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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-15371
--------------------------
ISTAR FINANCIAL INC.
(Exact name of registrant as specified in its charter)
MARYLAND 95-6881527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1114 AVENUE OF THE AMERICAS, 27TH FLOOR
NEW YORK, NY 10036
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 930-9400
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Exchange on which registered:
COMMON STOCK, $0.001 PAR VALUE NEW YORK STOCK EXCHANGE
9.375% SERIES B CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
9.200% SERIES C CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
8.000% SERIES D CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (ii) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12-b-2). Yes /X/ No / /
As of June 30, 2002, the aggregate market value of the common stock, $0.001
par value per share of iStar Financial Inc. ("Common Stock"), held by
non-affiliates(1) of the registrant was approximately $2.4 billion, based upon
the closing price of $28.50 on the New York Stock Exchange composite tape on
such date.
As of March 14, 2003, there were 98,622,217 shares of Common Stock
outstanding.
(1) For purposes of this Annual Report only, includes all outstanding Common
Stock other than Common Stock held directly by the registrant's directors
and executive officers.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's definitive proxy statement for the registrant's
2003 Annual Meeting, to be filed within 120 days after the close of the
registrant's fiscal year, are incorporated by reference into Part III of
this Annual Report on Form 10-K.
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TABLE OF CONTENTS
PAGE
--------
PART I
Item 1. Business............................................ 2
Item 2. Properties.......................................... 17
Item 3. Legal Proceedings................................... 17
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 17
PART II
Item 5. Market for Registrant's Equity and Related Share
Matters................................................... 18
Item 6. Selected Financial Data............................. 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 23
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk............................................... 41
Item 8. Financial Statements and Supplemental Data.......... 44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 95
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................ 95
Item 11. Executive Compensation............................. 95
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 95
Item 13. Certain Relationships and Related Transactions..... 95
Item 14. Controls and Procedures............................ 95
Item 16. Principal Accountant Fees and Services............. 95
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 96
SIGNATURES.................................................. 100
PART I
ITEM 1. BUSINESS
EXPLANATORY NOTE FOR PURPOSES OF THE "SAFE HARBOR PROVISIONS" OF SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
which involve certain risks and uncertainties. Forward-looking statements are
included with respect to, among other things, iStar Financial Inc.'s current
business plan, business strategy and portfolio management. The Company's actual
results or outcomes may differ materially from those anticipated. Important
factors that the Company believes might cause such differences are discussed in
the cautionary statements presented under the caption "Factors That May Affect
the Company's Business Strategy" in Item 1 of this Form 10-K or otherwise
accompany the forward-looking statements contained in this Form 10-K. In
assessing all forward-looking statements, readers are urged to read carefully
all cautionary statements contained in this Form 10-K.
CODE OF CONDUCT
iStar Financial Inc. (the "Company") has adopted a code of business conduct
for all of its employees and directors, including the Company's chief executive
officer, chief financial officer, other executive officers and personnel. A copy
of the Company's code of conduct is attached to this Annual Report on Form 10-K
as Exhibit 10.21 and is also available on the Company's website at
www.istarfinancial.com. The Company intends to post on its website material
changes to, or waivers from, its code of conduct, if any, within two days of any
such event. As of December 31, 2002, there were no such changes or waivers.
OVERVIEW
The Company is the leading publicly-traded finance company focused on the
commercial real estate industry. The Company provides structured financing to
private and corporate owners of real estate nationwide, including senior and
junior mortgage debt, corporate mezzanine and subordinated capital, and
corporate net lease financing. The Company, which is taxed as a real estate
investment trust ("REIT"), seeks to deliver strong dividends and superior
risk-adjusted returns on equity to shareholders by providing innovative and
value-added financing solutions to its customers.
The Company's primary product lines include:
- STRUCTURED FINANCE. The Company provides senior and subordinated loans
that typically range in size from $20 million to $100 million to borrowers
holding high-quality real estate. These loans may be either fixed or
variable rate and are structured to meet the specific financing needs of
the borrowers, including the acquisition or financing of large,
high-quality real estate. The Company offers borrowers a wide range of
structured finance options, including first mortgages, second mortgages,
partnership loans, participating debt and interim facilities. The
Company's structured finance transactions have maturities generally
ranging from three to ten years. As of December 31, 2002, based on gross
carrying values, the Company's structured finance assets represented
27.02% of its assets.
