As filed with the Securities and Exchange Commission on December 17, 2003
Registration No. 333-_________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Capital Trust, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
(State or Other Jurisdiction of Incorporation or Organization)
94-6181186
(I.R.S. Employer Identification Number)
410 Park Avenue, 14th Floor
New York, New York 10022
(212) 655-0220 (Address, Including Zip
Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
John R. Klopp
Chief Executive Officer
Capital Trust, Inc.
410 Park Avenue, 14th Floor
New York, New York 10022
(212) 655-0220
________________________________________________________________
(Name, address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copy to:
Michael L. Zuppone, Esq.
Paul, Hastings, Janofsky & Walker LLP
75 East 55th Street
New York, New York 10022
(212) 318-6000
________________________________________________________________
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ X ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
=======================================================================================================
Proposed maximum
Title of each class of aggregate offering Amount of
securities to be registered price (1) (2) registration fee
-------------------------------------------------------------------------------------------------------
Class A common stock, par value $0.01 per share (2)
-------------------------------------------------------------------------------------------------------
Preferred stock, par value $0.01 per share
-------------------------------------------------------------------------------------------------------
Senior notes
-------------------------------------------------------------------------------------------------------
Subordinated notes
-------------------------------------------------------------------------------------------------------
Warrants to purchase class A common stock, par value
$0.01 per share
-------------------------------------------------------------------------------------------------------
Warrants to purchase preferred stock, par value $0.01 per
share
-------------------------------------------------------------------------------------------------------
Total $300,000,000 $24,270.00
=======================================================================================================
(1) Such indeterminate number of shares of class A common stock and preferred
stock and warrants with respect thereto and such indeterminate principal
amount of senior notes and subordinated notes as may from time to time be
issued at indeterminate prices. There is also being registered hereunder an
indeterminate amount of shares of preferred stock as may from time to time
be issuable upon conversion of senior notes and subordinated notes
registered hereunder or upon exercise of warrants registered hereunder, as
the case may be, and an indeterminate number of shares of class A common
stock as may from time to time be issuable upon conversion of senior notes
and subordinated notes or preferred stock registered hereunder or upon
exercise of warrants registered hereunder, as the case may be.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
PRELIMINARY PROSPECTUS DATED DECEMBER 17, 2003
SUBJECT TO COMPLETION
$300,000,000
CAPITAL TRUST, INC.
Class A Common Stock, Preferred Stock, Debt Securities and Warrants
-----------------------
We may offer by this prospectus:
o Class A common stock
o Preferred stock
o Debt securities
o Warrants to purchase class A common stock
o Warrants to purchase preferred stock
We will provide the specific terms of these securities in supplements to
this prospectus when we offer these securities. You should read this prospectus
and the supplements carefully before you invest.
Our class A common stock is listed for trading on the New York Stock
Exchange under the symbol "CT." On December 16, 2003, the last reported sale
price of our class A common stock on the New York Stock Exchange was $23.05 per
share.
Investing in the securities covered by this prospectus involves risks.
See "Risk Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This prospectus may not be used to sell securities unless accompanied by
a prospectus supplement.
The date of this prospectus is December , 2003
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where such offer or sale is not permitted.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained or incorporated by reference in this
prospectus. The information contained or incorporated by reference in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of securities covered by this
prospectus.
Unless the context otherwise indicates, references in this prospectus to
"we," "us," "our" or "Capital Trust" refer to Capital Trust, Inc., a Maryland
corporation.
TABLE OF CONTENTS
Page
Prospectus Summary..........................................................................1
Risk Factors................................................................................5
Use of Proceeds............................................................................16
Price Range of Class A Common Stock........................................................16
Dividend Policy............................................................................17
Ratio of Earnings to Fixed Charges.........................................................17
Selected Financial Data....................................................................18
Management's Discussion and Analysis of Financial Condition and Results of Operations......21
Business...................................................................................38
Management.................................................................................43
Principal Shareholders.....................................................................46
Description of Capital Stock...............................................................48
Description of Debt Securities.............................................................54
Federal Income Tax Considerations..........................................................60
Plan of Distribution.......................................................................73
Legal Matters..............................................................................75
Experts....................................................................................75
About this Prospectus......................................................................75
Where You Can Find More Information........................................................75
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the information incorporated into it by
reference, includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements predict or describe our future operations, our business
plans and strategies and the performance of our investments and funds under
management, and do not relate solely to historical matters. You can generally
identify forward-looking statements by the use of words such as "believes,"
"expects," "may," "will," "should," "could," "seeks," "approximately,"
"intends," "plans," "objectives," "estimates," "anticipates," "continue" and
similar words. Because these statements reflect our current views concerning
future events and are based on current assumptions, they involve risks,
uncertainties and other factors which may lead to actual results or effects that
are materially different from those contemplated in the forward-looking
statements. Some, but not all, of the factors that may cause these differences
are discussed in the "Risk Factors" section of this prospectus and in other
information incorporated by reference into this prospectus.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We caution you not to place
undue reliance on these forward-looking statements. All written and oral
forward-looking statements attributable to us or persons acting on our behalf
are qualified in their entirety by these cautionary statements. Moreover, unless
we are required by law to update these statements, we will not necessarily
update any of these statements after the date of this prospectus, either to
conform them to actual results or to changes in our expectations.
i
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all the information that you should
consider before investing in our securities. This prospectus contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results anticipated in these
forward-looking statements. You should read the entire prospectus carefully,
including the risk factors and financial statements.
The per share information presented in this prospectus has been adjusted
to give effect to the one for three reverse stock split of our outstanding
shares of class A common stock effected on April 2, 2003 as though the reverse
stock split was in effect for all periods presented.
Our Company
We are a fully integrated, self-managed finance and investment
management company that specializes in credit-sensitive structured financial
products. We invest in loans, debt securities and related instruments for our
own account and on behalf of funds that we manage with the objective of
achieving superior risk-adjusted returns with low volatility. To date, our
investment programs have focused on loans and securities backed by
income-producing commercial real estate assets. We are organized and conduct our
operations to qualify as a real estate investment trust, or REIT, for federal
income tax purposes.
Since we commenced our finance business in 1997, we have completed $3.2
billion of real estate-related investments in 110 separate transactions. Our
investment strategies are designed to generate high current returns coupled with
substantial downside protection. We implement these strategies by applying a
disciplined, rigorous process founded on four key elements:
o intense credit underwriting;
o creative financial structuring;
o efficient use of leverage; and
o aggressive asset management.
Our real estate investments take various forms, but generally are
subordinate to third-party financing and senior to the owner/operator's equity
position, and therefore represent "mezzanine" capital. Our current investment
programs emphasize mezzanine loans, junior interests in first mortgage loans,
known as B Notes, and subordinate tranches of commercial mortgage-backed
securities, known as CMBS. We employ leverage to enhance returns on equity, but
seek to minimize interest rate exposure by matching the duration and interest
rate index of our assets and liabilities and by using derivatives to hedge risk.
Our objective is to create leveraged portfolios of high-yield structured
investments that are diversified and interest rate neutral. Since 1997,
approximately 60% of our investments have been fully realized and our loss
experience has totaled less than 1% of our investments.
We make investments both for our own balance sheet and for funds that we
manage on behalf of institutional and high net worth individual investors. As of
September 30, 2003, our balance sheet assets totaled $393 million, comprised
primarily of loans receivable, mortgage-backed securities and co-investments in
our managed funds. We currently manage two private equity funds, CT Mezzanine
Partners II LP and CT Mezzanine Partners III, Inc., which we refer to as Fund II
and Fund III, respectively. During its investment period, which expired in April
2003, Fund II invested $1.2 billion in 40 separate transactions. As of September
30, 2003, Fund II had $608 million of outstanding investments, all of which were
performing. Fund III held its final closing in August 2003, raising a total of
$425 million of equity commitments. With leverage, we are seeking to make over
$1 billion of investments for Fund III during its two-year investment period
that expires in June 2005. Our balance sheet investments generate net interest
income, while our investment management activity produces co-investment income,
base management fees, and, if certain profit thresholds are exceeded, incentive
management fees representing our share of the fund's profits.
1
Our business strategy is to continue to grow our balance sheet
investments and our third-party assets under management. We are a recognized
leader in the commercial real estate mezzanine sector and are actively seeking
to expand our franchise by adding complementary investment strategies which
leverage our core skills in credit underwriting and financial structuring.
--------------
We were incorporated in Maryland on April 7, 1998 as a successor to a
business trust organized in 1966. We commenced our balance sheet finance
business in July 1997 and our investment management business in March 2000. Our
principal executive offices are located at 410 Park Avenue, 14th Floor, New
York, New York 10022, and our telephone number is (212) 655-0220. Our website
address is www.capitaltrust.com. Information included or referred to on our
website is not incorporated by reference in or otherwise a part of this
prospectus.
2
SUMMARY FINANCIAL DATA
The following table sets forth our summary consolidated financial data:
o as of and for each of the nine month periods ended September 30, 2003
and 2002; and
o as of and for each of the years ended December 31, 2002, 2001 and
2000.
The summary consolidated financial data as of and for each of the years
ended December 31, 2002, 2001 and 2000 was derived from our historical
consolidated financial statements included in our Annual Reports on Form 10-K
for the years ended December 31, 2002 and 2001. The following summary historical
consolidated financial data as of and for each of the nine month periods ended
September 30, 2003 and 2002 were derived from our unaudited consolidated
financial statements included in our Quarterly Report on Form 10-Q for the nine
months ended September 30, 2003, which, in the opinion of our management, have
been prepared on the same basis as our audited consolidated financial statements
and reflect all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of our results of operations and financial
position for such periods. Results for the nine month periods ended September
30, 2003 and 2002 are not necessarily indicative of results that may be expected
for the entire year.
You should read the following information together with the information
contained under the captions "Risk Factors," "Ratio of Earnings to Fixed
Charges," "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto incorporated by reference into this prospectus.
3
Nine Months
Ended
Years Ended December 31, September 30,
------------------------- ---------------
2002 2001 2000 2003 2002
------- ------- ------- ------ -------
(unaudited)
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Interest and investment income.................. $47,207 $67,728 $88,433 $29,430 $38,095
Income/(loss) from equity investments in
affiliated Funds............................. (2,534) 2,991 1,530 1,085 (618)
Advisory and investment banking fees............ 2,207 277 3,920 -- 2,207
Management and advisory fees from Funds......... 10,123 7,664 373 5,793 7,624
------- ------- ------- ------- -------
Total revenues............................. 57,003 78,660 94,256 36,308 47,308
------- ------- ------- ------- -------
Operating Expenses and Other Sources of Charges
to Income:
Interest expense................................ 17,992 26,348 36,931 7,369 14,043
General and administrative expenses............. 13,996 15,382 15,439 10,497 11,390
Depreciation and amortization................... 992 909 902 781 744
Net unrealized (gain)/loss on derivative
securities and corresponding hedged risk
on CMBS Securities........................... (21,134) 542 -- -- 2,776
Net realized (gain)/loss on sale of fixed
assets, investments and settlement of
derivative securities........................ 28,715 -- 64 -- (1,651)
Provision for/(recapture of) allowance for
possible credit losses....................... (4,713) 748 5,478 -- (2,963)
------- ------- ------- ------- -------
Total operating expenses and other sources
of changes to income..................... 35,848 43,929 58,814 18,647 24,339
------- ------- ------- ------- -------
Income/loss before income tax expense and
distributions and amortization on
Convertible Trust Preferred Securities....... 21,155 34,731 35,442 17,661 22,969
Income tax expense.............................. 22,438 16,882 17,760 655 11,540
------- ------- ------- ------- -------
Income/(loss) before distributions and
amortization on Convertible Trust
Preferred Securities......................... (1,283) 17,849 17,682 17,006 11,429
Distributions and amortization on Convertible
Trust Preferred Securities, net of income
tax benefit.................................. 8,455 8,479 7,921 7,089 7,186
------- ------- ------- ------- -------
NET INCOME/(LOSS).......................... (9,738) 9,370 9,761 9,917 4,243
Less: Preferred Stock dividend and
dividend requirement..................... -- 606 1,615 -- --
------- ------- ------- ------- -------
Net income/(loss) allocable to class A
common stock............................. $(9,738)$ 8,764 $ 8,146 9,917 4,243
======= ======= ======= ======= =======
Per Share Information:
Net income/(loss) per share of class A
common stock:
Basic...................................... $ (1.62)$ 1.30 $ 1.05 $ 1.69 $ 0.69
======= ======= ======= ======= =======
Diluted:................................... $ (1.62)$ 1.12 $ 0.99 $ 1.67 $ 0.68
======= ======= ======= ======= =======
Weighted average shares of class A common
stock outstanding:
Basic...................................... 6,009 6,722 7,724 5,859 6,174
======= ======= ======= ======= =======
Diluted:................................... 6,009 12,041 9,897 10,183 6,243
======= ======= ======= ======= =======
As of December 31, As of September 30
------------------------- --------------------
2002 2001 2000 2003 2002
------- ------- ------- ------- --------
(unaudited)
(in thousands)
BALANCE SHEET DATA:
Total assets......................................... $384,976 $678,800 $644,392 $392,766 $440,396
Total liabilities.................................... 211,932 428,231 338,584 206,013 250,196
Convertible Trust Preferred Securities............... 88,988 147,941 147,142 89,346 88,869
Shareholders' equity................................. 84,056 102,628 158,666 97,407 101,331
OTHER DATA:
Nine Months
Ended
Years Ended December 31, September 30,
------------------------------------------ ---------------
2002 2001 2000 1999 1998 2003 2002
------- ------- ------ ------- ------- ------- ------
(unaudited)
Ratio of Earnings to
Fixed Charges............... 1.63x 1.80x 1.64x 1.80x 1.66x 2.22x 1.94x
4
RISK FACTORS
An investment in our securities involves various risks. You should
carefully consider the following risk factors in conjunction with the other
information contained and incorporated by reference into this prospectus before
purchasing our securities. If any of the risks discussed in this prospectus
actually occur, our business, operating results, prospects and/or financial
condition could be harmed. This could cause the market prices of our securities
to decline and could cause you to lose all or part of your investment.
In connection with the forward-looking statements that appear in this
prospectus, you should also carefully review the cautionary statement referred
to under "Cautionary Statement Regarding Forward-Looking Statements."
Risks Related to Our Investment Program
Our existing loans and investments 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 depends on many factors beyond our
control. The ultimate performance and value of our investments is subject to the
varying degrees of risk generally incident to the ownership and operation of the
commercial properties which collateralize or support our investments. The
ultimate performance and value of our loans and investments depends upon the
commercial property owner's ability to operate the property so that it produces
the revenues and cash flows needed to pay the interest and principal due to us
on our loans and investments. Revenues and cash flows 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,
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 decrease the
availability of or increase the cost of insurance or 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 or
investments experiences any of the foregoing events or occurrences, the value
of, and return on, such investments, our profitability and the market price of
our securities would be negatively impacted.
We may change our investment strategy without shareholder consent which may
result in riskier investments than our current investments.
As part of our strategy, we may seek to expand our investment activities
beyond real estate-related investments. We may change our investment strategy at
any time without the consent of our shareholders, which could result in our
making investments that are different from, and possibly riskier than, our
current real estate investments. New investments we may make outside of our area
of expertise may not perform as well as our current portfolio of real estate
investments.
5
We are exposed to the risks involved with making subordinated investments.
Our investments 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 or direct decisions with respect to the collateral securing such
investments, is subject to the rights of senior lenders and the rights set forth
in inter-creditor or servicing agreements.
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 depends, in part, upon our ability to grow our
balance sheet portfolio of invested assets and those of our funds through the
use of leverage obtained generally through bank credit facilities, repurchase
agreements and other borrowings. Our ability to obtain the necessary leverage on
attractive terms ultimately depends upon the quality of pledgable portfolio
assets and our ability to maintain interest coverage ratios meeting prevailing
market underwriting standards which 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 and 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 other risks. For example, leveraging magnifies changes in the
net worth of our funds. We expect that we and our funds will leverage assets
only when there is an expectation that leverage will enhance returns, although
we cannot assure you 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, we cannot
assure you that we and our funds will be able to meet debt service obligations
and, to the extent such obligations are not met, there is a risk of loss of some
or all of our and their assets through foreclosure or a financial loss if we or
they are required to liquidate assets at a commercially inopportune time to
satisfy our debt obligations.
Our success depends on the availability of attractive investments and our
ability to identify, structure, consummate, manage and realize returns on
attractive investments.
Our operating results are dependent upon the availability of, as well as
our ability to identify, structure, consummate, manage and realize returns on,
credit-sensitive investment opportunities. In addition, notwithstanding the fact
that we earn base management fees based upon committed capital during the
investment period, if we are not successful in investing all available equity
capital for our funds, it will reduce the potential revenues we earn including
base management fees that are charged on the amount of invested assets after the
investment period and incentive management fees. We may expend significant time
and resources in identifying and consummating targeted investments.
In general, the availability of desirable credit sensitive investment
opportunities, and consequently our balance sheet returns and our funds'
investment returns, will be affected by the level and volatility of interest
rates, by conditions in the financial markets, by general economic conditions
and by the market and demand for credit-sensitive investment opportunities. We
cannot assure you 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.
The real estate investment business is highly competitive. Our success depends
on our ability to compete with other providers of capital for real estate
investments.
Our business is highly competitive. We compete for attractive
investments with traditional lending sources, such as insurance companies and
banks, as well as private equity funds with similar investment objectives
sponsored by other firms, which may make it more difficult for us to consummate
our target investments. In recent years, other REITs have also begun offering
loans and other investments that compete with our products. Many of our
competitors have greater financial resources than us, which provides them with
greater operating flexibility.
6
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.
Our current investment program emphasizes loans with "floating" interest
rates to protect against fluctuations in interest rates. However, we do from
time to time make fixed rate loans and purchase fixed rate securities. In such
cases, we may employ various hedging strategies to limit the effects of changes
in interest rates, including engaging in interest rate swaps, caps, floors and
other interest rate exchange contracts. No strategy can completely insulate us
or our 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. We cannot assure you that
we will be able to enter into hedging transactions or that such hedging
transactions will adequately protect us or the funds against the foregoing
risks. In addition, cash flow hedges which are not perfectly correlated with a
variable rate financing will impact our reported 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 portfolio or our funds' portfolios 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 our or our funds'
investments. We cannot assure you that the fair market value of any of the real
property serving as security will not decrease in the future, leaving our or our
funds' investment under-collateralized or not collateralized at all, which could
impair the liquidity and value, as well as our return on such investments.
We may not have control over certain of our loans and investments.
Our ability to manage our portfolio of loans and investments may be
limited by the form in which they are made. In certain situations, we or our
funds may:
o acquire investments subject to rights of senior classes and
servicers under inter-creditor or servicing agreements,
o acquire only a participation in an underlying investment,
o co-invest with third parties through partnerships, joint ventures or
other entities, thereby acquiring non-controlling interests, or
o rely on independent third party management or strategic partners
with respect to the management of an asset.
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 senior creditors, servicers or third party controlling investors are not
involved. Our rights to control the process following a borrower default may be
subject to the rights of senior creditors or servicers whose interests may not
be aligned with ours. 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 our
funds, or may be in a position to take action contrary to our or our funds'
investment objectives. In addition, we and our managed funds may, in certain
circumstances, be liable for the actions of our third party partners or
co-venturers.
We may not achieve our targeted rate of return on our investments.
We originate or acquire investments based on our estimates or
projections of overall rates of return on such investments, which in turn are
based on, among other considerations, assumptions regarding the performance of
assets, the amount and terms of available financing to obtain desired leverage
and the manner and timing of dispositions, including possible asset recovery and
remediation strategies, all of which are subject to significant
7
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 are currently confronted with a low interest rate environment which
negatively impacts our ability to originate or acquire investments that produce
rates of returns similar to existing investments that were added to our
portfolio during a higher interest rate environment. As we acquire or originate
investments for our balance sheet portfolio, whether as new additions or as
replacements for maturing investments, there can be no assurance that we will be
able to originate or acquire investments that produce rates of return comparable
to rates on existing investments.
The commercial mortgage and mezzanine loans we originate or acquire and the
commercial mortgage loans underlying the CMBS in which we invest are subject to
delinquency, foreclosure and loss, which could result in losses to us.
Our commercial mortgage and mezzanine loans are secured by commercial
property and are subject to risks of delinquency and foreclosure, and risks of
loss that are greater than similar risks associated with loans made on the
security of single-family residential property. The ability of a borrower to
repay a loan secured by an income-producing property typically is dependent
primarily upon the successful operation of such property rather than upon the
existence of independent income or assets of the borrower. If the net operating
income of the property is reduced, the borrower's ability to repay the loan may
be impaired. Net operating income of an income-producing property can be
affected by, among other things: tenant mix, success of tenant businesses,
property management decisions, property location and condition, competition from
comparable types of properties, changes in laws that increase operating expense
or limit rents that may be charged, any need to address environmental
contamination at the property, changes in national, regional or local economic
conditions and/or specific industry segments, declines in regional or local real
estate values, declines in regional or local rental or occupancy rates,
increases in interest rates, real estate tax rates and other operating expenses,
changes in governmental rules, regulations and fiscal policies, including
environmental legislation, acts of God, terrorism, social unrest and civil
disturbances.
Our investments in subordinated CMBS are subject to losses.
In general, losses on an asset securing a mortgage loan included in a
securitization will be borne first by the equity holder of the property, then by
a cash reserve fund or letter of credit, if any, and then by the most junior
security holder. In the event of default and the exhaustion of any equity
support, reserve fund, letter of credit and any classes of securities junior to
those in which we invest, we may not be able to recover all of our investment in
the securities we purchase. In addition, if the underlying mortgage portfolio
has been overvalued by the originator, or if the values subsequently decline
and, as a result, less collateral is available to satisfy interest and principal
payments due on the related mortgage-backed securities, the securities in which
we invest may incur significant losses.
The prices of lower credit quality securities are generally less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual issuer developments. A
projection of an economic downturn, for example, could cause a decline in the
price of lower credit quality securities because the ability of obligors of
mortgages underlying mortgage-backed securities to make principal and interest
payments may be impaired. In such event, existing credit support in the
securitization structure may be insufficient to protect us against loss of our
principal on these securities.
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. We cannot assure you 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.
8
The impact of the events of September 11, 2001 and the resulting effect on
terrorism insurance expose us to certain risks.
The terrorist attacks on September 11, 2001 disrupted the U.S. financial
markets, including the real estate capital markets, and negatively impacted the
U.S. economy in general. Any future terrorist attacks, the anticipation of any
such attacks, and the consequences of any military or other response by the U.S.
and its allies may have a further adverse impact on the U.S. financial markets
and the economy generally. We cannot predict the severity of the effect that
such future events would have on the U.S. financial markets or the economy.
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 Insurance
Act of 2002, insurers must make terrorism insurance available under their
property and casualty insurance policies through the end of 2004 (which may be
extended by the Secretary of the Treasury through the end of 2005), but this
legislation does not regulate the pricing of such insurance. The absence of
affordable insurance coverage may adversely 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 us and the pace at
which we are able to make investments. If the properties that we invest in are
unable to obtain affordable insurance coverage, the value of those investments
could decline and in the event of an uninsured loss, we could lose all or a
portion of our investment.
The economic impact of any future terrorist attacks could also adversely
affect the credit quality of some of our loans and investments. Some of our
loans and investments will be more susceptible to the adverse effects than
others, such as hotel loans, which may experience a significant reduction in
occupancy rates following any future attacks. We may suffer losses as a result
of the adverse impact of any future attacks and these losses may adversely
impact investors' returns.
Risks Related to Our Investment Management Business
Because we commenced our investment management business in 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 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 funds successfully by investing a majority of our fund
capital in suitable investments that meet the funds' specified
investment criteria,
o incentivize our management and professional staff to the task of
developing and operating the investment management business,
o structure, sponsor and capitalize future 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.
If we do not successfully develop and operate our investment management
business to achieve the investment returns that we or the market anticipates,
the market price of our securities could decline.
We may pursue fund management opportunities related to other classes of
investments where we do not have prior investment experience.
We may expand our fund management business to the management of private
equity funds involving other investment classes where we do not have prior
investment experience. We may find it difficult to attract third party
9
investors without a performance track record involving such investments. Even if
we attract third party investment, there can be no assurance that we will be
successful in deploying the capital to achieve targeted returns on investment.
We face substantial competition from established participants in the private
equity market as we offer mezzanine and other funds to third party investors.
We 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
funds.
Our funds are subject to the risk of defaults by third party investors on their
capital commitments.
The capital commitments made by third party investors to our funds
represent promises by those investors to contribute cash to the funds from time
to time as investments are made by the funds. We are therefore 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.
Risks Related to Our Company
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. We cannot assure you that these individuals will remain in
our employ. The employment agreement with our chief executive officer, John R.
Klopp, expires in 2004, unless further extended. The loss of the services of our
senior management and key employees could have a material adverse effect on our
operations.
Our balance sheet portfolio continues to be concentrated in mark-to-market
mortgage-backed securities which subjects us to greater swings in equity and
income as we record balance sheet gains and losses on such assets.
Our venture agreement with affiliates of Citigroup Alternative
Investments, LLC placed restrictions on our ability to originate new mezzanine
loan investments for our balance sheet during the investment period for Fund II
which resulted in our balance sheet portfolio becoming more concentrated in
longer term fixed rate mortgage-backed securities. We have adopted accounting
policies under which such securities are recorded as available-for-sale and
changes in the market value 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 other than temporary, 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.
While the restrictions on our balance sheet investment activities
diminished when the investment period for Fund II ended and we have begun making
new investments for our own account, there can be no assurance that the
concentration in mark-to-market mortgage-backed securities will be reduced in
the near term through new originations. In an environment of lower interest
rates, there is also a higher risk that our existing non-mark-to-market loans
will pay off early. To the extent our balance sheet remains concentrated in
mark-to-market assets, we will remain subject to potential swings in equity and
income as we record gains and losses on such assets on our balance sheet. If
interest rates fluctuate and significantly affect the market value of such
mark-to-market assets, the corresponding reductions or increases in equity and
income may be significant.
10
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 that Act.
We rely on an exclusion from registration as an investment company
afforded by Section 3(c)(5)(C) of the Investment Company Act of 1940. 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
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. In the past, when required
due to the mix of assets in our balance sheet portfolio, we have purchased pools
of whole loan residential mortgage-backed securities that we treat as Qualifying
Interests based on SEC staff positions. Investments in such pools of whole loan
residential mortgage-backed securities may not represent an optimum use of our
investable capital when compared to the available investments we target pursuant
to our investment strategy. We continue to analyze our investments and may
acquire other pools of whole loan mortgage-backed securities when and if
required for compliance purposes.
If our portfolio does 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 a significant position in assets that are Qualifying
Interests. Altering our portfolio in this manner may have a material adverse
effect on our investments if we are forced to dispose of or acquire assets in an
unfavorable market.
