, including the investment management of Fund II and future third-party funds and the ongoing management of the Company itself, into its wholly owned subsidiary, CT Investment Management Co., LLC ("CTIMCO"), which will be operated as a taxable REIT subsidiary. The financial position and operations of CTIMCO will be consolidated into the financial position and operations of the Company, but presented as a separate segment. CTIMCO will serve as the Company's exclusive manager and all of the Company's employees will be directly employed by CTIMCO. Subject to the supervision of the Company's board of directors, CTIMCO will be responsible for the day-to-day operations pursuant to a management agreement. The Company expects to base the compensation, fees, expense reimbursements and other terms of the management agreement with CTIMCO upon the terms contained in the management agreements between externally managed publicly traded commercial mortgage REITs and their outside managers. The Company believes that this will produce a management agreement with terms comparable to those that could be obtained from unrelated parties on an arm's length basis. The Company believes that this corporate organizational structure will provide financial transparency for, and facilitate the separate valuation of, the Company's two business segments (to be established in 2003), which should provide the Company with more flexibility should it decide to sell or spin off CTIMCO's investment management business in the future. There are no present plans, proposals or understandings with respect to a sale or spin-off of the management business. Also in connection with the Company's intended REIT election, the Company and affiliates of Citigroup Inc. modified their existing venture commenced in 2000 under which they co-sponsor and invest in a series of commercial real estate mezzanine funds managed by the Company. In January 2003, the Company purchased Citigroup's 75% interest in CT Mezzanine Partners I LLC ("Fund I") for a purchase price of approximately $38.4 million (including the assumption of liabilities). The Company also purchased from Citigroup stock purchase warrants exercisable for 8,528,467 shares of Class A Common Stock for a purchase price of approximately $2.1 million. Finally, the Company and Citigroup have agreed to amend the terms of the agreement governing their venture. Under the amended agreement, the Company will earn 100% of the base management fees derived from all funds under management and will receive 62 1/2% of the incentive management interests in future mezzanine funds co-sponsored with Citigroup pursuant to the amended venture agreement. Developments During Fiscal Year 2002 - ------------------------------------ During fiscal year 2002, the Company continued to operate and develop the investment management business. The Company continues to service loans and investments for Fund I, a fund owned during fiscal year 2002 75% by affiliates of Citigroup and 25% by the Company, and to make and service loans and investments for Fund II. During 2002, Fund II added to its portfolio $549 million of loans and investments. As of December 31, 2002, Fund I held $50 million of loans in its portfolio, Fund II held $724 million of loans and investments in its portfolio and all loans in both portfolios were performing in accordance with the terms of their loan agreements. The Company earned approximately $10.1 million of management and advisory fees from its management of Fund I and Fund II during 2002. On January 1, 2003, the general 2 partners of Fund II (affiliates of the Company and Citigroup) voluntarily reduced the management fees for the remainder of the investment period by 50% due to a lower than expected level of deployment of the Fund's capital. The Company expects approximately 40% of Fund II's committed capital to be invested at the end of the investment period on April 9, 2003, further reducing management fees from Fund II in 2003. In December 2002, a Fund I loan for $26.0 million, which was in default and for which the accrual of interest had been suspended, was written down and distributed pro-rata to the Company and a Citigroup affiliate as the members of Fund I. Upon receipt of its pro-rata share of the loan with a face amount of $6,500,000, the Company disposed of the asset. The Company's total asset base decreased from $678.8 million at December 31, 2001 to $385.0 million at December 31, 2002, primarily as a result of loan repayments and sales of CMBS. The Company also sold other available-for-sale securities, which had been purchased to maintain compliance with an exemption from being treated as an investment company under the Investment Company Act of 1940 (the "1940-Act") and were no longer needed to maintain compliance. In 2003, the Company does not expect a significant decrease in total assets as additional reductions in loans and investments from satisfactions will require the Company to purchase or originate additional 1940-Act qualifying assets. Description of Business - ----------------------- General - ------- The Company is an investment management and real estate finance company that originates or acquires, for its own account and as investment manager for funds under management, loans and debt-related investments in various types of commercial real estate assets and operating companies. The Company believes that its 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. The Company's current lending and investment activities are conducted principally through funds under management, although when consistent with its obligations to funds under management, the Company will invest for its own balance sheet. Real Estate Lending and Investment Market - ----------------------------------------- The Company developed its current business to take advantage of opportunities resulting from the rapid evolution of the real estate capital markets. 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. 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 for funds under management or for its own account, 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 originates or acquires senior and junior mortgage loans ("Mortgage Loans") to commercial real estate owners 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. The Company may also originate and fund whole Mortgage Loans in which the Company intends to sell the senior tranche, thereby creating a Mezzanine Loan. o Mezzanine Loans. The Company originates or acquires 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 3 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 Subordinated Interests. The Company acquires rated and unrated investments in public and private subordinated tranches ("Subordinated Interests") of commercial collateralized mortgage obligations and other CMBS. Subordinated Interests represent the junior, subordinated classes of these securities, which typically have below investment grade ratings of "BB" or "B" from the rating agencies 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 and by the requirements to maintain its qualification as a REIT, 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 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"). The Company's current investment program emphasizes floating rate loans and investments that generally provide unleveraged investment yields within a target range of 400 to 800 basis points above LIBOR. The Company may originate or acquire fixed rate loans and may make 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 has a credit facility under which it can borrow funds to finance its balance sheet loan and investment assets. The $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 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, and is utilized to finance certain loans held by the Company. 4 o Repurchase Obligations. At December 31, 2002, the Company had repurchase obligations outstanding with two counterparties to finance the available-for-sale securities and the assets remaining in the CMBS portfolio discussed above. 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 the funds that it manages. 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 exceeds 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. The Company utilizes leverage to enhance yields for both its own account and as investment manager for the account of funds under management. 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, 2002, the Company's debt-to-equity ratio (treating the Convertible Trust Preferred Securities as a component of equity) was 1.16:1. 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 and/or the value of its assets and/or liabilities. 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, mortgage banks, pension funds, opportunity funds, 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. 5 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, 2002, the Company employed 20 full-time professionals, one part-time professional and six 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. 6 - ------------------------------------------------------------------------------- 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. 7 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 1407 stockholders-of-record at March 28, 2003. 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 2000 First Quarter...................................$4.875 $3.5625 Second Quarter.................................. 4.125 3.25 Third Quarter................................... 4.6875 3.75 Fourth Quarter.................................. 4.9375 4.00 2001 First Quarter................................... 4.85 4.10 Second Quarter.................................. 6.50 4.11 Third Quarter................................... 6.50 5.00 Fourth Quarter.................................. 5.76 4.70 2002 First Quarter................................... 5.75 5.00 Second Quarter.................................. 5.20 4.70 Third Quarter................................... 5.25 4.45 Fourth Quarter.................................. 5.31 4.24 No dividends were paid on the Class A Common Stock in 2000, 2001 or 2002. With its election to become a REIT, the Company expects to declare and pay dividends on its Class A Common Stock beginning in the first quarter of 2003. The Company's policy with respect to dividends for 2003 is to distribute at least 90% of its taxable earnings to its stockholders. 8 - ------------------------------------------------------------------------------- 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, 2002, 2001, 2000, 1999, and 1998. 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, 2002, 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, 2002, 2001 and 2000, the following information is not indicative of the Company's current business.
Years Ended December 31, -------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- -------- ---------- (in thousands, except for per share data) STATEMENT OF OPERATIONS DATA: REVENUES: Interest and investment income.......... $47,207 $67,728 $88,433 $89,839 $63,954 Income / (loss) from equity investments in affiliated Funds...................... (2,534) 2,991 1,530 -- -- Advisory and investment banking fees.... 2,207 277 3,920 17,772 10,311 Management and advisory fees from Funds. 10,123 7,664 373 -- -- --------- --------- --------- ----------- -------- Total revenues........................ 57,003 78,660 94,256 107,611 74,265 --------- --------- --------- ----------- -------- OPERATING EXPENSES: Interest expense........................ 17,992 26,348 36,931 39,791 27,665 General and administrative expenses..... 13,996 15,382 15,439 17,345 17,045 Depreciation and amortization........... 992 909 902 345 249 Net unrealized (gain) / loss on derivative securities and corresponding hedged risk on CMBS Securities.................... (21,134) 542 -- -- -- Net realized (gain) / loss on sale of fixed assets, investments and settlement of derivative securities................. 28,715 -- 64 (35) -- Provision for / (recapture of) allowance for possible credit losses (4,713) 748 5,478 4,103 3,555 --------- --------- --------- ----------- --------- Total operating expenses.............. 35,848 43,929 58,814 61,549 48,514 --------- --------- --------- ----------- --------- Income / (loss) before income tax expense and distributions and amortization on Convertible Trust Preferred Securities............ 21,155 34,731 35,442 46,062 25,751 Income tax expense...................... 22,438 16,882 17,760 22,020 9,367 --------- --------- --------- ----------- -------- Income / (loss) before distributions and amortization on Convertible Trust Preferred Securities.................. (1,283) 17,849 17,682 24,042 16,384 Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit............................... 8,455 8,479 7,921 6,966 2,941 --------- --------- --------- ----------- -------- NET INCOME / (LOSS)..................... (9,738) 9,370 9,761 17,076 13,443 Less: Preferred Stock dividend and dividend requirement.................. -- 606 1,615 2,375 3,135 --------- --------- --------- ----------- -------- Net income / (loss) allocable to Common Stock $(9,738) $8,764 $8,146 $14,701 $10,308 ========= ========= ========= =========== ======== PER SHARE INFORMATION: Net income / (loss) per share of Common Stock: Basic............................... $ (0.54) $ 0.43 $ 0.35 $ 0.69 $ 0.57 ========= ========= ========= =========== ======== Diluted............................. $ (0.54) $ 0.37 $ 0.33 $ 0.55 $ 0.44 ========= ========= ========= =========== ======== Weighted average shares of Common Stock outstanding: Basic............................... 18,026 20,166 23,171 21,334 18,209 ========= ========= ========= =========== ======== Diluted............................. 18,026 36,124 29,692 43,725 30,625 ========= ========= ========= =========== ======== As of December 31, -------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- ---------- --------- BALANCE SHEET DATA: Total assets............................ $384,976 $678,800 $644,392 $827,808 $766,438 Total liabilities....................... 211,932 428,231 338,584 522,925 472,207 Convertible Trust Preferred Securities.. 88,988 147,941 147,142 146,343 145,544 Stockholders' equity.................... 84,056 102,628 158,666 158,540 148,687
9 - ------------------------------------------------------------------------------- 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 investment management business in March 2000. The results for the years ended December 31, 2002, 2001 and 2000 reflect both balance sheet lending and the investment management business. In December 2002, the Company's board of directors authorized an election to be taxed as a REIT for the 2003 tax year. The Company will continue to make, for its own account and as investment manager for the account of funds under management, loans and debt-related investments in various types of commercial real estate assets and operating companies. Prior to July 1997, the Company operated as a REIT, originating, acquiring, operating and holding income-producing real property and mortgage-related investments. The Company is the 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 with a capital structure that closely mirrored the capital structure of the predecessor. 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. On March 8, 2000, 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 I and Fund II, which ultimately raised total equity commitments of $845.2 million, including equity commitments of $49.7 million and $198.9 million from the Company and Citigroup, respectively. The Company earned $9.6 million of basic management and advisory fees from its management of Fund II in 2002. On January 1, 2003, the general partners of Fund II (affiliates of the Company and Citigroup) voluntarily reduced the management fees for the remainder of the investment period by 50% due to a lower than expected level of deployment of the Fund's capital. The Company expects approximately 40% of Fund II's committed capital to be invested at the end of the investment period on April 9, 2003, further reducing management fees from Fund II in 2003. The Company is also entitled to receive incentive payments from Fund II if the return on invested equity is in excess of 10%. The amount of any such payments is not determinable at December 31, 2002 and as such, no amount has been accrued as income for such potential payments in the financial statements. Potential incentive payments received as Fund II winds down could result in significant additional income from operations in certain periods during which such payments can be recorded as income. In 2001 and 2002 in connection with the organization of Fund I and Fund II, the Company issued to affiliates of Citigroup warrants to purchase 8,528,467 shares of Class A Common Stock. At December 31, 2002, all such warrants had a $5.00 per share exercise price, were exercisable and were to expire on March 8, 2005. In January 2003, the Company purchased all of the warrants outstanding from the affiliates of Citigroup for $2.1 million. The Company's current lending and investment activities are conducted principally through funds under management. Until the end of the investment period for Fund II on April 9, 2003, the Company generally will not originate or acquire loans or CMBS directly for its own balance sheet portfolio. After the investment period for Fund II, the Company plans to originate loans or purchase investments for its own account as permitted by future funds under management. The Company will also use its available working capital to make contributions to Fund II or any other funds as and when required by the capital commitments to such funds. 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. In 2003, the Company does not expect a significant decrease in total assets as additional reductions in loans and investments from satisfactions will require the Company to purchase or originate additional 1940-Act qualifying assets. 10 Developments with and Contributions to Funds - -------------------------------------------- The Company's investment in Fund I at December 31, 2002 is $10.0 million. Since December 31, 2001, the Company has not made any equity contributions to Fund I and has received $10.1 million as a return of equity. As of December 31, 2002, Fund I has outstanding loans and investments totaling $50.2 million, all of which are performing in accordance with the terms of their agreements. One loan for $26.0 million, which was in default and for which the accrual of interest had been suspended, was written and distributed pro-rata to the members in December 2002. Upon receipt of its pro-rata share of the loan with a face amount of $6,500,000, the Company disposed of the asset. Since December 31, 2001, the Company has made equity contributions to Fund II of $5.2 million and equity contributions to Fund II's general partner of $823,000. The Company's remaining equity commitment to Fund II and its general partner is $39.9 million. The Company's investment in Fund II and its general partner at December 31, 2002 is $18.9 million. As of December 31, 2002, Fund II has outstanding loans and investments totaling $723.5 million, all of which are performing in accordance with the terms of their agreements. The Company has capitalized costs of $8,528,000 that are being amortized over the anticipated lives of the Funds. Results of Operations for the Years Ended December 31, 2002 and 2001 - -------------------------------------------------------------------- The Company reported a net loss allocable to shares of Common Stock of $9,738,000 for the year ended December 31, 2002, a decrease of $18,502,000 from the net income allocable to shares of Common Stock of $8,764,000 for the year ended December 31, 2001. This decrease was primarily the result of the inability to utilize capital losses generated in 2002 to reduce current taxes, the write-down of deferred tax assets as a result of the decision to elect REIT status, the settlement of three cash flow hedges resulting in a $6.7 million charge to earnings, the write-down of a loan in Fund I which caused a loss from equity investments in Funds and decreased net interest income from loans and other investments. These decreases were partially offset by increased advisory and investment management fees, a recapture of the allowance for possible credit losses and the elimination of the Preferred Stock dividend. The Company expects additional reductions in interest and related income due to declining interest earning assets that may not be offset by increased income from investment management operations. Interest and related income from loans and other investments amounted to $47,079,000 for the year ended December 31, 2002, a decrease of $20,254,000 from the $67,333,000 amount for the year ended December 31, 2001. Average interest earning assets decreased from approximately $570.6 million for the year ended December 31, 2001 to approximately $473.7 million for the year ended December 31, 2002. The average interest rate earned on such assets decreased from 11.8% in 2001 to 9.9% in 2002. During the year ended December 31, 2002, the Company recognized $1.6 million in additional income on the early repayment of loans, while during the year ended December 31, 2001, the Company recognized $4.8 million in additional income on the early repayment of loans. Without this additional interest income, the earning rate for 2002 would have been 9.6% versus 11.0% for 2001. LIBOR rates averaged 1.8% for the year ended December 31, 2002 and 3.9% for the year ended December 31, 2001, a decrease of 2.1%. Since substantial portions of the Company's assets earn interest at fixed-rates, the decrease in the average earning rate did not correspond to the full decrease in the average LIBOR rate. Interest and related expenses amounted to $17,969,000 for the year ended December 31, 2002, a decrease of $8,269,000 from the $26,238,000 amount for the year ended December 31, 2001. The decrease in expense was due to a decrease in the amount of average interest bearing liabilities outstanding from approximately $321.8 million for the year ended December 31, 2001 to approximately $260.0 million for the year ended December 31, 2002, and a decrease in the average rate paid on interest bearing liabilities from 8.2% to 6.9% for the same periods. The decrease in the average rate is substantially due to the increased use of repurchase agreements as debt in 2002 at lower spreads to LIBOR than the credit facilities utilized in 2001 and the decrease in the average LIBOR rate. Due to the decrease in total debt, the percentage of debt that has been swapped to fixed rates in 2002 increased, partially offsetting the previously discussed decreases in floating rates. 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 11 December 31, 2002 and 2001, the Company recognized $8,455,000 and $8,479,000, respectively, of net expenses related to its outstanding Convertible Trust Preferred Securities. This amount consisted of distributions to the holders totaling $14,439,000 and $15,237,000, respectively, and amortization of discount and origination costs totaling $1,305,000 and $799,000, respectively, during the years ended December 31, 2002 and 2001. This was partially offset by a tax benefit of $7,289,000 and $7,557,000 during the years ended December 31, 2002 and 2001, respectively. On April 1, 2002, in accordance with the terms of the securities, the blended rate on such securities increased from 10.16% to 11.21%. On October 1, 2002, after repayment of the Non-Convertible Amount (as discussed below), the rate on such securities is 10.00%. The increase in the amortization of discount and origination costs resulted from the recognition of the unamortized discount and fees on the Non-Convertible Amount expensed upon repayment of the Non-Convertible Amount on September 30, 2002. During the year ended December 31, 2002, other revenues decreased $1,403,000 to $9,924,000 from $11,327,000 in the same period of 2001. During the second quarter of 2001, Fund II commenced operations, which accounted for approximately $2.6 million of additional management and advisory fees in 2002. The Company also recognized $2.0 million from the Company's final investment banking assignment. These increases were offset by the write-down of a $26 million loan in Fund I, which decreased income from equity investments in funds by approximately $6 million. General and administrative expenses decreased $1,386,000 to $13,996,000 for the year ended December 31, 2002 from $15,382,000 for year ended December 31, 2001. The decrease in general and administrative expenses was primarily due to reduced executive compensation. The Company employed an average of 27 employees during both the year ended December 31, 2002 and the year ended December 31, 2001. The Company had 26 full-time employees and one part-time employee at December 31, 2002. During the year ended December 31, 2002, the Company recaptured $4,713,000 of its previously established allowance for possible credit losses. The Company deemed this recapture necessary due to the substantial reduction in the loan portfolio and a general reduction in the default risk of the loans remaining based upon current conditions. After the recapture, the Company believes that the reserve is adequate based on the existing loans in the balance sheet portfolio. For the year ended December 31, 2002 and 2001, the Company accrued income tax expense of $22,438,000 and $16,882,000, respectively, for federal, state and local income taxes. The increase (from 48.6% to 106.1%) in the effective tax rate was primarily due to capital losses being generated in 2002 that were not deductible for tax purposes in the current year and the reduction in deferred tax assets due to the uncertainty of use in the future. In December 2002, when the decision to elect REIT status for 2003 was complete, the Company wrote down its deferred tax asset to $1.6 million, due to the inability of the Company to utilize the recorded tax benefits in the future. The remaining $1.6 million deferred tax asset relates to future reversals of taxable income in subsidiaries which will be taxable REIT subsidiaries. 