- PORTFOLIO FINANCE. The Company provides funding to regional and national
borrowers who own multiple facilities in geographically diverse
portfolios. Loans are cross-collateralized to give the Company the benefit
of all available collateral and underwritten to recognize inherent
portfolio diversification. Property types include multifamily, suburban
office, hotels and other property types where individual property values
are less than $20 million on average. Loan terms are structured to meet
the specific requirements of the borrower and typically range in size from
$25 million to $150 million. The Company's portfolio finance transactions
have maturities generally ranging from
2
three to ten years. As of December 31, 2002, based on gross carrying
values, the Company's portfolio finance assets represented 7.08% of its
assets.
- CORPORATE FINANCE. The Company provides senior and subordinated capital to
corporations engaged in real estate or real estate-related businesses.
Financings may be either secured or unsecured and typically range in size
from $20 million to $150 million. The Company's corporate finance
transactions have maturities generally ranging from five to ten years. As
of December 31, 2002, based on gross carrying values, the Company's
corporate finance assets represented 12.18% of its assets.
- LOAN ACQUISITION. The Company acquires whole loans and loan participations
which represent attractive risk-reward opportunities. Loans are generally
acquired at a small discount to the principal balance outstanding. Loan
acquisitions typically range in size from $5 million to $100 million and
are collateralized by all major property types. The Company's loan
acquisition transactions have maturities generally ranging from three to
ten years. As of December 31, 2002, based on gross carrying values, the
Company's loan acquisition assets represented 8.60% of its assets.
- CORPORATE TENANT LEASING. The Company provides capital to corporations and
borrowers who control facilities leased to single creditworthy tenants.
The Company's net leased assets are generally mission-critical
headquarters or distribution facilities that are subject to long-term
leases with rated corporate credit tenants, and which provide for all
expenses at the property to be paid by the corporate tenant on a triple
net lease basis. Corporate tenant lease transactions have terms generally
ranging from ten to 20 years and typically range in size from $20 million
to $150 million. As of December 31, 2002, based on gross carrying values,
the Company's corporate tenant lease assets represented 43.64% of its
assets.
- SERVICING. Through its iStar Asset Services division, the Company provides
rated loan servicing to third-party institutional loan portfolios, as well
as to the Company's own assets. The servicing business did not represent a
meaningful percentage of the gross carrying value of the Company's assets
as of December 31, 2002.
As more fully discussed in Note 1 to the Company's Consolidated Financial
Statements, the Company began its business in 1993 through private investment
funds formed to capitalize on inefficiencies in the real estate finance market.
In March 1998, these funds contributed their approximately $1.1 billion of
assets to the Company's predecessor in exchange for a controlling interest in
that company. Since that time, the Company has grown by originating new lending
and leasing transactions, as well as through corporate acquisitions.
Specifically, in September 1998, the Company acquired the loan origination
and servicing business of a major insurance company, and in December 1998, the
Company acquired the mortgage and mezzanine loan portfolio of its largest
private competitor. Additionally, in November 1999, the Company acquired TriNet
Corporate Realty Trust, Inc. ("TriNet" or the "Leasing Subsidiary"), then the
largest publicly-traded company specializing in corporate sale/leaseback
transactions for office and industrial facilities (the "TriNet Acquisition").
The TriNet Acquisition was structured as a stock-for-stock merger of TriNet with
a subsidiary of the Company.
Concurrent with the TriNet Acquisition, the Company also acquired its former
external advisor in exchange for shares of the Company's common stock ("Common
Stock") and converted its organizational form to a Maryland corporation. As part
of the conversion to a Maryland corporation, the Company replaced its former
dual class common share structure with a single class of Common Stock. The
Company's Common Stock began trading on the New York Stock Exchange on
November 4, 1999. Prior to this date, the Company's common shares were traded on
the American Stock Exchange.
3
INVESTMENT STRATEGY
The Company's investment strategy targets specific sectors of the real
estate credit markets in which it believes it can deliver value-added, flexible
financial solutions to its customers, thereby differentiating its financial
products from those offered by other capital providers.
The Company has implemented its investment strategy by:
- Focusing on the origination of large, structured mortgage, corporate and
lease financings where customers require flexible financial solutions.
- Avoiding commodity businesses in which there is significant direct
competition from other providers of capital such as conduit lending and
investment in commercial or residential mortgage-backed securities.
- Developing direct relationships with borrowers and corporate customers as
opposed to sourcing transactions solely through intermediaries.