We may expand our franchise through business acquisitions and the recruitment of
financial professionals, which may present additional challenges and may not
prove successful.
Our business plan contemplates expansion of our franchise into
complementary investment strategies involving other credit-sensitive structured
financial products and we may undertake such expansion through business
acquisitions or the recruitment of financial professionals with experience in
other products. We could expend a substantial amount of time and capital
pursuing opportunities to expand into complementary investment strategies that
we do not consummate. The expansion of our operations could place a significant
strain on our management, financial and other resources. Our ability to manage
future expansion will depend upon our ability to monitor operations, maintain
effective quality controls and significantly expand our internal management and
technical and accounting systems, all of which could result in higher operating
expenses and could adversely affect our current business, financial condition
and results of operations.
We cannot assure you that we will be able to identify and integrate
complementary investment strategies and expand our business. Moreover, any
decision to pursue complementary investment strategies or acquisition
opportunities will be in the discretion of our management and may be consummated
without prior notice or shareholder approval. In such instances, shareholders
will be relying on our management to assess the relative benefits and risks
associated with any such expansion or acquisition.
Risks Relating to Our Class A Common 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 our 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
11
detrimental to your interests. As of the date hereof, these shareholders
collectively own and control 2,171,479 shares of our class A common stock
representing approximately 33.2% 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, including transactions in which you might
otherwise receive a premium for your class A common stock, and might affect the
market price of our class A common stock.
The conversion of the outstanding convertible trust preferred securities
held by EOP Operating Limited Partnership, Vornado Realty, L.P., and JPMorgan
Chase Bank, as trustee for the General Motors Employe Global Group Pension Trust
and the GMAM Group Pension Trust II, could result in other significant
concentrated holdings of class A common stock. EOP Operating Limited
Partnership, Vornado Realty, L.P. and JPMorgan Chase Bank, as trustee for the
General Motors Employe Global Group Pension Trust and the GMAM Group Pension
Trust II, may each acquire 1,424,474 shares of our class A common stock.
Officers, directors and other related persons of these securityholders serve on
our board of directors and therefore have the power to significantly influence
our affairs. If these persons acquire a significant ownership position, they may
acquire the ability to influence the outcome of matters submitted for
shareholder approval.
Some provisions of our charter and bylaws, and Maryland law may deter takeover
attempts, which may limit the opportunity of our shareholders to sell their
shares at a favorable price.
Some of the provisions of our charter and bylaws and Maryland law
discussed below could make it more difficult for a third party to acquire us,
even if doing so might be beneficial to our shareholders by providing them with
the opportunity to sell their shares at a premium to the then current market
price.
Issuance of Preferred Stock Without Shareholder Approval. Our charter
authorizes our board of directors to authorize the issuance of up to 100,000,000
shares of preferred stock and up to 100,000,000 shares of class A common stock.
Our charter also authorizes our board of directors, without shareholder
approval, to classify or reclassify any unissued shares of our class A 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. Our board of directors therefore can exercise its power to reclassify
our stock 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 or other distributions,
qualifications or terms or conditions of redemption. The issuance of any
preferred stock, however, could materially adversely affect the rights of
holders of our class A 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 could delay or prevent an unsolicited takeover of us. The
statute substantially restricts the ability of third parties who acquire, or
seek to acquire, control of us 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 or its affiliate and us are prohibited for five
years after the most recent date on which the acquiror or its affiliate becomes
an "interested shareholder." An "interested shareholder" would be any person who
beneficially owns 10 percent or more of our shareholder voting power or an
affiliate or associate of ours who, at any time within the two-year period prior
to the date interested shareholder status is determined, was the beneficial
owner of 10 percent or more of our shareholder voting power. If our board of
directors approved in advance the transaction that would otherwise give rise to
the acquiror or its affiliate attaining such status, the acquiror or its
affiliate 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 our strategic
interests. Even after the lapse
12
of the five-year prohibition period, any business combination with an interested
shareholder must be recommended by our board of directors and approved by the
affirmative vote of at least:
o 80% of the votes entitled to be cast by shareholders and
o two-thirds of the votes entitled to be cast by shareholders other
than the interested shareholder and affiliates and associates
thereof.
The super-majority vote requirements do not apply if the transaction
complies with a minimum price requirement prescribed by the statute.
The statute permits various exemptions from its provisions, including
business combinations that are exempted by the board of directors prior to the
time that an interested shareholder becomes an interested shareholder. 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, these persons 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 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.
Risks Related to our REIT Status
Our charter does not permit any individual to own more than over 2.5% of our
class A common stock, and attempts to acquire our class A 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 qualification as a REIT for federal
income tax purposes, our charter prohibits 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 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 charter's ownership limit. There can be no assurance that
our board of directors, as permitted in the 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 will 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%. Our charter contains a provision that would exempt certain of our
officers, directors and related persons from this ownership limit. Pursuant to
this exemption, the top five such officers, directors and related persons
collectively hold 41.2% of our outstanding shares of class A common stock as of
the date hereof.
The 2.5% ownership limit may have the effect of precluding a change in
control of us 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
13
shareholders or would result in a premium to the price of our class A common
stock (and even if such change in control would not reasonably jeopardize our
REIT status).
There are no assurances that we will be able 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. 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 that we will be able 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 class A common stock to
expect a higher dividend yield, which would adversely affect the market price of
our class A common stock.
Recent tax legislation may have negative consequences for REITs.
Recent tax legislation allows certain corporations to pay dividends that
qualify for a reduced tax rate in the hands of certain shareholders. This
legislation generally does not apply to REITs. Although the legislation 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, including our class A
common stock, 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 class A common 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. Our taxable REIT
subsidiaries will be subject to income tax.
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
14
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.
Income from our fund management business is expected to be realized by
one of our taxable REIT subsidiaries, and accordingly will be subject to income
tax.
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 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. 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.
15
USE OF PROCEEDS
Unless otherwise indicated in a prospectus supplement, we intend to use
the net proceeds from the offering of securities under this prospectus for
general corporate purposes, including funding our investment activity, repayment
of indebtedness, working capital and potential business acquisitions.
We have from time to time engaged in, and expect to continue to pursue,
discussions with respect to possible business acquisitions. While we have no
present commitments or agreements with respect to any material acquisitions, we
are actively investigating acquisitions of firms engaged in businesses that we
believe will complement our existing business, including firms engaged in
commercial loan origination, loan servicing, mortgage banking, real estate
acquisitions, specialty finance, structured products and advisory services. We
cannot assure you that any such transactions can be successfully negotiated or
completed or that any business acquired can be efficiently integrated with our
ongoing operations. We cannot assure you that the net proceeds from the offering
will be sufficient to fund any acquisitions identified by us and that we will
not need to obtain additional funds through borrowings under our credit facility
or through other loans or financing arrangements.
Pending such uses, the net proceeds may be invested in interest-bearing
accounts and short-term interest-bearing securities that are consistent with our
qualification as a REIT.
PRICE RANGE OF CLASS A COMMON STOCK
Our class A common stock is listed for trading on the New York Stock
Exchange under the symbol "CT." 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 composite transaction tape:
High Low
---- ---
2001
First Quarter.................................................. $14.55 $12.30
Second Quarter................................................. 19.50 12.33
Third Quarter.................................................. 19.50 15.00
Fourth Quarter................................................. 17.28 14.10
2002
First Quarter.................................................. 17.25 15.00
Second Quarter................................................. 15.60 14.10
Third Quarter.................................................. 15.75 13.35
Fourth Quarter................................................. 15.93 12.72
2003
First Quarter.................................................. 18.75 13.35
Second Quarter................................................. 19.62 14.49
Third Quarter.................................................. 20.99 18.60
Fourth Quarter (through December 16, 2003)..................... 23.40 19.71
The last reported sale price of the class A common stock on December 16,
2003 as reported on the NYSE composite transaction tape was $23.05. As of
December 16, 2003, there were 305 holders of record of the class A common stock.
By including persons holding shares in broker accounts under street names,
however, we estimate our shareholder base to be approximately 1,200 as of
December 16, 2003.
16
DIVIDEND POLICY
Although in recent years we have not paid dividends, with our decision
to elect to be taxed as a REIT, we began paying dividends on our class A common
stock in the first quarter of 2003.
We generally intend to distribute substantially all of our taxable
income each year (which does not ordinarily equal net income as calculated in
accordance with generally accepted accounting principles) to our shareholders so
as to comply with the REIT provisions of the Internal Revenue Code. We intend to
make dividend distributions quarterly and, if necessary for REIT qualification
purposes, we may need to distribute any taxable income remaining after the
distribution of the final regular quarterly dividend each year together with the
first regular quarterly dividend payment of the following taxable year or, at
our discretion, in a special dividend distributed prior thereto. Our dividend
policy is subject to revision at the discretion of our board of directors. All
distributions will be made at the discretion of our board of directors and will
depend on our taxable income, our financial condition, our maintenance of REIT
status and other factors as our board of directors deems relevant.
Distributions to shareholders will generally be subject to tax as
ordinary income, although a portion of the distributions may be designated by us
as capital gain or may constitute a tax-free return of capital. Annually, our
transfer agent will furnish to each of our shareholders a statement of
distributions paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital.
Our ability to pay dividends in the future and the amounts of any
dividends will depend upon a number of factors, including those discussed under
the caption "Risk Factors."
The following table sets forth the amounts of cash dividends paid per
share of class A common stock for the periods indicated in 2003 and the shares
of class A common stock outstanding:
2003 Dividend Per Share Shares Outstanding Total Distributed
---------- ------------------- ------------------- ------------------
First Quarter..................... 0.45/share 5,426,188 $2,441,784.45
Second Quarter.................... 0.45/share 6,500,734 $2,925,330.30
Third Quarter..................... 0.45/share 6,509,067 $2,929,080.15
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to fixed charges
for the periods indicated. For the purpose of calculating the ratio of earnings
to fixed charges, "earnings" consist of income before income taxes and fixed
charges, and "fixed charges" consist of interest on all indebtedness, amortized
premiums, discounts and capitalized expenses related to indebtedness and
preference security dividend requirements.
Nine Months Ended
Years Ended December 31, September 30,
---------------------------------------- -------------------
2002 2001 2000 1999 1998 2003 2002
------- ------- ------- ------- ------- ------- -------
(unaudited)
Ratio of Earnings to
Fixed Charges............... 1.63x 1.80x 1.64x 1.80x 1.66x 2.22x 1.94x
17
SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data:
o as of and for each of the nine month periods ended September 30,
2003 and 2002; and
o as of and for each of the years ended December 31, 2002, 2001, 2000,
1999 and 1998.
The following selected consolidated financial data as of and for each of
the years ended December 31, 2002, 2001, 2000, 1999 and 1998 was derived from
our historical consolidated financial statements included in our Annual Reports
on Form 10-K for the years ended December 31, 2002, 2001, 2000 and 1999. The
following selected consolidated financial data as of and for each of the nine
month periods ended September 30, 2003 and 2002 were derived from our unaudited
consolidated financial statements included in our Quarterly Report on Form 10-Q
for the nine months ended September 30, 2003, which, in the opinion of our
management, have been prepared on the same basis as our audited consolidated
financial statements and reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of our results of operations and
financial position for such periods. Results for the nine month periods ended
September 30, 2003 and 2002 are not necessarily indicative of results that may
be expected for the entire year.
Prior to March 8, 2000, we did not serve as investment manager for any
funds under management and only our historical financial data as of and for the
years ended December 31, 2002, 2001 and 2000 and as of and for the nine month
periods ended September 30, 2003 and 2002 reflects the operating results from
our investment management business. For these reasons, we believe that, except
for the information for the years December 31, 2002, 2001 and 2000 and the nine
month periods ended September 31, 2003 and 2002, the following selected
consolidated financial data is not indicative of our current business.
You should read the following information together with "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
incorporated by reference into this prospectus.
18
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------------------------- ---------------------
2002 2001 2000 1999 1998 2003 2002
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(in thousands, except for per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Interest and investment income... $47,207 $67,728 $88,433 $89,839 $63,594 $29,430 $38,095
Income/(loss) from equity
investments in affiliated
Funds......................... (2,534) 2,991 1,530 -- -- 1,085 (618)
Advisory and investment banking
fees.......................... 2,207 277 3,920 17,772 10,311 -- 2,207
Management and advisory fees
from Funds.................... 10,123 7,664 373 -- -- 5,793 7,624
------- ------- ------- ------- ------- ------- -------
Total revenues.............. 57,003 78,660 94,256 107,611 74,265 36,308 47,308
------- ------- ------- ------- ------- ------- -------
Operating Expenses and Other
Sources of
Charges to Income:
Interest expense................. 17,992 26,348 36,931 39,791 27,665 7,369 14,043
General and administrative
expenses...................... 13,996 15,382 15,439 17,345 17,045 10,497 11,390
Depreciation and amortization.... 992 909 902 345 249 781 744
Net unrealized (gain)/loss on
derivative securities and
corresponding hedged risk
on CMBS Securities............ (21,134) 542 -- -- -- -- 2,776
Net realized (gain)/loss on sale
of fixed assets, investments
and settlement of derivative
securities.................... 28,715 -- 64 (35) -- -- (1,651)
Provision for/(recapture of)
allowance for possible credit
losses........................ (4,713) 748 5,478 4,103 3,555 -- (2,963)
------- ------- ------- ------- ------- ------- -------
Total operating expenses
and other sources of
charges to income......... 35,848 43,929 58,814 61,549 48,514 18,647 24,339
------- ------- ------- ------- ------- ------- -------
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 17,661 22,969
Income tax expense............... 22,438 16,882 17,760 22,020 9,367 655 11,540
------- ------- ------- ------- ------- ------- -------
Income/(loss) before distributions and
amortization on Convertible
Trust Preferred Securities.... (1,283) 17,849 17,682 24,042 16,384 17,006 11,429
Distributions and amortization
on Convertible Trust
Preferred Securities, net of
income tax benefit............ 8,455 8,479 7,921 6,966 2,941 7,089 7,186
------- ------- ------- ------- ------- ------- -------
NET INCOME/(LOSS)........... (9,738) 9,370 9,761 17,076 13,443 9,917 4,243
Less: Preferred Stock
dividend and dividend
requirement............... -- 606 1,615 2,375 3,135 -- --
------- ------- ------- ------- ------- ------- -------
Net income/(loss) allocable
to class A common stock... $(9,738) $ 8,764 $ 8,146 $14,701 $10,308 9,917 4,243
======= ======= ======= ======= ======= ======= =======
Per Share Information:
Net income/(loss) per share of
class A common stock:
Basic....................... $ (1.62) $ 1.30 $ 1.05 $ 2.07 $ 1.70 $ 1.69 $ 0.69
======= ======= ======= ======= ======= ======= =======
Diluted:.................... $ (1.62) $ 1.12 $ 0.99 $ 1.65 $ 1.32 $ 1.67 $ 0.68
======= ======= ======= ======= ======= ======= =======
Weighted average shares of class A
common stock outstanding:
Basic....................... 6,009 6,722 7,724 7,111 6,070 5,859 6,174
======= ======= ======= ======= ======= ======= =======
Diluted:.................... 6,009 12,041 9,897 14,575 10,208 10,183 6,243
======= ======= ======= ======= ======= ======= =======
19
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------------------------- ---------------------
2002 2001 2000 1999 1998 2003 2002
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(in thousands)
BALANCE SHEET DATA:
Total assets...................... $384,976 $678,800 $644,392 $827,808 $766,438 $392,766 $440,396
Total liabilities................. 211,932 428,231 338,584 522,925 472,207 206,013 250,196
Convertible Trust Preferred
Securities...................... 88,988 147,941 147,142 146,343 145,544 89,346 88,869
Shareholders' equity.............. 84,056 102,628 158,666 158,540 148,687 97,407 101,331
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our consolidated
financial statements and the notes thereto incorporated by reference in this
prospectus. Historical results are not necessarily indicative of our future
financial position or results of operations.
Introduction
We are a fully integrated, self-managed finance and investment
management company that specializes in credit-sensitive structured financial
products. To date, our investment programs have focused on loans and securities
backed by income-producing commercial real estate assets. Since we commenced our
finance business in 1997, we have completed $3.2 billion of real estate-related
investments in 110 separate transactions. In December 2002, our board of
directors authorized an election to be taxed as a REIT for the 2003 tax year.
Currently, we make balance sheet investments for our own account and
manage a series of private equity funds on behalf of institutional and
individual investors. Our investment management business commenced in March
2000. Pursuant to a venture agreement, we have co-sponsored three funds with
Citigroup Alternative Investments, LLC; CT Mezzanine Partners I LLC, CT
Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., which we refer to
as Fund I, Fund II and Fund III, respectively.
Balance Sheet Overview
At September 30, 2003, we had four investments in Federal Home Loan
Mortgage Corporation Gold securities with a face value of $22,632,000. The
securities bear interest at a fixed rate of 6.5% of the face value. We purchased
the securities at a net premium and have $174,000 of the premium remaining to be
amortized over the remaining lives of the securities. After premium
amortization, the securities bore interest at a blended rate of 6.04% as of
September 30, 2003. As of September 30, 2003, the securities were carried at a
market value of $23,633,000, an $827,000 unrealized gain to their amortized
cost.
We held eighteen investments in twelve separate issues of commercial
mortgage-backed securities with an aggregate face value of $215,512,000 at
September 30, 2003. $5,000,000 face value of the commercial mortgage-backed
securities bear interest at a variable rate which averages LIBOR + 2.95% (4.07%
at September 30, 2003). The remaining $210,512,000 face value of the commercial
mortgage-backed securities bear interest at fixed rates averaging 7.64% of the
face value. We purchased the fixed rate commercial mortgage-backed securities at
discounts. As of September 30, 2003, the remaining discount to be amortized into
income over the remaining lives of the securities was $23,025,000. After
discount amortization, the fixed rate securities bore interest at a blended rate
of 11.55% as of September 30, 2003. As of September 30, 2003, the securities
were carried at market value of $160,937,000, reflecting a $31,550,000
unrealized loss to their amortized cost.
On January 31, 2003, we purchased Citigroup Alternative Investments' 75%
interest in Fund I for a purchase price of approximately $38.4 million,
including the assumption of liabilities, equal to the book value of the fund. In
conjunction with the purchase, we began consolidating the balance sheet and
operations of Fund I in our consolidated financial statements including four
loans receivable totaling $50.0 million and $24.1 million of borrowings under a
credit facility.
In addition to those acquired with the purchase of Citigroup Alternative
Investments' interest in Fund I, we have originated or purchased seven new loans
since December 31, 2002 totaling $73.3 million and have no future commitments
under any existing loans. We have received full satisfaction of four loans
totaling $68.8 million and partial repayments on eight loans totaling $4.9
million in the nine months ended September 30, 2003. At September 30, 2003, we
had outstanding loans receivable totaling approximately $171.0 million.
At September 30, 2003, we had twelve performing loans receivable with a
current carrying value of $167,695,000. Two of the loans, totaling $73,273,000,
bear interest at a fixed blended rate of interest of 11.92%. The ten remaining
loans, totaling $94,422,000, bear interest at a variable rate of interest
averaging LIBOR + 6.50%
21
(7.94% at September 30, 2003 including LIBOR floors). One mortgage loan
receivable with an original principal balance of $8,000,000 reached maturity on
July 15, 2001 and has not been repaid with respect to principal and interest. In
December 2002, the loan was written down to $4,000,000 through a charge to the
allowance for possible credit losses. During the quarter ended September 30,
2003, we received proceeds of $731,000 reducing the carrying value of the loan
to $3,269,000. In accordance with our policy for revenue recognition, income
recognition has been suspended on this loan and for the nine months ended
September 30, 2003, $684,000 of potential interest income has not been recorded.
All other loans are performing in accordance with their terms.
At September 30, 2003, we had investments in funds of $23,997,000,
including $6,809,000 of unamortized costs which were capitalized in connection
with the formation of the funds. These costs are being amortized over the lives
of the funds and are reflected as a reduction in income/(loss) from equity
investments in funds.
We utilize borrowings under a committed credit facility and a term
redeemable securities contract, along with repurchase obligations to finance our
balance sheet assets.
At September 30, 2003, after assumption of the debt in conjunction with
the purchase of Citigroup Alternative Investments' interests in Fund I, we were
party to two credit facilities with a commercial lender that provided for a
total of $150 million of credit. On June 27, 2003, we formally combined under
one facility the outstanding borrowings under the two facilities and extended
the maturity of the combined $150 million credit facility for two additional
years to July 16, 2005 on substantially the same terms. At September 30, 2003,
we had outstanding borrowings under the credit facility of $33,000,000, and had
unused potential credit of $117,000,000, an amount of available credit that we
believe provides us with adequate liquidity for our short-term needs. The credit
facility provides for advances to fund lender-approved loans and investments
made by us. Borrowings under the credit facility are secured by pledges of
assets owned by us. Borrowings under the credit facility bear interest at
specified rates over LIBOR, which rates may fluctuate, based upon the credit
quality of the pledged assets. The credit facility provides for margin calls on
asset-specific borrowings in the event of asset quality and/or market value
deterioration as determined under the credit facility. The credit facility
contains customary representations and warranties, covenants and conditions and
events of default. We pay interest on the facility at specified rates over LIBOR
based upon each asset included in the obligation. Based upon advances in place
at September 30, 2003, the effective rate on the credit facility was LIBOR +
2.25% (3.37% at September 30, 2003). As of September 30, 2003, we had
capitalized costs of $1,332,000 which are being amortized over the remaining
life of the facility (21.5 months at September 30, 2003). After amortizing these
costs to interest expense, the all-in effective borrowing cost on the facility
as of September 30, 2003 was 5.59% based upon the amount currently outstanding
on the credit facility.
On September 30, 2003, we were party to a term redeemable securities
contract which provides for $75 million of financing for portfolio assets. The
term redeemable securities contract has a two-year term, maturing in February
2004, with an automatic one-year amortizing extension option, if not otherwise
extended. We had borrowings against the term redeemable securities contract of
$12,089,000 at September 30, 2003. We pay interest on the term redeemable
securities contract at specified rates over LIBOR based upon each asset included
in the obligation. Based upon advances in place at September 30, 2003, the
blended rate on the term redeemable securities contract is LIBOR + 1.91% (3.03%
at September 30, 2003). As of September 30, 2003, we had capitalized costs of
$164,000 which are being amortized over the remaining life of the term
redeemable securities contract (5 months at September 30, 2003). After
amortizing these costs to interest expense, the all-in effective borrowing cost
on the facility as of September 30, 2003 was 6.26% based upon the amount
currently outstanding on the term redeemable securities contract.
In May 2003, we entered into a new master repurchase agreement with a
securities dealer that provided for $50,000,000 of financing, which was
increased to $100,000,000 in August 2003. As of September 30, 2003, we had
utilized the master repurchase agreement to finance the purchase of four loans
during the second and third quarters of 2003.
In the third quarter of 2003, we entered into another repurchase
obligation in connection with the purchase of a loan and commercial
mortgage-backed securities. In connection with the foregoing, at September 30,
2003, we had sold a loan and commercial mortgage-backed securities with a book
and market value of $9,950,000 and had a liability to repurchase these assets
for $8,210,000. The repurchase agreements are matched to the term of the
22
underlying loan and commercial mortgage-backed securities that mature between
August 2004 and January 2005 and bear interest at specified rates over LIBOR
based upon each asset included in the obligation.
At September 30, 2003, we had total outstanding repurchase obligations
of $146,922,000. Based upon advances in place at September 30, 2003, the blended
rate on the repurchase obligations is LIBOR + 1.06% (2.17% at September 30,
2003). We had capitalized costs of $494,000 as of September 30, 2003, which are
being amortized over the remaining life of the repurchase obligations. After
amortizing these costs to interest expense based upon the amount currently
outstanding on the repurchase obligations, the all-in effective borrowing cost
on the repurchase obligations as of September 30, 2003 was 2.67%. We expect to
enter into new repurchase obligations at their maturity.
We were party to two cash flow interest rate swaps with a total notional
value of $109 million as of September 30, 2003. 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. We received LIBOR
flat (1.12% at September 30, 2003) and pay an average rate of 4.24%. The market
value of the swaps at September 30, 2003 was a liability of $838,000, which is
recorded as interest rate hedge liabilities and accumulated other comprehensive
loss on our balance sheet.
We currently have $89,742,000 aggregate liquidation amount of variable
step up convertible trust preferred securities outstanding which were issued by
our consolidated statutory trust subsidiary, CT Convertible Trust I. The
convertible trust preferred securities represent an undivided beneficial
interest in the assets of the trust that consist solely of the $92,524,000
aggregate principal amount of our outstanding 8.25% step up convertible junior
subordinated debentures. The terms of the securities mirror the interest,
redemption and conversion terms of the convertible debentures held by the trust.
The convertible trust preferred securities are convertible into shares of class
A common stock, in increments of $1,000 in liquidation amount, at a conversion
price of $21.00 per share and are redeemable by us, in whole or in part, on or
after September 30, 2004.
Distributions on the outstanding 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 bear interest at 10%
through September 30, 2004. The interest rate increases by 0.75% on October 1,
2004 and on each October 1 thereafter. If the quarterly dividend paid on a share
of our class A common stock multiplied by four and divided by $21.00 is in
excess of the interest rate in effect at that time, then the holders are
entitled to be paid additional interest at that rate.
On September 30, 2002, we redeemed $60,258,000 aggregate liquidation
amount of the convertible trust preferred securities that bore a coupon rate of
13.00% per annum through the date of redemption.
In 2000, we announced an open market share repurchase program under
which we may purchase, from time to time, up to 666,667 shares of our class A
common stock. Since that time the authorization has been increased by the board
of directors to purchase cumulatively up to 2,366,923 shares of class A common
stock.
In March 2003, we repurchased 66,427 shares of class A common stock
under the open market share repurchase program from a former employee at a price
of $14.25 per share. After the repurchase, we had purchased and retired,
pursuant to the program, 1,700,584 shares of class A common stock at an average
price of $13.13, including commissions and had 666,339 shares remaining
authorized for repurchase under the program.
In 2001 and 2002, in connection with the organization of Fund I and Fund
II, we issued to affiliates of Citigroup Alternative Investments warrants to
purchase 2,842,822 shares of class A common stock. At December 31, 2002, all
such warrants were exercisable at $15.00 per share exercise price until March 8,
2005. In January 2003, we purchased all of the warrants outstanding from the
affiliates of Citigroup Alternative Investments for $2.1 million.
On June 18, 2003, we issued 1,075,000 shares of class A common stock in
a private placement to thirty-two separate investors, led by certain
institutional clients advised by Lend Lease Rosen Real Estate Securities, LLC.
23
Net proceeds to us were $17.1 million after payment of offering costs and fees
to Conifer Securities, LLC, our placement agent.
At September 30, 2003, we had 6,509,067 shares of our class A common
stock outstanding.