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 2000, 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, 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. Interest and related income from loans and other investments amounted to $67,333,000 for the year ended 12 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 a $4.8 million in additional interest income on the early repayment of loans, while during the year ended December 31, 2000, the Company recognized $4.7 million in additional interest income 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. 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. The terms of the Convertible Trust Preferred Securities were modified effective May 10, 2000 which resulted in the blended rate on such securities increasing 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 $4,756,000 to $11,327,000 from $6,571,000 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. 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 the general partner of Fund II in 2001. These additional fees account for the majority of the increase in investment management and consulting fees from 2000 to 2001. 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 13 during the second, third or fourth quarter of 2001 as the Company believed that the reserve was 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 higher 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. Liquidity and Capital Resources - -------------------------------- At December 31, 2002, the Company had $10,186,000 in cash. The primary sources of liquidity for the Company for 2003 will be cash on hand, cash generated from operations, principal and interest payments received on loans and investments and additional borrowings under the Company's credit facilities. The Company believes these sources of capital will adequately meet future cash requirements. The Company expects that during 2003, it will use a significant amount of its available capital resources to satisfy its capital contributions required in connection with its remaining equity commitment to Fund II and future funds. 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 decrease in cash of $1,465,000 for the year ended December 31, 2002, compared to the net increase of $263,000 for the year ended December 31, 2001. Cash used by operating activities during the year ended December 31, 2002 was $23,988,000, compared to $12,769,000 provided during the same period of 2001. For the year ended December 31, 2002, cash provided by investing activities was $301,336,000, compared to $40,034,000 used in investing activities during the same period in 2001 as the Company experienced significant loan and investment repayments in both years but purchased significant levels 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 in 2001 which accounted for the majority of the change in the net cash provided by financing activities from $27,528,000 in 2001 to the $278,813,000 of cash used in financing activities in the same period of 2002. Since December 31, 2001, the Company has not originated or purchased any new loans and has no future commitments under any existing loans. The Company received full satisfaction of three loans totaling $90.0 million and partial repayments on five loans totaling $46.2 million in 2002. At December 31, 2002, the Company had outstanding loans totaling approximately $116.3 million and held CMBS and other available-for-sale securities of $155.8 million and $65.2 million, respectively. In 2000, the Company announced an open market share repurchase program under which the Company may purchase, from time to time, up to two million shares of the Company's Class A Common Stock. Since that time the authorization has been increased by the board of directors to purchase cumulatively up to 7,100,770 shares of Class A Common Stock. As of December 31, 2002, the Company had purchased and retired, pursuant to the program, 4,902,470 shares of Class A Common Stock at an average price of $4.36 per share (including commissions). Also, 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 outside the open market share repurchase program. The Company has and will continue to fund share repurchases with available cash. At December 31, 2002, the Company was party to a credit facility with a commercial lender that provides for a total of $100 million of credit. The facility matures in July 2003, with an automatic nine-month amortizing extension option, if not otherwise extended. At December 31, 2002, the Company had outstanding borrowings under the credit facility of $40,000,000, and had unused potential credit of $60,000,000. The credit facility provides the Company with adequate liquidity for its short-term needs. 14 The 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. On February 28, 2002, the Company's then existing $355 million credit facility matured and the term redeemable securities contract became due and settled, upon which events the Company entered into a new term redeemable securities contract and two new repurchase obligations. The new term redeemable securities contract, with the same counterparty, 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 has no borrowings against the term redeemable securities contract at December 31, 2002. At December 31, 2002, the Company also has outstanding repurchase obligations of $160,056,000. The average interest rate in effect for the repurchase obligations outstanding at December 31, 2002 was 1.90%. The Company expects to enter into new repurchase obligations at their maturity. In July 1998, the Company issued $150 million aggregate liquidation amount Convertible Trust Preferred Securities through the Company's consolidated statutory trust subsidiary, CT Convertible Trust I (the "Trust"), which were 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 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 bore a blended coupon rate of 10.16% per annum which rate varies as the proportion of the outstanding Convertible Amount to the outstanding Non-Convertible Amount changes and steps up in accordance with the coupon rate step up terms applicable to the Convertible Amount and the Non-Convertible Amount. The Convertible Amount bore a coupon rate of 8.25% per annum through March 31, 2002 and increased 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 bore a coupon rate of 13.00% per annum through September 30, 2002, when the Company redeemed the entire Non-Convertible Amount. In December 2002, in order to reduce interest rate derivatives to proper levels based on expected debt levels for 2003, the Company settled all of its then outstanding derivative securities. The Company also entered 15 into two new interest rate cash flow swaps with a notional value of $109 million. These cash flow interest rate swaps effectively convert floating rate debt to fixed rate debt, which is utilized to finance assets which earn interest at fixed rates. Investment Company Act of 1940 - ------------------------------ In the quarter ended March 31, 2002, to remain in compliance with 1940-Act, the Company purchased $40.0 million of Federal Home Loan Mortgage Corporation Gold fixed rate whole pool mortgage-backed securities. To finance this purchase, the Company entered into a repurchase obligation that currently matures in April 2003 and is expected to be extended monthly thereafter. In total, the Company sold four Federal Home Loan Mortgage Corporation Gold fixed rate securities with a market value of $65.2 million at December 31, 2002 and the Company has a liability, representing the obligation to repurchase these assets, for $63.1 million. The Company continuously analyzes its investments and will adjust levels of 1940-Act qualified assets when and if required for compliance purposes. As a result of this analysis and due to favorable market conditions, in June 2002, the Company sold three Federal Home Loan Mortgage Corporation Gold fixed rate whole pool mortgage-backed securities due September 1, 2031 with an amortized cost of $75,006,000 and completed three sales of CMBS in two issues with a basis of $31,012,000. The Company recognized a net realized gain of $711,000 in conjunction with these sales. The Company also received full payment on three other CMBS issues that it held with a face value of $36.5 million. 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 accordance with SFAS No. 133, on December 31, 2002, the derivative financial instruments were reported at their fair value as interest rate hedge liabilities of $1,822,000. The Company is exposed to credit loss in the event of non-performance by the counterparties 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. 16 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. 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 99.1 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, 2002. 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 ---------------------------------------------------------------------- 2003 2004 2005 2006 2007 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (dollars in thousands) Assets: Available-for sale securities Fixed Rate $ 24,566 $ 20,147 $ 9,784 $ 4,423 $ 1,997 $ 1,638 $ 62,555 $65,233 Average interest rate 6.07% 6.07% 6.07% 6.07% 6.07% 6.07% 6.07% CMBS Fixed Rate -- -- -- $ 7,811 $ 135 $201,024 $208,970 $155,780 Average interest rate -- -- -- 10.03% 8.38% 11.99% 11.91% Loans receivable Fixed Rate -- -- -- -- $39,382 $ 49,331 $ 88,713 $ 96,794 Average interest rate -- -- -- -- 11.30% 11.99% 11.68% Variable Rate $ 19,727 $ 4,667 $ 667 $ 667 $ 667 $ 5,888 $ 32,283 $ 30,555 Average interest rate 11.51% 1.00% 6.97% 6.97% 6.97% 6.97% 8.88% Liabilities: Credit Facilities Variable Rate -- $40,000 -- -- -- -- $ 40,000 $ 40,000 Average interest rate -- 4.72% -- -- -- -- 4.72% Repurchase obligations Variable Rate $160,056 -- -- -- -- -- $160,056 $160,056 Average interest rate 2.03% -- -- -- -- -- 2.03% Convertible Trust Preferred Securities Fixed Rate -- -- -- $89,742 -- -- $ 89,742 $88,988 Average interest rate -- -- -- 10.00% -- -- 10.00% Interest rate swaps Notional amounts -- -- -- -- -- $109,000 $109,000 $(1,822) Average fixed pay rate -- -- -- -- -- 4.24% 4.24% Average variable receive rate -- -- -- -- -- 1.42% 1.42%
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 24 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 required by Items 401 and 405 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than April 30, 2003, 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, 2003, 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 Items 201(a) and 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, 2003, 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, 2003, with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act. - ------------------------------------------------------------------------------- Item 14. Controls and Procedures - ------------------------------------------------------------------------------- Evaluation of Disclosure Controls and Procedures An evaluation of the effectiveness of the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried out within 90 days prior to the filing of this annual report. This evaluation was made under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Controls There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the Company's evaluation. 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, 1998 (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). 3.1 Charter of the Capital Trust, Inc. (filed as Exhibit 3.1 to Capital Trust, Inc.'s Registration Statement on Form S-3 (File No. 333-103662) filed on March 7, 2003 and incorporated herein by reference). 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). +10.1 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) as amended by 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). +10.2 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). +10.3 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). +10.4 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 ------- ----------- +10.5 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). +10.6 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). +10.7 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). 10.8 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). 10.9.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) as amended by the 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. (filed as Exhibit 10.14.b to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on April 1, 2002 and incorporated herein by reference). o10.9.b Second Amendment to Amended and Restated Master Loan and Security Agreement, dated as of July 16, 2002, between Capital Trust, Inc. and Morgan Stanley Dean Witter Mortgage Capital Inc. o10.9.c Third Amendment to Amended and Restated Master Loan and Security Agreement, dated as of August 9, 2002, between Capital Trust, Inc. and Morgan Stanley Dean Witter Mortgage Capital Inc. 10.10.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) as amended by the 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 (filed as Exhibit 10.15.b to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on April 1, 2002 and incorporated herein by reference). o10.10.b Second Amendment to Amended and Restated CMBS Loan Agreement, dated as of July 16, 2002, between Capital Trust, Inc. and Morgan Stanley & Co. International Limited. o10.10.c Third Amendment to Amended and Restated CMBS Loan Agreement, dated as of August 9, 2002, between Capital Trust, Inc. and Morgan Stanley & Co. International Limited. 10.11 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). 10.12 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). 22 Exhibit Number Description ------- ----------- 10.13 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). 10.14 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). 10.15 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). 10.16 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 Employees 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). 10.17 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). 10.18 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). 10.19 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). 10.20 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). 10.21 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). 10.22 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). 23 Exhibit Number Description ------- ----------- o10.23 Warrant Purchase Agreement, dated as of January 29, 2003, by and between Travelers Insurance Company, Citigroup Alternative Investments GP, LLC Citigroup Alternative Investments General Real Estate Mezzanine Investments II, LLC and Capital Trust, Inc. o10.24 Registration Rights Agreement, dated as of February 7, 2003, by and between Capital Trust, Inc. and Stichting Pensioenfonds ABP. o21.1 Subsidiaries of Capital Trust, Inc. o23.1 Consent of Ernst & Young LLP o99.1 Risk Factors *99.2 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *99.3 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ________________ + Represents a management contract or compensatory plan or arrangement. o Filed herewith. * Pursuant to Commission Release No. 33-8212, this certification will be treated as "accompanying" this Annual Report on Form 10-K and not "filed" as part of such report for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act, and such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent the registrant specifically incorporates it by reference. (a)(4) Report on Form 8-K ------ ------------------ During the fiscal quarter ended December 31, 2002, 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. March 28, 2003 /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. March 28, 2003 /s/ Samuel Zell - ----------------------- ----------------- Date Samuel Zell Chairman of the Board of Directors March 28, 2003 /s/ John R. Klopp - ----------------------- ----------------- Date John R. Klopp Vice Chairman and Chief Executive Officer and Director March 28, 2003 /s/ Brian H. Oswald - ------------------------ ------------------- Date Brian H. Oswald Chief Financial Officer March 28, 2003 /s/ Jeffrey A. Altman - ------------------------ --------------------- Date Jeffrey A. Altman, Director March 28, 2003 /s/ Thomas E. Dobrowski - ------------------------ ----------------------- Date Thomas E. Dobrowski, Director March 28, 2003 /s/ Martin L. Edelman - ------------------------ --------------------- Date Martin L. Edelman, Director March 28, 2003 /s/ Gary R. Garrabrant - ------------------------ ---------------------- Date Gary R. Garrabrant, Director March 28, 2003 /s/ Craig M. Hatkoff - ------------------------ -------------------- Date Craig M. Hatkoff, Director March 28, 2003 /s/ Susan W. Lewis - ------------------------ ------------------ Date Susan W. Lewis, Director - March 28, 2003 /s/ Sheli Z. Rosenberg - ------------------------ ---------------------- Date Sheli Z. Rosenberg, Director March 28, 2003 /s/ Steven Roth - ------------------------ ---------------------- Date Steven Roth, Director March 28, 2003 /s/ Lynne B. Sagalyn - ------------------------ ---------------------- Date Lynne B. Sagalyn, Director March 28, 2003 /s/ Michael D. Watson - ------------------------ --------------------- Date Michael Watson, Director 25 CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John R. Klopp, certify that: 1. I have reviewed this annual report on Form 10-K of Capital Trust, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ John R. Klopp - ----------------- John R. Klopp Chief Executive Officer 26 CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Brian H. Oswald, certify that: 1. I have reviewed this annual report on Form 10-K of Capital Trust, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Brian H. Oswald - ------------------- Brian H. Oswald Chief Financial Officer 27 Index to Consolidated Financial Statements Report of Independent Auditors..............................................F-2 Audited Financial Statements Consolidated Balance Sheets as of December 31, 2002 and 2001................F-3 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000............................................F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000........................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000............................................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, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York February 14, 2003 F-2 Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2002 and 2001 (in thousands, except per share data)
2002 2001 ---------------- ---------------- Assets Cash and cash equivalents $ 10,186 $ 11,651 Available-for-sale securities, at fair value 65,233 152,789 Commercial mortgage-backed securities available-for-sale, at fair value 155,780 210,268 Loans receivable, net of $4,982 and $13,695 reserve for possible credit losses at December 31, 2002 and December 31, 2001, respectively 116,347 248,088 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") 28,974 38,229 Deposits and other receivables 431 1,192 Accrued interest receivable 4,422 4,614 Deferred income taxes 1,585 9,763 Prepaid and other assets 2,018 2,206 ---------------- ---------------- Total assets $ 384,976 $ 678,800 ================ ================ Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued expenses $ 9,067 $ 9,842 Notes payable -- 977 Credit facilities 40,000 121,211 Term redeemable securities contract -- 137,132 Repurchase obligations 160,056 147,880 Deferred origination fees and other revenue 987 1,202 Interest rate hedge liabilities 1,822 9,987 ---------------- ---------------- Total liabilities 211,932 428,231 ---------------- ---------------- Company-obligated, mandatory redeemable, convertible trust preferred securities of CT Convertible Trust I, holding $89,742 of convertible 8.25% junior subordinated debentures at December 31, 2002 and 2001 and $60,258 of non-convertible 13.00% junior subordinated debentures of Capital Trust, Inc. at December 31, 2001 ("Convertible Trust Preferred Securities") 88,988 147,941 ---------------- ---------------- 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, 2002 and 2001 ("Class A Preferred Stock") -- -- 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, 2002 and 2001 ("Class B Preferred Stock" and together with Class A Preferred Stock, "Preferred Stock") -- -- Class A common stock, $0.01 par value, 100,000 shares authorized, 16,216 and 18,332 shares issued and outstanding at December 31, 2002 and 2001, respectively 162 183 Class B common stock, $0.01 par value, 100,000 shares authorized, no shares issued and outstanding at December 31, 2002 and 2001 ("Class B Common Stock") -- -- Restricted Class A Common Stock, $0.01 par value, 300 and 396 shares issued and outstanding at December 31, 2002 and December 31, 2001, respectively ("Restricted Class A Common Stock" and together with Class A Common Stock and Class B Common Stock, "Common Stock") 3 4 Additional paid-in capital 126,809 136,805 Unearned compensation (320) (583) Accumulated other comprehensive loss (28,988) (29,909) Accumulated deficit (13,610) (3,872) ---------------- ---------------- Total stockholders' equity 84,056 102,628 ---------------- ---------------- Total liabilities and stockholders' equity $ 384,976 $ 678,800 ================ ================
See accompanying notes to consolidated financial statements. F-3 Capital Trust, Inc. and Subsidiaries Consolidated Statements of Operations For the Years Ended December 31, 2002, 2001 and 2000 (in thousands, except per share data)
2002 2001 2000 ------------- ------------- -------------- Income from loans and other investments: Interest and related income $ 47,079 $ 67,333 $ 87,685 Less: Interest and related expenses (17,969) (26,238) (36,712) ------------- ------------- -------------- Income from loans and other investments, net 29,110 41,095 50,973 ------------- ------------- -------------- Other revenues: Management and advisory fees from affiliated Funds managed 10,123 7,664 373 Income / (loss) from equity investments in Funds (2,534) 2,991 1,530 Advisory and investment banking fees 2,207 277 3,920 Other interest income 128 395 748 ------------- ------------- -------------- Total other revenues 9,924 11,327 6,571 ------------- ------------- -------------- Other expenses: General and administrative 13,996 15,382 15,439 Other interest expense 23 110 219 Depreciation and amortization 992 909 902 Net unrealized (gain) / loss on derivative securities and corresponding hedged risk on CMBS securities (21,134) 542 -- Net realized loss on sale of fixed assets, investments and settlement of derivative securities 28,715 -- 64 Provision for / (recapture of) allowance for possible credit losses (4,713) 748 5,478 ------------- ------------- -------------- Total other expenses 17,879 17,691 22,102 ------------- ------------- -------------- Income before income taxes and distributions and amortization on Convertible Trust Preferred Securities 21,155 34,731 35,442 Provision for income taxes 22,438 16,882 17,760 ------------- ------------- -------------- Income / (loss) before distributions and amortization on Convertible Trust Preferred Securities (1,283) 17,849 17,682 Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit of $7,289, $7,557 and $7,124 for the years ended December 31, 2002, 2001 and 2000, respectively 8,455 8,479 7,921 ------------- ------------- -------------- Net income / (loss) (9,738) 9,370 9,761 Less: Preferred Stock dividend -- 606 1,615 ------------- ------------- -------------- Net income / (loss) allocable to Common Stock $ (9,738) $ 8,764 $ 8,146 ============= ============= ============== Per share information: Net earnings / (loss) per share of Common Stock Basic $ (0.54) $ 0.43 $ 0.35 ============= ============= ============== Diluted $ (0.54) $ 0.37 $ 0.33 ============= ============= ============== Weighted average shares of Common Stock outstanding Basic 18,026,192 20,166,319 23,171,057 ============= ============= ============== Diluted 18,026,192 36,124,105 29,691,927 ============= ============= ==============
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, 2002, 2001 and 2000 (in thousands)
Restricted Class A Class B Class A Class B Class A Comprehensive Preferred Preferred Common Common Common Income/(Loss) Stock Stock Stock Stock Stock -------------- --------------------------------------------------------------------- Balance at January 1, 2000 $ 23 $ 40 $ 219 $ 23 $ 1 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 -- -- -- -- -- -- Issuance of Class A Common Stock unit awards -- -- -- 1 -- -- Cancellation of previously issued restricted Class A Common Stock -- -- -- -- -- (1) Issuance of restricted Class A Common Stock -- -- -- -- -- 3 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) -- -- -------------- --------------------------------------------------------------------- Balance at December 31, 2000 $ 9,773 23 40 190 28 3 ============== 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 -- -- -- -- -- -- Issuance of Class A Common Stock unit awards -- -- -- 1 -- -- Issuance of restricted Class A Common Stock -- -- -- -- -- 2 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 Stock previously outstanding -- (23) (40) (9) (28) -- -------------- --------------------------------------------------------------------- Balance at December 31, 2001 $ (9,813) -- -- 183 -- 4 ============== Net loss $ (9,738) -- -- -- -- -- Unrealized gain on derivative financial instruments, net of related income taxes 1,715 -- -- -- -- -- Unrealized loss on available-for-sale securities, net of related income taxes (794) -- -- -- -- -- Issuance of Class A Common Stock unit awards -- -- -- 1 -- -- Issuance of restricted Class A Common Stock -- -- -- -- -- 1 Restricted Class A Common Stock earned -- -- -- -- -- -- Vesting of restricted Class A Common Stock to unrestricted Class A Common Stock -- -- -- 2 -- (2) Repurchase and retirement of shares of Class A Common Stock previously outstanding -- -- -- (24) -- -- -------------- --------------------------------------------------------------------- Balance at December 31, 2002 $ (8,817) $ -- $ -- $ 162 $ -- $ 3 ============== =====================================================================