- Adding value beyond simply providing capital by offering borrowers and
corporate customers specific lending expertise, flexibility, certainty and
continuing relationships beyond the closing of a particular financing
transaction.
- Taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of
capital, such as the spread between lease yields and the yields on
corporate customers' underlying credit obligations.
The Company intends to continue to emphasize a mix of portfolio financing
transactions to create asset diversification and single-asset financings for
properties with strong, long-term competitive market positions. The Company's
credit process will continue to focus on:
- Building diversification by asset type, property type, obligor, loan/lease
maturity and geography.
- Financing high-quality commercial real estate assets in major metropolitan
markets.
- Underwriting assets using conservative assumptions regarding collateral
value and future property performance.
- Requiring adequate cash flow coverage on its investments.
- Stress testing potential investments for adverse economic and real estate
market conditions.
As of December 31, 2002, based on current gross carrying values, the
Company's business consists of the following product lines:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PRODUCT LINE
Portfolio Finance 7%
Structured Finance 27%
Loan Acquisitions 9%
Corporate Finance 12%
Corporate Tenant Leases 45%
4
The Company seeks to maintain an investment portfolio which is diversified
by asset type, underlying property type and geography. As of December 31, 2002,
based on current gross carrying values, the Company's total investment portfolio
has the following characteristics:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ASSET TYPE
First Mortgages 37%
Second Mortgages 5%
Corporate/Partnership Loans 13%
Corporate Tenant Leases 45%
PROPERTY TYPE
HOTEL - LENDING 12%
Hotel - Investment Grade CTL 5%
Mixed Use 4%
Office - Lending 20%
Office - CTL 27%
Industrial / R&D 15%
Apartment / Residential 5%
Conference Ctr. 2%
Retail 4%
Other 6%
GEOGRAPHY
Northeast 18%
North Central 4%
Central 8%
South 12%
Southwest 2%
West 29%
Northwest 4%
Various 1%
Southeast 11%
Mid-Atlantic 11%
5
THE COMPANY'S UNDERWRITING PROCESS
The Company discusses and analyzes investment opportunities during regular
weekly meetings which are attended by all of its investment professionals, as
well as representatives from its legal, risk management and capital markets
areas. The Company has developed a process for screening potential investments
called the Six Point Methodology(SM). The Six Point Methodology(SM) reflects the
six fundamental criteria by which the Company evaluates an investment
opportunity prior to beginning its formal commitment process.
THE SIX POINT METHODOLOGY
- First, the Company evaluates the source of the opportunity. The Company
prefers opportunities where it has a direct relationship with the customer
or an intermediary who has worked with the Company before, because it
believes that such relationships enable it to add more value to a
transaction.
- Second, the Company evaluates the quality of the collateral or corporate
credit, as well as its market or industry dynamics.
- Third, the Company evaluates the equity or corporate sponsor, including
factors such as its reputation, financial strength and commitment to the
collateral.
- Fourth, the Company determines whether it can implement an appropriate
legal and financial structure for the transaction given its risk profile,
including the Company's ability to control the collateral under various
circumstances.
- Fifth, the Company performs an alternative investment test. If the Company
believes that it can earn a better risk-adjusted return in a comparable
asset class or different part of the customer's capital structure, then
the proposed investment will score poorly in this category.
- Sixth, the Company evaluates the liquidity of the investment and its
ability to match fund the asset. A security that is too highly structured
is less desirable because it may limit the Company's ability to obtain
appropriately priced financing for the asset, or its ability to sell it if
it ever so desires.
The Company has an intensive underwriting process in place for all potential
investments. This process provides for comprehensive feedback and review by all
disciplines within the Company, including investments, credit, risk management,
legal/structuring and capital markets. Participation is encouraged from all
professionals throughout the entire origination process, from the initial
consideration of the opportunity, through the Six Point Methodology(SM) and into
the preparation and distribution of a comprehensive memorandum for the Company's
internal and Board of Directors investment committees.
Commitments of less than $30.0 million require the unanimous consent of the
Company's internal investment committee, consisting of senior management
representatives from each of the Company's key disciplines. For commitments
between $30.0 million and $50.0 million, the further approval of the Company's
Board of Directors' investment committee is also required. All commitments of
$50.0 million or more must be approved by the Company's full Board of Directors.