Investment Management Overview
We operated principally as a balance sheet investor until the start of
our investment management business in March 2000 when we entered into a venture
with affiliates of Citigroup Alternative Investments to co-sponsor and invest
capital in a series of commercial real estate mezzanine investment funds managed
by us. Pursuant to the venture agreement, we and Citigroup Alternative
Investments have co-sponsored Fund I, Fund II and Fund III. We have capitalized
costs of $6,809,000, net, from the formation of the Funds that are being
amortized over the remaining anticipated lives of the Funds.
Fund I commenced its investment operations in May 2000 with equity
capital supplied solely by us (25%) and Citigroup Alternative Investments (75%).
From May 11, 2000 to April 8, 2001, the investment period for the fund, Fund I
completed $330 million of total investments in 12 transactions. On January 31,
2003, we purchased from affiliates of Citigroup Alternative Investments their
75% interest in Fund I for $38.4 million, including the assumption of
liabilities. As of January 31, 2003, we began consolidating the operations of
Fund I in our consolidated financial statements.
Fund II had its initial closing on equity commitments on April 9, 2001
and its final closing on August 7, 2001, ultimately raising $845.2 million of
total equity commitments, including $49.7 million (5.9%) and $198.9 million
(23.5%) from us and Citigroup Alternative Investments, respectively. The balance
of the equity commitments were made by third-party private equity investors,
including public and corporate pension plans, endowment funds, financial
institutions and high net worth individuals. During its two-year investment
period, which expired on April 9, 2003, Fund II invested $1.2 billion in 40
separate transactions. Fund II utilizes leverage to increase its return on
equity, with a target debt-to-equity ratio of 2:1. Total capital calls during
the investment period were $329.0 million. On January 1, 2003, the general
partner of Fund II, which is owned by affiliates of us and Citigroup Alternative
Investments, voluntarily reduced the management fees for the remainder of the
investment period by 50% due to a lower than expected level of deployment of
Fund II's capital. CT Investment Management Co. LLC, our wholly-owned taxable
REIT subsidiary, acts as the investment manager to Fund II and receives 100% of
the base management fees paid by the fund. As of April 9, 2003, the end of the
Fund II investment period, CT Investment Management Co. began earning annual
base management fees of 1.287% of invested capital. Based upon Fund II's
invested capital at September 30, 2003, the date upon which the calculation for
the next quarter is based, CT Investment Management Co. will earn base
management fees of $718,000 for the quarter ending December 31, 2003.
We and Citigroup Alternative Investments, through our collective
ownership of the general partner, are also entitled to receive incentive
management fees from Fund II if the return on invested equity is in excess of
10% after all invested capital has been returned. The Fund II incentive
management fees are split equally between us and Citigroup Alternative
Investments. We intend to pay 25% of our share of the Fund II incentive
management fees as long-term incentive compensation to our employees. No such
incentive fees have been earned at September 30, 2003 and as such, no amount has
been accrued as income for such potential fees in our financial statements. The
amount of incentive fees to be received in the future will depend upon a number
of factors, including the level of interest rates and the fund's ability to
generate returns in excess of 10%, which is in turn impacted by the duration and
ultimate performance of the fund's assets. Potential incentive fees received as
Fund II winds down could result in significant additional income from operations
in certain periods during which such payments can be recorded as income. If Fund
II's assets were sold and liabilities were settled on October 1, 2003 at the
recorded book value, net of the allowance for possible credit losses, and the
fund equity and income were distributed, we would record approximately $4.7
million of incentive income.
Since December 31, 2002, we have made equity contributions to Fund II of
$5.5 million and equity contributions to Fund II's general partner of $757,000.
We do not anticipate making any additional equity contributions to Fund II or
its general partner. Our net investment in Fund II and its general partner at
24
September 30, 2003 was $15.2 million. As of September 30, 2003, Fund II had 27
outstanding loans and investments totaling $607.8 million, all of which were
performing in accordance with the terms of their agreements.
On June 2, 2003, Fund III effected its initial closing on equity
commitments and on August 8, 2003, its final closing, raising a total of $425.0
million in equity commitments. We and Citigroup Alternative Investments made
equity commitments of $20.0 million (4.7%) and $80.0 million (18.8%),
respectively, with the balance made by third-party private equity investors.
From the initial closing through September 30, 2003, we have made equity
investments in Fund III of $2,000,000 and have capitalized costs totaling
$903,000, which are being amortized over the remaining anticipated life of Fund
III. As of September 30, 2003, Fund III had closed five investments, totaling
$148.5 million, of which $146.6 million remains outstanding at September 30,
2003.
CT Investment Management Co. receives 100% of the base management fees
from Fund III calculated at a rate equal to 1.42% per annum of committed capital
during Fund III's two-year investment period, which expires June 2, 2005, and
1.42% of invested capital thereafter. Based upon Fund III's $425.0 million of
total equity commitments, CT Investment Management Co. will earn annual base
management fees of $6.0 million during the investment period. We and Citigroup
Alternative Investments are also entitled to receive incentive management fees
from Fund III if the return on invested equity is in excess of 10% after all
invested capital has been returned. We and Citigroup Alternative Investments
will receive 62.5% and 37.5%, respectively, of the total incentive management
fees. We expect to distribute a portion of our share of the Fund III incentive
management fees as long-term incentive compensation to our employees.
Results of Operations
Nine Month and Three Month Periods Ended September 30, 2003 Compared to Nine
Month and Three Month Periods Ended September 30, 2002
We reported net income of $9,917,000 for the nine months ended September
30, 2003, an increase of $5,674,000 from our net income of $4,243,000 for the
nine months ended September 30, 2002. This increase was primarily the result of
a reduction in income taxes in 2003 in connection with our REIT election, the
elimination of the net unrealized loss on derivative securities and the
corresponding hedged risk on commercial mortgage-backed securities by settling
the fair value hedge in December 2002 and entering into a new cash flow hedge,
and the increase in income from equity investments in funds. These increases
were partially offset by a recapture of the allowance for possible credit
losses, an advisory fee earned, sales of investments and the reduction of the
maturity of fair value hedges resulting in net gains, all of which occurred in
2002 and did not recur in 2003. Other offsets to the increase included a
reduction in management and advisory fees from funds and a reduction in net
income from loans and investments.
We reported net income of $4,786,000 for the three months ended
September 30, 2003, an increase of $3,233,000 from our income of $1,553,000 for
the three months ended September 30, 2002. This increase was primarily the
result of a reduction in income taxes in 2003 with the REIT election and an
increase in net income from loans and investments. These increases were
partially offset by a reduction in income from equity investments in funds and
an advisory fee earned in 2002, which did not recur in 2003.
Interest and related income from loans and other investments amounted to
$29,384,000 for the nine months ended September 30, 2003, a decrease of
$8,607,000 from the $37,991,000 amount for the nine months ended September 30,
2002. Average interest-earning assets decreased from approximately $505.0
million for the nine months ended September 30, 2002 to approximately $358.3
million for the nine months ended September 30, 2003. The average interest rate
earned on such assets increased from 10.1% in the nine months ended September
30, 2002 to 11.0% in the nine months ended September 30, 2003. During the nine
months ended September 30, 2003 and September 30, 2002, we recognized $2,804,000
and $1,490,000, respectively, in additional income on the early repayment of
loans and investments. Without this additional interest income, the earning rate
for the nine months ended September 30, 2003 would have been 9.9% versus 9.7%
for the nine months ended September 30, 2002. LIBOR rates averaged 1.2% for the
nine months ended September 30, 2003 and 1.8% for the nine months ended
September 30, 2002, a decrease of 0.6%. The portion of our average assets that
earn interest at fixed-rates did not decrease proportionately to the decrease in
assets that earn interest at variable rates in the nine months ended
25
September 30, 2003, which served to offset the decrease in earnings resulting
from the decrease in the average LIBOR rate.
Interest and related income from loans and other investments amounted to
$11,757,000 for the three months ended September 30, 2003, an increase of
$721,000 from the $11,036,000 amount for the three months ended September 30,
2002. Average interest-earning assets decreased from approximately $404.1
million for the three months ended September 30, 2002 to approximately $369.4
million for the three months ended September 30, 2003. The average interest rate
earned on such assets increased from 10.8% in the nine months ended September
30, 2002 to 12.6% in the nine months ended September 30, 2003. During the three
months ended September 30, 2003 and September 30, 2002, we recognized $2,437,000
and $1,120,000, respectively, in additional income on the early repayment of
loans and investments. Without this additional interest income, the earning rate
for the nine months ended September 30, 2003 would have been 10.0% versus 9.7%
for the nine months ended September 30, 2002. LIBOR rates averaged 1.1% for the
three months ended September 30, 2003 and 1.8% for the three months ended
September 30, 2002, a decrease of 0.7%. The portion of our average assets that
earn interest at fixed rates did not decrease proportionately to the decrease in
assets that earn interest at variable rates in the nine months ended September
30, 2003, which served to offset the decrease in earnings resulting from the
decrease in the average LIBOR rate.
We utilize our credit facility, our term redeemable securities contract
and our repurchase obligations to finance our interest-earning assets.
Interest and related expenses amounted to $7,369,000 for the nine months
ended September 30, 2003, a decrease of $6,651,000 from the $14,020,000 amount
for the nine months ended September 30, 2002. The decrease in expense was due to
a decrease in the amount of average interest-bearing liabilities outstanding
from approximately $279.5 million for the nine months ended September 30, 2002
to approximately $206.1 million for the nine months ended September 30, 2003 and
a decrease in the average rate on interest-bearing liabilities from 6.7% to 4.8%
for the same periods. The decrease in the average rate is substantially due to
the decrease in swap levels and rates and the increased use of repurchase
agreements as a percentage of total debt in the nine months ended September 30,
2003 at lower spreads to LIBOR than the credit facilities utilized in the nine
months ended September 30, 2002.
Interest and related expenses amounted to $2,616,000 for the three
months ended September 30, 2003, a decrease of $1,141,000 from the $3,757,000
amount for the three months ended September 30, 2002. The decrease in expense
was due to a decrease in the average rate on interest-bearing liabilities from
8.8% for the three months ended September 30, 2002 to 5.0% for the three months
ended September 30, 2003, partially offset by an increase in the amount of
average interest-bearing liabilities outstanding from approximately $169.9
million to approximately $207.2 million. The decrease in the average rate is
substantially due to the decrease in swap levels and rates and the increased use
of repurchase agreements as a percentage of total debt in the three months ended
September 30, 2003 at lower spreads to LIBOR than the credit facilities utilized
in the three months ended September 30, 2002.
We also utilize our outstanding convertible trust preferred securities
to finance our interest-earning assets. During the nine months ended September
30, 2003 and 2002, we recognized $7,089,000 and $7,186,000, respectively, of net
expenses related to our outstanding convertible trust preferred securities. This
amount consisted of distributions to the holders totaling $6,731,000 and
$12,195,000, respectively, and amortization of discount and origination costs
totaling $358,000 and $1,186,000, respectively, during the nine months ended
September 30, 2003 and 2002. In the nine months ended September 30, 2002, this
total was partially offset by a tax benefit of $6,195,000. Due to our election
to be taxed as a REIT, there is no tax benefit for the expense in the nine
months ended September 30, 2003. The decrease in the distribution amount and
amortization of discount and origination costs resulted from the elimination of
the distributions and discount and fees on the $60.3 million non-convertible
amount, which was redeemed on September 30, 2002.
During the three months ended September 30, 2003 and 2002, we recognized
$2,363,000 and $2,669,000, respectively, of net expenses related to our
outstanding convertible trust preferred securities. This amount consisted of
distributions to the holders totaling $2,244,000 and $4,184,000, respectively,
and amortization of discount and origination costs totaling $119,000 and
$786,000, respectively, during the three months ended September 30, 2003 and
2002. In the three months ended September 30, 2002, this total was partially
offset by a tax benefit of
26
$2,301,000. Due to our election to be taxed as a REIT, there is no tax benefit
for the expense in the three months ended September 30, 2003. The decrease in
the distribution amount and amortization of discount and origination costs
resulted from the elimination of the distributions and discount and fees on the
non-convertible amount, which was redeemed on September 30, 2002.
Other revenues decreased $4,044,000 from $10,968,000 for the nine months
ended September 30, 2002 to $6,924,000 for the nine months ended September 30,
2003. During the nine months ended September 30, 2002, we sold investments and
reduced the maturity of our fair value hedge, which resulted in a gain of
$1,651,000 and earned a $2.0 million fee from our final advisory assignment. On
January 1, 2003, the general partner of Fund II, which is owned by affiliates of
us and Citigroup Alternative Investments, voluntarily reduced by 50% the
management fees charged to Fund II for the remainder of the investment period
due to a lower than expected level of deployment of the fund's capital. This,
along with the reduction in income when we began charging management fees on
invested capital for Fund II, partially offset by the management fees charged to
Fund III, reduced our management and advisory fees from funds by $1.8 million
for the nine months ended September 30, 2003. In the nine months ended September
30, 2002, Fund I increased its allowance for possible credit losses by
establishing a specific reserve for the single non-performing loan it was
carrying. The loss from equity investments in funds during the nine months ended
September 30, 2002 was primarily due to this additional expense.
Other revenues decreased $3,047,000 from $5,807,000 for the three months
ended September 30, 2002 to $2,760,000 for the three months ended September 30,
2003. The decrease in other revenue was primarily the result of a $2.0 million
fee earned from our final advisory assignment in the three months ended
September 30, 2002 and the decrease in income from equity investments in funds.
General and administrative expenses decreased $893,000 to $10,497,000
for the nine months ended September 30, 2003 from $11,390,000 for the nine
months ended September 30, 2002 and decreased $178,000 to $3,804,000 for the
three months ended September 30, 2003 from $3,982,000 for three months ended
September 30, 2002. The decrease in general and administrative expenses was
primarily due to reduced employee compensation. We employed an average of 25
employees during the nine months ended September 30, 2003 and 27 during the nine
months ended September 30, 2002. We had 25 full-time employees at September 30,
2003.
During the nine months ended September 30, 2002, we recaptured
$2,963,000 of our previously established allowance for possible credit losses.
We deemed this recapture necessary due to the substantial reduction in the loan
portfolio and a general reduction in the default risk of the loans remaining
based upon current conditions. At September 30, 2003, we believe that our
reserve of $6,672,000 is adequate based on the existing loans in our balance
sheet portfolio.
In accordance with our decision to be taxed as a REIT, we will make a
formal election to be so taxed under Section 856(c) of the Internal Revenue Code
of 1986, as amended, commencing with the tax year ending December 31, 2003. As a
REIT, we generally are not subject to federal income tax. To maintain our
qualification as a REIT, we must distribute at least 90% of our REIT taxable
income to our shareholders and meet certain other requirements. If we fail to
qualify as a REIT in any taxable year, we will be subject to federal income tax
on our taxable income at regular corporate rates. We may also be subject to
certain state and local taxes on our income and property. Under certain
circumstances, federal income and excise taxes may be due on our undistributed
taxable income. At September 30, 2003, we were in compliance with all REIT
qualification requirements and as such, have only provided for income tax
expense on taxable income attributed to our taxable REIT subsidiaries in 2003.
Please refer to the discussion under the caption "Risk Factors -- Risks Related
to Our REIT Election" which explains the risks of failing to comply with REIT
qualification requirements.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
We reported a net loss allocable to shares of class A common stock of
$9,738,000 for the year ended December 31, 2002, a decrease of $18,502,000 from
our net income allocable to shares of class A 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 our decision to elect REIT
status for 2003, 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
27
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. We may experience additional reductions in interest and related income
if the amount of interest earning assets in our balance sheet portfolio continue
to decline and such reduced income is not offset by increased income from
investment management operations. As discussed below, we do not expect a
decrease in total assets as we expect to purchase or originate additional
assets.
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, we recognized
$1.6 million in additional income on the early repayment of loans, while during
the year ended December 31, 2001, we recognized $4.8 million in additional
income on the early repayment of loans. Without this additional interest income,
the earning rate for the year ended December 31, 2002 would have been 9.6%
versus 11.0% for the year ended December 31, 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 our 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 obligations for debt financing in the year ended
December 31, 2002 at lower spreads to LIBOR than those obtainable under the
credit facilities utilized in the year ended December 31, 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 the year ended December 31, 2002
increased, partially offsetting the previously discussed decreases in floating
rates.
During the years ended December 31, 2002 and 2001, we recognized
$8,455,000 and $8,479,000, respectively, of net expenses related to our
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 of the convertible trust preferred securities, as
discussed above, the rate on such securities was 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 year ended December 31, 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 the
year ended December 31, 2002. We also recognized $2.0 million from our 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. We employed an average of 27 employees during
both the year ended December 31, 2002 and the year ended December 31, 2001. We
had 26 full-time employees and one part-time employee at December 31, 2002.
28
During the year ended December 31, 2002, we recaptured $4,713,000 of our
previously established allowance for possible credit losses. We 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, we believe that the reserve is adequate based
on the existing loans in our balance sheet portfolio.
For the year ended December 31, 2002 and 2001, we 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 that year and the reduction in deferred tax
assets due to the uncertainty of use in the future. In December 2002, when we
decided to elect REIT status for 2003, we wrote down our deferred tax asset to
$1.6 million, due to our inability 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 and outstanding 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 class A preferred stock to
6,320,833 and the dividend requirement to $1,615,000 per annum. In the year
ended December 31, 2001, the remaining shares of class A preferred stock were
repurchased thereby eliminating the dividend requirement.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
We reported net income allocable to shares of class A 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 class A 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 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, we recognized
$4.8 million in additional interest income on the early repayment of loans,
while during the year ended December 31, 2000, we 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 the year ended December 31, 2001 would have been
11.0% versus 12.2% for the year ended December 31, 2000. The decrease in such
core-earning rate was due to a decrease in the average LIBOR rate from 6.41% for
the year ended December 31, 2000 to 3.88% for the year ended December 31, 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 weighted 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 weighted average rate was 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 were at a fixed rate, after adjusting for interest rate
swaps, which, in the current low LIBOR rate environment, were at higher rates
than the rates for variable rate interest-bearing liabilities.
During the years ended December 31, 2001 and 2000, we recognized
$8,479,000 and $7,921,000, respectively, of net expenses related to our
outstanding convertible trust preferred securities. This amount consisted
29
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 on
that date from 8.25% to 10.16% which accounted for the increase in expense in
the year ended December 31, 2001.
During the year ended December 31, 2001, other revenues increased
$4,756,000 to $11,327,000 from $6,571,000 in the year ended December 31, 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, including management and
advisory income in addition to the return on investment in the funds, partially
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. We 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 accounted 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, we had earned $2,991,000
and $1,530,000, respectively, on our 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 the year ended December 31, 2000, as we
transitioned to our new investment management business, we incurred one-time
expenses of $2.1 million that were included in general and administrative
expenses. We 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. We 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.
We did not add to the reserve for possible credit losses during the second,
third or fourth quarter of 2001 as we believed that the reserve was adequate
based on the existing loans and investments in our balance sheet portfolio.
For the year ended December 31, 2001 and 2000, we 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.
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 class A preferred stock to
6,320,833 and the dividend requirement to $1,615,000 per annum. In 2001, the
remaining shares of class A preferred stock were repurchased thereby eliminating
the dividend requirement.
Liquidity and Capital Resources
At September 30, 2003, we had $10,179,000 in cash. Our primary sources
of liquidity for 2004 are expected to be cash on hand, cash generated from
operations, principal and interest payments received on loans and investments,
additional borrowings under our credit facilities and any proceeds that we
receive from the sale of securities pursuant to this prospectus. We believe
these sources of capital are adequate to meet future cash requirements during
2004. We expect that during 2004, we will use a significant amount of our
available capital resources to satisfy capital contributions required pursuant
to our equity commitments to Fund III and to originate new loans and investments
for our balance sheet. We intend to continue to employ leverage on our balance
sheet assets to enhance our return on equity.
30
We experienced a net decrease in cash of $7,000 for the nine months
ended September 30, 2003, compared to a net decrease of $2,920,000 for the nine
months ended September 30, 2002. Cash provided by operating activities during
the nine months ended September 30, 2003 was $10,524,000, compared to $4,630,000
provided during the same period of 2002. For the nine months ended September 30,
2003, cash provided by investing activities was $12,766,000, compared to
$255,943,000 during the same period in 2002 as we experienced lower levels of
loan and investment repayments in the nine months ended September 30, 2003 than
the nine months ended September 30, 2002 and began making new loans and
investments for our balance sheet in the nine months ended September 30, 2003.
We utilized the cash received on loan repayments in both periods to reduce
borrowings under our credit facilities and our term redeemable securities
contract that along with the proceeds from the private placement of 1,075,000
shares of class A common stock in June 2003 accounted for substantially all of
the change in the net cash used in financing activities from $263,493,000 in the
nine months ended September 30, 2002 to $23,297,000 in the nine months ended
September 30, 2003.
We experienced a net decrease in cash of $1,465,000 for the year ended
December 31, 2002, compared to a 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
year ended December 31, 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 year ended December 31, 2001 as we
experienced significant loan and investment repayments in both years but
purchased significant levels of available-for-sale securities in 2001
principally for Investment Company Act compliance purposes. We received full
satisfaction of three loans totaling $90.0 million and partial repayments on
five loans totaling $46.2 million in 2002. We utilized the cash received on loan
repayments in both years to reduce borrowings under our 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 2002.
During the investment periods for Fund I and Fund II, we generally did
not originate or acquire loans or commercial mortgage-backed securities directly
for our own balance sheet portfolio. Now that the Fund II investment period has
ended, we are originating loans and investments for our own account as permitted
by the provisions of Fund III. We expect to use our available working capital to
make contributions to Fund III or any other funds sponsored by us as and when
required by the equity commitments made by us to such funds. If repayments of
our existing balance sheet loans and investments increase significantly before
excess capital is invested in new funds, or otherwise accretively deployed, we
may experience a reduction in revenues and lower earnings until offsetting
revenues are derived from funds under management or other sources. For the
remainder of 2003 and in 2004, we do not expect a decrease in total assets, as
we expect to purchase or originate additional balance sheet assets during this
period.
At September 30, 2003, we had outstanding borrowings under the credit
facility of $33,000,000, outstanding borrowings on the term redeemable
securities contract of $12,089,000 and outstanding repurchase obligations
totaling $146,922,000. The terms of these agreements are described in the
Balance Sheet Overview section of this Management Discussion and Analysis. At
September 30, 2003, we had pledged assets that enable us to borrow an additional
$25.3 million and $230.2 million of credit available for the financing of new
and existing unpledged assets pursuant to these facilities.
31
The following table sets forth information about our contractual
obligations as of December 31, 2002:
Payment due by period
-----------------------------------------------------
More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
-------- -------- --------- --------- ---------
(in thousands)
Long-Term Debt Obligations
Credit Facilities $ 40,000 $ -- $ 40,000 $ -- $ --
Repurchase Obligations 160,056 160,056 -- -- --
Convertible Trust Preferred
Securities 89,742 -- -- -- 89,742
Operating Lease Obligations 4,966 844 1,837 1,828 457
Commitment to Fund II (1) 36,682 36,682 -- -- --
-------- -------- --------- --------- ---------
Total $331,446 $197,582 $ 41,837 $ 1,828 $ 90,199
======== ======== ========= ======== =========
---------------------
(1) Fund II's investment period ended in April 2003 at which time our equity
commitment to the fund expired. We made a $20 million commitment to Fund III
that expires when the fund's investment period ends in June 2005.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Impact of Inflation
Our operating results depend in part on the difference between the
interest income earned on our interest-earning assets and the interest expense
incurred in connection with our 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 our income by affecting the
spread between our interest-earning assets and interest-bearing liabilities, as
well as, among other things, the value of our interest-earning assets and our
ability to realize gains from the sale of assets and the average life of our
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 our control. We
employ the use of correlated hedging strategies to limit the effects of changes
in interest rates on our operations, including engaging in interest rate swaps
and interest rate caps to minimize our exposure to changes in interest rates.
There can be no assurance that we will be able to adequately protect against the
foregoing risks or that we will ultimately realize an economic benefit from any
hedging contract into which we enter. Please refer to the discussion under the
caption "Risk Factors -- Risks Related To Our Business" which addressed the
risks associated with our hedging strategy.
Critical Accounting Policies
Changes in these estimates and assumptions could have a material effect
on our consolidated financial statements. Management has the obligation to
ensure that its policies and methodologies are in accordance with GAAP. During
2003, management reviewed and evaluated its critical accounting policies and
believes them to be appropriate. Our accounting policies are described in Note 3
to our consolidated financial statements. The following is a summary of our
accounting policies that we believe are the most affected by management
judgments, estimates and assumptions:
Securities Available For Sale
We have designated our investments in commercial mortgage-backed
securities and certain other securities as available for sale. Securities
available for sale are carried at estimated fair value with the net unrealized
gains or losses reported as a component of accumulated other comprehensive
income/(loss) in shareholders' equity. Many of these investments are relatively
illiquid and their values must be estimated by management. In making these
estimates, management generally utilizes market prices provided by dealers who
make markets in these securities, but may, under certain circumstances, adjust
these valuations based on management's judgment. Changes in the
32
valuations do not affect our reported income or cash flows, but impact
shareholders' equity and, accordingly, book value per share.
Management must also assess whether unrealized losses on securities
reflect a decline in value which is other than temporary, and, accordingly,
write the impaired security down to its fair value, through a charge to
earnings. Significant judgment of management is required in this analysis which
includes, but is not limited to, making assumptions regarding the collectibility
of the principal and interest, net of related expenses, on the underlying loans.
Income on these securities available for sale is recognized based upon a
number of assumptions that are subject to uncertainties and contingencies.
Examples of these include, among other things, the rate and timing of principal
payments, including prepayments, repurchases, defaults and liquidations, the
pass-through or coupon rate and interest rate fluctuations. Additional factors
that may affect our reported interest income on our mortgage-backed securities
include interest payment shortfalls due to delinquencies on the underlying
mortgage loans and the timing and magnitude of credit losses on the mortgage
loans underlying the securities that are a result of the general condition of
the real estate market, including competition for tenants and their related
credit quality, and changes in market rental rates. These uncertainties and
contingencies are difficult to predict and are subject to future events which
may alter the assumptions.
We adopted Emerging Issues Task Force 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets" on January 1, 2001. We recognize interest income
from our purchased beneficial interests in securitized financial interests,
other than beneficial interests of high credit quality, sufficiently
collateralized to ensure that the possibility of credit loss is remote, or that
cannot contractually be prepaid or otherwise settled in such a way that we would
not recover substantially all of our recorded investment, in accordance with
this guidance. Accordingly, on a quarterly basis, when significant changes in
estimated cash flows from the cash flows previously estimated occur due to
actual prepayment and credit loss experience, we calculate a revised yield based
on the current amortized cost of the investment, including any
other-than-temporary impairments recognized to date, and the revised cash flows.
The revised yield is then applied prospectively to recognize interest income.