Accumulated Additional Other Paid-In Unearned Comprehensive Accumulated Capital Compensation Income/(Loss) Deficit Total ------------------------------------------------------------------------- Balance at January 1, 2000 $ 189,456 $ (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 -- -- -- 1,360 Issuance of Class A Common Stock unit awards 624 -- -- -- 625 Cancellation of previously issued restricted Class A Common Stock (279) 182 -- -- (98) Issuance of restricted Class A Common Stock 947 (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 (10,601) -- -- -- (10,626) ------------------------------------------------------------------------- Balance at December 31, 2000 181,507 (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 -- -- -- 3,276 Issuance of Class A Common Stock unit awards 624 -- -- -- 625 Issuance of restricted Class A Common Stock 1,023 (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 Stock previously outstanding (49,625) -- -- -- (49,725) ------------------------------------------------------------------------- Balance at December 31, 2001 136,805 (583) (29,909) (3,872) 102,628 Net loss -- -- -- (9,738) (9,738) Unrealized gain on derivative financial instruments, net of related income taxes -- -- 1,715 -- 1,715 Unrealized loss on available-for-sale securities, net of related income taxes -- -- (794) -- (794) Issuance of Class A Common Stock unit awards 312 -- -- -- 313 Issuance of restricted Class A Common Stock 399 (400) -- -- -- Restricted Class A Common Stock earned -- 663 -- -- 663 Vesting of restricted Class A Common Stock to unrestricted Class A Common Stock -- -- -- -- -- Repurchase and retirement of shares of Class A Common Stock previously outstanding (10,707) -- -- -- (10,731) ------------------------------------------------------------------------- Balance at December 31, 2002 $ 126,809 $ (320) $(28,988) $ (13,610) $ 84,056 =========================================================================
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, 2002, 2001 and 2000 (in thousands)
2002 2001 2000 ------------- ------------- ------------- Cash flows from operating activities: Net income / (loss) $ (9,738) $ 9,370 $ 9,761 Adjustments to reconcile net income / (loss) to net cash provided by operating activities: Deferred income taxes 8,178 (1,044) (3,351) Provision for / (recapture of) provision for possible credit losses (4,713) 748 5,478 Depreciation and amortition 992 909 902 Loss / (income) from equity investments in Funds 2,534 (2,991) (1,530) Net gain on sales of CMBS and available-for-sale securities (711) -- -- Cash paid on settlement of fair value hedge (23,624) -- -- Unrealized loss on hedged and derivative securities 2,561 542 -- Restricted Class A Common Stock earned 663 910 707 Amortization of premiums and accretion of discounts on loans and investments, net (2,365) (2,853) (2,683) Accretion of discount on term redeemable securities contract 680 3,897 3,593 Accretion of discounts and fees on Convertible Trust Preferred Securities, net 1,305 799 799 Loss on sale of fixed assets -- -- 64 Expenses reversed on cancellation of restricted stock previously issued -- -- (98) Changes in assets and liabilities: Deposits and other receivables 761 (981) 322 Accrued interest receivable 192 2,627 2,287 Prepaid and other assets (26) 1,659 353 Deferred origination fees and other revenue (462) (961) (1,248) Accounts payable and accrued expenses (215) 138 (3,478) ------------- ------------- ------------- Net cash provided by / (used in) operating activities (23,988) 12,769 11,878 ------------- ------------- ------------- Cash flows from investing activities: Purchases of available-for-sale securities (39,999) (257,877) -- Principal collections on and proceeds from sales of available-for-sale securities 131,347 103,038 -- Cash received on commercial mortgage-backed securities recorded as discount -- -- 1,446 Principal collections on and proceeds from sale of CMBS 67,880 -- -- Principal collections on certificated mezzanine investments -- 22,379 23,053 Origination and purchase of loans receivable -- (13,319) (14,192) Principal collections on loans receivable 136,246 112,585 169,227 Equity investments in Funds (5,973) (35,599) (36,606) Return of capital from Funds 11,840 28,942 13,107 Purchases of equipment and leasehold improvements (5) (183) (495) Proceeds from sale of equipment -- -- 12 ------------- ------------- ------------- Net cash provided by / (used in) investing activities 301,336 (40,034) 155,552 ------------- ------------- ------------- Cash flows from financing activities: Proceeds from repurchase obligations 179,861 251,503 -- Repayment of repurchase obligations (167,685) (120,192) (12,134) Proceeds from credit facilities 118,500 191,870 56,000 Repayment of credit facilities (199,711) (244,300) (225,622) Repayment of notes payable (977) (891) (827) Repayment of Convertible Trust Preferred Securities (60,258) -- -- Proceeds from term redeemable securities contract 35,816 -- -- Repayment of term redeemable securities contract (173,628) -- -- Dividends paid on Class A Preferred Stock -- (737) (1,615) Repurchase and retirement of shares of Common and Preferred Stock previously outstanding (10,731) (49,725) (10,626) ------------- ------------- ------------- Net cash provided by / (used in) financing activities (278,813) 27,528 (194,824) ------------- ------------- ------------- Net increase / (decrease) in cash and cash equivalents (1,465) 263 (27,394) Cash and cash equivalents at beginning of year 11,651 11,388 38,782 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 10,186 $ 11,651 $ 11,388 ============= ============= =============
See accompanying notes to consolidated financial statements. F-6 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 1. Organization Capital Trust, Inc. (the "Company") is an investment management and real estate finance company that specializes in providing structured capital solutions to owner/operators of commercial real estate. In December 2002, the Company's board of directors authorized an election to be taxed as a real estate investment trust ("REIT") for the 2003 tax year. The Company will continue to make, for its own account and as investment manager for the account of funds under management, loans and debt-related investments in various types of commercial real estate assets and operating companies. The Company's business strategy is to expand its investment management business by sponsoring additional real estate investment funds and expanding the scope of its products. The Company is the 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. On March 8, 2000, the Company entered into a venture with affiliates of Citigroup Alternative Investments Inc. (collectively "Citigroup") pursuant to which they agreed, among other things, to co-sponsor and invest capital in a series of commercial real estate mezzanine private equity funds managed by the Company. 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 up to $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 earned approximately $9.6 million of management and advisory fees in 2002 from its management of Fund II. In November 2002, the general partner announced its intention to voluntarily reduce the management fees charged to partners by 50% effective January 1, 2003. F-7 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Venture with Citigroup Investments Inc., continued In connection with the organization of Fund I, the Company issued a warrant to Citigroup 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 had issued to Citigroup warrants to purchase 4,278,467 shares of its Class A Common Stock. In total, the Company had issued to Citigroup four warrants to purchase 8,528,467 shares of its Class A Common Stock which had a $5.00 per share exercise price, were exercisable and were to expire on March 8, 2005. The Company capitalized such costs that are being amortized over the anticipated lives of the Funds. The Company has no further obligations to issue additional warrants to Citigroup at December 31, 2002. In January 2003, the Company purchased all of the outstanding warrants for $2.1 million. 3. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, CTIMCO (as described in Note 2), CT-F1, LLC (direct member and equity owner of Fund I), CT-F2-LP, LLC (limited partner of Fund II), CT-F2-GP, LLC (direct member and equity owner of Fund II GP), CT-BB Funding Corp. (financing subsidiary for three mezzanine loans), CT Convertible Trust I (as described in Note 13), CT LF Funding Corp. LLC (financing subsidiary for all of the Company's CMBS securities), CT BSI Funding Corp. LLC and VIC, Inc., which together with the Company wholly owns Victor Capital Group, L.P. ("Victor Capital") and VCG Montreal Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. 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. Exit fees are also recognized over the estimated 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. 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, 2002 and 2001, a majority of the cash and cash equivalents consisted of overnight investments in JP Morgan commercial paper. The Company had no bank balances in excess of federally insured amounts at December 31, 2002 and 2001. The Company has not experienced any losses on its demand deposits, commercial paper or money market investments. F-8 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued 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 sheet 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. Loans Receivable and Reserve for Possible Credit Losses Loans receivable are reported on the consolidated balance sheet at the lower of cost or market. The provision for possible credit losses on loans receivable 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. 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. 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 of 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 with the changes in value included in net income. 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. Deferred Debt Issuance Costs The Company capitalizes costs incurred related to the issuance of long-term debt. These costs are deferred and reported on balance sheet in the caption deferred origination fees and other revenue and are 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. 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. The Company determined that there had been a decline in the value of the acquired enterprise and wrote down the value of the excess of purchase price over net tangible assets acquired to the revised fair value in 2000. 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 ($8,817,000), ($9,813,000) and $9,773,000 for the years ended December 31, 2002, 2001 and 2000, 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. At December 31, 2002, accumulated other comprehensive loss is comprised of unrealized losses on CMBS of $29,402,000 and unrealized losses on cash flow swaps of $1,822,000 offset by unrealized gains on available-for sale securities of $2,236,000 netting to a total of $28,988,000. 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, 2002, potentially dilutive shares of Common Stock include dilutive Common Stock warrants and options and future commitments for stock unit awards. 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. F-11 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made in the presentation of the 2001 and 2000 consolidated financial statements to conform to the 2002 presentation. Segment Reporting As the Company manages its operations as one segment, separate segment reporting is not presented for 2002, 2001 and 2000, as the financial information for that segment is the same as the information in the consolidated financial statements. New Accounting Pronouncement In January 2003 the FASB issued Interpretation No. 46,"Consolidation of Variable Interest Entities" (the "Interpretation"), which provides new criteria for determining whether or not consolidation accounting is required. The Interpretation may require the Company to consolidate financial information for certain of its investments/managed entities. This Interpretation generally is effective for entities with variable interests in variable interest entities created after January 31, 2003; otherwise, it is applicable for the first interim or annual reporting period beginning after June 15, 2003. If applicable, the Interpretation would require consolidation of an investee's/managed entity's assets and liabilities and results of operations, with minority interest recorded for the ownership share applicable to other investors. Where consolidation is not required, additional disclosures may be required. 4. Available-for-Sale Securities At December 31, 2002, 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 $ 6,513 $ 213 $ -- $ 6,726 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 31,017 936 -- 31,953 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 1, 2031 1,770 60 -- 1,830 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due April 1, 2032 23,698 1,026 -- 24,724 --------------------------------------- $ 62,998 $ 2,235 $ -- $65,233 =======================================
The Company purchased the security due April 1, 2032 in March 2002 at a discount with seller provided financing through a repurchase agreement. The Company sold three securities due September 1, 2031 in June 2002 with an amortized cost of $75,006,000 for $75,358,000 resulting in a total gain of $352,000. F-12 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Available-for-Sale Securities, continued 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 $ 9,309 $-- $ 107 $ 9,202 1, 2031 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 59,574 -- 733 58,841 1, 2031 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 8,086 -- 93 7,993 1, 2031 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 19,014 -- 220 18,794 1, 2031 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 56,570 -- 659 55,911 1, 2031 Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due September 2,072 -- 24 2,048 1, 2031 --------------------------------------- $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. During the year ended December 31, 2000, 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 2001, the Company received $1.4 million of additional discount from the issuer of the securities in settlement of a dispute with the issuer. In May 2002, the Company received full satisfaction of $36,509,000 face amount of interests in three subordinated CMBS issued by a financial asset securitization investment trust. In connection with the early payoff, the Company recognized an additional $370,000 of unamortized discount as additional interest income in 2002. F-13 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Commercial Mortgage-Backed Securities, continued 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. In June 2002, three sales of CMBS in two issues were completed. The securities, which had a basis of $31,012,000 including amortization of discounts, were sold for $31,371,000 resulting in a net gain of $359,000. The remaining BB CMBS Portfolio securities bear interest at fixed rates that have an average face rate of 7.63% on the face amount and mature at various dates from February 2006 to March 2015. At December 31, 2002, the expected average life for the CMBS portfolio is 9.1 years. 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, 2002 was 13.66%. 6. 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 or acquires 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 or acquires 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 other loans not meeting the above criteria. At December 31, 2002 and 2001, the Company's loans receivable consisted of the following (in thousands): 2002 2001 ---------------- --------------- Mortgage Loans $ 15,202 $ 69,998 Mezzanine Loans 98,268 142,160 Other loans receivable 7,859 49,625 ---------------- --------------- 121,329 261,783 Less: reserve for possible credit losses (4,982) (13,695) ---------------- --------------- Total loans $ 116,347 $ 248,088 ================ =============== F-14 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Loans Receivable, continued One Mortgage Loan receivable with an original principal balance of $8,000,000 reached maturity on July 15, 2001 and has not been repaid with respect to principal and interest. In December 2002, the loan was written down to $4,000,000 through a charge to the allowance for possible credit losses. 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, 2002, 2001 and 2000, $958,000, $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 were carried at $779,000 until the non-recourse note payable was foreclosed upon on January 17, 2001. 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 was not recorded. During the year ended December 31, 2002, the Company provided no additional fundings on loans originated in prior periods and has no outstanding loan commitments at December 31, 2002. At December 31, 2002, 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 10.27% Mezzanine Loans 11.23% Other loans receivable 13.66% Total Loans 11.31% At December 31, 2002, $28,283,000 (24%) 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 $89,046,000 (76%) 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, 2002 of the Company's performing loans receivable was as follows: Weighted Average Range of Maturity Dates Maturity --------------------------------- ------------ Mortgage Loans December 2003 11 Months Mezzanine Loans May 2007 to July 2009 68 Months Other loans receivable August 2003 7 Months Total Loans August 2003 to July 2009 58 Months At December 31, 2002, there are two loans secured by office buildings in New York City to a related group of borrowers totaling $73.8 million or approximately 19.2% of total assets. For the year ended December 31, 2002, total gross revenues, total operating expenses and net income before capital improvements on the two buildings total $46.6 million, $8.7 million and $4.6 million, respectively (unaudited). There are no other loans to a single borrower or to related groups of borrowers that exceed ten percent of total assets. Approximately 85% of all performing loans are secured by properties in New York. Approximately 76% of all performing loans are secured by office buildings. These credit concentrations are adequately collateralized as of December 31, 2002. F-15 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Loans Receivable, continued In connection with the aforementioned loans, at December 31, 2002 and 2001, the Company has deferred origination fees, net of direct costs of $160,000 and $1,202,000, respectively, that are being amortized into income over the life of the loan. At December 31, 2002 and 2001, the Company has also recorded $1,694,000 and $372,000, 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, 2002, performing loans totaling $117,329,000 are pledged as collateral for borrowings on the Company's credit facility and term redeemable securities contract. The Company has established a reserve for possible credit losses on loans receivable as follows (in thousands): 2002 2001 2000 ------------ ------------ ----------- Beginning balance $13,695 $12,947 $ 7,605 Provision for (recapture of) allowance for possible credit losses (4,713) 748 5,478 Amounts charged against reserve for possible credit losses (4,000) -- (136) ------------ ------------ ----------- Ending balance $ 4,982 $13,695 $12,947 ============ ============ =========== 7. Equity investment in Funds CT Mezzanine Partners LLC ("Fund I") As part of the venture with Citigroup, as described in Note 2, the Company held an equity investment in Fund I during the years ended December 31, 2002, 2001 and 2000. The activity for the equity investment in Fund I for the years ended December 31, 2002, 2001 and 2000 is as follows (in thousands): 2002 2001 2000 ------------ ------------ ------------ Beginning balance $24,983 $26,011 $ -- Capital contributions to Fund I -- 25,331 33,214 Company portion of Fund I income / (loss) (4,345) 2,934 1,530 Costs capitalized for investment in Fund I -- -- 4,752 Amortization of capitalized costs (476) (477) (378) Distributions from Fund I (10,133) (28,816) (13,107) ------------ ------------ ------------ Ending balance $10,029 $24,983 $26,011 ============ ============ ============ As of December 31, 2002, Fund I has loans outstanding totaling $50,237,000, all of which are performing in accordance with the terms of the loan agreements. One loan for $26.0 million, which was in default and for which the accrual of interest had been suspended, was written down to $212,000 and distributed pro-rata to the members in December 2002. Upon receipt of the loan with a face amount of $6,500,000, the Company disposed of the asset. For the years ended December 31, 2002, 2001 and 2000, the Company received $530,000, $765,000 and $373,000, respectively, of fees for management of Fund I. On January 31, 2003, the Company purchased from affiliates of Citigroup their 75% interests in Fund I for $38.4 million (including the assumption of liabilities). As of January 31, 2003, the Company will consolidate the operations of Fund I in its consolidated financial statements. F-16 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Equity investment in Funds, continued CT Mezzanine Partners II LP ("Fund II") The Company had equity investments in Fund II during the years ended December 31, 2002 and 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 for the years ended December 31, 2002 and 2001 is as follows (in thousands): 2002 2001 ------------ ------------ Beginning balance $10,571 $ -- Capital contributions to Fund II 5,150 7,097 Company portion of Fund II income 1,810 54 Costs capitalized for investment in Fund II -- 3,776 Amortization of capitalized costs (378) (229) Distributions from Fund II (1,707) (127) ------------ ------------ Ending balance $15,446 $10,571 ============ ============ As of December 31, 2002, Fund II has loans and investments outstanding totaling $723,525,000, all of which are performing in accordance with the terms of the loan agreements. For the years ended December 31, 2002 and 2001, the Company received $8,089,000 and $5,884,000, respectively, of fees for management of Fund II. 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 had equity investments in Fund II GP during the years ended December 31, 2002 and 2001. The activity for the equity investment in Fund II GP is as follows (in thousands): 2002 2001 ------------ ------------ Beginning balance $ 2,675 $ -- Capital contributions to Fund II GP 823 2,671 Company portion of Fund II GP income 1 4 Distributions from Fund II GP -- -- ------------ ------------ Ending balance $ 3,499 $ 2,675 ============ ============ In addition, the Company earned $1,505,000 and $1,015,000 of consulting fees from Fund II GP during the years ended December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, the Company had receivables of $380,000 and $1,015,000, respectively, from Fund II GP, which 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. F-17 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. 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 Group, L.P. 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. 9. Equipment and Leasehold Improvements At December 31, 2002 and 2001, equipment and leasehold improvements, net, are summarized as follows (in thousands): Period of Depreciation or Amortization 2002 2001 ------------------- ---------- ---------- Office and computer equipment 1 to 3 years $ 554 $ 568 Furniture and fixtures 5 years 146 146 Leasehold improvements Term of leases 388 385 ----------- ----------- 1,088 1,099 Less: accumulated depreciation (698) (576) ----------- ----------- $ 390 $ 523 =========== =========== Depreciation and amortization expense on equipment and leasehold improvements, which are computed on a straight-line basis totaled $138,000, $203,000 and $238,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Equipment and leasehold improvements are included at their depreciated cost in prepaid and other assets in the consolidated balance sheets. F-18 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Notes Payable At December 31, 2002, the Company has no notes payable and at December 31, 2001, the Company had notes payable aggregating $977,000. In connection with the acquisition of Victor Capital Group, L.P. 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 of whom serves as the chief executive officer of the Company. The notes were 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, 2002, the Acquisition Notes have been repaid. 11. 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 called for additional commitment fees when the total borrowing under the credit facility exceeded $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 February 28, 2002, the Company's $355 million credit facility matured and was settled and was replaced with the repurchase obligations discussed below. 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. The Company subsequently extended the expiration of such credit facility from December 1999 to June 2000 and 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. Effective July 16, 2002, pursuant to an amended and restated credit agreement, the Company extended the expiration of such credit facility from July 2002 to July 2003 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. F-19 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Long-Term Debt, continued 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 as an officer of the Company on December 29, 2000 is not an event of non-compliance with the foregoing covenant. At December 31, 2002, the Company has borrowed $40,000,000 against the $100 million credit facility at an average borrowing rate (including amortization of fees incurred and capitalized) of 4.72%. The Company has pledged assets of $81,666,000 as collateral for the borrowing against such credit facility. On December 31, 2002, the unused amount of potential credit under the remaining credit facility was $60,000,000. 