Prior to January 1, 2001, we recognized income from these beneficial
interests using the effective interest method, based on an anticipated yield
over the projected life of the security. Changes in the anticipated yields were
calculated due to revisions in our estimates of future and actual credit losses
and prepayments. Changes in anticipated yields resulting from credit loss and
prepayment revisions were recognized through a cumulative catch-up adjustment at
the date of the change which reflected the change in income from the security
from the date of purchase through the date of change in the anticipated yield.
The new yield was then used prospectively to account for interest income.
Changes in yields from reduced estimates of losses were recognized
prospectively.
For other mortgage-backed and related mortgage securities, we account
for interest income under Statement of Financial Accounting Standards 91, using
the effective interest method which includes the amortization of discount or
premium arising at the time of purchase and the stated or coupon interest
payments.
Mortgage Loans
We purchase and originate commercial mortgage and mezzanine loans to be
held as long-term investments. Management must periodically evaluate each of
these loans for possible impairment. Impairment is indicated when it is deemed
probable that we will not be able to collect all amounts due according to the
contractual terms of the loan. If a loan is determined to be permanently
impaired, we would write down the loan through a charge to the reserve for
possible credit losses. Given the nature of our loan portfolio and the
underlying commercial real estate collateral, significant judgment of management
is required in determining permanent impairment and the resulting charge to the
reserve which includes but is not limited to making assumptions regarding the
value of the real estate which secures the mortgage loan.
33
Deferred Financing
The deferred financing cost which is included in other assets on our
consolidated balance sheets include issuance costs related to our debt and are
amortized using the straight line method which method is similar to the results
of the effective interest method.
Impairment of Securities
In accordance with Statement of Financial Accounting Standards 115, when
the estimated fair value of a security classified as available-for-sale has been
below amortized cost for a significant period of time and we conclude that we no
longer have the ability or intent to hold the security for the period of time
over which we expect the values to recover to amortized cost, the investment is
written down to its fair value. The resulting charge is included in income, and
a new cost basis established. Additionally, under Emerging Issues Task Force
99-20, when significant changes in estimated cash flows from the cash flows
previously estimated occur due to actual prepayment and credit loss experience
and the present value of the revised cash flows using the current expected yield
is less than the present value of the previously estimated remaining cash flows,
adjusted for cash receipts during the intervening period, an
other-than-temporary impairment is deemed to have occurred. Accordingly, the
security is written down to fair value with the resulting change being included
in income and a new cost basis established. In both instances, the original
discount or premium is written off when the new cost basis is established.
After taking into account the effect of the impairment charge, income is
recognized under Emerging Issues Task Force 99-20 or Statement of Financial
Accounting Standards 91, as applicable, using the market yield for the security
used in establishing the write-down.
Our consolidated financial statements include all of our accounts and
the accounts of all of our majority-owned and controlled subsidiaries. The
preparation of financial statements in accordance with Generally Accepted
Accounting Principles requires management to make judgments, estimates and
assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements.
Revenue Recognition
The most significant sources of our revenue come from our lending
operations. For our lending operations, we reflect income using the effective
yield method, which recognizes periodic income over the expected term of the
investment on a constant yield basis. Management believes our revenue
recognition policies are appropriate to reflect the substance of the underlying
transactions.
Provision For Loan Losses
Our accounting policies require that an allowance for estimated credit
losses be reflected in our financial statements based upon an evaluation of
known and inherent risks in our mortgage and mezzanine loans. While we have
experienced minimal actual losses on our lending investments, management
considers it prudent to reflect provisions for loan losses on a portfolio basis
based upon our assessment of general market conditions, our internal risk
management policies and credit risk rating system, industry loss experience, our
assessment of the likelihood of delinquencies or defaults, and the value of the
collateral underlying our investments. Actual losses, if any, could ultimately
differ from these estimates.
Risk Management And Financial Instruments
We utilize derivative financial instruments only as a means to help to
manage our interest rate risk exposure on a portion of our variable-rate debt
obligations, through the use of cash flow hedges. The instruments utilized are
generally either pay-fixed swaps or LIBOR-based interest rate caps which are
widely used in the industry and typically entered into with major financial
institutions. Our accounting policies generally reflect these instruments at
their fair value with unrealized changes in fair value reflected in "Accumulated
other comprehensive income" on our consolidated balance sheets. Realized effects
on cash flows are generally recognized currently in income.
34
Income Taxes
Our financial results generally do not reflect provisions for current or
deferred income taxes on our REIT taxable income. Management believes that we
have and intend to continue to operate in a manner that will continue to allow
us to be taxed as a REIT and, as a result, do not expect to pay substantial
corporate-level taxes (other than taxes payable by our taxable REIT
subsidiaries). Many of these requirements, however, are highly technical and
complex. If we were to fail to meet these requirements, we would be subject to
Federal income tax.
New Accounting Standards
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." In June 2000, the SEC staff
amended Staff Accounting Bulletin 101 to provide registrants with additional
time to implement Staff Accounting Bulletin 101. We adopted Staff Accounting
Bulletin 101, as required, in the fourth quarter of fiscal 2000. The adoption of
Staff Accounting Bulletin 101 did not have a material financial impact on our
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." We were required to adopt Financial
Interpretation Number 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
that occur on or after that date. Financial Interpretation Number 44 addresses
practice issues related to the application of Accounting Practice Bulletin
Opinion No. 25, "Accounting for Stock Issued to Employees." The initial adoption
of Financial Interpretation Number 44 did not have a significant impact on us.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement is applicable for transfers of assets and extinguishments of
liabilities occurring after June 30, 2001. We adopted the provisions of this
statement as required for all transactions entered into on or after January 1,
2001. Our adoption of Statement of Financial Accounting Standards No. 140 did
not have a significant impact on us.
On January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by Statement of Financial Accounting Standards No. 137
and Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." Statement of Financial
Accounting Standards No. 133, as amended, establishes accounting and reporting
standards for derivative instruments. Specifically Statement of Financial
Accounting Standards 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.
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, we are 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 Statement of Financial Accounting
Standards 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
Statement of Financial Accounting Standards 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.
35
We are exposed to credit loss in the event of non-performance by the
counterparties to the interest rate swap and cap agreements, although we do not
anticipate such non-performance. The counterparties would bear the interest rate
risk of such transactions as market interest rates increase.
In July 2001, the SEC released Staff Accounting Bulletin No. 102,
"Selected Loan Loss Allowance and Documentation Issues." Staff Accounting
Bulletin 102 summarizes certain of the SEC's views on the development,
documentation and application of a systematic methodology for determining
allowances for loan and lease losses. Our adoption of Staff Accounting Bulletin
102 did not have a significant impact on us.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." Statement of Financial Accounting Standards No. 141 requires the
purchase method of accounting to be used for all business combinations initiated
after June 30, 2001. Statement of Financial Accounting Standards No. 141 also
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in business combinations and requires intangible
assets to be recognized apart from goodwill if certain tests are met. Statement
of Financial Accounting Standards No. 142 requires that goodwill not be
amortized but instead be measured for impairment at least annually, or when
events indicate that there may be an impairment. We adopted the provisions of
both statements, as required, on January 1, 2002 which did not have a
significant impact on us.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement of Financial Accounting
Standards No. 144 provides new guidance on the recognition of impairment losses
on long-lived assets to be held and used or to be disposed of, and also broadens
the definition of what constitutes a discontinued operation and how the results
of a discontinued operation are to be measured and presented. Statement of
Financial Accounting Standards No. 144 requires that current operations prior to
the disposition of corporate tenant lease assets and prior period results of
such operations be presented in discontinued operations in our consolidated
statements of operations. The provisions of Statement of Financial Accounting
Standards No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and must be applied at the beginning of a
fiscal year. We adopted the provisions of this statement on January 1, 2002, as
required, which did not have a significant financial impact on us.
In November 2002, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," an interpretation of Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies," Statement of Financial Accounting Standards No. 57, "Related
Party Disclosures," Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" and rescission of
Financial Accounting Standards Board Interpretation No. 34, "Disclosure of
Indirect Guarantees of Indebtedness of Others, an Interpretation of Statement of
Financial Accounting Standards No. 5." It requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee regardless of whether the guarantor
receives separately identifiable consideration, such as a premium. The new
disclosure requirements are effective December 31, 2002. Our adoption of
Financial Interpretation Number 45 did not have a material impact on our
consolidated financial statements, nor is it expected to have a material impact
in the future.
In January 2003, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of Accounting Research Bulletin
51. Financial Interpretation Number 46 provides guidance on identifying entities
for which control is achieved through means other than through voting rights,
and how to determine when and which business enterprise should consolidate a
variable intent entity. In addition, Financial Interpretation Number 46 requires
that both the primary beneficiary and all other enterprises with a significant
variable interest in a variable intent entity make additional disclosures. The
transitional disclosure requirements took effect almost immediately and are
required for all financial statements initially issued after January 31, 2003.
We have evaluated all of our investments and other interests in entities that
may be deemed variable interest entities under the provisions of Financial
Interpretation Number 46. We have concluded that no additional entities need to
be consolidated.
36
Quantitative and Qualitative Disclosures about Market Risk
The principal objective of our 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, we
use 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 we do not use derivative financial instruments for trading
purposes. We use 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 our financial instruments
that are sensitive to changes in interest rates at September 30, 2003. For
financial assets and debt obligations, the table presents cash flows to the
expected maturity and weighted average interest rates based upon the current
carrying values. For interest rate swaps, the table presents notional amounts
and weighted average fixed pay and variable receive interest rates by
contractual maturity dates. Notional amounts are used to calculate the
contractual cash flows to be exchanged under the contract. Weighted average
variable rates are based on rates in effect as of the reporting date.
Expected Maturity Dates
---------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total Fair Value
------- ------- ------- ------- ------- ---------- ------- ----------
(in thousands)
Assets:
Available-for-Sale Securities
Fixed Rate $ 2,145 $ 8,087 $ 5,126 $ 3,012 $ 1,768 $ 2,494 $ 22,632 $ 23,633
Average interest rate 6.04% 6.04% 6.04% 6.04% 6.04% 6.04% 6.04%
Commercial Mortgage-Backed
Securities
Fixed Rate -- -- -- $ 7,811 $ 135 $202,566 $210,512 $155,937
Average interest rate -- -- -- 9.90% 8.19% 11.64% 11.56%
Variable Rate -- $ 5,000 -- -- -- -- $ 5,000 $ 5,000
Average interest rate -- 4.07% -- -- -- -- 4.07%
Loans Receivable
Fixed Rate -- -- -- -- $24,195 $ 49,078 $ 73,273 $ 84,268
Average interest rate -- -- -- -- 11.78% 11.98% 11.92%
Variable Rate $10,968 $ 6,923 $12,654 $ 915 $14,452 $ 51,835 $ 97,747 $ 96,133
Average interest rate 9.71% 3.02% 6.94% 6.58% 8.92% 7.70% 7.67%
Liabilities:
Credit Facilities
Variable Rate -- -- $33,000 -- -- -- $ 33,000 $ 33,000
Average interest rate -- -- 5.59% -- -- -- 5.59%
Term Redeemable Securities
Contract
Variable Rate -- $ 12,089 -- -- -- -- $ 12,089 $ 12,089
Average interest rate -- 6.26% -- -- -- -- 6.26%
Repurchase Obligations
Variable Rate $22,909 $120,053 $ 3,960 -- -- -- $146,922 $146,922
Average interest rate 1.10% 2.99% 2.12% -- -- -- 2.67%
Convertible Trust Preferred
Securities
Fixed Rate -- -- -- $89,742 -- -- $ 89,742 $ 89,346
Average interest rate -- -- -- 10.58% -- -- 10.58%
Interest Rate Swaps
Notional amounts -- -- -- -- -- $109,000 $109,000 $ (838)
Average fixed pay rate -- -- -- -- -- 4.24% 4.24%
Average variable receive
rate -- -- -- -- -- 1.12% 1.12%
37
BUSINESS
Overview
We are a finance and investment management company that specializes in
originating and managing credit-sensitive structured financial products. Our
investment programs are executed directly for our own account and for
third-party funds that we manage. To date, our activities have been focused
exclusively in the commercial real estate mezzanine market where we have
originated over $3.2 billion of investments since 1997 and established ourselves
as a leader in that sector. We are organized and conduct our operations to
qualify as a REIT for federal income tax purposes.
Platform
We are a fully integrated, self-managed company that has 25 full-time
employees, all based in New York City. Our senior management team has an average
of 18 years of experience in the fields of real estate, credit, capital markets
and structured finance. Around this team of professionals, we have developed an
entire platform to originate and manage portfolios of credit-sensitive
structured products. Founded on our long-standing relationships with borrowers,
brokers and first mortgage providers, our extensive origination network produces
multiple investment opportunities from which we select only those transactions
which we believe exhibit a compelling risk/return profile. Once a transaction
that meets our parameters is identified, we apply a disciplined process founded
on four elements:
o intense credit underwriting,
o creative financial structuring,
o efficient use of leverage, and
o aggressive asset management.
The first element, and the foundation of our past and future success, is
our expertise in credit underwriting. For each prospective investment, an
in-house underwriting team is assigned to perform a ground-up analysis of all
aspects of credit risk and we reject any transaction that does not meet our
standards. Our rigorous underwriting process is embodied in our proprietary
credit policies and procedures that detail the due diligence steps from initial
client contact through closing. Input and approval is required from our finance,
capital markets, credit and legal teams, as well as from various third-parties
including our credit providers.
Creative financial structuring is the second critical element in our
process. Based upon our underwriting, we strive to create a customized structure
for each investment that minimizes our downside risk while preserving the
flexibility needed by our borrower. Typical structural features in our real
estate investments include bankruptcy-remote vehicles, springing guarantees and
cash flow controls that are implemented when collateral performance drops below
certain levels.
The prudent use of leverage is the third integral element of our
platform. Leverage can increase returns on equity and portfolio diversification,
but can also increase risk. We control this financial risk by actively managing
our capital structure, seeking to match the duration and interest rate index of
our assets and liabilities and, where appropriate, employing hedging instruments
such as interest rate swaps, caps and other interest rate exchange agreements.
Our objective is to minimize interest rate risk and optimize the difference
between the yield on our assets and the cost of our liabilities to create net
interest spread.
The final element of our platform is aggressive asset management. We
pride ourselves on our active style of managing our portfolios. From closing an
investment through its final repayment, our dedicated asset management team is
in constant contact with our borrowers, monitoring performance of the collateral
and enforcing our rights.
By adhering to these four key elements that define our platform, we have
limited the loss experience of our investment portfolios to less than 1.0% since
1997.
38
Business Model
Our business model is designed to produce a unique mix of net interest
spread from our balance sheet investments and fee income from our investment
management operations. Our goal is to deliver a stable, growing stream of
earnings from these two complementary activities.
Our current balance sheet investment program focuses on structured
commercial real estate debt investments, including B Notes, subordinate CMBS,
and small-balance (under $15 million) mezzanine loans. As of September 30, 2003,
our interest-earning balance sheet assets (excluding cash, fund investments and
other assets) total $355.5 million and had a weighted average unleveraged yield
of 10.2%. Our interest-bearing liabilities as of that date total $192.0 million
and had a weighted average interest rate cost of 3.4%.
We currently manage two private equity funds, Fund II and Fund III, that
specialize in making large-balance commercial real estate mezzanine loans. Fund
II made $1.2 billion of investments in 40 separate transactions during its
contractual investment period which commenced in April of 2001 and ended in
April of 2003. As of September 30, 2003, Fund II's remaining investments
aggregate $607.9 million, all of which were performing. Fund III held its
initial closing in June 2003 and its final closing in August 2003, ultimately
raising $425 million of committed equity capital. With leverage, we expect to
make over $1 billion of investments during Fund III's investment period (which
expires in June of 2005). We have made co-investments in Fund II and Fund III,
and our wholly-owned taxable REIT subsidiary, CT Investment Management Co., LLC,
acts as the manager of both funds. In addition to our pro-rata share of income
as a co-investor, we earn base management fees and performance-oriented
incentive management fees from each fund. Our investment management activities
are described further under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Commencing in 2003, we are operating our business to qualify as a REIT
for federal income tax purposes. Our objective in deciding to elect REIT status
is to pay dividends to our shareholders on a tax-efficient basis. We manage our
balance sheet investments to produce a portfolio that meets the asset and income
tests necessary to maintain our REIT qualification and otherwise conduct our
investment management business through our wholly-owned subsidiary, CT
Investment Management Co., which is subject to federal income tax.
Investment Strategies
Since 1997, our investment programs have focused on various strategies
designed to take advantage of investment opportunities that have developed in
the commercial real estate mezzanine sector. These investment opportunities have
been created largely by the evolution and growing importance of securitization
in the real estate capital markets. With approximately $2 trillion outstanding,
U.S. commercial real estate debt is a large and dynamic market that had
traditionally been dominated by institutional lenders such as banks, insurance
companies and thrifts making first mortgage loans for retention in their own
portfolios. Securitized debt has captured an increasing share of this market,
growing from less than 5% of total outstandings in 1990 to approximately 20% by
year-end 2002. More importantly, CMBS now accounts for roughly 40% of annual new
originations with domestic CMBS issuance in 2003 expected to exceed $75 billion.
In addition, many traditional lenders have adopted CMBS standards in their
portfolio lending programs, further extending the influence of securitization in
the market.
The essence of securitization is risk segmentation, whereby whole
mortgage loans (or pools of loans) are split into multiple classes and sold to
different buyers based on their risk appetite and return requirements. The most
senior classes, which have the lowest risk and therefore the lowest return, are
rated investment grade (AAA through BBB-) by the credit rating agencies. The
junior classes, which are subordinate to the senior debt but senior to the
owner/operator's common equity investment, command a higher yield. These
"mezzanine" tranches may carry sub-investment grade ratings or no rating at all.
Depending on our assessment of relative value, our real estate mezzanine
investments may take a variety of forms including:
o Property Mezzanine Loans - These are single-property secured loans
which are subordinate to a primary first mortgage loan, but senior
to the owner's equity. A mezzanine loan is evidenced by its own
promissory note and is typically made to the owner of the
property-owning entity (i.e. the senior loan borrower). It is not
secured by the first mortgage on the property, but by a pledge of
all of the mezzanine
39
borrower's ownership interest in the property owner. Subject to
negotiated contractual restrictions, the mezzanine lender has the
right, following foreclosure, to become the sole indirect owner of
the property subject to the lien of the primary mortgage.
o B Notes - These are loans evidenced by a junior participation in a
first mortgage against a single property; the senior participation
is known as an A Note. Although a B Note may be evidenced by its own
promissory note, it shares a single borrower and mortgage with the A
Note and is secured by the same collateral. B Note lenders have the
same obligations, collateral and borrower as the A Note lender and
in most instances are contractually limited in rights and remedies
in the case of a default. The B Note is subordinate to the A Note by
virtue of a contractual arrangement between the A Note lender and
the B Note lender. For the B Note lender to actively pursue a full
range of remedies, it must, in most instances, purchase the A note.
o Subordinate CMBS - These are the junior classes of securitized pools
of first mortgage loans. Cash flows from the underlying mortgages
are aggregated and allocated to the different classes in accordance
with their priority ranking, typically from AAA through the unrated,
first-loss tranche. Administration and management of the pool are
performed by a trustee and servicers, who act on behalf of all
holders in accordance with contractual agreements. Our investments
generally represent the subordinated tranches ranging from BBB
through the unrated class.
o Preferred Equity Interests - These are senior equity investments in
property-owning entities. Preferred equity holders have a first
claim on cash flow and/or capital event proceeds relative to the
common equity partner. Following an event of default, preferred
equity holders have the right to squeeze out the other equity
holders to become the primary owner of the property subject to the
lien of the primary mortgage. Like true owners, preferred equity
investors have the option to support the loan during temporary cash
flow shortfalls.
o Corporate Mezzanine Loans - These are investments in or loans to
real estate-related operating companies, including REITs. Such
investments may take the form of secured debt, preferred stock and
other hybrid instruments such as convertible debt. Corporate
mezzanine loans may finance, among other things, operations, mergers
and acquisitions, management buy-outs, recapitalizations, start-ups
and stock buy-backs generally involving real estate and real
estate-related entities.
We finance single properties, multiple property-portfolios and operating
companies, with our investment typically representing the portion of the capital
structure ranging between 50% and 85% of underlying collateral value. Our
objective is to create portfolios which are diversified by investment format,
property type and geographic market. The following charts illustrate the
diversification achieved to date in the origination of our investment
portfolios.
Investment Format
-----------------
Property Mezzanine.................. 50%
CMBS................................ 18%
Corporate Mezzanine................. 12%
First Mortgage...................... 11%
B Note.............................. 7%
Preferred Equity.................... 2%
40
Property Type
-------------
Office.............................. 44%
Retail.............................. 19%
Mixed Use........................... 15%
Hotel............................... 13%
Multifamily......................... 7%
Other............................... 2%
Geographic Market
-----------------
Northeast........................... 42%
West................................ 18%
Diversified ........................ 16%
Southeast........................... 13%
Southwest........................... 8%
Midwest............................. 3%
If carefully underwritten and structured, we believe that portfolios of
real estate mezzanine investments can produce superior risk-adjusted returns
when compared to both senior debt and direct equity ownership.
Business Plan
Our business plan is to grow our balance sheet investments and our
third-party assets under management. We intend to continue our commercial real
estate investment programs and actively seek to expand our franchise by pursuing
complementary investment strategies involving other credit-sensitive structured
products that leverage our core skills in credit underwriting and financial
structuring. We may expand through business acquisitions or the recruitment of
finance professionals with experience in other products.
Competition
We are engaged in a highly competitive business. We compete 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 us, 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
us. We compete with other investment management companies in attracting capital
for funds under management.
Government Regulation
Our activities, including the financing of our operations, are subject
to a variety of federal and state regulations. In addition, a majority of states
have ceilings on interest rates chargeable to certain customers in financing
transactions.
41
Employees
As of September 30, 2003, we had 25 full-time employees. None of our
employees are covered by a collective bargaining agreement and management
considers the relationship with its employees to be good.
Properties
Our 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 our telephone number is (212) 655-0220. The
lease for such space expires in June 2008. We believe that this office space is
suitable for our current operations for the foreseeable future.
Legal Proceedings
We are not a party to any material litigation or legal proceedings,
which, in the opinion of management, would have a material adverse effect on our
results of operations or financial condition.
42
MANAGEMENT
Directors
The names, ages as of December 1, 2003, and existing positions of our
directors are as follows:
Name Age Office or Position Held
---- --- -----------------------
Samuel Zell.................. 62 Chairman of the Board of Directors
Jeffrey A. Altman............ 37 Director
Thomas E. Dobrowski.......... 60 Director
Martin L. Edelman............ 62 Director
Gary R. Garrabrant........... 46 Director
Craig M. Hatkoff............. 49 Director
John R. Klopp................ 49 Director, Chief Executive Officer, President
Henry N. Nassau.............. 49 Director
Sheli Z. Rosenberg........... 61 Director
Steven Roth.................. 62 Director
Lynne B. Sagalyn............. 56 Director
The name, principal occupation, selected biographical information and
the period of service as a director of each of the directors are set forth
below.
Samuel Zell has been the chairman of our board of directors since 1997.
Mr. Zell is chairman of Equity Group Investments, L.L.C., a privately-held
corporate investment firm. He is chairman of the board of trustees of Equity
Residential, a REIT specializing in the ownership and management of multi-family
housing, and of Equity Office Properties Trust, a REIT specializing in the
ownership and management of office buildings. He also serves as chairman of the
board of Anixter International Inc., a provider of integrated network and
cabling systems; Manufactured Home Communities, Inc., a REIT specializing in the
ownership and management of manufactured home communities; Angelo & Maxies,
Inc., an owner and operator of restaurants; and iDine Rewards Network, Inc., an
administrator of consumer loyalty rewards programs. Additionally, he serves as
chairman and chief executive officer of Danielson Holding Corporation, a holding
company that offers a variety of insurance products and financial services.
Jeffrey A. Altman has been a director since 1997. Mr. Altman is the sole
managing partner of Owl Creek Asset Management, L.P., a manager of distressed
securities and value equities hedge funds, which he founded in February 2002.
Mr. Altman previously served since November 1996 as a senior vice president of
Franklin Mutual Advisers, Inc., formerly Heine Securities Corporation, a
registered investment adviser, and a vice president of Franklin Mutual Series
Fund Inc., a mutual fund with assets in excess of $20 billion, advised by
Franklin Mutual Advisers. From August 1988 to October 1996, Mr. Altman was an
analyst with Franklin Mutual Advisers.
Thomas E. Dobrowski has been a director since 1998. Mr. Dobrowski is the
managing director of Real Estate and Alternative Investments for General Motors
Asset Management, an investment manager for several pension funds of General
Motors Corporation and its subsidiaries, as well as for several third party
clients. Mr. Dobrowski is a trustee of Equity Office Properties Trust and a
director of Manufactured Home Communities.
Martin L. Edelman has been a director since 1997. Mr. Edelman has been
of counsel to Paul, Hastings, Janofsky & Walker LLP, and prior thereto Battle
Fowler LLP, each a law firm that has provided services to us, since 1993. Mr.
Edelman was a partner with Battle Fowler LLP from 1972 to 1993. Mr. Edelman
served as president of Chartwell Leisure Inc., an owner and operator of hotel
properties, from January 1996 until it was sold in March 1998. He has been a
director of Cendant Corporation and a member of that corporation's executive
committee since November 1993. Mr. Edelman also serves as a director of Acadia
Realty Trust, Ashford Hospitality Trust and Hanover Direct, Inc.
43
Gary R. Garrabrant has been a director since 1997. Mr. Garrabrant was
our vice chairman from February 1997 until July 1997. Mr. Garrabrant has been
chief executive officer of Equity International Properties, Ltd., a
privately-held company which invests in real estate companies and properties
outside the United States, since September 2002 having previously served as its
chief investment officer since July 1998. Mr. Garrabrant is executive vice
president of Equity Group Investments and joined Equity Group Investments as
senior vice president in January 1996. Mr. Garrabrant is a director of Equity
International Properties, Fondo de Valores Inmobiliarios, a publicly-held Latin
American real estate company, and various Equity International Properties'
portfolio companies.
Craig M. Hatkoff has been a director since 1997. From 1997 to 2000, Mr.
Hatkoff served as our vice chairman. Mr. Hatkoff is chairman of Turtle Pond
Publications LLC, which is active in children's publishing and entertainment,
and is a private investor in other entrepreneurial ventures. Mr. Hatkoff was a
founder and a managing partner of Victor Capital Group, L.P. from 1989 until our
acquisition of Victor Capital in July 1997. Mr. Hatkoff was a managing director
and co-head of Chemical Realty Corporation, the real estate investment banking
arm of Chemical Banking Corporation, from 1982 until 1989. From 1978 to 1982,
Mr. Hatkoff was the head of new product development in Chemical Bank's Real
Estate Division, where he previously served as a loan officer.