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 had a three-year term that expired in February 2002. On February 28, 2002, when the Company's $355 million credit facility matured and the term redeemable securities contract became due and settled, 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. The Company has no outstanding borrowings against the new term redeemable securities contract at December 31, 2002. Repurchase Obligations At December 31, 2002, the Company was obligated to two counterparties under repurchase agreements. The repurchase obligation with the first counterparty, an affiliate of a securities dealer, was utilized to finance CMBS securities that were previously financed with the credit facility and original term redeemable securities contract. At December 31, 2002, the Company sold CMBS assets with a book and market value of $155,780,000 and has a liability to repurchase these assets for $97,000,000 that is non-recourse to the Company. This repurchase obligation has a one-year term that expired in February 2003 and was subsequently extended to February 2004. The liability balance bears interest at specified rates over LIBOR based upon each asset included in the obligation. F-20 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Long-Term Debt, continued The other repurchase obligation with the other counterparty, a securities dealer, arose in connection with the purchase of available-for-sale securities. At December 31, 2002, the Company has sold such assets with a book and market value of $65,233,000 and has a liability to repurchase these assets for $63,056,000. This repurchase agreement has a maturity date in March 2003. The liability balance bears interest at LIBOR. The interest rate in effect for the repurchase obligations outstanding at December 31, 2002 was 1.90% and the interest rate in effect for the repurchase obligations outstanding at December 31, 2001 was 2.03%. 12. 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. 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. 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, "Accounting for Certain Investments in Debt and Equity Securities," 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. Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Derivative Financial Instruments, continued The fair value hedge 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. During the period from January 1, 2002 to December 20, 2002, the Company recognized a loss of $16,234,000 for the decrease in the value of the swap which was substantially offset by a gain of $15,924,000 for the change in the fair value of the securities attributed to the hedged risk resulting in a $310,000 charge to unrealized loss on derivative securities on the consolidated statement of operations. In conjunction with the sale of the CMBS previously discussed in Note 5, in order to maintain the effectiveness of the hedge, the Company reduced the maturity of the fair value hedge from December 2014 to November 2009 and recognized a realized gain for the payments received totaling $940,000. On December 23, 2002, in order to eliminate accumulated earnings and profits in anticipation of the Company's election of REIT status for tax purposes, the fair value hedge was settled resulting in a realized loss of $23.6 million. 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 period from January 1, 2002 to December 20, 2002 and during the year ended December 31, 2001, the fair value of the cash flow swaps decreased by $3.3 million and $2.9 million, respectively, which was deferred into other comprehensive loss until the cash flow hedges were settled on December 23, 2002 and the settlement amount of $6.7 million was recorded as a charge to earnings. During the period from January 1, 2002 to December 20, 2002 and during the year ended December 31, 2001, the Company recognized a loss of $62,000 and a gain of $47,000, respectively 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. When the interest rate cap was settled on December 23, 2002, the Company recognized a realized loss of $51,000 on the consolidated statement of operations. In December 2002, the Company entered into two new cash flow hedge contracts. The following table summarizes the notional value and fair value of the Company's derivative financial instruments at December 31, 2002. Notional Interest Hedge Type Value Rate Maturity Fair Value - ------- ---------------- ------------- ----------- -------- ------------ Swap Cash Flow Hedge $85,000,000 4.2425% 2015 $(1,435,000) Swap Cash Flow Hedge 24,000,000 4.2325% 2015 (387,000) On December 31, 2002, the derivative financial instruments were reported at their fair value as interest rate hedge liabilities and the decrease in the fair value of the cash flow swaps of $1.8 million 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 $3.1million currently held in accumulated other comprehensive income will be reclassified to earnings, with regard to the cash flow hedges. F-22 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. 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. 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 was 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, mirrored 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 bore a blended coupon rate of 10.16% per annum which rate varied as the proportion of outstanding Convertible Amount to the outstanding Non-Convertible Amount changes and were to step up in accordance with the coupon rate step up terms applicable to the Convertible Amount and the Non-Convertible Amount. F-23 13. Convertible Trust Preferred Securities, continued The Convertible Amount bore a coupon rate of 8.25% per annum through March 31, 2002 and increased 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 share of common stock 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. Prior to redemption, the Non-Convertible Amount bore a coupon rate of 13.00% per annum. On September 30, 2002, the Non-Convertible Debentures were redeemed in full, utilizing additional borrowings on the credit facility and repurchase agreements, resulting in a corresponding redemption in full of the related Non-Convertible Amount. In connection with the redemption transaction, the Company expensed the remaining unamortized discount and fees on the redeemed Non-Convertible Amount resulting in $586,000 of additional expense for the quarter ended September 30, 2002. 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. 14. Stockholders' Equity Authorized Capital Upon consummation of the reorganization (see Note 1), each outstanding predecessor class A common share of beneficial interest was converted into one share of Class A Common Stock, and each outstanding predecessor class A preferred share of beneficial interest was converted into one share of Class A Preferred Stock. 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 had 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. F-24 14. Stockholders' Equity, continued 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 of beneficial interest were converted into shares of 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. 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. Common and Preferred Stock Transactions During March 2000, the Company commenced an open market stock repurchase program under which the Company was initially authorized to purchase, from time to time, up to 2,000,000 shares of Class A Common Stock. Since that time the authorization has been increased by the board of directors to purchase up to 7,100,770 shares of Class A Common Stock. As of December 31, 2002, the Company had purchased and retired, pursuant to the program, 4,902,470 shares of Class A Common Stock at an average price of $4.36 per share (including commissions). The Company has no further obligations to issue additional warrants to Citigroup at December 31, 2002. The value of the warrants at the issuance dates, $4,636,000, was capitalized and is being amortized over the anticipated lives of the Funds. On January 31, 2003, the Company purchased all of the outstanding warrants to purchase 8,528,467 shares of Class A Common Stock for $2,132,000. 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 $20,896,000, 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 previously outstanding Preferred Stock and eliminated the related dividend. F-25 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. Stockholders' Equity, continued Earnings per Share The following table sets forth the calculation of Basic and Diluted EPS for the years ended December 31, 2002 and 2001:
Year Ended December 31, 2002 Year Ended December 31, 2001 -------------------------------------- ------------------------------------ Per Share Per Share Net Loss Shares Amount Net Income Shares Amount ------------- ------------- ---------- ------------- ---------- ------------ Basic EPS: Net earnings / (loss) allocable to Common Stock $(9,738,000) 18,026,192 $ (0.54) $8,764,000 20,166,319 $ 0.43 ========== =========== Effect of Dilutive Securities: Options outstanding for the purchase of Common Stock -- -- -- 96,432 Warrants outstanding for the purchase of Common Stock -- -- -- 420,947 Future commitments for stock unit awards for the issuance of Common Stock -- -- -- 50,000 Convertible Trust Preferred Securities exchangeable for shares of Common Stock -- -- 4,120,000 12,820,513 Convertible Preferred Stock -- -- 606,000 2,569,894 ------------- ------------- ---------- ------------- ---------- ----------- Diluted EPS: Net earnings / (loss) per share of Common Stock and Assumed Conversions $(9,738,000) 18,026,192 $ (0.54) $13,490,000 36,124,105 $ 0.37 ============= ============= ========== ============= ========== ===========
The following table sets forth the calculation of Basic and Diluted EPS for the year ended December 31, 2000: Year Ended December 31, 2000 ------------------------------------- Net Income Shares Per Share Amount ------------- ------------- --------- Basic EPS: Net earnings allocable to Common Stock $8,146,000 23,171,057 $ 0.35 ========= Effect of Dilutive Securities: Options outstanding for the purchase of Common Stock -- 37 Future commitments for stock unit awards for the issuance of Common Stock -- 200,000 Convertible Trust Preferred Securities exchangeable for shares of Common Stock -- -- Convertible Preferred Stock 1,615,000 6,320,833 ------------- ------------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $9,761,000 29,691,927 $ 0.33 ============= ============= ========= F-26 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. General and Administrative Expenses General and administrative expenses for the years ended December 31, 2002, 2001 and 2000 consist of (in thousands): 2002 2001 2000 ---------------- --------------- --------------- Salaries and benefits $ 9,276 $ 11,082 $ 11,280 Professional services 1,806 1,545 1,170 Other 2,914 2,755 2,989 ---------------- --------------- --------------- Total $ 13,996 $ 15,382 $ 15,439 ================ =============== =============== 16. 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, 2002, 2001 and 2000 is comprised as follows (in thousands): 2002 2001 2000 ------------ ------------- ------------- Current Federal $ 8,752 $10,642 $12,561 State 2,654 3,811 4,493 Local 2,802 3,473 4,057 Deferred Federal 5,152 (732) (2,025) State 1,483 (72) (697) Local 1,595 (240) (629) ------------ ------------- ------------- Provision for income taxes $22,438 $16,882 $17,760 ============ ============= ============= 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, 2002, 2001 and 2000 are as follows (in thousands): 2002 2001 2000 ---------------- ---------------- ---------------- $ % $ % $ % -------- ------- -------- ------- -------- ------- Federal income tax at statutory rate $ 7,404 35.0% $12,156 35.0% $12,405 35.0% State and local taxes, net of federal tax benefit 5,547 26.2% 4,532 13.1% 4,696 13.3% Utilization of net operating loss carryforwards (490) (2.3)% (490) (1.4)% (490) (1.4)% Capital loss carryforwards not recognized due to uncertainty of utilization 10,304 48.7% -- --% -- --% Compensation in excess of deductible limits 502 2.4% 642 1.8% 851 2.4% Reduction of net deferred tax liabilities (2,783) (13.1)% -- --% -- --% Other 1,954 9.2% 42 0.1% 298 0.8% --------- ------- -------- ------- -------- ------- $22,438 106.1% $16,882 48.6% $17,760 50.1% ========= ======= ======== ======= ======== ======= F-27 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Income Taxes, continued The Company has federal net operating loss carryforwards ("NOLs") as of December 31, 2002 of approximately $13.9 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 Company also has federal capital loss carryforwards as of December 31, 2002 of approximately $29.4 million that expire in 2007. 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. As discussed in Note 1, the board of directors has authorized the election to be taxed as a REIT beginning in 2003. Management intends to operate the Company in a manner to meet the qualifications to be taxed as a REIT for federal income tax purposes during the 2003 tax year. Management does not expect the Company will be liable for income taxes or taxes on "built-in gain" on its assets at the federal level or in most states in future years, other than on the Company's taxable REIT subsidiary. Accordingly, the Company eliminated substantially all of its deferred tax liabilities other than that related to its taxable REIT subsidiary at December 31, 2002. The components of the net deferred tax assets are as follows (in thousands): December 31, --------------------------- 2002 2001 ------------ ------------- Net operating loss carryforward $ 4,849 $ 5,394 Capital loss carryforward 13,573 -- Reserves on other assets and for possible credit losses 2,689 6,340 Other (2,858) 2,434 ------------ ------------- Deferred tax assets 18,253 14,168 Valuation allowance (16,668) (4,405) ------------ ------------- $ 1,585 $ 9,763 ============ ============= 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. 17. 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, 2002, 2001 and 2000, was $110,000, $196,000 and $187,000, respectively. F-28 17. 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 882,896 shares of Class A Common Stock may be issued during the fiscal year 2003 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, 2002. The maximum number of shares that may be subject to awards to any employee during the term of the plan may not exceed 1,000,000 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 2002, 2001 and 2000, the Company issued 75,472 shares, 227,780 shares and 230,304 shares, respectively, of restricted stock. 62,374 shares were canceled in 2001 and 32,500 shares were canceled in 2000 upon the resignation of employees prior to vesting. The shares of restricted stock issued in 2002 vest one-third on each of the following dates: February 1, 2003, February 1, 2004 and February 1, 2005. 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 Company also granted 52,083 shares of performance based restricted stock in 1999, which were canceled in 2002. 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, 2002, 2001 and 2000:
Weighted Options Exercise Price Average Outstanding per Share Exercise Price per Share ------------ --------------------- ---------------- Outstanding at January 1, 2000 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 Granted in 2002 292,500 $5.30 5.30 Canceled in 2002 (52,000) $4.125 - $6.00 4.99 ------------ ---------------- Outstanding at December 31, 2002 1,971,667 $4.125 - $10.00 $ 6.29 ============ ================
F-29 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 17. Employee Benefit Plans, continued At December 31, 2002, 2001 and 2000, 1,306,987, 1,011,824 and 745,505, respectively, of the options were exercisable. At December 31, 2002, the outstanding options have various remaining contractual lives ranging from 3.00 to 9.09 years with a weighted average life of 6.54 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 882,896 shares of Class A Common Stock may be issued during the fiscal year 2002 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, 2002. 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, 2002, 2001 and 2000:
Weighted Options Exercise Price Average Outstanding per Share Exercise Price per Share ------------ --------------------- ---------------- Outstanding at January 1, 2000 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 Granted in 2002 -- $ -- -- ------------ ---------------- Outstanding at December 31, 2002 255,000 $6.00-$10.00 $ 9.22 ============ ================
At December 31, 2002, 2001 and 2000, 255,000, 255,000 and 186,668, respectively, of the options were exercisable. At December 31, 2002, the outstanding options have a remaining contractual life of 4.54 years to 5.08 years with a weighted average life of 4.98 years. F-30 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 17. Employee Benefit Plans, continued Accounting for Stock-Based Compensation The Company complies with the provisions of the FASB's Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). 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: 2002 2001 2000 ---------------- --------------- ------------- Risk-free interest rate 4.30% 4.75% 6.65% Volatility 25.0% 25.0% 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, 2002, 2001 and 2000 were $1.64, $1.47 and $1.58, 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, 2002, 2001 and 2000 is as follows (in thousands, except for net earnings (loss) per share of common stock):
2002 2001 2000 --------------------- -------------------- -------------------- As As As reported Pro forma reported Pro forma reported Pro forma --------- ---------- --------- --------- -------- --------- Net income $(9,738) $(10,038) $ 9,370 $ 9,043 $ 9,761 $ 9,287 Net earnings per share of common stock: Basic $ (0.54) $ (0.56) $ 0.43 $ 0.42 $ 0.35 $ 0.33 Diluted $ (0.54) $ (0.56) $ 0.37 $ 0.36 $ 0.33 $ 0.31
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) 18. Fair Values of Financial Instruments The FASB's Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," ("SFAS No. 107") 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. 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) 18. 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, 2002 December 31, 2001 ------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------- ---------- ----------- ---------- Financial Assets: Loans receivable, net $ 116,347 $ 122,366 $ 248,088 $ 247,127 Available-for-sale securities 65,233 65,233 152,789 152,789 CMBS 155,780 155,780 210,268 210,268 Interest rate hedge liabilities (1,822) (1,822) (9,987) (9,987) Interest rate cap agreement -- -- 82 82
19. Supplemental Schedule of Non-Cash and Financing Activities Interest paid on the Company's outstanding debt for 2002, 2001 and 2000 was $32,293,000, $38,290,000 and $48,531,000, respectively. Income taxes paid by the Company in 2002, 2001 and 2000 were $8,275,000, $11,583,000 and $15,612,000, respectively. 20. 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, 2002. Pursuant to the agreement, the director provided 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, 2002, 2001 and 2000, 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 that expired on December 31, 2002. Under the agreement, the consultant was paid $15,000 per month for which the consultant provided services for the Company including serving on the management committees for Fund I, Fund II and any other tasks and assignments requested by the chief executive officer. During the years ended December 31, 2002 and 2001, the Company incurred expenses of $180,000 in connection with this agreement. The Company pays Equity Group Investments, L.L.C. and Equity Risk Services, Inc., affiliates under common control of the chairman of the board of directors, for certain corporate services provided to the Company. These services include consulting on insurance matters, legal matters, tax matters, risk management, and investor relations. During the years ended December 31, 2002, 2001 and 2000, the Company incurred $57,000, $100,000 and $85,000, respectively, of expenses in connection with these services. During the year ended December 31, 2000, 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 year ended December 31, 2000, the Company earned $16,000 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) 21. Commitments and Contingencies Leases The Company leases premises and equipment under operating leases with various expiration dates. Minimum annual rental payments at December 31, 2002 are as follows (in thousands): Years ending December 31: - ------------------------- 2003 $ 844 2004 923 2005 914 2006 914 2007 914 Thereafter 457 ------------- $ 4,966 ============= Rent expense for office space and equipment amounted to $899,000, $852,000 and $1,017,000 for the years ended December 31, 2002, 2001 and 2000, 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 has an employment agreement with its chief executive officer that provided for an initial five-year term of employment that ended July 15, 2002. The agreement has been automatically extended for a one-year renewal term ending July 15, 2003 and contains extension options that extend the agreement for additional one-year terms automatically unless terminated by either party by April 17, 2003. The employment agreement currently provides for a base annual salary of $600,000, subject to calendar year cost of living increases at the discretion of the board of directors. The chief 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 is a participant in the Incentive Stock Plan and other employee benefit plans of the Company. 22. Segment Reporting As the Company manages its operations as one segment, separate segment reporting is not presented for 2002, 2001 and 2000 as the financial information for that segment is the same as the information in the consolidated financial statements. F-34 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 23. 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, including acts of terrorism, 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) 24. 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, 2002, 2001 and 2000 (in thousands except per share data):
March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ 2002 - ---- Revenues $13,886 $16,579 $16,843 $ 9,695 Net income / (loss) $ 1,573 $ 1,117 $ 1,553 $(13,981) Net income / (loss) per share of Common Stock: Basic $ 0.08 $ 0.06 $ 0.09 $ (0.84) Diluted $ 0.08 $ 0.06 $ 0.08 $ (0.84) 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 $22,617 $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
F-36 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 25. Subsequent Events In December 2002, the Company's board of directors authorized the Company's election to be taxed as a REIT for the 2003 tax year. The Company will continue to make, for its own account and as investment manager for the account of funds under management, loans and debt-related investments in various types of commercial real estate and related assets. In view of the Company's election to be taxed as a REIT, the Company will tailor the its balance sheet investment program to originate or acquire loans and investments to produce a portfolio that meets the asset and income tests necessary to maintain the Company's qualification as a REIT. In order to accommodate the Company's REIT status, the legal structure of future investment funds the Company sponsors may be different from the legal structure of the Company's existing investment funds. In order to qualify as a REIT, five or fewer individuals may own no more than 50% of the Company's Common Stock. As a means of facilitating compliance with such qualification, stockholders controlled by John R. Klopp and Craig M. Hatkoff and trusts for the benefit of the family of Samuel Zell each sold 500,000 shares of Class A Common Stock to an institutional investor in a transaction that closed on February 7, 2003. Following this transaction, the Company's largest five individual stockholders own in the aggregate less than 50% of the Company's Class A Common Stock. In connection with the organization of Fund I and Fund II and in accordance with the venture agreement, in 2001 and 2002, the Company issued to affiliates of Citigroup a warrant to purchase 8,528,467 shares of Class A Common Stock. At December 31, 2002, all such warrants had a $5.00 per share exercise price, were exercisable and were to expire on March 8, 2005. In January 2003, the Company purchased all of the outstanding warrants for $2.1 million. In January 2003, the Company purchased Citigroup's 75% interest in Fund I for a purchase price of approximately $38.4 million (including the assumption of liabilities). As of January 31, 2003, the Company will consolidate the operations of Fund I in its consolidated financial statements. On January 31, 2003, Edward L. Shugrue III, the Company's chief financial officer, resigned and was replaced by Brian H. Oswald. Prior to his appointment as chief financial officer, Mr. Oswald had been the Company's director of finance and accounting and chief accounting officer since 1997. In connection with Mr. Shugrue's resignation, the Company purchased 199,282 shares of Class A Common Stock from Mr. Shugrue for $947,000. F-37 EX-10 3 ex10-9b.txt Exhibit 10.9.b SECOND 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, 2002 Between CAPITAL TRUST, INC. as Borrower and MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC. as Lender ================================================================================ TABLE OF CONTENTS Page ---- 1. Amendment..............................................................1 2. Representations and Warranties.........................................2 3. No Default.............................................................2 4. Ratification and Confirmation..........................................2 5. Binding Effect; No Waiver; No Partnership; Counterparts................2 6. Governing Law..........................................................2 7. Continuing Effect......................................................2 8. Costs and Expenses.....................................................2 i SECOND AMENDMENT TO AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT dated as of July 16, 2002 (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 as amended pursuant to that certain First Amendment to Amended and Restated Master Loan and Security Agreement dated as of July 16, 2001, between Borrower and Lender (collectively, 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 extend the term. NOW, THEREFORE, in consideration of the mutual promises herein contained the parties hereto hereby agree as follows: 1. Amendment. 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 "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 August 9, 2002 to, but not including, May 9, 2003. (ii) the deletion of the words "June 30, 2001" in subsection (B) of the definition of the term "Eurodollar Rate Spread" and the substitution therefor with the words "August 9, 2002." (iii) the deletion in its entirety of the definition of the term "Termination Date" and the substitution therefor of the following: "Termination Date" shall mean August 9, 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 August 9, 2002, the Termination Date shall be automatically extended to May 8, 2003. (b) 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 "August 9, 2002." (c) 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 May 9, 2003 pursuant to the terms hereof, Borrower promises to repay such aggregate principal amount of the Loans outstanding on August 9, 2002 by the payment on the first Business Day of each month during the Amortization Period beginning with September 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 August 9, 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." 2. Representations and Warranties. Borrower hereby makes to Lender the representations and warranties set forth in Section 6 of the Original Loan and Security Agreement. Such representations and warranties are true and correct as though made on and as of the date hereof and after giving effect to this Agreement, except to the extent such representations and warranties refer to an earlier date. 3. No Default. No Default has occurred and is continuing, or will result from the execution, delivery or performance of this Agreement, the performance of the Original Loan and Security Agreement, as amended by this Agreement, or the consummation of the transactions contemplated hereby. 4. Ratification and Confirmation. Borrower hereby (i) ratifies and confirms all of the obligations of Borrower under the Original Loan and Security Agreement (as amended hereby), the Note and the other Loan Documents and (ii) represents, warrants and covenants that, as of the date hereof, 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. 5. Binding Effect; No Waiver; No Partnership; Counterparts. The provisions of the Original Loan and Security 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 Original Loan and Security 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. 6. Governing Law. This Agreement shall be governed by the laws of the State of New York. 7. Continuing Effect. As modified by this Agreement, all terms of the Original Loan and Security Agreement are in full force and effect. Each and all references to the "Loan Agreement" in the Loan Documents shall mean the Original Loan and Security Agreement as amended hereby. 8. Costs and Expenses. Borrower shall pay as and when billed by the Lender all of the out-of-pocket costs and expenses of the Lender incurred in connection with the development, preparation, execution, delivery and administration, modification and amendment of this Agreement, and the other documents to be delivered hereunder (including, without limitation, all the reasonable fees, disbursements and expenses of counsel to the Lender) in accordance with the terms of Section 11.03 of the Original Loan Agreement. [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 LENDER ------ MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC. By:/s/ Andrew B. Neuberger --------------------------------------- Name: Andrew B. Neuberger Title: Vice President EX-10 4 ex10-9c.txt Exhibit 10.9.c THIRD 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 August 9, 2002 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.........................................4 3. Binding Effect; No Waiver; No Partnership; Counterparts................4 4. Further Agreements.....................................................4 5. Governing Law..........................................................4 6. Continuing Effect......................................................4 7. Conditions Precedent...................................................4 THIRD AMENDMENT TO AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT dated as of August 9, 2002 (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 as amended pursuant to that certain First Amendment to Amended and Restated Master Loan and Security Agreement dated as of July 16, 2001, between Borrower and Lender and as further amended pursuant to that certain Second Amendment to Amended and Restated Master Loan and Security Agreement dated as of July 16, 2002, between Borrower and Lender (collectively, 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 amend certain of the financial covenants therein and such other 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, as further amended pursuant to that certain Second Amendment to Master Loan and Security Agreement dated as of February 8, 2001, as further amended pursuant to that certain Third Amendment dated as of July 16, 2001, as further amended pursuant to that certain Fourth Amendment to Master Loan and Security Agreement, dated as of July 16, 2002 and as further amended pursuant to that certain Fifth Amendment to Master Loan and Security Agreement dated as of August 9, 2002, (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 to CMBS Loan Agreement dated as of July 16, 2001, as further amended pursuant to that certain Third Amendment to CMBS Loan Agreement dated as of July 16, 2002 and as further amended 3 pursuant to that certain Fourth Amendment to CMBS Loan Agreement dated as of August 9, 2002, (iii) that certain Master Loan and Security Agreement dated as of July 16, 2001, between Lender and CTMP II Funding Corp. (MS), as supplemented pursuant to that certain Joinder dated as of January 31, 2002, by CTMPII FC BLOCK (MS), CTMP II Funding Corp. (MS), CTMPII FC Transpotomac (MS) and CT Mezzanine Partners II LP in favor of Morgan Stanley & Co. International Limited, Lender and agreed to and accepted by Bankers Trust Company and Midland Loan Services, Inc., as further supplemented pursuant to that certain Modification to Joinder dated as of August 9, 2002 among the same parties as amended pursuant to that certain First Amendment to Master Loan and Security Agreement dated as of July 16, 2002 and as further amended pursuant to that certain Second Amendment to Master Loan and Security Agreement dated as of August 9, 2002, and (iv) CMBS Loan Agreement dated as of July 16, 2001, between MSIL and CTMP II Funding Corp. (MS)) as supplemented pursuant to that certain Joinder dated as of January 31, 2002, by CTMPII FC BLOCK (MS), CTMP II Funding Corp. (MS), CTMPII FC Transpotomac (MS) and CT Mezzanine Partners II LP in favor of Morgan Stanley & Co. International Limited, Lender and agreed to and accepted by Bankers Trust Company and Midland Loan Services, Inc., as further supplemented pursuant to that certain Modification to Joinder dated as of August 9, 2002 among the same parties as amended pursuant to that certain First Amendment to CMBS Loan Agreement dated as of July 16, 2002 and as further amended pursuant to that certain Second Amendment to CMBS Loan Agreement dated as of August 9, 2002) 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, 2003 to, but not including, April 16, 2004. (iii) the deletion of the words "June 30, 2001" in subsection (B) of the definition of the term "Eurodollar Rate Spread" and the substitution therefor with the words "July 16, 2003." (iv) 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, 2003 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, 2003, the Termination Date shall be automatically extended to April 16, 2004. (v) the deletion in its entirety of the definition of the term "Tangible Net Worth" and the substitution therefor of the following: "Tangible Net Worth" shall mean, as of a particular date, (a) all amounts included in stockholder's equity plus the aggregate amount recorded for convertible trust preferred securities, on a balance sheet of Borrower at such date, determined in accordance with GAAP, less (b) (i) amounts owing to Borrower from Affiliates and (ii) intangible assets. 4 (vi) the deletion in its entirety of the definition of the term "Total Indebtedness" and the substitution therefor of the following: "Total Indebtedness" shall mean, at any date, the aggregate Indebtedness of Borrower during such period (specifically excluding any amount recorded on the Borrower's balance sheet for convertible trust preferred securities), less the amount of any nonspecific balance sheet reserves maintained in accordance with GAAP. (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, 2003." (c) Subsection 2.02 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 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 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 Three Hundred and Fifty Million Dollars ($350,000,000.00). 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." (b) 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 from time to time on its internal books and records (whether electronic or otherwise). Failure of Lender to make such notation shall not affect the obligations of Borrower to make a payment when due of any amount owing hereunder or under the Note in respect of the Loans. Borrower agrees that Lender's books and records showing the MS Indebtedness pursuant to this Loan Agreement and the other Loan Documents shall be admissible in any action or proceeding arising therefrom, and shall constitute rebuttably presumptive proof thereof, irrespective of whether any MS Indebtedness is also evidenced by a promissory note or other instrument. Lender will provide to the Borrower a monthly statement of Loans, payments, and other transactions pursuant to this Loan Agreement. Failure by Lender to provide such monthly statement shall not effect the obligations of Borrower to make a payment when due of any amount owing hereunder or under 5 the Note in respect of the Loans. Such statement shall be deemed correct, accurate, and binding on Borrower absent manifest error." (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 April 16, 2004 pursuant to the terms hereof, Borrower promises to repay such aggregate principal amount of the Loans outstanding on July 16, 2003 by the payment on the first Business Day of each month during the Amortization Period beginning with August 1, 2003 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, 2003 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) Section 6.14 of the Original Loan and Security Agreement is hereby deleted in its entirety and the following section shall be inserted in lieu thereof: "Tangible Net Worth. On the date hereof, the Tangible Net Worth is not less than the sum of $200,000,000." (f) Section 7.12 of the Original Loan and Security Agreement is hereby deleted in its entirety and the following section shall be inserted in lieu thereof: "Maintenance of Tangible Net Worth. Borrower shall not permit Tangible Net Worth at any time to be less than the sum of (i) $200,000,000 plus (ii) an amount equal to 75% of the net proceeds received by the Borrower from the issuance by it after July 1, 2002 of any equity securities (including convertible trust preferred securities); provided, however, that in the event Borrower shall redeem or repurchase and cancel any equity securities (or convertible trust preferred securities), the amount set forth in clause (i) of this Section 7.12 shall be reduced, dollar for dollar, by the amount of the aggregate redemption price of such equity securities, or if greater, the book value thereof." 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. 6 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) the receipt of a fee in the amount of $300,000; (b) each party hereto shall have executed and delivered this Agreement; (c) 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 (d) Lender shall have received from Borrower's counsel, or counsels, opinions acceptable to Lender. [SIGNATURE PAGE FOLLOWS] 7 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 LENDER ------ MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC. By: /s/ Andrew B. Neuberger --------------------------------------- Name: Andrew B. Neuberger Title: Vice President 8 EX-10 5 ex10-10b.txt Exhibit 10.10.b ================================================================================ SECOND 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, 2002 Between CAPITAL TRUST, INC. as Borrower and MORGAN STANLEY & CO. INTERNATIONAL LIMITED as Lender ================================================================================ TABLE OF CONTENTS Page ---- 1. Amendment..............................................................1 2. Representations and Warranties.........................................2 3. No Default.............................................................2 4. Ratification and Confirmation..........................................2 5. Binding Effect; No Waiver; No Partnership; Counterparts................2 6. Governing Law..........................................................2 7. Continuing Effect......................................................2 8. Costs and Expenses.....................................................2 i SECOND AMENDMENT TO CMBS LOAN AGREEMENT dated as of July 16, 2002 (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 as amended pursuant to that certain First Amendment to Amended and Restated CMBS Loan Agreement dated as of July 16, 2001, between Borrower and Lender (collectively, 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 extend the term. NOW, THEREFORE, in consideration of the mutual promises herein contained the parties hereto hereby agree as follows: 1. Amendment. The Original Loan 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 "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 August 9, 2002 to, but not including, May 9, 2003. (ii) the deletion of the words "June 30, 2001" in subsection (B) of the definition of the term "Eurodollar Rate Spread" and the substitution therefor with the words "August 9, 2002." (iii) the deletion in its entirety of the definition of the term "Termination Date" and the substitution therefor of the following: "Termination Date" shall mean August 9, 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 August 9, 2002, the Termination Date shall be automatically extended to May 8, 2003. (b) 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 "August 9, 2002." (c) 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 May 9, 2003 pursuant to the terms hereof, Borrower promises to repay such aggregate principal amount of the Loans outstanding on August 9, 2002 by the payment on the first Business Day of each month during the Amortization Period beginning with September 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 August 9, 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." 2. Representations and Warranties. Borrower hereby makes to Lender the representations and warranties set forth in Section 6 of the Original Loan and Security Agreement. Such representations and warranties are true and correct as though made on and as of the date hereof and after giving effect to this Agreement, except to the extent such representations and warranties refer to an earlier date. 3. No Default. No Default has occurred and is continuing, or will result from the execution, delivery or performance of this Agreement, the performance of the Original Loan and Security Agreement, as amended by this Agreement, or the consummation of the transactions contemplated hereby. 4. Ratification and Confirmation. Borrower hereby (i) ratifies and confirms all of the obligations of Borrower under the Original Loan and Security Agreement (as amended hereby), the Note and the other Loan Documents and (ii) represents, warrants and covenants that, as of the date hereof, 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. 5. Binding Effect; No Waiver; No Partnership; Counterparts. The provisions of the Original Loan and Security 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 Original Loan and Security 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. 2 6. Governing Law. This Agreement shall be governed by the laws of the State of New York. 7. Continuing Effect. As modified by this Agreement, all terms of the Original Loan and Security Agreement are in full force and effect. Each and all references to the "Loan Agreement" in the Loan Documents shall mean the Original Loan and Security Agreement as amended hereby. 8. Costs and Expenses. Borrower shall pay as and when billed by the Lender all of the out-of-pocket costs and expenses of the Lender incurred in connection with the development, preparation, execution, delivery and administration, modification and amendment of this Agreement, and the other documents to be delivered hereunder (including, without limitation, all the reasonable fees, disbursements and expenses of counsel to the Lender) in accordance with the terms of Section 11.03 of the Original Loan Agreement. 3 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 LENDER ------ MORGAN STANLEY & CO. INTERNATIONAL LIMITED By: /s/ Thomas G. Wipf --------------------------------------- Name: Thomas G. Wipf Title: Managing Director 4 EX-10 6 ex10-10c.txt Exhibit 10.10.c ================================================================================ THIRD AMENDMENT TO AMENDED AND RESTATED CMBS LOAN AGREEMENT FOR A CREDIT FACILITY IN AN AMOUNT UP TO $100,000,000 Dated as of August 9, 2002 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.........................................4 3. Binding Effect; No Waiver; No Partnership; Counterparts................4 4. Further Agreements.....................................................4 5. Governing Law..........................................................4 6. Continuing Effect......................................................4 7. Conditions Precedent...................................................4 THIRD AMENDMENT TO AMENDED AND RESTATED CMBS LOAN AGREEMENT dated as of August 9, 2002 (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 Borrower and Lender as amended pursuant to that certain First Amendment to Amended and Restated CMBS Loan Agreement dated as of July 16, 2001, between Borrower and Lender and as further amended pursuant to that certain Second Amendment to Amended and Restated CMBS Loan Agreement dated as of July 16, 2002, between Borrower and Lender (collectively, 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, change the definition of the term Lazard Collateral and amend certain of the financial covenants therein and such other 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 "Additional Lazard Collateral" and the substitution of the following: "Additional Lazard Collateral" collectively means, the Eligible Collateral set forth on Exhibit A hereto. (ii) 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, as further amended pursuant to that certain Second Amendment to Master Loan and Security Agreement dated as of February 8, 2001, as further amended pursuant to that certain Third Amendment dated as of July 16, 2001, as further amended pursuant to that certain Fourth Amendment to Master Loan and Security Agreement dated as of July 16, 2002 and as further amended pursuant to that certain Fifth Amendment to Master Loan and Security Agreement dated as of August 9, 2002, (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 to CMBS Loan Agreement dated as of July 16, 2001, as further amended pursuant to that certain Third Amendment to CMBS Loan Agreement dated as of July 16, 2002 and as further amended pursuant to that certain Fourth Amendment to CMBS Loan Agreement dated as of August 9, 2002, (iii) that certain Master Loan and Security Agreement dated as of July 16, 2001, between Lender and CTMP II Funding Corp. (MS) as supplemented pursuant to that certain Joinder dated as of January 31, 2002, by CTMPII FC BLOCK (MS), CTMP II Funding Corp. (MS), CTMPII FC Transpotomac (MS) and CT Mezzanine Partners II LP in favor of Lender, MSIL and agreed to and accepted by Bankers Trust Company and Midland Loan Services, Inc., as further supplemented pursuant to that certain Modification to Joinder dated as of August 9, 2002 among the same parties as amended pursuant to that certain First Amendment to Master Loan and Security Agreement dated as of July 16, 2002 and as further amended pursuant to that certain Second Amendment to Master Loan and Security Agreement dated as of August 9, 2002 and (iv) CMBS Loan Agreement dated as of July 16, 2001, between MSIL and CTMP II Funding Corp. (MS)) as supplemented pursuant to that certain Joinder dated as of January 31, 2002, by CTMPII FC BLOCK (MS), CTMP II Funding Corp. (MS), CTMPII FC Transpotomac (MS) and CT Mezzanine Partners II LP in favor of Lender, MSDWMCI and agreed to and accepted by Bankers Trust Company and Midland Loan Services, Inc., as further supplemented pursuant to that certain Modification to Joinder dated as of August 9, 2002 among the same parties as amended pursuant to that certain First Amendment to CMBS Loan Agreement dated as of July 16, 2002 and as further amended pursuant to that certain Second Amendment dated as of August 9, 2002) 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. (iii) 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, 2003 to, but not including, April 16, 2004. (iv) the deletion of the words "June 30, 2001" in subsection (B) of the definition of the term "Eurodollar Rate Spread" and the substitution therefor with the words "July 16, 2003." (v) 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, 2003 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, 2003, the Termination Date shall be automatically extended to April 16, 2004. (vi) The deletion in its entirety of the definition of the term "Tangible Net Worth" and the substitution thereof of the following: "Tangible Net Worth" shall mean, as of a particular date, (a) all amounts included in stockholder's equity plus the aggregate amount recorded for convertible trust preferred securities, on a balance sheet of Borrower at such date, determined in accordance with GAAP, less (b) (i) amounts owing to Borrower from Affiliates and (ii) intangible assets. (vii) the deletion in its entirety of the definition of the term "Total Indebtedness" and the substitution therefor of the following: 2 "Total Indebtedness" shall mean, at any date, the aggregate Indebtedness of Borrower during such period (specifically excluding any amount recorded on the Borrower's balance sheet for convertible trust preferred securities), less the amount of any nonspecific balance sheet reserves maintained in accordance with GAAP. (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, 2003." (c) Subsection 2.02 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 Three Hundred and Fifty Million Dollars ($350,000,000.00). 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." (b) 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 from time to time on its internal books and records (whether electronic or otherwise). Failure of Lender to make such notation shall not affect the obligations of Borrower to make a payment when due of any amount owing hereunder or under the Note in respect of the Loans. Borrower agrees that Lender's books and records showing the MS Indebtedness pursuant to this Loan Agreement and the other Loan Documents shall be admissible in any action or proceeding arising therefrom, and shall constitute rebuttably presumptive proof thereof, irrespective of whether any MS Indebtedness is also evidenced by a promissory note or other instrument. Lender will provide to the Borrower a monthly statement of Loans, payments, and other transactions pursuant to this Loan Agreement. Failure by Lender to provide such monthly statement shall not effect the obligations of Borrower to make a payment when due of any amount owing hereunder or under the Note in respect of the Loans. Such statement shall be deemed correct, accurate, and binding on Borrower absent manifest error." 3 (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 April 16, 2004 pursuant to the terms hereof, Borrower promises to repay such aggregate principal amount of the Loans outstanding on July 16, 2003 by the payment on the first Business Day of each month during the Amortization Period beginning with August 1, 2003 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, 2003 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) Section 6.14 of the Original Loan Agreement is hereby deleted in its entirety and the following subsection shall be inserted in lieu thereof: "Tangible Net Worth. On the date hereof, the Tangible Net Worth is not less than the sum of $200,000,000." (f) Section 7.12 of the Original Loan and Security Agreement is hereby deleted in its entirety and the following section shall be inserted in lieu thereof: "Maintenance of Tangible Net Worth. Borrower shall not permit Tangible Net Worth at any time to be less than the sum of (i) $200,000,000 plus (ii) an amount equal to 75% of the net proceeds received by the Borrower from the issuance by it after July 1, 2002 of any equity securities (including convertible trust preferred securities); provided, however, that in the event Borrower shall redeem or repurchase and cancel any equity securities (or convertible trust preferred securities) the amount set forth in clause (i) of this Section 7.12 shall be reduced, dollar for dollar, by the amount of the aggregate redemption or repurchase price of such equity securities, or if greater, the book value thereof." 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 4 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. 5 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 LENDER ------ MORGAN STANLEY & CO. INTERNATIONAL LIMITED By: /s/ Thomas G. Wipf --------------------------------------- Name: Thomas G. Wipf Title: Managing Director 6 EXHIBIT A All of Borrower's right, title and interest under the following documents and agreements (collectively, the "Documents"), whether now owned or hereafter acquired, now existing or hereafter arising and wherever located: Unless otherwise noted, all documents listed as items 1-94 are dated as of February 8, 2001 1. Amended and Restated Loan Agreement, among Borrower, LFSRI II SPV REIT Corp. ("LFSRI") and Senior Quarters Funding Corp. ("Senior"; Senior and LFSRI hereinafter collectively, referred to as, "Lazard Borrowers"). 2. Note dated April 24, 2000, made by LFSRI payable to the order of Borrower, in the original principal amount of $10,000,000, as endorsed by Borrower in blank pursuant to that certain Allonge. 