John R. Klopp has been a director since 1997, and our chief executive
officer and president since 1997 and 1999, respectively. Mr. Klopp was a founder
and a managing partner of Victor Capital from 1989 until the acquisition of
Victor Capital by us in July 1997. Mr. Klopp was a managing director and co-head
of Chemical Realty Corporation from 1982 until 1989. From 1978 to 1982, Mr.
Klopp held various positions with Chemical Bank's Real Estate Division, where he
was responsible for originating, underwriting and monitoring portfolios of
construction and permanent loans.
Henry N. Nassau has been a director since 2003. Mr. Nassau was the chief
operating officer of Internet Capital Group, Inc., an internet holding company,
from December 2002 until June 2003 having previously served as managing
director, general counsel and secretary since May 1999. Since September 2003,
Mr. Nassau has been a partner at the law firm, Dechert LLP. Mr. Nassau was
previously a partner at Dechert LLP from September 1987 to May 1999 and was
chair of the firm's Business Department from January 1988 to May 1999. At
Dechert LLP, Mr. Nassau engages in the practice of corporate law, concentrating
on mergers and acquisitions, public offerings, private equity, and venture
capital financing.
Sheli Z. Rosenberg has been a director since 1997. Ms. Rosenberg is the
retired chief executive officer and president of Equity Group Investments. She
was a principal of the law firm Rosenberg & Liebentritt P.C. from 1980 until
September 1997. Ms. Rosenberg is a director of Manufactured Home Communities,
CVS Corporation, a drugstore chain, Cendant Corporation and Ventas, Inc. She is
also a trustee of Equity Residential and Equity Office Properties Trust.
Steven Roth has been a director since 1998. Mr. Roth has been chairman
of the board of trustees and chief executive officer of Vornado Realty Trust
since May 1989 and chairman of the executive committee of the board of Vornado
Realty Trust since April 1980. Since 1968, he has been a general partner of
Interstate Properties, a real estate and investment company, and, more recently,
he has been managing general partner. On March 2, 1995, he became chief
executive officer of Alexander's, Inc., a real estate company. Mr. Roth is also
a director of Alexander's, Inc.
Lynne B. Sagalyn has been a director since 1997. Dr. Sagalyn is
Professor of Real Estate Development and Planning at the University of
Pennsylvania, with appointments at both the Department of City Planning and the
Wharton School's Real Estate Department. From 1992 until her appointments at the
University of Pennsylvania in 2004, Dr. Sagalyn served as a professor and the
Earl W. Kazis and Benjamin Schore Director of the MBA Real Estate Program and
Milstein Center for Real Estate at the Columbia University Graduate School of
Business. She also serves on the faculty of the Weimer School for Advanced
Studies in Real Estate and Land Economics. Dr. Sagalyn is a director of United
Dominion Realty Trust, a self-administered REIT in the apartment communities
sector and a board member of J.P. Morgan U.S. Real Estate Income and Growth Fund
and has served on the New York City Board of Education Chancellor's Commission
on the Capital Plan.
Executive and Senior Officers
The following sets forth the positions, ages as of December 1, 2003 and
selected biographical information for our executive and senior officers who are
not directors.
44
Jeremy FitzGerald, age 40, has served as a managing director since 1997.
Ms. FitzGerald is responsible for originating, structuring and negotiating high
yield investments. Prior to that time, she served as a principal of Victor
Capital Group and had been employed in various positions at such firm since May
1990. She was previously employed in various positions at PaineWebber
Incorporated.
Peter S. Ginsberg, age 41, has served as a managing director since 2003.
Mr. Ginsberg is responsible for originating, structuring and negotiating high
yield investments. He has been employed by us in various positions since 1997.
He was previously employed as a senior associate at a New York City law firm
focusing on real estate finance and investments.
Geoffrey G. Jervis, age 32, has served as our vice president of capital
markets since 2003. He has been employed by us in various positions since 1999.
Mr. Jervis is responsible for our capital markets activities that include the
structuring, marketing and management of our and our funds' under management
equity and liability structures. Prior to joining us, Mr. Jervis was the Chief
of Staff to the New York City Economic Development Corporation under the
Giuliani Administration.
Brian H. Oswald, age 42, has served as our chief financial officer since
2003. Mr. Oswald joined us in 1997 as our director of finance and accounting and
chief accounting officer. Prior to joining us, Mr. Oswald was employed for 10
years at KPMG Peat Marwick where he held various positions, including senior
manager in the financial institutions group. After leaving KPMG, he was employed
as the president of a savings and loan association, director of financial
reporting and subsidiary accounting for a $1.5 billion bank and corporate
controller for an international computer software company. Mr. Oswald is a
Certified Public Accountant and Certified Management Accountant.
Stephen D. Plavin, age 44, has served as our chief operating officer
since 1998. Prior to that time, Mr. Plavin was employed for fourteen years with
the Chase Manhattan Bank and its securities affiliate, Chase Securities Inc. Mr.
Plavin held various positions within the real estate finance unit of Chase,
including the management of: loan origination and execution, loan syndications,
portfolio management, banking services and real estate owned sales. He served as
a managing director responsible for real estate client management for Chase's
major real estate relationships and in 1997 he became co-head of Global Real
Estate for Chase. Mr. Plavin serves as a director of Omega Healthcare Investors,
Inc., a skilled nursing real estate investment trust.
Thomas C. Ruffing, age 42, has served as our director of asset
management since 2001. Mr. Ruffing is responsible for the asset management of
our investment portfolios. Prior to joining us in 2001, Mr. Ruffing was employed
by JP Morgan Chase serving in its real estate and lodging investment banking
group since 1990. In various roles at the bank, his responsibilities included
structured corporate real estate finance transactions, major asset property
sales, and the restructuring and workout of problem real estate loans.
45
PRINCIPAL SHAREHOLDERS
The following table sets forth as of December 1, 2003, certain
information with respect to the beneficial ownership of our class A common
stock, after adjustment for the one (1) for three (3) reverse stock split
effected on April 2, 2003, by:
o each person known to us to be the beneficial owner of more than 5% of
our outstanding class A common stock,
o each director and "named executive officer" within the meaning of Item
402(a)(3) of Regulation S-K currently employed by us, and
o all of our directors and executive officers as a group.
Such information (other than with respect to our directors and executive
officers) is based on a review of statements filed with the Commission pursuant
to Sections 13(d), 13(f) and 13(g) of the Securities Exchange Act of 1934 with
respect to our class A common stock.
Percentage of
Number of Shares Shares
Beneficially Outstanding
Name of Beneficial Owner Owned (1) Before Offering
------------------------ ----------------- ---------------
Veqtor Finance Company, L.L.C. (2) 897,429 13.7%
EOP Operating Limited Partnership (3) 1,424,474(4) 17.9
Vornado Realty, L.P. (5) 1,424,474(4) 17.9
JPMorgan Chase Bank, as trustee for General Motors
Employe Global Group Pension Trust (6) 99,713(7) 1.5
JPMorgan Chase Bank, as trustee for GMAM Group
Pension Trust II (6) 1,324,761(8) 16.9
Stichting Pensioenfonds ABP (9) 459,566 7.0
Jeffrey A. Altman -- --
Thomas E. Dobrowski --(10) --
Martin L. Edelman 37,093(11) *
Gary R. Garrabrant 88,566(11)(12) 1.4
Craig M. Hatkoff 668,819(13)(14) 10.2
John R. Klopp 813,564(13)(14) 12.1
Henry N. Nassau 10,684(15) *
Brian H. Oswald 51,131(16) *
Stephen D. Plavin 154,445(16) 2.3
Sheli Z. Rosenberg 151,899(11)(17) 2.3
Steven Roth --(18) --
Lynne B. Sagalyn 20,426(11) *
Samuel Zell 77,092(11)(19) 1.2
All executive officers and directors as a group (13 2,069,119 29.6%
persons)
----------------------------
* Represents less than 1%.
(1) The number of shares are those beneficially owned, as determined under the
rules of the SEC, and such information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which a person has sole or shared
voting power or investment power and any shares which the person has the
right to acquire within 60 days through the exercise of any option, warrant
or right, through conversion of any security or pursuant to the automatic
termination of a power of attorney or revocation of a trust, discretionary
account or similar arrangement.
(2) Zell General Partnership, Inc. is the sole managing member of Veqtor
Finance Company, L.L.C. The sole shareholder of Zell General Partnership is
The Sam Investment Trust, a trust established for the benefit of the family
of Sam Zell. Chai Trust Company L.L.C. serves as trustee of The Sam
Investment Trust. Veqtor Finance Company, L.L.C. is located at c/o Equity
Group Investments, L.L.C., Two North Riverside Plaza, Chicago, Illinois
60606.
(3) Beneficial ownership information is based on a statement filed pursuant to
Section 13(d) of the Securities Exchange Act of 1934 by EOP Operating
Limited Partnership. The address of EOP Operating Limited Partnership is
Two North Riverside Plaza, Chicago, Illinois 60606.
46
(4) Represents shares which may be obtained upon conversion of $29,914,000 in
convertible amount of variable step up convertible trust preferred
securities issued by our consolidated Delaware statutory business trust
subsidiary, CT Convertible Trust I.
(5) Beneficial ownership information is based on a statement filed pursuant to
Section13(d) of the Securities Exchange Act of 1934 by Vornado Realty, L.P.
The address of Vornado Realty is c/o Vornado Realty Trust, Park 80 West,
Plaza II, Saddle Brook, New Jersey 07663.
(6) Each trust is a pension trust formed pursuant to the laws of the State of
New York for the benefit of certain employee benefit plans of General
Motors Corporation, its subsidiaries and unrelated employers. These shares
may be deemed to be owned beneficially by General Motors Investment
Management Corporation, a wholly-owned subsidiary of General Motors.
General Motors Investment Management Corporation is registered as an
investment adviser under the Investment Advisers Act of 1940. General
Motors Investment Management Corporation's principal business involves
investment advice and investment management services with respect to the
assets of certain employee benefit plans of General Motors, its
subsidiaries and unrelated employers and with respect to the assets of
certain direct and indirect subsidiaries of General Motors and associated
entities. General Motors Investment Management Corporation is serving as
investment manager with respect to these shares and in that capacity it has
the sole power to direct the trustee as to the voting and disposition of
these shares. Because of the trustee's limited role, beneficial ownership
of the shares by the trustee is disclaimed.
(7) Represents shares which may be obtained upon conversion of $2,093,980 in
convertible amount of variable step up convertible trust preferred
securities issued by our consolidated Delaware statutory business trust
subsidiary, CT Convertible Trust I.
(8) Represents shares which may be obtained upon conversion of $27,820,020 in
convertible amount of variable step up convertible trust preferred
securities issued by our consolidated Delaware statutory business trust
subsidiary, CT Convertible Trust I.
(9) Beneficial ownership information is based on a statement filed pursuant to
Section 13(d) of the Securities Exchange Act of 1934 by Stichting
Pensioenfonds ABP and other information available to us as of the date of
this prospectus. The address of Stichting Pensioenfonds ABP is c/o ABP
Investments US, Inc., 666 Third Avenue, 2nd floor, New York, NY 10017-3904.
(10) Does not include the shares that may be deemed beneficially owned by
General Motors Investment Management Corporation, as to which Mr. Dobrowski
disclaims beneficial ownership.
(11) In the case of Mr. Zell, Mr. Edelman, Mr. Garrabrant, Ms. Rosenberg and Dr.
Sagalyn, includes 12,092 shares obtainable by each upon conversion of
vested stock units. In the case of Mr. Zell, Mr. Edelman, Mr. Garrabrant
and Dr. Sagalyn, includes 40,000, 25,001, 11,667 and 8,334 shares issuable
upon the exercise of vested stock options.
(12) Includes the 64,807 shares owned by GRG Investment Partnership LP, a family
partnership for which Mr. Garrabrant serves as the general partner.
(13) Includes, in the case of Mr. Hatkoff, the 610,044 shares owned by CMH
Investment Partnership LP, a family partnership for which Mr. Hatkoff
serves as a general partner. Includes, in the case of Mr. Klopp, 600,044
shares owned by JRK Investment Partnership LP, a family partnership for
which Mr. Klopp serves as general partner.
(14) Includes 180,558 and 47,223 shares issuable upon the exercise of vested
stock options held by each of Messrs. Klopp and Hatkoff. Includes 9,876
shares for Mr. Klopp that are the subject of restricted stock awards for
which he retains voting rights. Includes for Mr. Hatkoff 5,552 shares that
may be obtained upon conversion of vested stock units.
(15) Includes 684 shares obtainable upon conversion of vested stock units.
Includes 400 shares held by Mr. Nassau's two sons.
(16) Includes 35,002 and 44,445 shares issuable upon the exercise of vested
stock options held by Mr. Oswald and Mr. Plavin, respectively. Includes
3,734 and 10,000 shares for Mr. Oswald and Mr. Plavin, respectively, that
are the subject of restricted stock awards for which they retain voting
rights.
(17) Includes 139,807 shares owned by Rosenberg-CT General Partnership, for
which Ms. Rosenberg serves as a general partner.
(18) Does not include the shares that may be deemed beneficially owned by
Vornado Realty, L.P., as to which Mr. Roth disclaims beneficial ownership.
(19) Does not include the shares that may be deemed beneficially owned by Equity
Office Properties Trust, as to which Mr. Zell disclaims beneficial
ownership.
47
DESCRIPTION OF CAPITAL STOCK
The following is a summary of our class A common stock and preferred
stock, the general terms and provisions of warrants to purchase our common stock
or preferred stock to which any prospectus supplement may relate and provisions
of our charter and bylaws and specific provisions of the Maryland General
Corporation Law containing the material terms of our class A common stock and
preferred stock. As summaries, they are qualified in their entirety by reference
to the Maryland General Corporation Law, to our charter and bylaws and any form
of warrant and warrant agreement applicable to a particular warrant.
General
Under our charter, we may issue up to 200,000,000 shares of stock
comprised of the following:
o 100,000,000 shares of class A common stock, par value $.01 per
share; and
o 100,000,000 shares of preferred stock, par value $.01 per share.
As of the date of this prospectus, 6,536,345 shares of class A common
stock were issued and outstanding and no shares of preferred stock were
designated as a particular class or series or are outstanding. Under Maryland
law, our shareholders generally are not liable for our debts or obligations. The
class A common stock is listed on the New York Stock Exchange under the symbol
"CT".
No warrants to purchase either class A common stock or preferred stock
were issued or outstanding as of the date of this prospectus.
Our charter authorizes our board of directors, without shareholder
approval, to:
o classify and reclassify any unissued shares of our class A common
stock and preferred stock into other classes or series of stock, and
o amend our charter to increase or decrease the aggregate number of
shares of stock of any class or series that may be issued.
We believe that the power to issue additional shares of our class A
common stock or preferred stock, increase the aggregate number of shares of
stock of any class or series that we have the authority to issue and to classify
or reclassify unissued shares of our class A common or preferred stock and
thereafter to issue the classified or reclassified shares of stock provides us
with increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. These actions can be
taken without shareholder approval, unless shareholder approval is required by
applicable law or the rules of any stock exchange or automated quotation system
on which our securities may be listed or traded.
Prior to the issuance of shares of each class or series, the board is
required by Maryland law and by our charter to set, subject to our charter
restrictions on ownership and transfers of our stock, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each class or series. Thus, the board could authorize the
issuance of shares of preferred stock with terms and conditions which could have
the effect of delaying, deferring or preventing a transaction or a change in
control of our company that might involve a premium price for holders of our
class A common stock or otherwise be in their best interest.
Class A Common Stock
Holders of our class A common stock are entitled to receive dividends
when authorized by our board of directors and declared by us out of assets
legally available for the payment of dividends. They are also entitled to share
ratably in our assets legally available for distribution to our shareholders in
the event of our liquidation, dissolution or winding up, after payment of, or
adequate provision for, all of our known debts and liabilities. These rights are
subject to the preferential rights of any other class or series of our stock.
All shares of class A common stock have equal dividend and liquidation rights.
48
Subject to our charter restrictions on ownership and transfer of our
stock, each outstanding share of class A common stock is entitled to one vote on
all matters to be submitted to a vote of the shareholders. There is no
cumulative voting in the election of our directors and our directors are elected
by a plurality of the votes cast, so the holders of a simple majority of the
outstanding class A common stock, voting at a shareholders meeting at which a
quorum is present, can elect all of the directors nominated for election at the
meeting. Holders of our class A common stock have no exchange, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any of our securities. Because holders of class A common stock do not have
preemptive rights, we may issue additional shares of stock that may reduce each
shareholder's proportionate voting and financial interest in our company. Rights
to receive dividends on our class A common stock may be restricted by the terms
of any future classified and issued shares of our preferred stock.
Under Maryland law, a Maryland corporation generally cannot dissolve,
amend its charter, merge, sell all or substantially all of its assets, engage in
a share exchange or engage in similar transactions outside the ordinary course
of business unless approved by the affirmative vote of shareholders holding at
least two-thirds of the shares entitled to vote on the matter. However, a
Maryland corporation may provide in its charter for approval of these matters by
a lesser percentage, but not less than a majority of all of the votes entitled
to be cast on the matter. Our charter provides for approval of these matters by
a majority of all votes entitled to be cast on the matter.
Preferred Stock
General
We are authorized to issue 100,000,000 shares of preferred stock. As of
the date of this prospectus, no shares of preferred stock are outstanding. Our
board of directors has the authority, without further action by the
shareholders, to authorize us to issue shares of preferred stock in one or more
series and to fix the number of shares, dividend rights, conversion rights,
voting rights, redemption rights, liquidation preferences, sinking funds, and
any other rights, preferences, privileges and restrictions applicable to each
such series of preferred stock. The issuance of preferred stock could have the
effect of making an attempt to gain control of us more difficult by means of a
merger, tender offer, proxy contest or otherwise. The preferred stock, if
issued, would have a preference on dividend payments that could affect our
ability to make dividend distributions to the common shareholders. The preferred
stock will, when issued, be duly authorized, fully paid and non-assessable.
A prospectus supplement relating to any series of preferred stock being
offered will include specific terms relating to the offering. They will include,
where applicable:
o the title and stated value of the preferred stock;
o the number of shares of the preferred stock offered, the liquidation
preference per share and the offering price of the preferred stock;
o the dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to the preferred stock;
o whether dividends will be cumulative or non-cumulative and, if
cumulative, the date from which dividends on the preferred stock
shall accumulate;
o the procedures for an auction and remarketing, if any, of the
preferred stock;
o the provisions for a sinking fund, if any, for the preferred stock;
o any voting rights of the preferred stock;
o the provisions for redemption, if applicable, of the preferred
stock;
o any listing of the preferred stock on any securities exchange;
o the terms and conditions, if applicable, upon which the preferred
stock will be convertible into or exchangeable for our class A
common stock, preferred stock or other securities including the
conversion price or the manner of calculating the conversion price
and conversion period;
o if appropriate, a discussion of federal income tax consequences
applicable to the preferred stock;
49
o any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to assist us in
qualifying as a REIT or otherwise;
o the priority of the preferred stock with all series of preferred
stock ranking on a parity with each other unless otherwise specified
in the charter and will rank senior to class A common stock with
respect to payment of dividends and distribution of assets upon
liquidation; and
o any other specific terms, preferences, rights, limitations or
restrictions on the preferred stock.
Conversion or Exchange
The terms, if any, on which the preferred stock may be convertible into
or exchangeable for our class A common stock, preferred stock or other
securities will be stated in the prospectus supplement relating to the preferred
stock. The terms will include provisions as to whether conversion or exchange is
mandatory, at the option of the holder or at our option, and may include
provisions pursuant to which the number of shares of our class A common stock or
other securities to be received by the holders of preferred stock would be
subject to adjustment.
Description of Warrants
We may issue warrants for the purchase of common stock or preferred
stock. Warrants may be issued independently or together with any offered
securities and may be attached to or separate from such securities. Each series
of warrants will be issued under a separate warrant agreement we will enter into
with a warrant agent specified in the agreement. The warrant agent will act
solely as our agent in connection with the warrants of that series and will not
assume any obligation or relationship of agency or trust for or with any holders
or beneficial owners of warrants.
A prospectus supplement relating to any series of warrants being offered
will include specific terms relating to the offering. They will include, where
applicable:
o the title of the warrants;
o the aggregate number of warrants;
o the price or prices at which the warrants will be issued;
o the currencies in which the price or prices of the warrants may be
payable;
o the designation, amount and terms of the offered securities
purchasable upon exercise of the warrants;
o the designation and terms of the other offered securities, if any,
with which the warrants are issued and the number of warrants issued
with the security;
o if applicable, the date on and after which the warrants and the
offered securities purchasable upon exercise of the warrants will be
separately transferable;
o the price or prices at which, and currency or currencies in which,
the offered securities purchasable upon exercise of the warrants may
be purchased;
o the date on which the right to exercise the warrants shall commence
and the date on which the right shall expire;
o the minimum or maximum amount of the warrants which may be exercised
at any one time;
o information with respect to book-entry procedures, if any;
o if appropriate, a discussion of federal income tax consequences; and
o any other material term of the warrants, including terms, procedures
and limitations relating to the exchange and exercise of the
warrants.
Transfer Agent and Registrar
Our transfer agent and registrar is American Stock Transfer & Trust
Company located in Brooklyn, New York.
50
Certain Provisions of Our Charter and Bylaws and of Maryland Law
REIT Qualification Restrictions on Ownership and Transfer
Our charter contains restrictions on the number of shares of our stock
that a person may own. No individual may acquire or hold, directly or
indirectly, in excess of 2.5% in value or number of our outstanding stock or our
outstanding common stock unless they receive an exemption from our board of
directors.
Our charter further prohibits any person from owning shares of our stock
that would result in our being "closely held" under Section 856(h) of the
Internal Revenue Code or otherwise cause us to fail to qualify as a REIT and any
person from transferring shares of our stock if the transfer would result in our
stock being owned by fewer than 100 persons. Any person who acquires or intends
to acquire shares of our stock that may violate any of these restrictions, or
who is the intended transferee of shares of our stock which are transferred to
the trust, as described below, is required to give us immediate written notice
and provide us with such information as we may request in order to determine the
effect of the transfer on our status as a REIT. The above restrictions will not
apply if our board of directors determines that it is no longer in our best
interests to continue to qualify as a REIT.
Our board of directors, in its sole discretion, may exempt a person
from, or modify, these limits, subject to such terms, conditions,
representations and undertakings as it may determine. Our charter provides for,
and our board of directors has granted, limited exemptions to certain persons
who directly or indirectly own our stock, including officers, directors and
shareholders controlled by them or trusts for the benefit of their families.
Any attempted transfer of our stock which, if effective, would result in
violation of the above limitations, will cause the number of shares causing the
violation, rounded to the nearest whole share, to be automatically transferred
to a trust for the exclusive benefit of one or more charitable beneficiaries
designated by us and the proposed transferee will not acquire any rights in the
shares. The automatic transfer will be deemed to be effective as of the close of
business on the business day, as defined in our charter, prior to the date of
the transfer. The shares transferred to the trust will generally be selected so
as to minimize the aggregate value of shares transferred to the trust. Shares of
our stock held in the trust will be issued and outstanding shares. The proposed
transferee will not benefit economically from ownership of any shares of stock
held in the trust, will have no rights to dividends and no rights to vote or
other rights attributable to the shares of stock held in the trust. The trustee
of the trust will have all voting rights and rights to dividends or other
distributions with respect to shares held in the trust. These rights will be
exercised for the exclusive benefit of the charitable beneficiaries. Any
dividend or other distribution paid prior to our discovery that shares of stock
have been transferred to the trust will be paid by the recipient to the trustee
upon demand. Any dividend or other distribution authorized but unpaid will be
paid when due to the trustee. Any dividend or distribution paid to the trustee
will be held in trust for the charitable beneficiaries. Subject to Maryland law,
the trustee will have the authority to rescind as void any vote cast by the
proposed transferee prior to our discovery that the shares have been transferred
to the trust and to recast the vote in accordance with the desires of the
trustee acting for the benefit of the charitable beneficiaries. However, if we
have already taken irreversible corporate action, then the trustee will not have
the authority to rescind and recast the vote. If necessary to protect our status
as a REIT, we may establish additional trusts with distinct trustees and
charitable beneficiaries to which shares may be transferred.
Within 20 days of receiving notice from us that shares of our stock have
been transferred to the trust, the trustee will sell the shares to a person
designated by the trustee, whose ownership of the shares will not violate the
above ownership limitations. Upon the sale, the interest of the charitable
beneficiaries in the shares sold will terminate and the trustee will distribute
the net proceeds of the sale to the proposed transferee and to the charitable
beneficiaries as follows. The proposed transferee will receive the lesser of (i)
the price paid by the proposed transferee for the shares or, if the proposed
transferee did not give value for the shares in connection with the event
causing the shares to be held in the trust, such as a gift, devise or other
similar transaction, the market price, as defined in our charter, of the shares
on the day of the event causing the shares to be held in the trust and (ii) the
price received by the trustee from the sale or other disposition of the shares.
Any net sale proceeds in excess of the amount payable to the proposed transferee
will be paid immediately to the charitable beneficiaries. If, prior to our
discovery that shares of our stock have been transferred to the trust, the
shares are sold by the proposed transferee, then the shares shall be deemed to
have been sold on behalf of the trust and, to the extent that the proposed
transferee received an amount for the shares that exceeds the amount he was
entitled to receive, the excess shall be paid to the trustee upon demand.
51
In addition, shares of our stock held in the trust will be deemed to
have been offered for sale to us, or our designee, at a price per share equal to
the lesser of (i) the price per share in the transaction that resulted in the
transfer to the trust, or, in the case of a devise or gift, the market price at
the time of the devise or gift and (ii) the market price on the date we, or our
designee, accept the offer. We will have the right to accept the offer until the
trustee has sold the shares. Upon a sale to us, the interest of the charitable
beneficiaries in the shares sold will terminate and the trustee will distribute
the net proceeds of the sale to the proposed transferee.
All certificates representing shares of our stock issued in the future
will bear a legend referring to the restrictions described above.
Every owner of more than such percentage as may from time to time be
established by our board of directors, or such lower percentage as required by
the Internal Revenue Code or the regulations promulgated thereunder, of our
stock, within 30 days after the end of each taxable year, is required to give us
written notice, stating his name and address, the number of shares of each class
and series of our stock which he beneficially owns and a description of the
manner in which the shares are held. Each such owner shall provide us with such
additional information as we may request in order to determine the effect, if
any, of its beneficial ownership on our status as a REIT and to ensure
compliance with the ownership limits. In addition, each shareholder shall, upon
demand, be required to provide us with such information as we may request in
good faith in order to determine our status as a REIT and to comply with the
requirements of any taxing authority or governmental authority or to determine
such compliance.