3. Second Additional Note made by Lazard Borrowers payable to the order of Borrower, in the original principal amount of $63,750,000, as endorsed by Lazard Borrowers in blank pursuant to that certain Allonge. 4. Guaranty made by LF Strategic Realty Investors II L.P., LFSRI II - CADIM Alternative Partnership L.P. and LFSRI II Alternative Partnership L.P. (collectively, the "Fund") in favor of Borrower. 5. Acknowledgement among Borrower, Lazard Borrowers and the other parties signatory thereto. 6. Amended and Restated Deposit and Security Agreement (the "Deposit Agreement") among Borrower, Lazard Borrowers, the Fund, LFSRI II Extended Stay L.L.C., Prometheus Extended Stay L.L.C., Prometheus Southeast Retail LLC, Prometheus Assisted Living LLC, LSFRI II Assisted Living LLC, Prometheus Homebuilders LLC, Prometheus UK Hospitality LLC, Prometheus Senior Quarters LLC, Prometheus SQ Interim Corp., Atria Holdings LLC, Prometheus SQ Holdings Corp., Lender, The Chase Manhattan Bank and Midland Loan Services, Inc., together with: (a) the Deposit Account defined in the Deposit Agreement (the "Deposit Account"); (b) the Account Collateral (as defined in the Deposit Agreement); (c) all funds and financial assets in the Deposit Account; and (d) all other property credited to the Deposit Account from time to time. 7. LFSRI II SPV REIT Corp. Delaware UCC-1 Financing Statement made by LFSRI, as debtor, Borrower, as secured party, filed July 9, 1999, bearing File No. 991281108, with the Delaware Secretary of State, as assigned by Borrower, to Secured Party pursuant to UCC-3 Assignment, as amended by LFSRI and Secured Party pursuant to UCC-3 Amendment (Amended and Restated Deposit and Security Agreement). New York UCC-1 Financing Statement made by LFSRI, as debtor, Borrower, as secured party, filed July 9, 1999, bearing File No. 137574, with the New York Secretary of State, as assigned by Borrower, to Secured Party pursuant to UCC-3 Assignment, as amended by LFSRI and Secured Party pursuant to UCC-3 Amendment (Amended and Restated Deposit and Security Agreement). New York County UCC-1 Financing Statement made by LFSRI, as debtor, Borrower, as secured party, filed July13, 1999, bearing File No. 99PN36877, with the Office of the City Register, New York County, as assigned by Borrower, to Secured Party pursuant to UCC-3 Assignment, as amended by LFSRI and Secured Party pursuant to UCC-3 Amendment (Amended and Restated Deposit and Security Agreement). Senior Quarters Funding Corp. Delaware UCC-1 Financing Statement among Senior, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State (Amended and Restated Deposit and Security Agreement). New York UCC-1 Financing Statement among Senior, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State (Amended and Restated Deposit and Security Agreement). New York County UCC-1 Financing Statement among Senior, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County (Amended and Restated Deposit and Security Agreement). Prometheus Extended Stay L.L.C. Delaware UCC-1 Financing Statement among Prometheus Extended Stay L.L.C., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State (Amended and Restated Deposit and Security Agreement). New York UCC-1 Financing Statement among Prometheus Extended Stay L.L.C., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State (Amended and Restated Deposit and Security Agreement). New York County UCC-1 Financing Statement among Prometheus Extended Stay L.L.C., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County (Amended and Restated Deposit and Security Agreement). Prometheus Southeast Retail LLC Delaware UCC-1 Financing Statement made by Prometheus Southeast Retail LLC, as debtor, Borrower, as secured party, filed July 9, 1999, bearing File No. 991281139, with the Delaware Secretary of State, as assigned by Borrower, to Secured Party pursuant to UCC-3 Assignment, as amended by Prometheus Southeast Retail LLC and Secured Party pursuant to UCC-3 Amendment (Amended and Restated Deposit and Security Agreement). New York UCC-1 Financing Statement made by Prometheus Southeast Retail LLC, as debtor, Borrower, as secured party, filed July 9, 1999, bearing File No. 137585, with the New York Secretary of State, as assigned by Borrower, to Secured Party pursuant to UCC-3 Assignment, as amended by Prometheus Southeast Retail LLC and Secured Party pursuant to UCC-3 Amendment (Amended and Restated Deposit and Security Agreement). New York County UCC-1 Financing Statement made by Prometheus Southeast Retail LLC, as debtor, Borrower, as secured party, filed July 9, 1999, bearing File No. 99PN36880, with the New York Secretary of State, as assigned by Borrower, to Secured Party pursuant to UCC-3 Assignment, 2 as amended by Prometheus Southeast Retail LLC and Secured Party pursuant to UCC-3 Amendment (Amended and Restated Deposit and Security Agreement). 8. Pledge and Security Agreement (Membership Interests) among Borrower, LFSRI II Extended Stay L.L.C. and Prometheus Extended Stay L.L.C. [for 51% of the membership interests in Prometheus Extended Stay L.L.C.]. 9. Delaware UCC-1 Financing Statement among LFSRI II Extended Stay L.L.C., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for 51% of the membership interests in Prometheus Extended Stay L.L.C. and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among LFSRI II Extended Stay L.L.C., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for 51% of the membership interests in Prometheus Extended Stay L.L.C. and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among LFSRI II Extended Stay L.L.C., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for 51% of the membership interests in Prometheus Extended Stay L.L.C. and Amended and Restated Deposit and Security Agreement]. 10. Pledge and Security Agreement (Stock and Promissory Note) between Borrower and Prometheus Assisted Living LLC [for approximately 43.5% of the common stock of ARV Assisted Living, Inc. and a $1.5m Note made by ARV Associated Living, Inc.]. 11. Delaware UCC-1 Financing Statement among Prometheus Assisted Living LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for approximately 43.5% of the common stock of ARV Assisted Living, Inc. and a $1.5m Note made by ARV Associated Living, Inc. and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among Prometheus Assisted Living LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for approximately 43.5% of the common stock of ARV Assisted Living, Inc. and a $1.5m Note made by ARV Associated Living, Inc. and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among Prometheus Assisted Living LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for approximately 43.5% of the common stock of ARV Assisted Living, Inc. and a $1.5m Note made by ARV Associated Living, Inc. and Amended and Restated Deposit and Security Agreement]. 12. 485,700 Shares of the Common Stock of ARV Assisted Living, Inc. represented by Certificate Number SD 2780 in the name of Prometheus Assisted Living LLC, dated September 15, 1998, together with Stock Power executed in blank by Prometheus Assisted Living LLC. 13. 4,262,226 Shares of the Common Stock of ARV Assisted Living, Inc. represented by Certificate Number SD 1363 in the name of Prometheus Assisted Living LLC, dated December 5, 1997, together with Stock Power executed in blank by Prometheus Assisted Living LLC. 3 14. 1,921,012 Shares of the Common Stock of ARV Assisted Living, Inc. represented by Certificate Number SD 0934 in the name of Prometheus Assisted Living LLC, dated July 23, 1997, together with Stock Power executed in blank by Prometheus Assisted Living LLC. 15. 926,131 Shares of the Common Stock of ARV Assisted Living, Inc. represented by Certificate Number SD 1664 in the name of Prometheus Assisted Living LLC, dated January 23, 1998, together with Stock Power executed in blank by Prometheus Assisted Living LLC. 16. Intentionally omitted. 17. Pledge and Security Agreement (Warrants) between Borrower and LFSRI II Assisted Living LLC [for warrants to purchase 750,000 shares of ARV Assisted Living, Inc. at $3.00 per share]. 18. Delaware UCC-1 Financing Statement among LFSRI II Assisted Living LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for warrants to purchase 750,000 shares of ARV Assisted Living, Inc. at $3.00 per share and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among LFSRI II Assisted Living LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for warrants to purchase 750,000 shares of ARV Assisted Living, Inc. at $3.00 per share and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among LFSRI II Assisted Living LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for warrants to purchase 750,000 shares of ARV Assisted Living, Inc. at $3.00 per share and Amended and Restated Deposit and Security Agreement]. 19. Warrant dated April 24, 2000, to Purchase 750,000 Shares of the Common Stock of ARV Assisted Living, Inc. at $3.00 per share, together with Assignment of Warrant executed in blank by LFSRI II Assisted Living LLC. 20. Pledge and Security Agreement (Membership Interests) between Borrower and Prometheus UK Hospitality LLC [for 49% of Prometheus UK Hospitality LLC's 65% interest in Destination Europe USA, LLC]. 21. Delaware UCC-1 Financing Statement among Prometheus UK Hospitality LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for 49% of Prometheus UK Hospitality LLC's 65% interest in Destination Europe USA, LLC and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among Prometheus UK Hospitality LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for 49% of Prometheus UK Hospitality LLC's 65% interest in Destination Europe USA, LLC and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among Prometheus UK Hospitality LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for 49% of Prometheus UK Hospitality LLC's 65% interest in Destination Europe USA, LLC and Amended and Restated Deposit and Security Agreement]. 4 22. Pledge and Security Agreement (Membership Interests) among Borrower, the Fund, Prometheus Assisted Living LLC, Prometheus Homebuilders LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders LLC and LFSRI II Assisted Living LLC]. LF Strategic Realty Investors II L.P. 23. Delaware UCC-1 Financing Statement among LF Strategic Realty Investors II L.P., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among LF Strategic Realty Investors II L.P., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among LF Strategic Realty Investors II L.P., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC and Amended and Restated Deposit and Security Agreement]. LFSRI II - CADIM Alternative Partnership, L.P. 24. Delaware UCC-1 Financing Statement among LFSRI II - CADIM Alternative Partnership, L.P., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among LFSRI II - CADIM Alternative Partnership, L.P., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among LFSRI II - CADIM Alternative Partnership, L.P., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC and Amended and Restated Deposit and Security Agreement]. LFSRI II Alternative Partnership L.P. 25. Delaware UCC-1 Financing Statement among LFSRI II Alternative Partnership, L.P., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders 5 LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among LFSRI II Alternative Partnership, L.P., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among LFSRI II Alternative Partnership, L.P., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for 100% of the membership interests in Prometheus Assisted Living LLC, Prometheus Homebuilders LLC, LFSRI II Assisted Living LLC and Prometheus Senior Quarters LLC and Amended and Restated Deposit and Security Agreement]. 26. Pledge and Security Agreement (Stock and Warrants) between Borrower and Prometheus Homebuilders LLC [for 33% of the outstanding shares (Preferred and Common) of The Fortress Group, Inc. and warrants to purchase 33,333,333 additional common shares of The Fortress Group, Inc. at $0.01 per share]. 27. First Amendment to Pledge and Security Agreement (Stock and Warrants) dated as of July 31, 2001 between Borrower and Prometheus Homebuilders LLC, together with allonge executed in blank. 28. Pledge and Security Agreement (Stock) among Borrower, Prometheus SQ Holdings Corp., Senior and Prometheus SQ Interim Corp.[for 100% of the equity interests in Senior and Prometheus SQ Interim Corp.] 29. Delaware UCC-1 Financing Statement among Prometheus SQ Holdings Corp., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for 100% of the equity interests in Senior and Prometheus SQ Interim Corp. and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among Prometheus SQ Holdings Corp., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for 100% of the equity interests in Senior and Prometheus SQ Interim Corp. and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among Prometheus SQ Holdings Corp., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for 100% of the equity interests in Senior and Prometheus SQ Interim Corp. and Amended and Restated Deposit and Security Agreement]. 30. 100 Shares of the Common Stock of Senior represented by Certificate Number C-1 in the name of Prometheus SQ Holdings Corp., dated February 7, 2001, together with Stock Power executed in blank by Prometheus SQ Holdings Corp. 31. Stock Subscription Agreement between Prometheus SQ Holdings Corp. and Senior Quarters Funding Corp. 6 32. 100 Shares of the Common Stock of Prometheus SQ Interim Corp. represented by Certificate Number 1 in the name of Prometheus SQ Holdings Corp., dated September 15, 1998, together with Stock Power executed in blank by Prometheus SQ Holdings Corp. 33. Pledge and Security Agreement (Stock) between Borrower and Prometheus SQ Interim Corp. [for 100% of the equity interests in Kapson Senior Quarters Corp. ]. 34. Delaware UCC-1 Financing Statement among Prometheus SQ Interim Corp., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for 100% of the equity interests in Kapson Senior Quarters Corp. and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among Prometheus SQ Interim Corp., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for 100% of the equity interests in Kapson Senior Quarters Corp. and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among Prometheus SQ Interim Corp., as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for 100% of the equity interests in Kapson Senior Quarters Corp. and Amended and Restated Deposit and Security Agreement]. 35. 200 Shares of the Common Stock of Kapson Senior Quarters Corp. represented by Certificate Number 5 in the name of Prometheus SQ Interim Corp., together with Stock Power executed in blank by Prometheus SQ Interim Corp. 36. Pledge and Security Agreement (Stock) between Borrower and Atria Holdings LLC [for 89.1% of the common stock and 100% of the preferred stock in Atria, Inc.]. 37. Delaware UCC-1 Financing Statement among Atria Holdings LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for 89.1% of the common stock and 100% of the preferred stock in Atria, Inc. and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among Atria Holdings LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for 89.1% of the common stock and 100% of the preferred stock in Atria, Inc. and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among Atria Holdings LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for 89.1% of the common stock and 100% of the preferred stock in Atria, Inc. and Amended and Restated Deposit and Security Agreement]. 38. 9,135.802 Shares of the Common Stock of Atria, Inc. represented by Certificate Number 4 in the name of Atria Holdings LLC, dated February 16, 2000, together with Stock Power executed in blank by Atria Holdings LLC. 39. 274.99155 Shares of the Series A Cumulative Preferred Stock of Atria, Inc. represented by Certificate Number 4 in the name of Atria Holdings LLC, dated December 28, 2000, together with Stock Power executed in blank by Atria Holdings LLC. 7 40. Pledge and Security Agreement (Membership Interests) between Borrower, Prometheus Senior Quarters LLC, Prometheus SQ Holdings Corp. and Atria Holdings LLC [for 100% of the membership interests in Atria Holdings LLC and 100% of the equity interests in Prometheus SQ Holdings Corp.]. 41. Delaware UCC-1 Financing Statement among Prometheus Senior Quarters LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Delaware Secretary of State [for 100% of the membership interests in Atria Holdings LLC and 100% of the equity interests in Prometheus SQ Holdings Corp. and Amended and Restated Deposit and Security Agreement]. New York UCC-1 Financing Statement among Prometheus Senior Quarters LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the New York Secretary of State [for 100% of the membership interests in Atria Holdings LLC and 100% of the equity interests in Prometheus SQ Holdings Corp. and Amended and Restated Deposit and Security Agreement]. New York County UCC-1 Financing Statement among Prometheus Senior Quarters LLC, as debtor, Borrower, as secured party, and Lender, as assignee, filed with the Office of the City Register, New York County [for 100% of the membership interests in Atria Holdings LLC and 100% of the equity interests in Prometheus SQ Holdings Corp. and Amended and Restated Deposit and Security Agreement]. 42. 100 Shares of the Common Stock of Prometheus SQ Holdings Corp. represented by Certificate Number 1 in the name of Prometheus Senior Quarters LLC, dated September 15, 1998, together with Stock Power executed in blank by Prometheus Senior Quarters LLC. Direction Letters 43. Direction Letter dated February 6, 2001, from the Fund to American Apartment Comminutes III Inc. and American Apartment Communities III L.P. 44. Direction Letter dated February 6, 2001, from the Fund to Prometheus UK Hospitality LLC. 45. Direction Letter dated February 6, 2001, from Prometheus Extended Stay, L.L.C. to Intown Holding Company, L.L.C. 46. Direction Letter dated February 6, 2001, from Prometheus Assisted Living LLC to ARV Assisted Living, Inc., as amended by Letter of Direction dated April 24, 2002. 47. Direction Letter dated February 6, 2001, from Prometheus UK Hospitality LLC to Destination Europe USA, LLC 48. Direction Letter dated February 6, 2001, from the Fund to Prometheus Senior Quarters LLC. 49. Direction Letter from Prometheus Homebuilders LLC to The Fortress Group, Inc. 50. Direction Letter dated February 6, 2001, from Prometheus SQ Holdings Corp. to Prometheus SQ Interim Corp. 51. Direction Letter dated February 6, 2001, from Prometheus SQ Holdings Corp. to Senior Quarters Funding Corp. 8 52. Direction Letter dated February 6, 2001, from Prometheus SQ Interim Corp. to Kapson Senior Quarters Corp. 53. Direction Letter dated February 6, 2001, from Atria Holdings LLC to Atria, Inc. 54. Opinion of Simpson Thacher & Bartlett to Borrower, CT Mezzanine Partners I LLC and Lender. 55. Opinion of Lazard Freres & Co. LLC to Borrower. Organizational Documents 56. Secretary's Certificate of Senior. 57. Certificate of LFSRI. 58. Certificate of LF Strategic Realty Investors II, L.P. 59. Certificate of LFSRI II-CADIM Alternative Partnership L.P. 60. Certificate of LFSRI II Alternative Partnership L.P. 61. Certificate of Lazard Freres Real Estate Investors L.L.C. 62. Certificate of Prometheus Southeast Retail LLC. 63. Certificate of Prometheus Southeast Retail Trust. 64. Certificate of Prometheus Mid-Atlantic Investors Trust. 65. Certificate of The Rubenstein Company, L.P. 66. Certificate of LFSRI II Extended Stay L.L.C. 67. Secretary's Certificate of LFSRI II SPV E.S. Corp. 68. Certificate of Prometheus Extended Stay LLC. 69. Certificate of Intown Holding Company LLC. 70. Secretary's Certificate of American Apartment Communities III, Inc. 71. Certificate of American Apartment Communities III, L.P. 72. Certificate of Prometheus Assisted Living LLC. 73. Certificate of Prometheus UK Hospitality LLC. 74. Certificate of Prometheus Homebuilders LLC. 75. Organizational documents of The Fortress Group, Inc. 76. Secretary's Certificate of Prometheus SQ Holdings Corp. 9 77. Certificate of Prometheus Senior Quarters LLC. 78. Certificate of Atria Holdings LLC. 79. Organizational documents of Atria, Inc. 80. Certificate of Prometheus SQ Interim Corp. 81. Certificate of LFSRI II Assisted Living LLC. 82. Organizational documents of Kapson Senior Quarters Corp. 83. Organizational documents of ARV Assisted Living, Inc. Loan from LSFRI II Assisted Living LLC to ARV Assisted Living, Inc. 84. Amended Term Note dated April 24, 2002, made by ARV Assisted Living, Inc. payable to the order of LFSRI II Assisted Living LLC, in the original principal amount of $11,500,000, as endorsed by LFSRI II Assisted Living LLC in blank pursuant to that certain Allonge. 85. Omnibus Amendment dated as of April 24, 2000, between Borrower and LFSRI. 86. Amended and Restated Collateral Assignment dated as of April 24, 2002, between Borrower and LFSRI II Assisted Living LLC. 87. Direction Letter dated April 24, 2002, from LFSRI II Assisted Living LLC to ARV Assisted Living, Inc. 88. Opinion of Simpson, Thacher & Bartlett dated April 24, 2000, to Borrower and Lender. 89. Opinion of Lazard Freres & Co. LLC dated April 24, 2000, to Borrower. Participation to CT Mezzanine Partners I LLC 90. Participation Agreement between Borrower and CT Mezzanine Partners I LLC. 91. Participation Certificate, made by Capital Trust in favor of CT Mezzanine Partners, LLC in the original principal amount of $42,500,000, together with Endorsement to Participation Certificate, endorsed in blank by CT Mezzanine Partners, LLC. 92. Any additional Participation Certificate(s) issued pursuant to the Participation Agreement referenced as item 1 above. 93. Tri-Party Agreement among Borrower, CT Mezzanine Partners I LLC and Lazard Borrowers. Pledge of Atria and Kapson Promissory Notes/Guaranties Unless otherwise noted, all documents listed below are dated as of March 2, 2001 94. Pledge and Security Agreement dated as of the Effective Date (Promissory Notes/Guaranties) between Borrower and Senior. 95. Promissory Note made by Atria Inc. in favor of Senior in the original principal amount of $15,000,000, as endorsed by Senior in blank pursuant to Promissory Note Allonge. 10 96. Guaranty of Payment from Kapson Senior Quarters Corp. to Senior. 97. Promissory Note made by Kapson Senior Quarters Corp. to Senior in the original principal amount of $15,000,000, as endorsed by Senior in blank pursuant to Promissory Note Allonge. 98. Guaranty of Payment from Atria, Inc. to Senior. 99. Delaware UCC-1 Financing Statement made by Senior, as debtor, in favor of Borrower, as secured party, filed with the Delaware Secretary of State, as assigned by Borrower to Lender. 100. New York UCC-1 Financing Statement made by Senior, as debtor, in favor of Borrower, as secured party, filed with the New York Secretary of State, as assigned by Borrower to Lender. 101. New York County UCC-1 Financing Statement made by Senior, as debtor, in favor of Borrower, as secured party, filed with the Office of the City Register, New York County, as assigned by Borrower to Lender. 102. Legal opinion letter dated as of the Effective Date, from Simpson Thacher & Bartlett to CT Mezzanine Partners I LLC, Borrower and Lender. 103. Direction letter dated April 26, 2001 from Senior to Kapson Senior Quarters Corp. regarding payments on account of the promissory note or guaranty. 104. Direction letter dated April 26, 2001, from Senior to Atria Inc. regarding payments on account of the promissory note or guaranty. 11 EX-23 7 ex10-23.txt Exhibit 10.23 WARRANT PURCHASE AGREEMENT This Purchase Agreement (the "Agreement") is entered into as of January 29, 2003, by and between Travelers Insurance Company, a Connecticut corporation ("TIC"), Citigroup Alternative Investments GP, LLC, a Delaware limited liability company ("CAI GP"), Citigroup Alternative Investments General Real Estate Mezzanine Investments II, LLC (formerly known as Travelers General Real Estate Mezzanine Investments II, LLC), a Delaware limited liability company ("General REMI II" and together with TIC and CAI GP, the "Selling Parties") and Capital Trust, Inc., a Maryland corporation ("CT"). Preliminary Statement TIC holds a warrant to purchase 1,402,500 shares of class A common stock, par value $.01 per share ("Common Stock"), of CT at an exercise price of $5.00 per share pursuant to a warrant agreement, dated as of March 8, 2000, made by CT (the "TIC Warrant"). CAI GP holds a warrant to purchase 2,847,500 shares of Common Stock of CT at an exercise price of $5.00 per share pursuant to a warrant agreement, dated as of March 8, 2000, made by CT (the "CAI GP Warrant"). General REMI II holds a warrant to purchase 3,015,600 shares of Common Stock of CT at an exercise price of $5.00 per share pursuant to a warrant agreement, dated as of April 9, 2001, made by CT (the "General REMI II Warrant 1"). General REMI II holds a warrant to purchase 236,233 shares of Common Stock of CT at an exercise price of $5.00 per share pursuant to a warrant agreement, dated as of May 29, 2001, made by CT (the "General REMI II Warrant 2"). General REMI II holds a warrant to purchase 1,026,634 shares of Common Stock of CT at an exercise price of $5.00 per share pursuant to a warrant agreement dated as of August 7, 2001, made by CT (the "General REMI II Warrant 3", and together with the TIC Warrant, the CAI GP Warrant, the General REMI II Warrant 1 and the General REMI II Warrant 2, the "Warrants"). The Selling Parties desire to sell to CT, and CT desires to purchase from the Selling Parties, all of Selling Parties' right, title and interest in and to the Warrants. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereby agree as follows: 1. Terms of Purchase and Closing 1.1 Purchase and Sale. At the Closing (as defined herein), subject to the terms and conditions set forth in this Agreement, each Selling Party hereby agrees to sell, assign, transfer, convey and deliver to CT, and CT hereby agrees to purchase from each such Selling Party, all of each such Selling Party's right, title and interest in and to its Warrant(s), at the purchase price specified herein. 1.2 Purchase Price. The purchase price payable to each Selling Party for its Warrant(s) shall be an amount determined by multiplying $0.25 by the total number of shares issuable upon exercise of such Warrant(s) as set forth below, payable in cash in the manner set forth in Section 1.3 (each such price, a "Purchase Price").
Warrant Number of Shares Purchase Price - ------- ---------------- -------------- TIC Warrant 1,402,500 $350,625.00 CAI GP Warrant 2,847,500 $711,875.00 General REMI II Warrant 1 3,015,600 $753,900.00 General REMI II Warrant 2 236,233 $59,058.25 General REMI II Warrant 3 1,026,634 $256,658.50 Total: 8,528,467 $2,132,116.75
1.3 Closing Payment. The Purchase Price payable to each Selling Party for its Warrant(s) shall be delivered at the Closing to each such Selling Party in cash by wire transfer of immediately available funds to the account(s) of such Selling Party as set forth in written wire transfer instructions provided to CT by each such Selling Party prior to the Closing. 1.4 Closing. The closing of the purchase and sale of the Warrants (the "Closing") shall take place on the date hereof (the "Closing Date"), at which time CT shall deliver the Purchase Price due each Selling Party and each Selling Party shall deliver to CT its Warrant(s), which Warrants shall be deemed cancelled and of no further legal force or effect. The purchase and sale of the Warrants shall be irrevocable and complete upon the Closing. 2. Representations and Warranties 2.1 Authorization and Binding Nature. Each of the parties represents and warrants as of the date hereof that: (a) Such party is duly organized, existing and in good standing under the laws of the state of its organization, with the requisite authority and power to carry on its business as currently conducted; (b) Such party has duly and validly executed and delivered this Agreement and has the corporate, limited liability company or other power and authority and the legal right to effect the transactions contemplated hereby; (c) The execution of this Agreement and performance thereunder by such party will not result in any breach or violation of or conflict with (i) any provision of its charter, by-laws or limited liability company agreement, (ii) any of the terms or conditions of any agreement or other instrument by which any such party is bound or -2- affected or by which its assets are affected, (iii) any order, writ, injunction, judgement, decree, law, statute, rule or regulation applicable to it, or any of its respective properties or assets or (iv) result in the creation or imposition of any lien or encumbrance on any of its assets; and (d) This Agreement constitutes the legal, valid, binding and enforceable obligation of such party, enforceable against it in accordance with its terms, subject to (i) judicial principles respecting election of remedies or limiting the availability of specific performance, injunctive relief or other equitable remedies, (ii) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect generally relating to or affecting creditors' rights and (iii) public policy concerns (including, without limitation, the ability of a court to refuse to enforce unconscionable covenants and similar provisions). 2.2 Representation and Warranty of the Selling Parties. The Selling Parties, jointly and severally, represent and warrant as of the date hereof that the Selling Parties own the Warrants, and have not assigned, sold, participated out, cancelled, transferred or subjected to any lien, charge or encumbrance in any manner, all or any portion of their interest in the Warrants. 3. Miscellaneous 3.1 Survival. All representations, warranties and covenants made herein shall survive the execution and delivery of this Agreement. 3.2 Entire Agreement. Except as otherwise expressly set forth herein, this document embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and thereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 3.3 Amendment. No amendment, whether express or implied, to this Agreement shall be effective unless it is in writing and signed by the parties hereto. 3.4 Assignment and Successors. The Selling Parties and CT may not assign or transfer any of their rights, obligations or responsibilities under this Agreement without the other party's prior written consent. Any purported assignment or transfer without any required consent is null and void. Subject to the foregoing, this Agreement shall be binding upon the respective successors and permitted assigns of the parties hereto and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 3.5 Notices. All notices or other communications under this Agreement shall be sufficient if in writing and delivered by hand or sent by a recognized overnight air -3- courier service and shall be deemed given when received by the parties at the following addresses: If to CT: Capital Trust, Inc. 410 Park Avenue, 14th Floor New York, N.Y. 10022 Attention: Brian H. Oswald and with a copy to: Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, NY 10022 Attention: Michael L. Zuppone If to TIC: Travelers Insurance Company 850 Third Avenue, 12th Floor New York, NY 10022 Attn: Duane R. Nelson and with a copy to: Loeb & Loeb LLP 345 Park Avenue New York, NY 10154 Attention: Stanley M. Johnson, Esq. If to CAI GP: Citigroup Alternative Investments GP, LLC 850 Third Avenue, 12th Floor New York, NY 10022 Attn: Duane R. Nelson and with a copy to: Loeb & Loeb LLP 345 Park Avenue New York, NY 10154 Attn: Stanley M. Johnson, Esq. -4- If to General REMI II: Citigroup Alternative Investments Limited Real Estate Mezzanine Investments II, LLC 850 Third Avenue, 12th Floor New York, NY 10022 Attn: Duane R. Nelson and with copies to: Citigroup Investments Inc. 850 Third Avenue, 12th Floor New York, NY 10022 Attn: Michael Watson Real Estate Investment Number 12833 Loeb & Loeb LLP 345 Park Avenue New York, NY 10154 Attn: Stanley M. Johnson, Esq. 3.6 Arbitration. All claims, disputes and other matters in question arising out of or relating to this Agreement or interpretation or breach of this Agreement shall be decided by arbitration in accordance with the procedures set forth in Sections 4.2(a) through (d) of the Venture Agreement (as defined below). For purposes of this Agreement, the term "Venture Agreement" means that certain venture agreement dated as of March 8, 2000, among 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, Travelers Limited Real Estate Mezzanine Investments II, LLC, a Delaware limited liability 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, and Capital Trust, Inc., a Maryland corporation, as amended to date or hereafter. 3.7 Governing Law; Submission to Jurisdiction. This Agreement shall be subject to and the parties shall be bound by the provisions of Section 4.2(e) of the Venture Agreement. 3.8 Further Assurances. From and after the date hereof, each party to this Agreement shall perform any further acts and execute and deliver any further documents or instruments as may be reasonably necessary to assure and confirm the rights hereby -5- created, cancelled or intended now or hereafter to be so, or to carry out the intention or facilitate the performance of this Agreement. 3.9 Costs and Expenses. Each party to this Agreement shall bear its own respective costs and expenses incurred in connection with the negotiation, preparation, execution, delivery and enforcement of this Agreement and the consummation of the transactions contemplated hereby. 3.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. [Signature Page Follows] -6- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CAPITAL TRUST, INC. By:/s/ John R. Klopp ---------------------------- Name: John R. Klopp Title: Chief Executive Officer TRAVELERS INSURANCE COMPANY By: /s/ Duane R. Nelson ---------------------------- Name: Duane R. Nelson Title: Vice President CITIGROUP ALTERNATIVE INVESTMENTS GP, LLC By: /s/ Duane R. Nelson ---------------------------- Name: Duane R. Nelson Title: Vice President CITIGROUP ALTERNATIVE INVESTMENTS GENERAL REAL ESTATE MEZZANINE INVESTMENTS II, LLC By: /s/ Duane R. Nelson ---------------------------- Name: Duane R. Nelson Title: Vice President EX-10 8 ex10-24.txt Exhibit 10.24 REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of February 7, 2003 by and between Capital Trust, Inc., a Maryland corporation (the "Company"), and Stichting Pensioenfonds ABP, a foundation pursuant to the laws of the Netherlands ("ABP"), or any Affiliate of ABP who may hereafter execute and agree to be bound by this Agreement and be named as a Holder on Schedule A attached hereto (which schedule shall be amended from time to time to reflect such agreement of such Person). Recitals WHEREAS, the Board of Directors of the Company has previously determined that it was advisable and in the best interest of the Company and its stockholders for the Company to elect to operate and be taxed as a real estate investment trust ("REIT") under federal income tax laws, and has authorized the officers of the Company to take all actions necessary and appropriate to effect the same; WHEREAS, in order for the Company to qualify to be taxed as a REIT, 50% of the common stock, par value $0.01 per share ("Common Stock"), of the Company can not be owned, directly or indirectly, by five or fewer natural individuals; WHEREAS, ABP has agreed to purchase from JRK Investment Partnership LP ("JRK"), CMH Investment Partnership LP ("CMH") and Veqtor Finance Company, LLC ("Veqtor"), an aggregate of 1,500,000 shares of Common Stock pursuant to that certain stock purchase agreement, dated as of the date hereof, by and among JRK, CMH, Veqtor and ABP (the "Stock Purchase Agreement"), which purchase will facilitate the Company's compliance with the foregoing concentrated ownership restriction; WHEREAS, the Company has agreed to grant to the Holders the registration rights set forth in Section 2 hereof which is a condition to the foregoing purchase by ABP of the Common Stock. NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby agree as follows: Section 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Advice" has the meaning set forth in Section 3(b) hereof. "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or is under common control with such Person. For the purposes of this definition, "control", when used with respect to any Person, means possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "affiliated", "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means a day other than a Saturday, Sunday or other day on which banking institutions in New York, New York are permitted or required by any applicable law to close. "Closing Date" means the date of closing on the purchase and sale of Common Stock pursuant to the Stock Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Common Stock" has the meaning set forth in the Recitals. "Company" has the meaning set forth in the Preamble and also includes the Company's successors. "Delay Notice" has the meaning set forth in Section 2(c) hereof. "Delay Period" has the meaning set forth in Section 2(c) hereof. "Effectiveness Period" has the meaning set forth in Section 2(b) hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Holder" or "Holders" means ABP or, any Affiliate of the foregoing Person who agrees to be bound by this Agreement and named as a Holder on Schedule A hereto in accordance with the introductory paragraph of this Agreement, or any Person who has acquired Registrable Securities by Transfer, operation of law or otherwise, if such Person is an owner of record of Registrable Securities, or of a security convertible into or exercisable or exchangeable for Registrable Securities, whether or not such conversion, exercise or exchange has actually been effected and disregarding any legal restrictions upon the exercise of such rights. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company may act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. "Inspectors" has the meaning set forth in Section 3(a)(xii) hereof. 2 "NASD" means the National Association of Securities Dealers, Inc. "Person" means an individual, partnership, corporation, limited liability company, trust, estate, or unincorporated organization, or other entity, or a government or agency or political subdivision thereof. "Prospectus" shall mean the prospectus included in a Shelf Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and, in each case, including all documents incorporated by reference therein. "Registrable Securities" means (i) the shares of Common Stock purchased pursuant to the Stock Purchase Agreement and such other shares of Common Stock acquired by ABP prior to or after the date hereof that when added to the foregoing shares do not exceed fifteen percent of the shares of Common Stock outstanding on the date of filing of the Shelf Registration Statement pursuant to Section 2(a) (subject to adjustment as appropriate to reflect any of the events described in clauses (ii) and (iii) below); (ii) any shares of Common Stock or other securities issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange by the Company generally for, or in replacement by the Company generally of, such shares of Common Stock; and (iii) any securities issued in exchange for such shares of Common Stock in any merger, combination or reorganization of the Company; provided, however, that Registrable Securities shall not include any securities which have theretofore been registered and sold by a Holder pursuant to the Securities Act or which have been sold by a Holder to the public pursuant to Rule 144 or any similar rules promulgated by the Commission pursuant to the Securities Act, and, provided further, that the Company shall have no obligation under Section 2 to register any Registrable Securities of a Holder or keep any Shelf Registration Statement effective if the Company shall deliver to the Holders requesting such registration an opinion of counsel reasonably satisfactory to such Holders and their counsel to the effect that the proposed sale or disposition of all of the Registrable Securities does not require registration under the Securities Act for a sale or disposition in a single public sale, and if the Company shall offer to remove any and all legends restricting transfer from the certificates evidencing such Registrable Securities. For purposes of this Agreement, a Person will be deemed to be a Holder of Registrable Securities whenever such Person has the then-existing right to acquire such Registrable Securities (by conversion, purchase or otherwise), whether or not such acquisition has actually been effected. "Rule 144" and "Rule 145" mean Rule 144 and Rule 145 promulgated under the Securities Act. 3 "Securities Act" means the Securities Act of 1933, as amended from time to time. "Shelf Registration" shall mean a registration effected pursuant to Section 2(a) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2 hereof which covers all of the Registrable Securities, on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein. "Stock Purchase Agreement" has the meaning set forth in the Recitals. "Transfer" means and includes the act of selling, giving, transferring, creating a trust (voting or otherwise), assigning or otherwise disposing of (other than pledging, hypothecating or otherwise transferring as security or any transfer upon any merger or consolidation) (and correlative words shall have correlative meanings); provided however, that any transfer or other disposition upon foreclosure or other exercise of remedies of a secured creditor after an event of default under or with respect to a pledge, hypothecation or other transfer as security shall constitute a Transfer. "Violation" has the meaning set forth in Section 5(a)(i). Section 2. Registration under the Securities Act. (a) Registration Requirement. The Company shall use best efforts to file with the Commission a Shelf Registration Statement meeting the requirements of the Securities Act within 30 days following the Closing Date, and shall use reasonable best efforts to cause such Shelf Registration Statement to be declared effective by the Commission within 120 days after the filing of any such Shelf Registration Statement, provided however, the Company shall not be required to file a Shelf Registration Statement or cause it to be declared effective during any Delay Period. No Holder of Registrable Securities shall be entitled to include any of its Registrable Securities in any Shelf Registration pursuant to this Agreement unless and until such Holder agrees in writing to be bound by all of the provisions of this Agreement applicable to such Holder and furnishes to the Company in writing, within 10 Business Days after receipt of a request therefor, such information as the Company may, after conferring with counsel with regard to information relating to Holders that would be required by the Commission to be included in such Shelf Registration Statement or Prospectus included therein, reasonably request for inclusion in any Shelf Registration Statement or Prospectus included therein. Each Holder as to which any Shelf Registration is being effected agrees to furnish to the Company all information with respect to such Holder necessary to make 4 the information previously furnished to the Company by such Holder not materially misleading. (b) Effectiveness Requirement. The Company agrees to use its reasonable best efforts to keep each Shelf Registration Statement continuously effective and the Prospectus usable for resales for a period commencing on the date that such Shelf Registration Statement is initially declared effective by the SEC and terminating on the date when all of the Registrable Securities covered by such Shelf Registration Statement have been sold pursuant to such Shelf Registration Statement or cease to be Registrable Securities (the "Effectiveness Period"); provided, however, the Company shall be permitted to suspend sales of Securities during any Delay Period. (c) Delay Period. The term "Delay Period" shall mean, with respect to any obligation to file a Shelf Registration Statements or to keep any Prospectus usable for resales pursuant to this Section 2, the shortest period of time determined in good faith by the Company to be necessary for such purpose when there exist circumstances relating to a material pending development, including but not limited to a pending or contemplated material acquisition or merger or other material transaction or similar event, which would require disclosure by the Company in such Shelf Registration Statement or Prospectus of material information which the Company determines in good faith that it has a bona fide business purpose for keeping confidential and non-public and the non-disclosure of which in such Shelf Registration Statement or Prospectus might cause such Shelf Registration Statement or Prospectus to fail to comply with applicable disclosure requirements. A Delay Period shall commence on and include the date that the Company gives written notice (a "Delay Notice") to the Holders that it is not required to file any Shelf Registration Statement or cause it to be declared effective or the Prospectus is no longer usable as a result of a material pending development pursuant to Section 2(b) hereof and shall end on the date when the Holders are advised in writing by the Company that the current Delay Period has terminated (it being understood that the Company shall give such notice to all Holders promptly upon making the determination that the Delay Period has ended); provided, however, that the Company shall not be entitled to Delay Periods having durations that exceed ninety (90) days in the aggregate during any calendar year. The Company covenants and agrees that it shall not deliver a Delay Notice with respect to a Delay Period unless Company employees, officers and directors and their Affiliates and any other holders of registration rights with respect to the Company's Common Stock are also prohibited by the Company for the duration of such Delay Period from effecting any public sales of shares of Common Stock beneficially owned by them. The Company represents that it has no knowledge of any circumstance that would reasonably be expected at the time of the Shelf Registration Statement pursuant to Section 2(a) to cause the Company to exercise its rights under this Section 2(c). (d) Notice. Each Holder agrees that it shall give the Company notice of not less than one (1) Business Day prior to disposing of any Registrable Securities 5 under a Shelf Registration Statement so that the Company may make any determination to suspend sales of Securities as contemplated in Section 2(b) hereof. The Company will, in the event a Shelf Registration Statement is declared effective, provide to each Holder a reasonable number of copies of the Prospectus which is a part of such Shelf Registration Statement, notify each such Holder when such Shelf Registration Statement has become effective and take such other actions as are required to permit unrestricted resales of the Registrable Securities. The Company further agrees to supplement or amend each Shelf Registration Statement if and as required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registrations, and the Company agrees to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the Commission. (e) Effective Shelf Registration Statement. A Shelf Registration Statement will not be deemed to have become effective unless it has been declared effective by the Commission; provided, however, that if, after it has been declared effective, the offering of Registrable Securities pursuant to such Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the Commission or any other governmental agency or court, such Shelf Registration Statement will be deemed not to have been effective during the period of such interference, until the offering of Registrable Securities pursuant to such Shelf Registration Statement may legally resume. The Company will be deemed not to have used its reasonable best efforts to cause a Shelf Registration Statement to become, or to remain, effective during the requisite period if it voluntarily takes any action or omits to take any action that would result in any such Shelf Registration Statement not being declared effective or that would result in the Holders of Registrable Securities covered thereby not being able to offer and sell such Registrable Securities during that period, unless such action or omission is required by applicable law. (f) Eligibility. As of the Closing Date, the Company will be eligible to file a Shelf Registration Statement with respect to the Registrable Securities. Section 3. Registration Procedures. (a) Obligations of the Company. In connection with its obligations under Section 2 hereof with respect to the Shelf Registration Statement, the Company shall, as expeditiously as practicable: (i) prepare and file with the Commission a Shelf Registration Statement as prescribed by Section 2(a) within the relevant time period specified in Section 2(a) hereof on the appropriate form under the Securities Act, which form shall (i) be selected by the Company, (ii) be available for the sale of the Registrable Securities by the selling Holders thereof, and (iii) comply as to form in all material respects with the 6 requirements of the applicable form and include all financial statements required by the Commission to be filed therewith; the Company shall use its reasonable best efforts to cause such Shelf Registration Statement to become effective and remain effective and the Prospectus usable for resales in accordance with Section 2 hereof, subject to the proviso contained in Section 2(b) hereof; provided, however, that, before filing any Shelf Registration Statement or Prospectus or any amendments or supplements thereto, the Company shall furnish to and afford the Holders of the Registrable Securities covered by such Shelf Registration Statement, their counsel and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed; and the Company shall not file any Shelf Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document, other than filings required under the Exchange Act, if the Holders, their counsel or the managing underwriters of an underwritten offering of Registrable Securities, if any, shall reasonably object in a timely manner; (ii) prepare and file with the Commission such amendments and post-effective amendments to such Shelf Registration Statement as may be necessary to keep such Shelf Registration Statement effective for the Effectiveness Period, subject to the proviso contained in Section 2(b) hereof or as reasonably requested by the Holders of a majority of Registrable Securities, and cause each Prospectus to be supplemented, if so determined by the Company or requested by the Commission, by any required prospectus supplement and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force), under the Securities Act, respond within a reasonable time to any comments received from the Commission with respect to such Shelf Registration Statement, or any amendment, post-effective amendment or supplement relating thereto, and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder applicable to it with respect to the disposition of all Registrable Securities covered by such Shelf Registration Statement during the Effectiveness Period in accordance with the intended method or methods of distribution by the selling Holders thereof described in this Agreement; (iii) register or qualify the Registrable Securities under all applicable state securities or "Blue Sky" laws of such jurisdictions by the time the applicable Shelf Registration Statement is declared effective by the Commission as any Holder of Registrable Securities covered by such Shelf Registration Statement and each underwriter of an underwritten 7 offering of Registrable Securities shall reasonably request in writing in advance of such date of effectiveness, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Company shall not be required to (A) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(a)(iii) hereof, (B) file any general consent to service of process in any jurisdiction where it would not otherwise be subject to such service of process or (C) subject itself to taxation in any such jurisdiction if it is not then so subject; (iv) promptly notify each Holder of Registrable Securities, its counsel and the managing underwriters of an underwritten offering of Registrable Securities, if any, and promptly confirm such notice in writing (A) when the Shelf Registration Statement covering such Registrable Securities has become effective and when any post-effective amendments thereto become effective, (B) of any request by the Commission or any state securities authority for amendments and supplements to such Shelf Registration Statement or Prospectus or for additional information after such Shelf Registration Statement has become effective, (C) of the issuance or threatened issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of such Shelf Registration Statement or the qualification of the Registrable Securities in any jurisdiction described in Section 3(a)(iii) hereof or the initiation of any proceedings for that purpose, (D) if, between the effective date of such Shelf Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company contained in any purchase agreement, securities sales agreement or other similar agreement cease to be true and correct in all material respects, (E) of the happening of any event or the failure of any event to occur or the discovery of any facts, during the Effectiveness Period, which makes any statement made in such Shelf Registration Statement or the related Prospectus untrue in any material respect or which causes such Shelf Registration Statement or Prospectus to omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (F) of the reasonable determination of the Company that a post-effective amendment to such Shelf Registration Statement would be appropriate; (v) take reasonable efforts to prevent the entry of any stop order suspending the effectiveness of any Shelf Registration Statement, or 8 if entered, to obtain the withdrawal of any such stop order at the earliest possible moment; (vi) furnish to each Holder of Registrable Securities included within the coverage of a Shelf Registration Statement, without charge, a reasonable number of conformed copies of the Shelf Registration Statement relating to such Shelf Registration and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested) as such Holder or managing underwriters, if any, may reasonably request; (vii) deliver to each selling Holding of Registrable Securities and each managing underwriter participating in any such disposition of Registrable Securities, if any, without charge, as many copies of the applicable Prospectus (including each preliminary Prospectus) as such Holder or managing underwriter may reasonably request (it being understood that the Company consents to the use of the Prospectus by each of the selling Holders of Registrable Securities and the underwriter or underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus), such other documents incorporated by reference therein and any exhibits thereto as such selling Holder or managing underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities by such Holder or underwriter; (viii) cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and registered in such names as the selling Holders or any underwriters may reasonably request at least two Business Days prior to the closing of any sale of Registrable Securities pursuant to the Shelf Registration Statement relating thereto; (ix) as soon as practicable after the resolution of any matter or event specified in Sections 3(a)(iv)(B), 3(a)(iv)(C), 3(a)(iv)(E) (subject to the proviso contained in Section 2(b) hereof) and 3(a)(iv)(F) hereof), prepare a supplement or post-effective amendment to the applicable Shelf Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; 9 (x) a reasonable time prior to the filing of any document which is to be incorporated by reference into a Shelf Registration Statement or a Prospectus after the initial filing of such Shelf Registration Statement, provide a reasonable number of copies of such document to the Holders and managing underwriters, if any, and make such of the representatives of the Company as shall be reasonably requested by the Holders of Registrable Securities available for discussion of such document; (xi) if requested by the Holders of Registrable Securities in connection with a firm commitment underwritten offering of at least $1 million of Registrable Securities: (i) (A) enter into such agreements (including underwriting agreements) as are customary in underwritten offerings, (B) make such representations and warranties in such agreements to the underwriters (if any), with respect to the business of the Company and its subsidiaries as then conducted and with respect to the applicable Shelf Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers to underwriters in underwritten offerings (all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters included in each such agreement shall also be made to and for the benefit of such Holders and any or all of the conditions precedent to the obligations of such underwriters under such agreements shall be conditions precedent to the obligations of such Holders), and confirm the same if and when requested and (C) include in such agreements such terms and conditions as are generally prevailing in agreements of that type, including, without limitation, indemnities no less favorable to the recipient thereof than those provided in Section 5 hereof; (ii) obtain opinions of counsel to the Company and updates thereof (which may be in the form of a reliance letter) in form and substance reasonably satisfactory to the managing underwriters covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such underwriters (it being agreed that the matters to be covered by such opinion may be subject to customary qualifications and exceptions); (iii) obtain "cold comfort" accountants' letters and updates thereof in form and substance reasonably satisfactory to the managing underwriters from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings and such other matters as 10 reasonably requested by such underwriters in accordance with Statement on Auditing Standards No. 72; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures customary for such agreements; (xii) if requested by Holders of Registrable Securities in connection with a firm underwritten commitment offering of at least $1 million of Registrable Securities, make reasonably available for inspection by any selling Holder of Registrable Securities who certifies to the Company that it has a current intention to sell Registrable Securities pursuant to the Shelf Registration, any underwriter participating in any such disposition of Registrable Securities, if any, and any attorney, accountant or other agent retained by any such selling Holder or underwriter (collectively, the "Inspectors"), at the offices where normally kept, during the Company's normal business hours, all financial and other records, and pertinent organizational and operational documents of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, trustees and employees of the Company and its subsidiaries to supply all relevant information in each case reasonably requested by any such Inspector in connection with such Shelf Registration Statement, records and information which the Company, in good faith, determines to be confidential and any Records and information which it notifies the Inspectors are confidential shall not be disclosed to any Inspector except where (i) the disclosure of such Records or information is necessary to avoid or correct a material misstatement or omission in the applicable Shelf Registration Statement, (ii) the release of such Records or information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or is necessary in connection with any action, suit or proceeding, or (iii) such Records or information previously have been made generally available to the public; each selling Holder of such Registrable Securities will be required to agree in writing that Records and information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company unless and until such is made generally available to the public through no fault of an Inspector or a selling Holder; and each selling Holder of such Registrable Securities will be required to further agree in writing that it will, upon learning that disclosure of such Records or information is sought in a court of competent jurisdiction, or in connection with any action, suit or proceeding, give notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records and information deemed confidential; 11 (xiii) comply with all applicable rules and regulations of the Commission so long as any provision of this Agreement shall be applicable and make generally available to its securityholders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any twelve-month period (or 90 days after the end of any twelve-month period if such period is a fiscal year) or, in each case, such shorter period as may be required for the filing of reports containing quarterly and annual financial statements pursuant to the rules and regulations adopted under the Securities Act from time to time (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Shelf Registration Statement, which statements shall cover said twelve-month periods, provided that the obligations under this Section 3(l) shall be satisfied by the timely filing of quarterly and annual reports on Forms 10-Q and 10-K under the Exchange Act; (xiv) cooperate with each seller of Registrable Securities covered by a Shelf Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD; (xv) take all other steps necessary to effect the registration of the Registrable Securities covered by a Shelf Registration Statement contemplated hereby; and (xvi) notwithstanding any other provision of this Section 3, if the Company becomes ineligible to use the registration form on which the Shelf Registration Statement is filed and declared effective pursuant to Section 2(a), thereby precluding any Holder from using the related Prospectus, the Company shall use best efforts to prepare and file either a post effective amendment to the Shelf Registration Statement to convert such registration statement to, or a new Shelf Registration Statement on, another registration form which the Company is eligible to use within 30 days after the date that the Company becomes ineligible, provided such other registration form shall be available for the sale of the Registrable Securities by the selling Holders thereof and such amended or new Shelf Registration Statement shall remain subject in all respects to the provisions of this Section 3. 