These ownership limits could delay, defer or prevent a transaction or a
change in control that might involve a premium price for the class A common
stock or otherwise be in the best interest of the shareholders.
Business Combinations
Under Maryland law, "business combinations" between a Maryland
corporation and an interested shareholder or any affiliate of an interested
shareholder are prohibited for five years after the most recent date on which
the interested shareholder becomes an interested shareholder. These business
combinations include a merger, consolidation, share exchange, or, in
circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities. An interested shareholder is defined as:
o any person who beneficially owns 10% or more of the voting power of
the corporation's shares; or
o an affiliate or associate of the corporation who, at any time within
the two-year period prior to the date interested shareholder status
is determined, was the beneficial owner of 10% or more of the voting
power of the corporation.
A person is not an interested shareholder under the statute if the board
of directors approved in advance the transaction by which he or she otherwise
would have become an interested shareholder. However, in approving a
transaction, our board of directors may provide that its approval is subject to
compliance, at or after the time of approval, with any terms and conditions
determined by the board.
After the five-year prohibition, any business combination between the
Maryland corporation and an interested shareholder or any affiliate of an
interested shareholder generally must be recommended by the board of directors
of the corporation and approved by the affirmative vote of at least:
o 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
o two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation other than shares held by the interested
shareholder with whom or with whose affiliate the business
combination is to be effected or the shares held by any affiliate or
associate of the interested shareholder.
These super-majority vote requirements do not apply if the corporation's
common shareholders receive a minimum price, as defined under Maryland law, for
their shares in the form of cash or other consideration in the same form as
previously paid by the interested shareholder for its shares.
The statute permits various exemptions from its provisions, including
business combinations that are exempted by the board of directors prior to the
time that the interested shareholder became an interested shareholder. Our board
52
of directors has adopted resolutions which exempt Veqtor Finance Company,
L.L.C., JRK Investment Partnership LP and CMH Investment Partnership LP from the
five-year prohibition and the super-majority vote requirement. The business
combination statute may discourage others from trying to acquire control of us
and may increase the difficulty of consummating any offer relating to the same.
Control Share Acquisitions
Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter. A control share acquisition means the acquisition of control shares,
subject to certain exceptions. Shares owned by the acquiror or by officers or
directors of the target corporation who are also employees are excluded from
shares entitled to vote on the matter. Control shares are voting shares of stock
which, if aggregated with all other shares of stock owned by the acquiror or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power, except solely by virtue of a revocable proxy, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power:
o one-tenth or more but less than one-third;
o one-third or more but less than a majority; or
o a majority or more of all voting power.
Control shares do not include shares the acquiror is entitled to vote as
a result of having previously obtained shareholder approval.
A person who has made or proposes to make a control share acquisition
may compel the board of directors of the corporation to call a special meeting
of shareholders to be held within 50 days of demand to consider the voting
rights of the shares. The right to compel the calling of a special meeting is
subject to the satisfaction of certain conditions, including an undertaking to
pay the expenses of the meeting. If no request for a meeting is made, the
corporation may itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then the corporation may redeem for fair value any or all of the
control shares, except those for which voting rights have previously been
approved. The right of the corporation to redeem control shares is subject to
certain conditions and limitations. Fair value is determined, without regard to
the absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of the shares are considered and not approved. If voting
rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of appraisal rights may not be less than the highest
price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or to acquisitions approved or exempted by the charter or
bylaws of the corporation.
Maryland Unsolicited Takeovers Act
The Maryland Unsolicited Takeovers Act applies to any Maryland
corporation that has a class of securities registered under the Securities
Exchange Act of 1934 and at least three independent directors. Pursuant to such
act, the board of directors of any Maryland corporation fitting such
description, without obtaining shareholder approval and notwithstanding a
contrary provision in its charter or bylaws, may elect to:
o classify the board;
o increase the required shareholder vote to remove a director to
two-thirds of all the votes entitled to be cast by the shareholders
generally in the election of directors; and
o require that a shareholder requested special meeting need be called
only upon the written request of the shareholders entitled to cast a
majority of all the votes entitled to be cast at the meeting.
53
Additionally, the board may provide that:
o the number of directors may be fixed only by a vote of the board of
directors,
o each vacancy on the board of directors, including a vacancy
resulting from the removal of a director by the shareholders, may be
filled only by the affirmative vote of a majority of the remaining
directors in office, even if the remaining directors do not
constitute a quorum; and
o any director elected to fill a vacancy will hold office for the full
remainder of the term, rather than until the next election of
directors.
The Maryland Unsolicited Takeovers Act does not limit the power of a
corporation to confer on the holders of any class or series of preferred stock
the right to elect one or more directors. We currently have more than three
independent directors and have a class of securities registered under the
Securities Exchange Act of 1934 and therefore our board of directors could elect
to provide for any of the foregoing provisions. As of the date hereof, our board
of directors has not made any such election.
Advance Notice of Director Nominations and New Business
Our bylaws provide that with respect to an annual meeting of
shareholders, nominations of individuals for election to the board of directors
and the proposal of business to be considered by shareholders may be made only:
o pursuant to our notice of the meeting;
o by or at the direction of the board of directors; or
o by a shareholder who was a shareholder of record both at the time of
giving of notice and at the time of the annual meeting, who is
entitled to vote at the meeting and who has complied with the
advance notice procedures of the bylaws.
With respect to special meetings of shareholders, only the business
specified in our notice of the meeting may be brought before the meeting.
Nominations of individuals for election to the board of directors at a special
meeting may only be made:
o pursuant to our notice of the meeting;
o by or at the direction of the board of directors; or
o provided that the board of directors has determined that directors
will be elected at the meeting, by a shareholder who is a
shareholder of record both at the time of giving of notice and at
the time of the special meeting and who is entitled to vote at the
meeting and has complied with the advance notice provisions of the
bylaws.
DESCRIPTION OF DEBT SECURITIES
The following description contains general terms and provisions of the
debt securities to which any prospectus supplement may relate. The particular
terms of the debt securities offered by any prospectus supplement and the
extent, if any, to which such general provisions may not apply to the debt
securities so offered will be described in the prospectus supplement relating to
such debt securities. For more information, please refer to the senior indenture
we will enter into with a trustee to be selected, relating to the issuance of
the senior notes, and the subordinated indenture we will enter into with a
trustee to be selected, relating to issuance of the subordinated notes. Forms of
these documents are filed as exhibits to the registration statement, which
includes this prospectus.
As used in this prospectus, the term indentures refers to both the
senior indenture and the subordinated indenture. The indentures will be
qualified under and governed by the Trust Indenture Act. As used in this
prospectus, the term trustee refers to either the senior trustee or the
subordinated trustee, as applicable.
The following are summaries of material provisions anticipated to be
included in the senior indenture and the subordinated indenture. As summaries,
they do not purport to be complete or restate the indentures in their entirety
and are subject to, and qualified in their entirety by reference to, all
provisions of the indentures and the debt securities. We urge you to read the
indentures applicable to a particular series of debt securities because they,
and not this description,
54
define your rights as the holders of the debt securities. Except as otherwise
indicated, the terms of the senior indenture and the subordinated indenture are
identical.
General
Each prospectus supplement will describe the following terms relating to
a series of notes:
o the title;
o any limit on the amount that may be issued;
o whether or not such series of notes will be issued in global form,
the terms and who the depository will be;
o the maturity date(s);
o the annual interest rate(s), which may be fixed or variable, or the
method for determining the rate(s) and the date(s) interest will
begin to accrue, the date(s) interest will be payable and the
regular record dates for interest payment dates or the method for
determining such date(s);
o the place(s) where payments shall be payable;
o our right, if any, to defer payment of interest and the maximum
length of any such deferral period;
o the date, if any, after which, and the price(s) at which, such
series of notes may, pursuant to any optional redemption provisions,
be redeemed at our option, and other related terms and provisions;
o the date(s), if any, on which, and the price(s) at which we are
obligated, pursuant to any mandatory sinking fund provisions or
otherwise, to redeem, or at the holder's option to purchase, such
series of notes and other related terms and provisions;
o the denominations in which such series of notes will be issued, if
in other than denominations of $1,000 and any integral multiple
thereof;
o any mandatory or optional sinking fund or similar provisions;
o the currency or currency units of payment of the principal of,
premium, if any, and interest on the notes;
o any index used to determine the amount of payments of the principal
of, premium, if any, and interest on the notes and the manner in
which such amounts shall be determined;
o the terms pursuant to which such notes are subject to defeasance;
o the terms and conditions, if any, pursuant to which such notes are
secured; and
o any other terms, which terms shall not be inconsistent with the
indentures.
The notes may be issued as original issue discount securities. An
original issue discount security is a note, including any zero-coupon note,
which:
o is issued at a price lower than the amount payable upon its stated
maturity and
o provides that upon redemption or acceleration of the maturity, an
amount less than the amount payable upon the stated maturity, shall
become due and payable.
United States federal income tax consequences applicable to notes sold
at an original issue discount will be described in the applicable prospectus
supplement. In addition, United States federal income tax or other consequences
applicable to any notes which are denominated in a currency or currency unit
other than United States dollars may be described in the applicable prospectus
supplement.
Under the indentures, we will have the ability, in addition to the
ability to issue notes with terms different from those of notes previously
issued, without the consent of the holders, to reopen a previous issue of a
series of notes and issue additional notes of that series, unless the reopening
was restricted when the series was created, in an aggregate principal amount
determined by us.
55
Conversion or Exchange Rights
The terms, if any, on which a series of notes may be convertible into or
exchangeable for our class A common stock, preferred stock or other securities
will be described in the prospectus supplement relating to that series of notes.
The terms will include provisions as to whether conversion or exchange is
mandatory, at the option of the holder or at our option, and may include
provisions pursuant to which the number of shares of our class A or other class
of common stock, preferred stock or other securities to be received by the
holders of the series of notes would be subject to adjustment.
Consolidation, Merger or Sale
The indentures do not contain any covenant which restricts our ability
to merge or consolidate, or sell, convey, transfer or otherwise dispose of all
or substantially all of their assets. However, any successor or acquirer of such
assets must assume all of our obligations under the indentures or the notes, as
appropriate.
Events of Default Under the Indenture
The following are events of default under the indentures with respect to
any series of notes issued:
o failure to pay the principal, or premium, if any, when due;
o failure to pay interest when due and such failure continues for 90
days and the time for payment has not been extended or deferred;
o failure to observe or perform any other covenant contained in the
notes or the indentures, other than a covenant specifically relating
to another series of notes, and such failure continues for 90 days
after we receive notice from the trustee or holders of at least 25%
in aggregate principal amount of the outstanding notes of that
series;
o certain events of bankruptcy, insolvency or reorganization; and
o any other event of default described in the applicable prospectus
supplement.
If an event of default with respect to notes of any series occurs and is
continuing, the trustee or the holders of at least 25% in aggregate principal
amount of the outstanding notes of that series, by notice in writing to us, and
to the trustee if notice is given by such holders, may declare the unpaid
principal of, premium, if any, and accrued interest, if any, due and payable
immediately. The trustee may withhold notice to the holders of notes of any
default or event of default, except a default or event of default relating to
the payment of principal or interest, if it determines that withholding such
notice is in the holders' interest.
The holders of a majority in principal amount of the outstanding notes
of an affected series may waive any default or event of default with respect to
such series and its consequences, except a continuing default or events of
default in the payment of principal, premium, if any, or interest on the notes
of such series.
Any such waiver shall cure such default or event of default.
Subject to the terms of the indentures, if an event of default under an
indenture shall occur and be continuing, the trustee will be under no obligation
to exercise any of its rights or powers under such indenture at the request or
direction of any of the holders of the applicable series of notes, unless such
holders have offered the trustee reasonable indemnity. The holders of a majority
in principal amount of the outstanding notes of any series will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the trustee, or exercising any trust or power conferred on the
trustee, with respect to the notes of that series, provided that:
o it is not in conflict with any law or the applicable indenture;
o the trustee may take any other action deemed proper by it which is
not inconsistent with such direction; and
o subject to its duties under the Trust Indenture Act, the trustee
need not take any action that might involve it in personal liability
or might be unduly prejudicial to the holders not involved in the
proceeding.
56
A holder of the notes of any series will only have the right to
institute a proceeding under the indentures or to appoint a receiver or trustee,
or to seek other remedies if:
o the holder has given written notice to the trustee of a continuing
event of default with respect to that series;
o the holders of at least 25% in aggregate principal amount of the
outstanding notes of that series have made written request, and such
holders have offered reasonable indemnity to the trustee to
institute such proceedings as trustee; and
o the trustee does not institute such proceeding, and does not receive
from the holders of a majority in the aggregate principal amount of
the outstanding notes of that series other conflicting directions
within 60 days after such notice, request and offer.
These limitations do not apply to a suit instituted by a holder of notes
if we default in the payment of the principal, premium, if any, or interest on,
the notes.
We will periodically file statements with the trustee regarding our
compliance with certain of the covenants in the indentures.
Modification of Indenture; Waiver
We and the trustee may change an indenture without the consent of any
holders with respect to certain matters, including:
o to fix any ambiguity, defect or inconsistency in such indenture; and
o to change anything that does not materially adversely affect the
interests of any holder of notes of any series.
In addition, under the indentures, the rights of holders of a series of
notes may be changed by us and the trustee with the written consent of the
holders of at least a majority in aggregate principal amount of the outstanding
notes of each series that is affected. However, we can make the following
changes only with the consent of each holder of any outstanding notes affected:
o extending the fixed maturity of such series of notes;
o changing any of our obligations to pay additional amounts;
o reducing the principal amount, reducing the rate of or extending the
time of payment of interest, or any premium payable upon the
redemption of any such notes;
o reducing the amount of principal of an original issue discount
security or any other note payable upon acceleration of the maturity
thereof;
o changing currency in which any note or any premium or interest is
payable;
o impairing the right to enforce any payment on or with respect to any
note;
o adversely changing the right to convert or exchange, including
decreasing the conversion rate or increasing the conversion price
of, such note, if applicable;
o in the case of the subordinated indenture, modifying the
subordination provisions in a manner adverse to the holders of the
subordinated notes;
o if the notes are secured, changing the terms and conditions pursuant
to which the notes are secured in a manner adverse to the holders of
the secured notes;
o reducing the percentage in principal amount of outstanding notes of
any series, the consent of whose holders is required for
modification or amendment of the applicable indenture or notes or
for waiver of compliance with certain provisions of the applicable
indenture or for waiver of certain defaults;
o reducing the requirements contained in the applicable indenture for
quorum or voting;
57
o changing any of our obligations to maintain an office or agency in
the places and for the purposes required by the indentures; or
o modifying any of the above provisions.
Form, Exchange, and Transfer
The notes of each series will be issuable only in fully registered form
without coupons and, unless otherwise specified in the applicable prospectus
supplement, in denominations of $1,000 and any integral multiple thereof. The
indentures will provide that notes of a series may be issuable in temporary or
permanent global form and may be issued as book-entry securities that will be
deposited with, or on behalf of, The Depository Trust Company or another
depository named by us and identified in a prospectus supplement with respect to
such series.
At the option of the holder, subject to the terms of the indentures and
the limitations applicable to global securities described in the applicable
prospectus supplement, notes of any series will be exchangeable for other notes
of the same series, in any authorized denomination and of like tenor and
aggregate principal amount.
Subject to the terms of the indentures and the limitations applicable to
global securities described in the applicable prospectus supplement, notes may
be presented for exchange or for registration of transfer, duly endorsed or with
the form of transfer endorsed, duly executed if so required by us or the
security registrar, at the office of the security registrar or at the office of
any transfer agent designated by us for such purpose. Unless otherwise provided
in the notes to be transferred or exchanged, we will not require a service
charge for any registration of transfer or exchange, but we may require payment
of any taxes or other governmental charges. The security registrar and any
transfer agent initially designated by us for any notes will be named in the
applicable prospectus supplement. We may at any time designate additional
transfer agents or rescind the designation of any transfer agent or approve a
change in the office through which any transfer agent acts, except that we will
be required to maintain a transfer agent in each place of payment for the notes
of each series.
If the notes of any series are to be redeemed, we will not be required
to:
o issue, register the transfer of, or exchange any notes of that
series during a period beginning at the opening of business 15 days
before the day of mailing of a notice of redemption of any such
notes that may be selected for redemption and ending at the close of
business on the day of such mailing; or
o register the transfer of or exchange any notes so selected for
redemption, in whole or in part, except the unredeemed portion of
any such notes being redeemed in part.
Information Concerning the Trustee
The trustee, other than during the occurrence and continuance of an
event of default under an indenture, undertakes to perform only such duties as
are specifically described in the indentures and, upon an event of default under
an indenture, must use the same degree of care as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the trustee is under no obligation to exercise any of the powers
given it by the indentures at the request of any holder of notes unless it is
offered reasonable security and indemnity against the costs, expenses and
liabilities that it might incur. The trustee is not required to spend or risk
its own money or otherwise become financially liable while performing its duties
unless it reasonably believes that it will be repaid or receive adequate
indemnity.
Payment and Paying Agents
Unless otherwise indicated in the applicable prospectus supplement,
payment of the interest on any notes on any interest payment date will be made
to the person in whose name such notes or one or more predecessor securities are
registered at the close of business on the regular record date for such
interest.
Principal of and any premium and interest on the notes of a particular
series will be payable at the office of the paying agents designated by us,
except that unless otherwise indicated in the applicable prospectus supplement,
interest payments may be made by check mailed to the holder. Unless otherwise
indicated in such prospectus supplement, the corporate trust office of the
trustee in the City of New York will be designated as our sole paying agent for
payments
58
with respect to notes of each series. Any other paying agents initially
designated by us for the notes of a particular series will be named in the
applicable prospectus supplement. We will be required to maintain a paying agent
in each place of payment for the notes of a particular series.
All moneys paid by us to a paying agent or the trustee for the payment
of the principal of or any premium or interest on any notes which remains
unclaimed at the end of two years after the principal, premium or interest has
become due and payable will be repaid to us, and the holder of the security may
then look only to us for payment.
Governing Law
The indentures and the notes will be governed by and construed in
accordance with the laws of the State of New York except to the extent that the
Trust Indenture Act shall be applicable.
Subordination of Subordinated Notes
The subordinated notes will be unsecured and will be subordinate and
junior in priority of payment to certain of our other indebtedness to the extent
described in a prospectus supplement. The subordinated indenture does not limit
the amount of subordinated notes which we may issue, nor does it limit us from
issuing any other secured or unsecured debt.
59
FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material United States federal
income tax considerations associated with our decision to elect to be taxed as a
REIT and with the ownership of our class A common stock. The following
discussion is not exhaustive of all possible tax considerations that may be
relevant to the REIT election or with the ownership of our class A common stock.
Moreover, the discussion contained herein does not address all aspects of
taxation that may be relevant to you in light of your personal tax
circumstances, including, for example, certain types of shareholders subject to
special treatment under federal income tax laws, including insurance companies,
tax-exempt organizations, except to the extent discussed under the caption
"Taxation of Tax-Exempt Shareholders", financial institutions, broker-dealers,
and foreign corporations and persons who are not citizens or residents of the
United States, except to the extent discussed under the caption "Taxation of
Non-U.S. Shareholders".
The statements in this discussion are based upon, and qualified in their
entirety by, current provisions of the Internal Revenue Code, existing,
temporary, and currently-proposed, Treasury Regulations promulgated under the
Internal Revenue Code, existing administrative rulings and practices of the
Internal Revenue Service and judicial decisions. We cannot give you any
assurances that future legislative, administrative or judicial actions or
decisions, which may be retroactive in effect, will not affect the accuracy of
any of the statements contained herein.
You are urged to consult your own tax advisor regarding the specific tax
consequences to you of the ownership and sale of stock in an entity electing to
be taxed as a real estate investment trust, including the federal, state, local,
foreign and other tax consequences of such ownership and sale, as well as
potential changes in the applicable tax laws. This summary is based on the facts
and applicable law as of the date hereof.
Tax Consequences of REIT Election
Prior to January 1, 2003, all of our income was subject to income taxes
that we paid, and our shareholders recognized income only to the extent that we
paid a dividend from current or accumulated earnings and profits. Following the
election, we generally will be taxable only on our undistributed income, and our
shareholders generally will be taxable on the income distributed to them.
However, because the operations of our wholly-owned subsidiary, CT Investment
Management Co., are of a nature and scope that would cause us to fail to qualify
as a real estate investment trust, it will be treated and operate as a taxable
REIT subsidiary. As a result, CT Investment Management Co. will be directly
taxed on its income, so that only its after-tax income will be available for
reinvestment or for distribution to our shareholders. In general, any of the
after-tax income of CT Investment Management Co. distributed to our shareholders
will be includable in our shareholders' taxable income and will be subject to a
second level of tax. We may own an interest in one or more taxable REIT
subsidiaries, in addition to CT Investment Management Co.
In accordance with our decision to be taxed as a REIT, we will make a
formal election to be so taxed under Section 856 of the Internal Revenue Code,
commencing with our taxable year beginning January 1, 2003. The sections of the
Internal Revenue Code and Treasury Regulations applicable to qualification and
operation as a real estate investment trust are technical and complex. Although
we believe that we will be organized and will operate in a manner necessary to
satisfy the requirements for taxation as a real estate investment trust under
the Internal Revenue Code, many of which are discussed below, we cannot assure
you that the REIT will be able to so operate for all periods following the
election.
Taxation of a REIT
If we qualify as a real estate investment trust, the REIT generally will
not be subject to federal corporate income taxes on net income currently
distributed to shareholders. The benefit of this tax treatment is that it
substantially eliminates the "double taxation" resulting from the taxation at
both the corporate and shareholder levels that generally results from owning
stock in a corporation. Accordingly, income generated by us generally will be
subject to taxation solely at the shareholder level upon distribution. We will,
however, be required to pay certain federal income taxes, including in the
following circumstances:
60
o We will be subject to federal income tax at regular corporate rates
on taxable income, including net capital gain, that we do not
distribute to shareholders during, or within a specified time period
after, the calendar year in which such income is earned.
o We will be subject to the "alternative minimum tax" on our
undistributed items of tax preference.
o We will be subject to a 100% tax on net income from certain sales or
other dispositions of property that we hold primarily for sale to
customers in the ordinary course of business (known as "prohibited
transactions").
o If we fail to satisfy the 75% gross income test or the 95% gross
income test, both described below, but nevertheless qualify as a
real estate investment trust, we will be subject to a 100% tax on an
amount equal to the gross income attributable to the greater of the
amount by which we fail the 75% or 95% gross income test multiplied
by a fraction intended to reflect our profitability.
o If we have net income from the sale or other disposition of
"foreclosure property," which is held primarily for sale to
customers in the ordinary course of business, or other nonqualifying
income from foreclosure property, we will be required to pay tax at
the highest corporate rate on this income. In general, foreclosure
property is property acquired through foreclosure after a default on
a loan secured by the property or on a lease of the property.
o If we acquire an asset from a corporation which is not a REIT in a
transaction in which the basis of the asset in our hands is
determined by reference to the basis of the asset in the hands of
the transferor corporation, and we subsequently sell the asset
within ten years, then under Treasury Regulations, we would be
required to pay tax at the highest regular corporate tax rate on
this gain to the extent the fair market value of the asset exceeds
our adjusted tax basis in the asset, in each case, determined as of
the date on which we acquired the asset. The results described in
this paragraph assume that we will elect this treatment in lieu of
an immediate tax when the asset is acquired. We will also be subject
to such tax liability for all of our assets that were held as of
January 1, 2003.
o We will generally be subject to tax on the portion of any "excess
inclusion" income derived from an investment in residual interests
in real estate mortgage investment conduits to the extent our stock
is held by specified tax exempt organizations not subject to tax on
unrelated business taxable income.
o If we fail to distribute during the calendar year at least the sum
of (i) 85% of our real estate investment trust ordinary income for
such year, (ii) 95% of our real estate investment trust capital gain
net income for such year, and (iii) any undistributed taxable income
from prior periods, we will pay a 4% excise tax on the excess of
such required distribution over the amount actually distributed to
shareholders.
o We may elect to retain and pay income tax on some or all of our
long-term capital gain, as described below.
o We may be subject to a 100% excise tax on transactions with our
taxable REIT subsidiary not conducted on an arm's-length basis.
Requirements for Qualification as a REIT.
Introduction
In order to qualify as a real estate investment trust for federal income
tax purposes, we must elect to be treated as a REIT and must satisfy certain
statutory tests relating to, among other things, sources of our income, the
nature of our assets, the amount of our distributions, and the ownership of our
stock.
The Internal Revenue Code defines a REIT as a corporation, trust or
association:
(1) that is managed by one or more trustees or directors;
(2) that issues transferable shares or transferable certificates
of beneficial ownership to its owners;
(3) that would be taxable as a regular corporation, but for its
election to be taxed as a REIT;
61
(4) that is not a financial institution or an insurance company
under the Internal Revenue Code;
(5) that is owned by 100 or more persons;
(6) in which not more than 50% in value of the outstanding stock
is owned, actually or constructively, by five or fewer individuals, as
defined in the Internal Revenue Code to include some entities, during
the last half of each year; and
(7) that meets other tests, described below, regarding the nature
of its income and assets, and the amount of its distributions.
The Internal Revenue Code provides that conditions (1) to (4) must be
met during the entire year and that condition (5) must be met during at least
335 days of a year of twelve months, or during a proportionate part of a shorter
taxable year. Conditions (5) and (6) do not apply to the first taxable year for
which an election is made to be taxed as a REIT.
Our amended and restated charter provides for restrictions regarding
ownership and transfer of our stock. These restrictions are intended to assist
us in satisfying the share ownership requirements described in conditions (5)
and (6) above. These stock ownership and transfer restrictions are described
above under the caption "Description of Capital Stock -- Certain Provisions of
Maryland Law and Our Charter and Bylaws -- REIT Qualification Restrictions on
Ownership and Transfer." These restrictions, however, may not ensure that we
will, in all cases, be able to satisfy the share ownership requirements
described in conditions (5) and (6) above. If we fail to satisfy these share
ownership requirements, our status as a REIT would terminate. If, however, we
comply with the rules contained in applicable Treasury Regulations that require
us to determine the actual ownership of our shares and we do not know, or would
not have known through the exercise of reasonable diligence, that we failed to
meet the requirement described in condition (6) above, we would not be
disqualified as a REIT.
In addition, a corporation may not qualify as a REIT unless its taxable
year is the calendar year. We have and will continue to have a calendar taxable
year.
A corporation that is a "qualified REIT subsidiary" is not treated as a
corporation separate from its parent real estate investment trust for federal
income tax purposes. All assets, liabilities and items of income, deduction, and
credit of a qualified REIT subsidiary are treated as the assets, liabilities and
items of income, deduction and credit of the real estate investment trust. A
qualified REIT subsidiary is a corporation, all of the capital stock of which is
owned by a real estate investment trust and for which no election has been made
to treat it as a "taxable REIT subsidiary" as discussed below. Thus, in applying
the requirements described in this section, any qualified REIT subsidiary that
we may own in the future will be ignored and all assets, liabilities and items
of income, deduction and credit of such subsidiary will be treated as our
assets, liabilities, and items of income, deduction and credit.