12 (b) Holders' Obligations. (i) Each Holder agrees that, upon receipt of any notice from the Company of the occurrence of any event specified in Sections 3(a)(iv)(B), 3(a)(iv)(C), 3(a)(iv)(E), 3(a)(iv)(F) hereof or any Delay Notice, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to the Shelf Registration Statement at issue until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(a)(viii) hereof or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. (ii) Each Holder agrees that the Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to it such information regarding such seller as may be required by the staff of the Commission to be included in the applicable Shelf Registration Statement, the Company may exclude from such registration the Registrable Securities of any seller who fails to furnish such information within 10 Business Days after receiving such request, and the Company shall have no obligation to register under the Securities Act the Registrable Securities of a seller who so fails to furnish such information. Section 4. Expenses of Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing, or qualification of Registrable Securities with respect to a Shelf Registration Statement for each selling Holder, including all registration, exchange listing, accounting, filing and NASD fees, all fees and expenses of complying with securities or Blue Sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the reasonable fees and disbursements of counsel for the Company, and of the Company's independent public accountants, including the expenses of "comfort letters" required by or incident to such performance and compliance and reasonable fees and disbursements of one firm of counsel and one firm of accountants for ABP. Holders shall be responsible for any underwriting discounts and commissions and taxes of any kind (including without limitation, transfer taxes) relating to any disposition, sale or transfer of Registrable Securities. 13 Section 5. Indemnification; Contribution. (a) Indemnification by the Company. If any Registrable Securities are included in a Shelf Registration Statement under this Agreement: (i) To the extent permitted by applicable law, the Company shall indemnify and hold harmless each selling Holder, each Person, if any, who controls such selling Holder within the meaning of the Securities Act, and each officer, director, trustee, partner, and employee of such selling Holder and such controlling Person, against any and all losses, claims, damages, liabilities and expenses (joint or several), including attorneys' fees and disbursements and expenses of investigation, incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may become subject under the Securities Act, the Exchange Act or other federal or state laws, insofar as such losses, claims, damages, liabilities and expenses arise out of or are based upon any of the following statements, omissions or violations (collectively, a "Violation"): (A) Any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein, or any amendments or supplements thereto or any document incorporated by reference therein; (B) The omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (C) Any violation or alleged violation by the Company of the federal securities laws, any applicable state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any applicable state securities law; provided, however, that the indemnification required by this Section 5(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or expense to the extent that it arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such Registration Statement in reliance upon and in conformity with written information furnished to the Company by the indemnified party expressly for use in connection with such registration; provided, further, that the indemnity agreement contained in this Section 5(a) shall not apply to any underwriter to the extent that any such loss is based on or arises out of an untrue statement or alleged untrue statement of a 14 material fact, or an omission or alleged omission to state a material fact, contained in or omitted from any preliminary prospectus if the final prospectus shall correct such untrue statement or alleged untrue statement, or such omission or alleged omission, and a copy of the final prospectus has not been sent or given to such Person at or prior to the confirmation of sale to such Person if such underwriter was under an obligation to deliver such final prospectus and failed to do so. The Company shall also indemnify underwriters participating in the distribution of the Registrable Securities, their officers, directors, agents and employees and each Person who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the selling Holders. This indemnity shall be in addition to any liability the Company may otherwise have. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such selling Holder or any indemnified party and shall survive the transfer of such securities by such Holder. (b) Indemnification by Holder. If any of a selling Holder's Registrable Securities are included in a registration statement under this Agreement, to the extent permitted by applicable law, such selling Holder shall indemnify and hold harmless the Company, each of its directors, each of its officers who shall have signed the registration statement, each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, any other selling Holder, any controlling Person of any such other selling Holder and each officer, director, partner, and employee of such other selling Holder and such controlling Person, against any and all losses, claims, damages, liabilities and expenses (joint and several), including attorneys' fees and disbursements and expenses of investigation, incurred by such party pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may otherwise become subject under the Securities Act, the Exchange Act or other federal or state laws, insofar as such losses, claims, damages, liabilities and expenses arise out or are based upon any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement under which such Registrable Securities were registered under the Securities Act (including any final, preliminary or summary Prospectus contained therein or any amendment thereof or supplement thereto or any documents incorporated by reference therein), or necessary to make the statements therein (in the case of a Prospectus or preliminary Prospectus, in light or the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or omission had been contained in any information furnished in writing by such selling Holder to the Company expressly for use in connection with such registration; provided, however, that (x) the indemnification required by this Section 5(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense if settlement is effected without the consent of the relevant selling Holder of Registrable Securities, which consent shall not be unreasonably withheld, and (y) in no event shall the amount of any indemnity under this Section 5(b) exceed the gross proceeds from the 15 applicable offering received by such selling Holder. In no event shall a Holder be jointly liable with any other Holder as a result of its indemnification obligations. (c) Conduct of Indemnification Proceedings. Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action, suit, proceeding, investigation or threat thereof made in writing for which such indemnified party may make a claim under this Section 5, such indemnified party shall deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties. The failure to deliver written notice to the indemnifying party within a reasonable time following the commencement of any such action, if not otherwise known by the indemnifying party and if it materially prejudices or results in forfeiture of substantial rights or defenses, shall relieve such indemnifying party of any liability to the indemnified party under this Section 5, to the extent of any damage directly suffered by the indemnifying party as a result thereof, but shall not relieve the indemnifying party of any liability that it may have to any indemnified party otherwise than pursuant to this Section 5. Any fees and expenses incurred by the indemnified party (including any fees and expenses incurred in connection with investigating or preparing to defend such action or proceeding) shall be paid to the indemnified party, as incurred, within thirty (30) days of written notice thereof to the indemnifying party (regardless of whether it is ultimately determined that an indemnified party is not entitled to indemnification hereunder). Any such indemnified party shall have the right to employ separate counsel in any such action, claim or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be the expenses of such indemnified party unless (i) the indemnifying party has agreed to pay such fees and expenses, (ii) the indemnifying party shall have failed to promptly assume the defense of such action, claim or proceeding, (iii) the named parties to any such action, claim or proceeding (including any impleaded parties) include both such indemnified party and the indemnifying party, and such indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or in addition to those available to the indemnifying party, or (iv) in the reasonable judgment of the indemnified party, based upon advice of its counsel, a conflict of interest may exist between such party and the indemnifying party with respect to such claims (in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action, claim or proceeding on behalf of such indemnified party, it being understood, however, that the indemnifying party shall not, in connection with any one such action, claim or proceeding or separate but substantially similar or related actions, claims or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one additional firm of attorneys (together with appropriate local counsel) at any time for all such indemnified parties, unless in the reasonable judgment of such indemnified party a 16 conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such action, claim or proceeding, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels). No indemnifying party shall be liable to an indemnified party for any settlement of any action, proceeding or claim without the written consent of the indemnifying party, which consent shall not be unreasonably withheld. (d) Contribution. If the indemnification required by this Section 5 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to in this Section 5: (i) The indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any Violation has been committed by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Violation. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 5(a) and Section 5(b), any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. (ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in Section 5(d)(i). No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (e) Full Indemnification. If indemnification is available under this Section 5, the indemnifying parties shall indemnify each indemnified party to the full extent provided in this Section 5 without regard to the relative fault of such indemnifying party or indemnified party or any other equitable consideration referred to in Section 5(d)(i) hereof. 17 (f) Survival. The obligations of the Company and the selling Holders of Registrable Securities under this Section 5 shall survive the completion of any offering of Registrable Securities pursuant to a registration statement under this agreement, and otherwise. Section 6. Covenants of the Company. The Company hereby agrees and covenants as follows: (a) Exchange Act Filings. The Company shall file as and when applicable, on a timely basis, all reports required to be filed by it under the Exchange Act. If the Company is not required to file reports pursuant to the Exchange Act, upon the request of any Holder of Registrable Securities, the Company shall make publicly available the information specified in subparagraph (c)(2) of Rule 144. The Company shall take such further action as may be reasonably required from time to time and as may be within the reasonable control of the Company, to enable the Holders to Transfer Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 or any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements and, if not, the specifics thereof. In connection with any sale, transfer or other disposition by a Holder of any Registrable Securities pursuant to Rule 144, the Company shall cooperate with such Holder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any Securities Act legend, and enable certificates for such Registrable Securities to be for such number of shares and registered in such names as the Holder may reasonably request at least two business days prior to any sale of Registrable Securities. (b) Merger, Consolidations and Sale of Assets. The Company shall not, directly or indirectly, (x) enter into any merger, consolidation or reorganization in which the Company shall not be the surviving corporation or (y) Transfer or agree to Transfer all or substantially all the Company's assets, unless prior to such merger, consolidation, reorganization or asset Transfer, the surviving corporation or the transferee, respectively, shall have agreed in writing to assume the obligations of the Company under this Agreement, and for that purpose references hereunder to "Registrable Securities" shall be deemed to include the securities which the Holders of Registrable Securities would be entitled to receive in exchange for Registrable Securities pursuant to any such merger, consolidation or reorganization. 18 Section 7. Miscellaneous. (a) Amendments and Waivers. (i) The provisions of this Agreement, including the provisions of this Section 7(a), may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given without the written consent of the Company and the Holders of a majority of the outstanding Registrable Securities, provided that no amendment, modification or supplement or waiver or consent to a departure with respect to Section 5 hereof shall be effective against any Holder unless consented to in writing by such Holder. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder, each future Holder of Registrable Securities, and the Company. (ii) Notice of any amendment, modification or supplement to this Agreement adopted in accordance with this Section 7 shall be provided by the Company to the Holders at least thirty (30) days prior to the effective date of such amendment, modification or supplement. (b) Notices. All notices or other communications under this Agreement shall be sufficient if in writing and delivered by hand or sent, postage prepaid by registered, certified or express mail, or by recognized overnight air courier service and shall be deemed given when so delivered by hand, or if mailed or sent by overnight courier service, on the third Business Day after mailing (one Business Day in the case of express mail or overnight courier service) to the parties at the following addresses: (i) if to ABP, to: Stichting Pensioenfonds ABP c/o ABP Investments US, Inc. Attention: Barden Gale Managing Director/CIO 666 Third Avenue 2nd floor New York, NY 10017-3904 Tel. No.: 917-368-3500 Fax. No.: 917-368-0413 and with a copy to: Stichting Pensioenfonds ABP Attention: Rene Maatman Chief Legal Counsel ABP Investments Oude Lindestraat 70 19 6411 EJ Heerlen The Netherlands Tel. No.: +31 45 579 5765 Fax. No.: +31 45 579 2143 (ii) if to the Company, to: Capital Trust, Inc. 410 Park Avenue, 14th Floor, New York, New York 10022 Attention: John R. Klopp with a copy to: Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, New York 10022 Attention: Michael L. Zuppone or at such other address as the addressee may have furnished in writing to the sender as provided herein. (c) Successors, Assigns and Transferees. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of the Company and the Holders, including, without limitation and without the need for an express assignment, subsequent Holders who have acquired Registrable Securities by Transfer. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities, such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. (d) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (e) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (f) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE 20 STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. (g) Specific Performance; Costs and Expenses. The parties hereto acknowledge that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under this Agreement in accordance with the terms and conditions of this Agreement in any court of the United States or any State thereof having jurisdiction. The parties agree that if any party or parties violates this Agreement, in addition to the any other rights and remedies the non-violating party may have (including monetary damages), the prevailing party or parties shall be entitled to receive from the losing party or parties all costs and expenses, including reasonable attorneys' fees, incurred or expended by the prevailing party or parties to enforce its rights under the Agreement. (h) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 21 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement, or caused this Agreement to be duly executed on its behalf, as of the date first written above. CAPITAL TRUST, INC. By: /s/ John R. Klopp ---------------------------------- Name: John R. Klopp Title: Chief Executive Officer STICHTING PENSIOENFONDS ABP By: /s/ Barden N. Gale ---------------------------------- Name: Barden N. Gale Title: Managing Director/CIO of ABP Investments US, Inc. acting as agent for Stichting Pensionfonds ABP STICHTING PENSIOENFONDS ABP By: /s/ Arnold J. Shapiro ---------------------------------- Name: Arnold J. Shapiro Title: Managing Director/CIO of ABP Investments US, Inc. acting as agent for Stichting Pensionfonds ABP EX-21 9 ex21-1.txt 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 Mezzanine Partners I LLC Delaware - -------------------------------------------------------------------------------- CT Investment Management Co., LLC Delaware - -------------------------------------------------------------------------------- EX-23 10 ex23-1.txt Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-39743 and No. 333-72725) pertaining to the Amended and Restated 1997 Long Term Incentive Stock Plan, Amended and Restated 1997 Non-Employee Director Stock Plan, 1998 Employee Stock Purchase Plan, 1998 Non-Employee Stock Purchase Plan, and Stock Purchase Loan Plan of Capital Trust, Inc. of our report dated February 14, 2003 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, 2002. We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-103662) of Capital Trust, Inc. and in the related Prospectus of our report dated February 14, 2003 with respect to the consolidated financial statements of Capital Trust, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ Ernst & Young LLP New York, New York March 28, 2003 EX-99 11 ex99-1.txt EXHIBIT 99.1 FORWARD-LOOKING INFORMATION AND RISK FACTORS The Company's Annual Report on Form l0-K for the year ended December 31, 2002, the Company's 2002 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 in press releases or otherwise 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 commenced our investment management business in March 2000, 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 has a limited track record of proven results upon which to evaluate our performance. We will encounter risks and difficulties as we proceed to develop and operate our investment management 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 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 2 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, o 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. The impact of the events of September 11, 2001 and the effect thereon on terrorism insurance expose the Company to certain risks. The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets and 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, including real estate capital 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. It is possible that the economic impact of 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 will be more susceptible to the adverse effects than others, such as the hotel loans, which may experience a significant reduction in occupancy rates following any future 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, the Company may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact investors' returns. In addition, the events of September 11 created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With the enactment of the Terrorism Risk Protection Act of 2002, through the end of 2004, insurers must make terrorism insurance available under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may affect the general real estate lending market, lending volume and the market's overall liquidity and may reduce the number of suitable investment opportunities available to the Company and the pace at which its investments are made. Real estate valuations, particularly for assets at high risk locations, may also be impacted, which may adversely impact the Company's existing loans and investment. 3 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 current venture agreement with affiliates of Citigroup Inc. has placed restrictions on our ability to originate new assets for our balance sheet until the end of the investment period for Fund II in April 2003. Our balance sheet portfolio therefore has become more concentrated in mark-to-market mortgage backed securities, which generally have longer terms than non-mark-to-market loans that mature or may be paid off early. In an environment of lower interest rates, there is a greater risk that our existing loans will pay off early. We have adopted accounting policies under which such securities will impact either or both shareholders' equity or net income depending on the characterization of the change in market value. If a reduction in market value is deemed to be permanent (generally due to a change in the credit risk), the reduction in value will be recorded as a reduction of net income. If any of the available-for-sale securities are sold, the resulting gain or loss will be recorded through the income statement. All other changes in market value will impact shareholders equity only. 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 prevailing 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 business. Our ability to develop and operate our 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 our operations. 4 We will be exposed to the risks involved with making subordinated investments. Our 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 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 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, the early repayment of hedged transactions and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense. 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, cash flow hedges which are not perfectly correlated with a variable rate financing will impact our income as gains and losses on the ineffective portion of such hedges will be 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, we 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. 5 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, we 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 as 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 other shareholders indirectly owned by trusts 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 the date hereof, these shareholders collectively own and control 7,694,181 shares of our class A common stock representing approximately 47.3% of our outstanding class A common stock. 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. 6 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. 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. Following the adoption of proposed amendments to our charter, our charter will authorize our board of directors to authorize and issue up to 100,000,000 shares of preferred stock and up to 100,000,000 shares of 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. 7 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 indirectly controlled by a trust for the benefit of Samuel Zell and his family. 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. Risk Factors Related to our REIT Election Our proposed amended and restated charter does not permit ownership of over 2.5% of our class A common stock by individuals, and attempts to acquire our common stock in excess of the 2.5% limit would be void without the prior approval of our board of directors. For the purpose of preserving our REIT qualification, our proposed amended and restated charter would prohibit direct or constructive ownership by any individual of more than 2.5% of the lesser of the total number or value of the outstanding shares of our class A common stock as a means of preventing ownership of more than 50% of our class A common stock by five or fewer individuals. The amended and restated charter's constructive ownership rules are complex and may cause the outstanding class A common stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual. As a result, the acquisition of less than 2.5% of our outstanding class A common stock by an individual or entity could cause an individual to own constructively in excess of 2.5% of our outstanding class A common stock, and thus be subject to the amended and restated charter's ownership limit. The ownership limit was established following a review of the aggregate ownership of the top five direct or constructive individual shareholders. There can be no assurance that our board of directors, as permitted in the amended and restated charter, will increase this ownership limit in the future. Any attempt to own or transfer shares of our class A common stock in excess of the ownership limit without the consent of our board of directors shall be void, and will result in the shares being transferred by operation of law to a charitable trust, and the person who acquired such excess shares will not be entitled to any distributions thereon or to vote such excess shares. After reviewing the top five shareholders treated as individuals for REIT qualification purposes, our board of directors fixed the ownership limit at 2.5%. The amended and restated charter contains a provision that would exempt certain of our officers and directors and related persons from the ownership limit. Based on the number of shares outstanding on the date hereof, this exemption would permit these top five shareholders collectively to hold up to 48.6% of our outstanding shares of class A common stock. The 2.5% ownership limit may have the effect of precluding a change in control of Capital Trust by a third party without the consent of our board of directors, even if such change in control would be in the interest of our stockholders (and even if such change in control would not reasonably jeopardize our REIT status). There are no assurances of our ability to pay dividends in the future. We intend to pay quarterly dividends and to make distributions to our shareholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. 8 We have not established a dividend payment level. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances as to our ability to pay dividends in the future. In addition, some of our distributions may include a return of capital. An increase in market interest rates may lead prospective purchasers of our class A common stock to expect a higher dividend yield, which would adversely affect the market price of our class A common stock. One of the factors that will influence the price of our class A common stock will be the dividend yield on our stock (distributions as a percentage of the price of our stock) relative to market interest rates. An increase in market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield, which would adversely affect the market price of our class A common stock. Tax legislation proposed by President Bush may have negative consequences for REITs. Recent tax legislation proposed by President Bush would, if enacted, allow corporations to pay dividends that are tax-free to shareholders or, to the extent dividends are not paid, allow shareholders to increase the tax basis of their shares. As currently described, this proposal would not apply to REITs. Although the proposal does not adversely affect the tax treatment of REITs, it may cause investments in non-REIT corporations to become relatively more desirable. As a result, the capital markets may be less favorable to REITs when they seek to raise equity capital, and the prices at which REIT equity securities trade may decline or underperform non-REIT corporations. We will be dependent on external sources of capital to finance our growth. As with other REITs, but unlike corporations generally, our ability to finance our growth must largely be funded by external sources of capital because we generally will have to distribute to our shareholders 90% of our taxable income in order to qualify as a REIT (including taxable income where we do not receive corresponding cash). Our access to external capital will depend upon a number of factors, including general market conditions, the market's perception of our growth potential, our current and potential future earnings, cash distributions and the market price of our stock. If we do not maintain our qualification as a REIT, we will be subject to tax as a regular corporation and face a substantial tax liability. We expect to operate so as to qualify as a REIT under the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then: o we would be taxed as a regular domestic corporation, which under current laws, among other things, means being unable to deduct distributions to shareholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates; o any resulting tax liability could be substantial, could have a material adverse effect on our book value and could reduce the amount of cash available for distribution to shareholders; and o unless we were entitled to relief under applicable statutory provisions, we would be required to pay taxes, and thus, our cash available for distribution to shareholders would be reduced for each of the years during which we did not qualify as a REIT. 9 Complying with REIT requirements may cause us to forego otherwise attractive opportunities. In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature and diversification of our investments in commercial real estate and related assets, the amounts we distribute to our shareholders and the ownership of our stock. We may also be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. The REIT provisions of the tax code may substantially limit our ability to hedge our financial assets and related borrowings. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits. Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments. In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities cannot include more than 10% of the outstanding voting securities of any one issuer or 10% of the total value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences. Complying with REIT requirements may force us to borrow to make distributions to shareholders. From time to time, our taxable income may be greater than our cash flow available for distribution to shareholders. If we do not have other funds available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the Internal Revenue Code. Thus, we could be required to borrow funds, sell a portion of our assets at disadvantageous prices or find another alternative. These options could increase our costs or reduce our equity. 10 EX-99 12 ex99-2.txt Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Capital Trust, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Klopp, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. - -------------------------------------------------------------------------------- NOTE: A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. - -------------------------------------------------------------------------------- /s/ John R. Klopp - -------------------------- John R. Klopp Chief Executive Officer March 28, 2003 EX-99 13 ex99-3.txt Exhibit 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Capital Trust, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian H. Oswald, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. - -------------------------------------------------------------------------------- NOTE: A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. - -------------------------------------------------------------------------------- /s/ Brian H. Oswald - -------------------------- Brian H. Oswald Chief Financial Officer March 28, 2003 -----END PRIVACY-ENHANCED MESSAGE-----