A REIT will be deemed to own its proportionate share (based upon its
share of the capital of the partnership) of the assets of a partnership in which
it is a partner and will be deemed to be entitled to the income of the
partnership attributable to such share. In addition, the assets and income of
the partnership attributed to a REIT shall retain their same character as in the
hands of the partnership for purposes of determining whether the REIT satisfied
the income and asset tests described below.
A real estate investment trust may own up to 100% of the stock of one or
more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that
would not be REIT qualifying income, as described below, if earned directly by
the parent real estate investment trust. Both the subsidiary and the real estate
investment trust must jointly elect to treat the subsidiary as a taxable REIT
subsidiary. Overall, not more than 20% of the value of the real estate
investment trust's assets may consist of securities of one or more taxable REIT
subsidiaries. A taxable REIT subsidiary will pay tax at regular corporate rates
on any income that it earns. There is a 100% excise tax imposed on transactions
involving a taxable REIT subsidiary and its parent real estate investment trust
that are not conducted on an arm's-length basis. Our wholly owned subsidiary, CT
Investment Management Co. serves as our exclusive manager and subject to the
supervision of our board of directors is responsible for our day-to-day
operations pursuant to a management agreement. We believe the compensation,
expense reimbursement and other terms of the management agreement are comparable
to those that could be obtained from unrelated parties on an arm's-length basis.
62
We and CT Investment Management Co. have made a taxable REIT subsidiary
election with respect to CT Investment Management Co. CT Investment Management
Co. will pay corporate income tax on its taxable income and its after-tax net
income will be available for reinvestment and for distribution to us as its
parent. We may own interests in one or more taxable REIT subsidiaries other than
CT Investment Management Co.
Income Tests
General
A REIT must satisfy annually two tests regarding the sources of its gross income
in order to maintain its real estate investment trust status. First, at least
75% of a REIT's gross income, excluding gross income from certain "dealer"
sales, for each taxable year generally must consist of defined types of income
that the REIT derives, directly or indirectly, from investments relating to real
property or mortgages on real property or temporary investment income. We refer
to this test as the 75% gross income test. Qualifying income for purposes of the
75% gross income test generally includes:
o interest from debt secured by mortgages on real property or on
interests in real property;
o "rents from real property" (as defined below);
o dividends or other distributions on, and gain from the sale of,
shares in other real estate investment trusts;
o gain from the sale or other disposition of real property; and
o amounts, other than amounts the determination of which depends in
whole or in part on the income or profits of any person, received as
consideration for entering into agreements to make loans secured by
mortgages on real property or on interests in real property or
agreements to purchase or lease real property.
Second, at least 95% of the REIT's gross income, excluding gross income
from certain "dealer" sales, for each taxable year generally must consist of
income that is qualifying income for purposes of the 75% gross income test, as
well as dividends, other types of interest and gain from the sale or disposition
of stock or securities. We refer to this test as the 95% gross income test.
Interest from Debt Secured by Mortgages on Real Property or on Interests in Real
Property
For these purposes, the term "interest" generally does not include any
interest of which the amount received depends on the income or profits of any
person. An amount will generally not be excluded from the term "interest,"
however, if such amount is based on a fixed percentage of receipts or sales.
Any amount includable in gross income by us with respect to a regular or
residual interest in a real estate mortgage investment conduit, or REMIC, is
generally treated as interest on an obligation secured by a mortgage on real
property for purposes of the 75% gross income test. If, however, less than 95%
of the assets of a real estate mortgage investment conduit consist of real
estate assets, we will be treated as receiving directly our proportionate share
of the income of the REMIC, which would generally include non-qualifying income
for purposes of the 75% gross income test. In addition, if we receive interest
income with respect to a mortgage loan that is secured by both real property and
other property and the principal amount of the loan exceeds the fair market
value of the real property on the date we purchased the mortgage loan, interest
income on the loan will be apportioned between the real property and the other
property, which apportionment would cause us to recognize income that is not
qualifying income for purposes of the 75% gross income test.
In general, and subject to the exceptions in the preceding paragraph,
the interest, original issue discount, and market discount income that we derive
from investments in mortgage-backed securities and mortgage loans will be
qualifying interest income for purposes of both the 75% and the 95% gross income
tests. It is possible, however, that interest income from a mortgage loan may be
based in part on the borrower's profits or net income, which would generally
disqualify such interest income for purposes of both the 75% and the 95% gross
income tests.
We may acquire construction loans or mezzanine loans that have shared
appreciation provisions. To the extent interest on a loan is based on the cash
proceeds from the sale or value of property, income attributable to such
provision
63
would be treated as gain from the sale of the secured property, which generally
should qualify for purposes of the 75% and 95% gross income tests. There is some
uncertainty as to whether mezzanine loans constitute qualifying assets for
purposes of the 75% asset test described below and result in qualifying income
for purposes of the 75% gross income test. A Revenue Procedure and private
letter rulings issued by the Internal Revenue Service to other taxpayers
indicate that, in certain circumstances, mezzanine loans secured by interests in
a partnership or limited liability company, substantially all of the assets of
which represent interests in real estate, constitute qualifying assets and
result in qualifying income. However, we may not rely on private letter rulings
issued to other taxpayers. We believe that our mezzanine loans constitute
qualifying assets and result in qualifying income. If our mezzanine loans are
determined not to constitute qualifying assets and do not result in qualifying
income for purposes of these tests, our ability to elect REIT status will be
jeopardized.
We may employ, to the extent consistent with the REIT provisions of the
Internal Revenue Code, forms of securitization of our assets under which a
"sale" of an interest in a mortgage loan occurs, and a resulting gain or loss is
recorded on our balance sheet for accounting purposes at the time of sale. In a
"sale" securitization, only the net retained interest in the securitized
mortgage loans would remain on our balance sheet. We may elect to conduct
certain of our securitization activities, including such sales, through one or
more taxable subsidiaries, or through qualified REIT subsidiaries, formed for
such purpose. To the extent consistent with the REIT provisions of the Internal
Revenue Code, such entities could elect to be taxed as real estate mortgage
investment conduits or financial asset securitization investment trusts.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any year, we may still qualify as a REIT if we are entitled to relief under
the Internal Revenue Code. Generally, we may be entitled to relief if:
o our failure to meet the gross income tests was due to reasonable
cause and not due to willful neglect;
o we attach a schedule of the sources of our income to our federal
income tax return; and
o any incorrect information on the schedule was not due to fraud with
the intent to evade tax.
It is not possible to state whether in all circumstances we would be entitled to
rely on these relief provisions. If these relief provisions do not apply to a
particular set of circumstances, we would not qualify as a REIT. As discussed
above under the caption "--Taxation of a REIT", even if these relief provisions
apply, and we retain our status as a REIT, a tax would be imposed with respect
to our income that does not meet the gross income tests. We may not always be
able to maintain compliance with the gross income tests for REIT qualification
despite frequently monitoring our income.
Foreclosure Property
Net income realized by us from foreclosure property would generally be
subject to tax at the maximum federal corporate tax rate. Foreclosure property
includes real property and related personal property that is acquired by us
through foreclosure following a default on indebtedness owed to us that is
secured by the property and for which we make an election to treat the property
as foreclosure property.
Prohibited Transaction Income
Any gain realized by us on the sale of any property, other than
foreclosure property, held as inventory or otherwise held primarily for sale to
customers in the ordinary course of business will be prohibited transaction
income and subject to a 100% penalty tax. This prohibited transaction income may
also adversely affect our ability to satisfy the gross income tests for
qualification as a REIT. Whether property is held as inventory or primarily for
sale to customers in the ordinary course of a trade or business depends on all
the facts and circumstances surrounding the particular transaction. While the
Treasury Regulations provide standards which, if met, would not result in
prohibited transaction income, we may not be able to meet these standards in all
circumstances.
Hedging Transactions
We may enter into hedging transactions with respect to one or more of
our assets or liabilities. Our hedging transactions could take a variety of
forms, including interest rate swaps or cap agreements, options, futures
contracts, forward rate agreements or similar financial instruments. To the
extent that we enter into hedging transactions to reduce our interest rate risk
on indebtedness incurred to acquire or carry real estate assets, any income or
gain from the
64
disposition of hedging transactions should be qualifying income for purposes of
the 95% gross income test, but not the 75% gross income test.
Rents from Real Property
Rent that a REIT receives from real property that it owns and leases to
tenants will qualify as "rents from real property" if the following conditions
are satisfied,
o First, the rent must not be based, in whole or in part, on the
income or profits of any person. An amount will not fail to qualify
as rent from real property solely by reason of being based on a
fixed percentage, or percentages, of sales and receipts.
o Second, neither a REIT nor any direct or indirect owner of 10% or
more of its stock may own, actually or constructively, 10% or more
of the tenant from which the REIT collects the rent.
o Third, all of the rent received under a lease will not qualify as
rents from real property unless the rent attributable to the
personal property leased in connection with the real property
constitutes no more than 15% of the total rent received under the
lease.
o Finally, a REIT generally must not operate or manage its real
property or furnish or render services to its tenants, other than
through an "independent contractor" who is adequately compensated
and from whom the REIT does not derive revenue. The REIT may provide
services directly, however, if the services are "usually or
customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered rendered "primarily
for the occupant's convenience." In addition, the REIT may render,
other than through an independent contractor, a de minimis amount of
"non-customary" services to the tenants of a property as long as the
REIT's income from such services does not exceed 1% of its gross
income from the property.
Although no assurances can be given that either of the income tests will
be satisfied in any given year, we anticipate that our operations will allow us
to meet each of the 75% gross income test and the 95% gross income test. Such
belief is premised in large part on our expectation that substantially all of
the amounts received by us will qualify as interest from debt secured by
mortgages on real property or on interests in real property.
Asset Tests
A REIT also must satisfy the following four tests relating to the nature
of its assets at the close of each quarter of its taxable year.
o First, at least 75% of the value of a REIT's total assets must
consist of cash or cash items, including receivables, government
securities, "real estate assets," or qualifying temporary
investments. We refer to this test as the "75% asset test".
o Second, no more than 25% of the value of a REIT's total assets may
be represented by securities other than those that are qualifying
assets for purposes of the 75% asset test. We refer to this test as
the "25% asset test".
o Third, of the investments included in the 25% asset test, the value
of the securities of any one issuer (other than a "taxable REIT
subsidiary") that a REIT owns may not exceed 5% of the value of the
REIT's total assets, and a REIT may not own 10% or more of the total
combined voting power or 10% or more of the total value of the
securities of any issuer (other than a "taxable REIT subsidiary").
o Fourth, while a REIT may own up to 100% of the stock of a
corporation that elects to be treated as a "taxable REIT subsidiary"
for federal income tax purposes, at no time may the total value of a
REIT's stock in one or more taxable REIT subsidiaries exceed 20% of
the value of the REIT's gross assets.
We expect that any mortgage-backed securities, real property and
temporary investments that we acquire will generally be qualifying assets for
purposes of the 75% asset test, except to the extent that less than 95% of the
assets of a real estate mortgage investment conduit in which we own an interest
consists of "real estate assets." Mortgage loans, including distressed mortgage
loans, construction loans, bridge loans and mezzanine loans also will generally
be qualifying assets for purposes of the 75% asset test to the extent that the
principal balance of each mortgage loan does not exceed the value of the
associated real property.
65
We anticipate that we may securitize certain mortgage loans which we
originate or acquire, in which event we will likely retain certain of the
subordinated and interest only classes of mortgage-backed securities which may
be created as a result of such securitization. The securitization of mortgage
loans may be accomplished through one or more real estate mortgage investment
conduits established by us or, if a non-real estate mortgage investment conduit
securitization is desired, through one or more qualified REIT subsidiaries or
taxable subsidiaries established by us. The securitization of the mortgage loans
through either one or more real estate mortgage investment conduits or one or
more qualified REIT subsidiaries or taxable subsidiaries should not affect our
qualification as a REIT or result in the imposition of corporate income tax
under the taxable mortgage pool rules. Income realized by us from a real estate
mortgage investment conduit securitization could, however, be subject to a 100%
tax as a "prohibited transaction." Such prohibited transactions are discussed
above under the caption "--Income Tests--Prohibited Transaction Income."
We intend to operate so that we will not acquire any assets that would
cause us to violate any of the asset tests. If, however, we should fail to
satisfy any of the asset tests at the end of a calendar quarter, we would not
lose our real estate investment trust status if (i) we satisfied the asset tests
at the end of the close of the preceding calendar quarter and (ii) the
discrepancy between the value of our assets and the asset test requirements
arose from changes in the market values of our assets and was not wholly or
partly caused by the acquisition of one or more nonqualifying assets. If we did
not satisfy the condition described in clause (ii) of the preceding sentence, we
could still avoid disqualification as a real estate investment trust by
eliminating any discrepancy within 30 days after the close of the calendar
quarter in which the discrepancy arose.
Distribution Requirements
Each taxable year, a REIT must distribute dividends to its shareholders
in an amount at least equal to:
o 90% of the REIT's "real estate investment trust taxable income,"
computed without regard to the dividends paid deduction and the
REIT's net capital gain or loss; and
o certain items of noncash income.
A REIT must make such distributions in the taxable year to which they
relate, or in the following taxable year if the REIT declares the distribution
before it timely files its federal income tax return for such year and pays the
distribution on or before the first regular distribution date after such
declaration. Further, if a REIT fails to meet the 90% distribution requirement
as a result of an adjustment to its tax returns by the Internal Revenue Service,
the REIT may, if the deficiency is not due to fraud with intent to evade tax or
a willful failure to file a timely tax return, and if certain other conditions
are met, retroactively cure the failure by paying a deficiency dividend (plus
interest) to its shareholders.
A REIT will be subject to federal income tax on its taxable income,
including net capital gain, that it did not distribute to its shareholders.
Furthermore, if a REIT fails to distribute during a calendar year, or, in the
case of distributions with declaration and record dates falling within the last
three months of the calendar year, by the end of the January following such
calendar year, at least the sum of:
o 85% of the REIT's real estate investment trust ordinary income for
such year;
o 95% of the REIT's real estate investment trust capital gain income
for such year; and
o any of the REIT's undistributed taxable income from prior periods,
the REIT will be subject to a 4% nondeductible excise tax on the excess of such
required distribution over the amount actually distributed. If the REIT elects
to retain and pay income tax on the net capital gain that it receives in a
taxable year, the REIT will be deemed to have distributed any such amount for
the purposes of the 4% excise tax described in the preceding sentence.
We intend to make distributions to our holders of class A common stock
in a manner that will allow us to satisfy the distribution requirements
described above. It is possible that, from time to time, our pre-distribution
taxable income may exceed our cash flow and we may have difficulty satisfying
the distribution requirements. We intend to monitor closely the relationship
between our pre-distribution taxable income and our cash flow and intend to
borrow funds or liquidate assets in order to overcome any cash flow shortfalls
if necessary to satisfy the distribution requirements imposed by the Internal
Revenue Code. It is possible, although unlikely, that we may decide to terminate
66
our REIT status as a result of any such cash shortfall. Such a termination would
have adverse consequences to our shareholders. The consequences are described
above under the caption "--Taxation of a REIT."
Recordkeeping Requirements
A REIT must maintain records of information specified in applicable
Treasury Regulations in order to maintain its qualification as a real estate
investment trust. In addition, in order to avoid a monetary penalty, a REIT must
request on an annual basis certain information from its shareholders designed to
disclose the actual ownership of the REIT's outstanding stock. We intend to
comply with these recordkeeping requirements.
Ownership Requirements
For a REIT to qualify as a real estate investment trust, shares of the
REIT must be held by a minimum of 100 persons for at least 335 days in each
taxable year after the REIT's first taxable year. Further, at no time during the
second half of any taxable year after the REIT's first taxable year may more
than 50% of the REIT's shares be owned, actually or constructively, by five or
fewer "individuals." As of the date hereof, we satisfy the requirement that we
not be closely held as described in the foregoing sentence. Our class A common
stock is held by 100 or more persons. Our amended and restated charter contains
ownership and transfer restrictions designed to prevent violation of these
requirements. The provisions of the amended and restated charter restricting the
ownership and transfer of our class A common stock are described below under the
caption "Description of Capital Stock--Certain Provisions of Our Charter and
Bylaws and of Maryland Law--REIT Qualification Restrictions on Ownership and
Transfer."
Earnings and Profits
In order for us to qualify as a REIT, on or before the end of the 2003
tax year (the first year to which our election to be taxed as a REIT relates),
we must have distributed to our shareholders an amount equal to any earnings and
profits accumulated from years in which we were taxed as a regular corporation.
We have been treated as a regular corporation subject to Federal income taxes
for the years 1997 through 2002. Any distribution made by us to satisfy this
requirement will be treated as taxable income by the shareholders and we
generally will not be permitted to include such amounts when computing our
dividends paid deduction. If we were found to have miscalculated our earnings
and profits accumulated from years in which we were a regular corporation, our
ability to qualify as a REIT could be jeopardized. We believe, as of January 1,
2003, we have no accumulated earnings or profits from any non-REIT qualifying
tax year for which we were taxed as a regular corporation as a result of losses
we triggered in December 2002.
Failure to Qualify
If a REIT fails to qualify as a real estate investment trust in any
taxable year, and no relief provisions applied, the REIT would be subject to
federal income tax, including any applicable alternative minimum tax, on its
taxable income at regular corporate rates. In calculating a REIT's taxable
income in a year in which it did not qualify as a real estate investment trust,
the REIT would not be able to deduct amounts paid out to its shareholders. In
fact, the REIT would not be required to distribute any amounts to its
shareholders in such taxable year. In such event, to the extent of the REIT's
current and accumulated earnings and profits, all distributions to shareholders
would be taxable as ordinary income. Moreover, subject to certain limitations
under the Internal Revenue Code, corporate shareholders might be eligible for
the dividends received deduction. Unless the REIT qualified for relief under
specific statutory provisions, the REIT would be disqualified from taxation as a
real estate investment trust for the four taxable years following the year in
which it ceased to qualify as a real estate investment trust. We cannot predict
whether, in all circumstances, we would qualify for such statutory relief.
Taxation of Taxable U.S. Shareholders
Taxable U.S. Shareholder
As used herein, the term "Taxable U.S. Shareholder" means a holder of
our class A common stock that, for United States federal income tax purposes,
is:
o a citizen or resident of the United States;
67
o a corporation, partnership, or other entity created or organized in
or under the laws of the United States or any state or political
subdivision thereof;
o an estate, the income of which from sources without the United
States is includible in gross income for United States federal
income tax purposes regardless of its connection with the conduct of
a trade or business within the United States; or
o any trust with respect to which a United States court is able to
exercise primary supervision over the administration of such trust
and one or more United States persons have the authority to control
all substantial decisions of the trust.
For any taxable year in which we qualify as a REIT, amounts distributed
to Taxable U.S. Shareholders will be taxed as follows.
Distributions Generally
Distributions made to our Taxable U.S. Shareholders out of current or
accumulated earnings and profits, and not designated as a capital gain dividend,
will be taken into account by such shareholder as ordinary income and will not,
in the case of a corporate shareholder, be eligible for the dividends received
deduction. To the extent that we make a distribution with respect to holders of
our class A common stock that is in excess of our current or accumulated
earnings and profits, the distribution will be treated by a Taxable U.S.
Shareholder first as a tax-free return of capital, reducing the shareholder's
tax basis in the class A common stock, and any portion of the distribution in
excess of the shareholder's tax basis in the class A common stock will then be
treated as gain from the sale of such class A common stock. Dividends declared
by us in October, November, or December of any year payable to a shareholder of
record on a specified date in any such month shall be treated as both paid by us
and received by shareholders on December 31 of such year, provided that the
dividend is actually paid by us during January of the following calendar year.
Taxable U.S. Shareholders may not include on their federal income tax returns
any of our tax losses.
Capital Gain Dividends
Dividends to Taxable U.S. Shareholders that properly are designated by
us as capital gain dividends will be treated by such shareholders as long-term
capital gain, to the extent that such dividends do not exceed our actual net
capital gain, without regard to the period for which the shareholders have held
our class A common stock. Taxable U.S. Shareholders that are corporations may be
required, however, to treat up to 20% of particular capital gain dividends as
ordinary income. Capital gain dividends, like regular dividends from a real
estate investment trust, are not eligible for the dividends received deduction
for corporations.
Retained Capital Gains
A REIT may elect to retain, rather than distribute, its net long-term
capital gain received during the tax year. To the extent designated in a notice
from the REIT to its shareholders, the REIT will pay the income tax on such
gains and Taxable U.S. Shareholders must include their proportionate share of
the undistributed net long-term capital gain so designated in their income for
the tax year. Each Taxable U.S. Shareholder will be deemed to have paid its
share of the tax paid by the REIT, which tax will be credited or refunded to
such shareholder.
Passive Activity Loss and Investment Interest Limitations
Distributions, including deemed distributions of undistributed net
long-term capital gain, from us and gain from the disposition of our class A
common stock will not be treated as passive activity income, and, therefore,
Taxable U.S. Shareholders who are subject to the passive loss limitation rules
of the Internal Revenue Code will not be able to apply any passive activity
losses against such income. Distributions from us, to the extent they do not
constitute a return of capital, generally will be treated as investment income
for purposes of the investment income limitation on deductibility of investment
interest. However, net capital gain from the disposition of our class A common
stock or capital gain dividends, including deemed distributions of undistributed
net long-term capital gains, generally will be excluded from investment income.
68
Sale of Class A Common Stock
Upon the sale of our class A common stock, a Taxable U.S. Shareholder
generally will recognize gain or loss equal to the difference between the amount
realized on such sale and the holder's tax basis in the class A common stock
sold. To the extent that the class A common stock is held as a capital asset by
the Taxable U.S. Shareholder, the gain or loss will be a long-term capital gain
or loss if the class A common stock has been held for more than a year, and will
be a short-term capital gain or loss if the class A common stock has been held
for a shorter period. In general, however, any loss upon a sale of the class A
common stock by a Taxable U.S. Shareholder who has held such class A common
stock for six months or less, after applying certain holding period rules, will
be treated as a long-term capital loss to the extent that distributions from us
were required to be treated as long-term capital gain by that holder.
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts, which we refer to as exempt
organizations, generally are exempt from federal income taxation. Exempt
organizations are subject to tax, however, on their unrelated business taxable
income, or UBTI. UBTI is defined as the gross income derived by an exempt
organization from an unrelated trade or business, less the deductions directly
connected with that trade or business, subject to certain exceptions. While many
investments in real estate generate UBTI, the Internal Revenue Service has
issued a ruling that dividend distributions from a REIT to an exempt employee
pension trust do not constitute UBTI, provided that the shares of the REIT are
not otherwise used in an unrelated trade or business of the exempt employee
pension trust. Based on that ruling, amounts distributed to exempt organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of class A common stock with debt, a portion of its
income from a REIT will constitute UBTI pursuant to the "debt-financed property"
rules.
In addition, in certain circumstances, a pension trust that owns more
than 10% of the stock of a REIT will be required to treat a percentage of the
dividends paid by the REIT as UBTI based upon the percentage of the REIT's
income that would constitute UBTI to the shareholder if received directly by it.
This rule applies to a pension trust holding more than 10% (by value) of our
class A common stock only if (i) the percentage of the income from us that is
UBTI (determined as if we were a pension trust) is at least 5% and (ii) we are
treated as a "pension-held REIT." We do not expect to qualify as a "pension-held
REIT" and have covenanted not to become one in connection with our prior
convertible trust preferred financing.
Taxation of Non-U.S. Shareholders
General
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign trusts
and certain other foreign shareholders, which we refer to as Non-U.S.
Shareholders, are complex and no attempt is made herein to provide more than a
general summary of such rules. This discussion does not consider the tax rules
applicable to all Non-U.S. Shareholders and, in particular, does not consider
the special rules applicable to U.S. branches of foreign banks or insurance
companies or certain intermediaries. Non-U.S. shareholders should consult with
their own tax advisors to determine the impact of federal, state, local and
foreign tax laws with regard to the election, including any reporting and
withholding requirements.
Ordinary Dividends
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by a REIT of United States real property interests and
are not designated by a REIT as capital gain dividends (or deemed distributions
of retained capital gains) will be treated as ordinary dividends to the extent
that they are made out of current or accumulated earnings and profits of the
REIT. Any portion of a distribution in excess of current and accumulated
earnings and profits of the REIT will not be taxable to a Non-U.S. Shareholder
to the extent that such distribution does not exceed the adjusted basis of the
shareholder in the REIT's stock, but rather will reduce the adjusted basis of
such shares. To the extent that the portion of the distribution in excess of
current and accumulated earnings and profits exceeds the adjusted basis of a
Non-U.S. Shareholder in our class A common stock, such excess generally will be
treated as gain from the sale or disposition of the class A common stock and
will be taxed as described below.
69
Withholding
Dividends paid to Non-U.S. Shareholders may be subject to U.S.
withholding tax. If an income tax treaty does not apply and the Non-U.S.
Shareholder's investment in the REIT's stock is not effectively connected with a
trade or business conducted by the Non-U.S. Shareholder in the United States (or
if a tax treaty does apply and the investment in the stock is not attributable
to a United States permanent establishment maintained by the Non-U.S.
Shareholder), ordinary dividends (i.e., distributions out of current and
accumulated earnings and profits) will be subject to a U.S. withholding tax at a
30% rate, or, if an income tax treaty applies, at a lower treaty rate. Because
we generally cannot determine at the time that a distribution is made whether or
not it will be in excess of earnings and profits, we intend to withhold on the
gross amount of each distribution at the 30% rate (or lower treaty rate) (other
than distributions subject to the 35% FIRPTA withholding rules described below).
To receive a reduced treaty rate, a Non-U.S. Shareholder must furnish us or our
paying agent with a duly completed Form 1001 or Form W-8BEN (or authorized
substitute form) certifying such holder's qualification for the reduced rate.
Generally, a Non-U.S. Shareholder will be entitled to a refund from the IRS to
the extent the amount withheld by us from a distribution exceeds the amount of
United States tax owed by such shareholder.
In the case of a Non-U.S. Shareholder that is a partnership or a trust,
the withholding rules for a distribution to such a partnership or trust will be
dependent on numerous factors, including (1) the classification of the type of
partnership or trust, (2) the status of the partner or beneficiary, and (3) the
activities of the partnership or trust. Non-U.S. Shareholders that are
partnerships or trusts are urged to consult their tax advisors regarding the
withholding rules applicable to them based on their particular circumstances.
If an income tax treaty does not apply, ordinary dividends that are
effectively connected with the conduct of a trade or business within the United
States by a Non-U.S. Shareholder (and, if a tax treaty applies, ordinary
dividends that are attributable to a United States permanent establishment
maintained by the Non-U.S. Shareholder) are exempt from U.S. withholding tax. In
order to claim such exemption, a Non-U.S. Shareholder must provide us or our
paying agent with a duly completed Form W-8ECI (or authorized substitute form)
certifying such holder's exemption. However, ordinary dividends exempt from U.S.
withholding tax because they are effectively connected or are attributable to a
United States permanent establishment maintained by the Non-U.S. Shareholder
generally are subject to U.S. federal income tax on a net income basis at
regular graduated rates. In the case of Non-U.S. Shareholders that are
corporations, any effectively connected ordinary dividends or ordinary dividends
attributable to a United States permanent establishment maintained by the
Non-U.S. Shareholder may, in certain circumstances, be subject to an additional
branch profits tax at a 30% rate, or lower rate specified by an applicable
income tax treaty.
Capital Gain Dividends
For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges by us of United States real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980, which is commonly
referred to as FIRPTA. Under FIRPTA, distributions attributable to gain from
sales of United States real property are taxed to a Non-U.S. Shareholder as if
such gain were effectively connected with a United States trade or business.
Non-U.S. Shareholders thus would be taxed at the regular capital gain rates
applicable to Taxable U.S. Shareholders (subject to the applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). Distributions subject to FIRPTA also may be subject to a 30%
branch profits tax in the hands of a corporate Non-U.S. Shareholder not
otherwise entitled to treaty relief or exemption.
Withholding
Under FIRPTA, a REIT is required to withhold 35% of any distribution
that is designated as a capital gain dividend or which could be designated as a
capital gain dividend and is attributable to gain from the disposition of a
United States real property interest. Moreover, if a REIT designates previously
made distributions as capital gain dividends, subsequent distributions (up to
the amount of the prior distributions so designated) will be treated as capital
gain dividends for purposes of FIRPTA withholding.
70
Sale of Class A Common Stock
A Non-U.S Shareholder generally will not be subject to United States
federal income tax under FIRPTA with respect to gain recognized upon a sale of
our class A common stock, if less than 50% of our assets during a prescribed
testing period consist of interests in real property located within the United
States (excluding interests in real property solely in the capacity as a
creditor) or we are a "domestically-controlled REIT." A domestically-controlled
REIT generally is defined as a real estate investment trust in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by non-U.S. persons. Although currently it is
anticipated that we will be a domestically-controlled REIT, and, therefore, that
the sale of class A common stock will not be subject to taxation under FIRPTA,
there can be no assurance that we will, at all relevant times, be a
domestically-controlled REIT. If we are not a domestically-controlled REIT, a
Non-U.S. Shareholder's sale of our stock will generally not be subject to tax
under FIRPTA if (a) the stock is treated as "regularly traded" on an established
securities market and (b) the seller held 5% or less of our stock at all times
during a specified testing period. If the gain on the sale of our class A common
stock were subject to taxation under FIRPTA, a Non-U.S. Shareholder would be
subject to the same treatment as Taxable U.S. Shareholders with respect to such
gain (subject to the applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). In
addition, a purchaser of our class A common stock from a Non-U.S. Shareholder
subject to taxation under FIRPTA generally would be required to deduct and
withhold a tax equal to 10% of the amount realized by a Non-U.S. Shareholder on
the disposition. Any amount withheld would be creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Even if gain recognized by a Non-U.S. Shareholder upon the sale of our
class A common stock is not subject to FIRPTA, such gain generally will be
taxable to such shareholder if:
o an income tax treaty does not apply and the gain is effectively
connected with a trade or business conducted by the Non-U.S.
Shareholder in the United States (or, an income tax treaty applies
and the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Shareholder), in which
case, unless an applicable treaty provides otherwise, a Non-U.S.
Shareholder will be taxed on his or her net gain from the sale at
regular graduated U.S. federal income tax rates. In the case of a
Non-U.S. Shareholder that is a corporation, such shareholder may be
subject to an additional branch profits tax at a 30% rate, unless an
applicable income tax treaty provides for a lower rate and the
shareholder demonstrates its qualification for such rate; or
o the Non-U.S. Shareholder is a nonresident alien individual who holds
our class A common stock as a capital asset and was present in the
United States for 183 days or more during the taxable year and
certain other conditions apply, in which case the Non-U.S.
Shareholder will be subject to a 30% tax on capital gains.
Estate Tax Considerations
The value of our class A common stock owned, or treated as owned, by a
Non-U.S. Shareholder who is a nonresident alien individual at the time of his or
her death will be included in the individual's gross estate for United States
federal estate tax purposes, unless otherwise provided in an applicable estate
tax treaty.
Information Reporting and Backup Withholding
A REIT is required to report to its shareholders and to the IRS the
amount of distributions paid during each tax year, and the amount of tax
withheld, if any. These requirements apply even if withholding was not required
with respect to payments made to a shareholder. In the case of Non-U.S.
Shareholders, the information reported may also be made available to the tax
authorities of the Non-U.S. Shareholder's country of residence, if an applicable
income tax treaty so provides.
Backup withholding generally may be imposed on certain payments to
shareholders unless the shareholder (i) furnishes certain information, or (ii)
is otherwise exempt from backup withholding.
A shareholder who does not provide a REIT with his or her correct
taxpayer identification number also may be subject to penalties imposed by the
IRS. In addition, the REIT may be required to withhold a portion of capital gain
distributions to any shareholders who fail to certify their non-foreign status
to the REIT.
71
You should consult your own tax advisor regarding your qualification for
an exemption from backup withholding and the procedure for obtaining an
exemption. Backup withholding is not an additional tax. Rather, the amount of
any backup withholding with respect to a distribution to a shareholder will be
allowed as a credit against such holder's United States federal income tax
liability and may entitle the Taxable U.S. Shareholder to a refund, provided
that the required information is furnished to the IRS.
In general, backup withholding and information reporting will not apply
to a payment of the proceeds of the sale of our class A common stock by a
Non-U.S. Shareholder by or through a foreign office of a foreign broker effected
outside of the United States; provided, however, that foreign brokers having
certain connections with the United States may be obligated to comply with the
backup withholding and information reporting rules. Information reporting (but
not backup withholding) will apply, however, to a payment of the proceeds of a
sale of our class A common stock by foreign offices of certain brokers,
including foreign offices of a broker that:
o is a United States person;
o derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States; or
o is a "controlled foreign corporation" for United States tax
purposes.
Information reporting will not apply in the above cases if the broker
has documentary evidence in its records that the holder is a Non-U.S.
Shareholder and certain conditions are met, or the Non-U.S. Shareholder
otherwise establishes an exemption.
Payment to or through a United States office of a broker of the proceeds
of a sale of our class A common stock is subject to both backup withholding and
information reporting unless the shareholder certifies in the manner required
that he or she is a Non-U.S. Shareholder and satisfies certain other
qualifications under penalties of perjury or otherwise establishes an exemption.
State and Local Tax
The discussion herein concerns only the United States federal income tax
treatment likely to be accorded to a REIT and its shareholders. No consideration
has been given to the state and local tax treatment of such parties. The state
and local tax treatment may not conform to the federal treatment described
above. As a result, you should consult your own tax advisor regarding the
specific state and local tax consequences of the REIT Election and ownership and
sale of our class A common stock.
72
PLAN OF DISTRIBUTION
We may sell class A common stock, preferred stock or any series of debt
securities being offered by this prospectus in one or more of the following ways
from time to time:
o through underwriters or dealers;
o through agents;
o directly to purchasers; or
o through a combination of any of these methods of sale.
An underwriter or agent involved in the offer and sale of the securities
will be named in the applicable prospectus supplement. If underwriters are used
in the sale, the securities will be acquired by the underwriters for their own
account and resold in one or more transactions, including negotiated
transactions, and if agents are used the securities will be offered and sold
through such firms acting as our agents in one or more transactions, including
negotiated transactions. The securities may be offered and sold through
underwriters and agents at:
o fixed prices, which may be changed;
o prices related to the prevailing market prices at the time of sale;
or
o negotiated prices.
We also may, from time to time, authorize underwriters acting as our
agents to offer and sell the securities upon the terms and conditions as are set
forth in the applicable prospectus supplement. In connection with the sale of
securities, underwriters may be deemed to have received compensation from us in
the form of underwriting discounts or commissions and may also receive
commissions from purchasers of securities for whom they may act as agent.
Underwriters may sell securities to or through dealers, and these dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters or commissions from the purchasers for whom they may act as
agent, or both. The applicable prospectus supplement will disclose:
o any underwriting compensation we pay to underwriters or agents in
connection with the offering of securities and
o any discounts, concessions or commissions allowed or reallowed by
underwriters to participating dealers.
Under the Securities Act of 1933, underwriters, dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters and any discounts and commissions received by them and any profit
realized by them on resale of the securities may be deemed to be underwriting
discounts and commissions.
If indicated in the applicable prospectus supplement, we will authorize
dealers acting as our agents to solicit offers by institutions to purchase
securities at the offering price set forth in that prospectus supplement under
delayed delivery contracts providing for payment and delivery on the dates
stated in the prospectus supplement. Each contract will be for an amount not
less than, and the aggregate principal amount of securities sold under contracts
will be not less nor more than, the respective amounts stated in the applicable
prospectus supplement. Institutions with whom contracts, when authorized, may be
made include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions, and other
institutions but will in all cases be subject to our approval. Contracts will
not be subject to any conditions except:
o the purchase by an institution of the securities covered by its
contracts will not at the time of delivery be prohibited under the
laws of any jurisdiction in the United States to which the
institution is subject, and
73
o if the securities are being sold to underwriters, we will have sold
to them the total principal amount of the securities less the
principal amount of the securities covered by contracts.
Agents and underwriters will have no responsibility in respect of the
delivery or performance of contracts.
Unless a prospectus supplement states otherwise, the obligations of
underwriters to purchase any series of securities will be subject to certain
conditions precedent and the underwriters will be obligated to purchase all of
such series of securities, if any are purchased.
We may agree to indemnify underwriters, dealers and agents against civil
liabilities, including liabilities under the Securities Act and to make
contribution to them in connection with those liabilities. Underwriters and
agents may be customers of, engage in transactions with, or perform services for
us and our affiliates in the ordinary course of business.
Direct sales to investors or our shareholders may be accomplished
through subscription offerings or through shareholder purchase rights
distributed to shareholders. In connection with subscription offerings or the
distribution of shareholder purchase rights to shareholders, if all of the
underlying securities are not subscribed for, we may sell any unsubscribed
securities to third parties directly or through underwriters or agents. In
addition, whether or not all of the underlying securities are subscribed for, we
may concurrently offer additional securities to third parties directly or
through underwriters or agents. If securities are to be sold through shareholder
purchase rights, the shareholder purchase rights will be distributed as a
dividend to the shareholders for which they will pay no separate consideration.
The prospectus supplement with respect to the offer of securities under
shareholder purchase rights will set forth the relevant terms of the shareholder
purchase rights, including:
o whether class A common stock, preferred stock, or warrants for those
securities will be offered under the shareholder purchase rights;
o the number of those securities or warrants that will be offered
under the shareholder purchase rights;
o the period during which and the price at which the shareholder
purchase rights will be exercisable;
o the number of shareholder purchase rights then outstanding;
o any provisions for changes to or adjustments in the exercise price
of the shareholder purchase rights; and
o any other material terms of the shareholder purchase rights.
Each series of securities will be a new issue of securities and will
have no established trading market other than our class A common stock which is
listed on the NYSE. Any shares of our class A common stock sold pursuant to a
prospectus supplement will be listed on the NYSE, subject to official notice of
issuance. Any underwriters to whom we sell securities for public offering and
sale may make a market in the securities, but such underwriters will not be
obligated to do so and may discontinue any market making at any time without
notice. The securities, other than the class A common stock, may or may not be
listed on a national securities exchange.
To facilitate the offering of the securities, certain persons
participating in the offering may engage in transactions that stabilize,
maintain, or otherwise affect the price of the securities. This may include
over-allotments or short sales of the securities, which involves the sale by
persons participating in the offering of more securities than we sold to them.
In these circumstances, these persons would cover the over-allotments or short
positions by making purchases in the open market or by exercising their
over-allotment option. In addition, these persons may stabilize or maintain the
price of the debt securities by bidding for or purchasing debt securities in the
open market or by imposing penalty bids, whereby selling concessions allowed to
dealers participating in the offering may be reclaimed if securities sold by
them are repurchased in connection with stabilization transactions. The effect
of these transactions may be to stabilize or maintain the market price of the
securities at a level above that which might otherwise prevail in the open
market. These transactions may be discontinued at any time.
74
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us
by Venable LLP, Baltimore, Maryland. Certain other matters in connection with
the offering of securities by this prospectus will be passed upon for us by
Paul, Hastings, Janofsky & Walker LLP. Martin L. Edelman, who serves as one of
our directors, is of counsel to Paul, Hastings, Janofsky & Walker LLP.
EXPERTS
The consolidated financial statements of Capital Trust and subsidiaries
appearing in Capital Trust's Annual Report on Form 10-K for the year ended
December 31, 2002, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under this shelf process, we may sell any combination of the securities
described in this prospectus in one or more offerings up to a total dollar
amount of proceeds of $300,000,000. This prospectus provides you with a general
description of the securities we may offer. Each time we sell securities, we
will provide a prospectus supplement that will contain specific information
about the terms of the securities being offered and of the offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. You should read both this prospectus and any prospectus
supplement together with additional information described under the heading
"Where You Can Find More Information" before purchasing any securities.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any materials we have
filed with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The SEC also maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information concerning issuers that file electronically with the SEC,
including us. Our class A common stock is listed and traded on the New York
Stock Exchange. These reports, proxy statements and other information are also
available for inspection at the offices of the New York Stock Exchange, 20 Broad
Street, New York, NY 10005. We also maintain an internet site at
www.capitaltrust.com that contains information concerning us. The information
contained or referred to on our website is not incorporated by reference in this
prospectus and is not a part of this prospectus.
We have filed with the SEC a registration statement on Form S-3 under
the Securities Act of 1933 to register the securities being offered in this
prospectus. This prospectus, which is part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules to the registration statement. For further
information regarding us and our securities, please refer to the registration
statement and the documents filed or incorporated by reference as exhibits to
the registration statement. You may obtain the registration statement and its
exhibits from the SEC as indicated above or from us. Statements contained in
this prospectus or any prospectus supplement as to the contents of any contract
or other document that is filed or incorporated by reference as an exhibit to
the registration statement are not necessarily complete and we refer you to the
full text of the contract or other document filed or incorporated by reference
as an exhibit to the registration statement.
The SEC allows us to "incorporate by reference" the information we file
with the SEC, which means that we can disclose important information to you by
referring you to those filed documents. The information incorporated by
reference is considered to be part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information.
75
The following documents, which have been filed with the SEC (File No.
001-14788), are incorporated herein by reference:
o Our annual report on Form 10-K for the year ended December 31, 2002;
o Our quarterly reports on Form 10-Q for the fiscal quarters ended
March 31, 2003, June 30, 2003 and September 30, 2003; and
o Our current reports on Form 8-K filed with the SEC on April 2, 2003,
May 19, 2003, July 10, 2003 (including any amendment or report filed
for the purpose of updating the description of our class A common
stock contained therein), August 18, 2003 and November 13, 2003.
All documents subsequently filed by us with the SEC pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date
of this prospectus and prior to the termination of the offering are deemed
incorporated by reference into this prospectus and a part hereof from the date
of filing of those documents. Any statement contained in any document
incorporated by reference shall be deemed to be amended, modified or superseded
for the purposes of this prospectus to the extent that a statement contained in
this prospectus, any prospectus supplement or a later document that is or is
considered to be incorporated by reference herein amends, modifies or supersedes
such statement. Any statements so amended, modified or superseded shall not be
deemed to constitute a part of this prospectus, except as so amended, modified
or superseded.
We will provide without charge to each person to whom this prospectus is
delivered, upon written or oral request of such person, a copy of any or all of
the documents referred to above which have been or may be incorporated by
reference into this prospectus. Requests for such documents should be directed
to Capital Trust, Inc., 410 Park Avenue, 14th Floor, New York, New York 10022,
Attention: Investor Relations (Telephone: (212) 655-0220).
76
===============================================================================
-------------------
$300,000,000
CAPITAL TRUST, INC.
Class A Common Stock, Preferred Stock,
Debt Securities and Warrants
PROSPECTUS
__________, 2003
------------------------------
===============================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be borne by the
registrant in connection with the offering described in this registration
statement. All such expenses other than the Securities and Exchange Commission
registration fee are estimates.
Securities and Exchange Commission registration fee................... $24,270
Fees and expenses of transfer agent, trustees
and depositary*..................................................... $10,000
Accounting fees and expenses*......................................... $25,000
Legal fees and expenses*.............................................. $100,000
Printing and engraving costs*......................................... $5,000
Miscellaneous*........................................................ $5,000
TOTAL................................................................. $169,270
* Estimated pursuant to instruction to Rule 511 of Regulation S-K.
Item 15. Indemnification of Directors and Officers
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its shareholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services, or (b) active and deliberate dishonesty established by a
final judgment and which is material to the cause of action. Our charter
contains such a provision eliminating such liability to the maximum extent
permitted under Maryland law.
Our charter authorizes us, to the maximum extent permitted under
Maryland law, to indemnify any present or former director or officer or any
individual who, while a director of us and at our request, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise as a director, officer, partner
or trustee, from and against any claim or liability to which that person may
become subject or which that person may incur by reason of his or her status as
a present or former director or officer of us and to pay or reimburse such
person's reasonable expenses in advance of final disposition of a proceeding.
Our bylaws obligate us, to the maximum extent permitted by Maryland law, to
indemnify any present or former director or officer or any individual who, while
a director of us and at our request, serves or has served another corporation,
real estate investment trust, partnership, joint venture, trust, employee
benefit plan or other enterprise as a director, officer, partner or trustee and
who is made a party to the proceeding by reason of his service in that capacity
from and against any claim or liability to which that person may become subject
or which that person may incur by reason of his or her status as a present or
former director or officer of us and to pay or reimburse such person's
reasonable expenses in advance of final disposition of a proceeding. The charter
and bylaws also permit us to indemnify and advance expenses to any person who
served a predecessor of us in any of the capacities described above and any
employee or agent of us or a predecessor of us.
Maryland law requires a Maryland corporation (unless its charter
provides otherwise, which our charter does not) to indemnify a director or
officer who has been successful in the defense of any proceeding to which he or
she is made a party by reason of his or her service in that capacity. Maryland
law permits a Maryland corporation to indemnify its present and former directors
and officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services, or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under Maryland law, a
II-1
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, Maryland law permits a
Maryland corporation to advance reasonable expenses to a director or officer
upon the corporation's receipt of (a) a written affirmation by the director or
officer of his or her good faith belief that he or she has met the standard of
conduct necessary for indemnification by the corporation, and (b) a written
undertaking by such director or officer or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it is ultimately determined that
the standard of conduct was not met.
We have a "claims-made" directors and officers liability insurance
policy that insures our directors and officers against loss from claimed insured
wrongful acts. The policy limit of liability is $10,000,000 each policy year and
is subject to retentions for each loss of $100,000, or $500,000 with respect to
securities laws related losses, for us.
Item 16. Exhibits
The following documents are filed as exhibits to this registration
statement:
Exhibit No. Description
----------- -----------
1.1 The form of any Underwriting Agreement will be filed as an exhibit to
a Current Report on Form 8-K of Capital Trust, Inc. and incorporated
herein by reference (1)
3.1 Charter of Capital Trust, Inc. (filed as Exhibit 3.1.a to Capital
Trust, Inc.'s Current Report on Form 8-K (File No. 001-14788) filed on
April 2, 2003 and incorporated herein by reference) (2)
3.2 Amended and Restated Bylaws of Capital Trust, Inc., as amended (filed
as Exhibit 3.2 to Capital Trust, Inc.'s Current Report on Form 8-K
(File No. 001-14788) filed on January 29, 1999 and incorporated herein
by reference) (2)
4.1 Form of Senior Indenture (3)
4.2 Form of Subordinated Indenture (3)
4.3 The form of any Senior Note with respect to each particular
series of Senior Notes issued hereunder will be filed as an
exhibit to a Current Report on Form 8-K of Capital Trust, Inc.
and incorporated herein by reference (1)
4.4 The form of any Subordinated Note with respect to each
particular series of Subordinated Notes issued hereunder will
be filed as an exhibit to a Current Report on Form 8-K of
Capital Trust, Inc. and incorporated herein by reference (1)
4.5 The form of any articles supplementary with respect to any
preferred stock issued hereunder will be filed as an exhibit to
a Current Report on Form 8-K of Capital Trust, Inc. and
incorporated herein by reference (1)
4.6 The form of warrant agreement with respect to any warrant
served hereunder will be filed as an exhibit to a Current
Report on Form 8-K of Capital Trust, Inc. and incorporated
herein by reference (1)
4.7 The form of any warrant with respect to each series of warrants
will be filed as an exhibit to a Current Report on Form 8-K of
Capital Trust, Inc. and incorporated herein by reference (1)
5.1 Opinion of Venable LLP as to legality of the securities being
registered (3)
23.1 Consent of Ernst & Young LLP (3)
23.2 Consent of Venable LLP (included in the opinion filed as Exhibit 5.1)
(3)
24.1 Power of Attorney (included on signature page) (3)
II-2
25.1 The Statement of Eligibility on Form T-1 under the Trust Indenture Act
of 1939, as amended, of Trustee under the Senior Indenture will be
filed as an exhibit to a Current Report on Form 8-K of Capital Trust,
Inc. and incorporated herein by reference (1)
25.2 The Statement of Eligibility on Form T-1 under the Trust Indenture Act
of 1939, as amended, of Trustee under the Subordinated Indenture will
be filed as an exhibit to a Current Report on Form 8-K of Capital
Trust, Inc. and incorporated herein by reference (1)
--------------------------
(1) To be incorporated by reference
(2) Incorporated by reference
(3) Filed herewith
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933, as amended.
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule
424(b), if, in the aggregate, the changes in volume and price
represent not more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3, Form S-8, or
Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of this offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
II-3
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of section 310 of the Trust Indenture Act ("Act") in accordance
with the rules and regulations prescribed by the Commission under section
305(b)(2) of the Act.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against such public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expanses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense if any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on December 16, 2003.
CAPITAL TRUST, INC.
By: /s/ John R. Klopp
--------------------------------
Name: John R. Klopp
Title: Chief Executive Officer and President
POWER OF ATTORNEY
Each person whose signature appears below hereby severally constitutes
and appoints John R. Klopp and Brian H. Oswald, and each of them with full power
to act alone, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution and revocation, for each of him or her
and in his or her name, place, and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) and additions to this
registration statement, and to file or cause to be filed the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grants unto such
attorneys-in-fact and agents, and each of them, the full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the foregoing, as fully to all intents and purposes, as each of him
or her might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their respective
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
/s/ Samuel Zell
----------------------------- Chairman of the Board December 16, 2003
Samuel Zell
/s/ John R. Klopp
----------------------------- Chief Executive Officer, December 16, 2003
John R. Klopp President and Director
(principal executive officer)
/s/ Brian H. Oswald
----------------------------- Chief Financial Officer December 16, 2003
Brian H. Oswald (principal financial and
accounting officer)
/s/ Jeffrey A. Altman
----------------------------- Director December 16, 2003
Jeffrey A. Altman
/s/ Thomas E. Dobrowski
----------------------------- Director December 16, 2003
Thomas E. Dobrowski
II-5
/s/ Martin L. Edelman
----------------------------- Director December 16, 2003
Martin L. Edelman
/s/ Gary R. Garrabrant
----------------------------- Director December 16, 2003
Gary R. Garrabrant
/s/ Craig M. Hatkoff
----------------------------- Director December 16, 2003
Craig M. Hatkoff
/s/ Henry N. Nassau
----------------------------- Director December 16, 2003
Henry N. Nassau
/s/ Sheli Z. Rosenberg
----------------------------- Director December 16, 2003
Sheli Z. Rosenberg
/s/ Steven Roth
----------------------------- Director December 16, 2003
Steven Roth
/s/ Lynne B. Sagalyn
----------------------------- Director December 16, 2003
Lynne B. Sagalyn
II-6
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1.1 The form of any Underwriting Agreement will be filed as an exhibit to a
Current Report on Form 8-K of Capital Trust, Inc. and incorporated
herein by reference (1)
3.1 Charter of Capital Trust, Inc. (filed as Exhibit 3.1.a to Capital Trust,
Inc.'s Current Report on Form 8-K (File No. 001-14788) filed on April 2,
2003 and incorporated herein by reference) (2)
3.2 Amended and Restated Bylaws of Capital Trust, Inc., as amended (filed as
Exhibit 3.2 to Capital Trust, Inc.'s Current Report on Form 8-K (File
No. 001-14788) filed on January 29, 1999 and incorporated herein by
reference) (2)
4.1 Form of Senior Indenture (3)
4.2 Form of Subordinated Indenture (3)
4.3 The form of any Senior Note with respect to each particular
series of Senior Notes issued hereunder will be filed as an
exhibit to a Current Report on Form 8-K of Capital Trust, Inc.
and incorporated herein by reference (1)
4.4 The form of any Subordinated Note with respect to each particular
series of Subordinated Notes issued hereunder will be filed as an
exhibit to a Current Report on Form 8-K of Capital Trust, Inc.
and incorporated herein by reference (1)
4.5 The form of any articles supplementary with respect to any
preferred stock issued hereunder will be filed as an exhibit to a
Current Report on Form 8-K of Capital Trust, Inc. and
incorporated herein by reference (1)
4.6 The form of warrant agreement with respect to any warrant served
hereunder will be filed as an exhibit to a Current Report on Form
8-K of Capital Trust, Inc. and incorporated herein by reference
(1)
4.7 The form of any warrant with respect to each series of warrants
will be filed as an exhibit to a Current Report on Form 8-K of
Capital Trust, Inc. and incorporated herein by reference (1)
5.1 Opinion of Venable LLP as to legality of the securities being
registered (3)
23.1 Consent of Ernst & Young LLP (3)
23.2 Consent of Venable LLP (included in the opinion filed as Exhibit 5.1)(3)
24.1 Power of Attorney (included on signature page) (3)
25.1 The Statement of Eligibility on Form T-1 under the Trust Indenture Act
of 1939, as amended, of Trustee under the Senior Indenture will be
filed as an exhibit to a Current Report on Form 8-K of Capital Trust,
Inc. and incorporated herein by reference (1)
25.2 The Statement of Eligibility on Form T-1 under the Trust Indenture Act
of 1939, as amended, of Trustee under the Subordinated Indenture will be
filed as an exhibit to a Current Report on Form 8-K of Capital Trust,
Inc. and incorporated herein by reference (1)
--------------------------
(1) To be incorporated by reference
(2) Incorporated by reference
(3) Filed herewith