FINANCING STRATEGY
The Company has access to a wide range of debt and equity capital resources
to finance its investment and growth strategies. At December 31, 2002, the
Company had over $2.0 billion of tangible book equity capital and a total market
capitalization of approximately $6.6 billion. The Company believes that its
size, diversification, investor sponsorship and track record are competitive
advantages in obtaining attractive financing for its businesses.
6
The Company seeks to maximize risk-adjusted returns on equity and financial
flexibility by accessing a variety of public and private debt and equity capital
sources, including:
- iStar Asset Receivables ("STARs"), the Company's proprietary match-funded,
securitized debt program.
- Long-term, unsecured corporate debt.
- A combined $2.7 billion available under its unsecured and secured
revolving credit facilities at year end.
The Company's business model is premised on significantly lower leverage
than many other commercial finance companies. In this regard, the Company seeks
to:
- Target a maximum consolidated debt/book equity ratio of 2.0x.
- Maintain a large tangible equity base and conservative credit statistics.
- Match fund assets and liabilities.
The Company has not historically utilized, and does not currently plans to
utilize, "off-balance sheet" financing vehicles other than normal corporate
tenant leasing joint ventures with unrelated third parties, which may be
accounted for under the equity method due to the existence of provisions
providing for a sharing of control with the venture partners. Detailed
information on joint ventures in which the Company currently has
investments/operations, including information on the Company's share of the
joint ventures' non-recourse debt, is provided in Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and in Note 6 to the Company's
Consolidated Financial Statements.
A more detailed discussion of the Company's current capital resources is
provided in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
HEDGING STRATEGY
The Company has variable-rate lending assets and variable-rate debt
obligations. These assets and liabilities create a natural hedge against changes
in variable interest rates. This means that as interest rates increase, the
Company earns more on its variable-rate lending assets and pays more on its
variable-rate debt obligations and, conversely, as interest rates decrease, the
Company earns less on its variable-rate lending assets and pays less on its
variable-rate debt obligations. When the Company's variable-rate debt
obligations exceed its variable-rate lending assets, the Company utilizes
derivative instruments to limit the impact of changing interest rates on its net
income. The Company does not use derivative instruments to hedge assets or for
speculative purposes. The derivative instruments the Company uses are typically
in the form of interest rate swaps and interest rate caps. Interest rate swaps
effectively change variable-rate debt obligations to fixed-rate debt
obligations. Interest rate caps effectively limit the maximum interest rate on
variable-rate debt obligations.
In addition, when appropriate the Company may occasionally enter into
interest rate swaps that convert fixed-rate debt to variable rate in order to
mitigate the risk of changes in fair value of the fixed-rate debt obligations.
The primary risks from the Company's use of derivative instruments is the
risk that a counterparty to a hedging arrangement could default on its
obligation and the risk that the Company may have to pay certain costs, such as
transaction fees or breakage costs, if a hedging arrangement is terminated by
it. As a matter of policy, the Company enters into hedging arrangements with
counterparties that are large, creditworthy financial institutions typically
rated at least "A/A2" by Standard & Poor's and Moody's Investors Service,
7
respectively. The Company's hedging strategy is monitored by its Audit Committee
on behalf of its Board of Directors and may be changed by the Board of Directors
without stockholder approval.
Developing an effective strategy for dealing with movements in interest
rates is complex and no strategy can completely insulate the Company from risks
associated with such fluctuations. There can be no assurance that the Company's
hedging activities will have the desired beneficial impact on its results of
operations or financial condition.
BUSINESS
REAL ESTATE LENDING:
The Company provides structured financing to private and corporate owners of
real estate nationwide, including senior and junior mortgage debt, as well as
corporate mezzanine and subordinated capital.
Set forth below is information regarding the Company's primary real estate
lending product lines as of December 31, 2002:
CURRENT
CARRYING %
VALUE OF TOTAL
-------------- --------
(IN THOUSANDS)
Structured finance..................................... $1,516,326 49.24%
Portfolio finance...................................... 397,114 12.90%
Corporate finance...................................... 683,381 22.19%
Loan acquisition....................................... 482,771 15.67%
---------- ------
Gross carrying value................................. $3,079,592 100.00%
======
Provision for loan losses............................ (29,250)
----------
Total carrying value, net............................ $3,050,342
==========
As more fully discussed in Note 3 to the Company's Consolidated Financial
Statements, the Company continually monitors borrower performance and completes
a detailed, loan-by-loan formal credit review on a quarterly basis. After having
originated or acquired over $6 billion of investment transactions, the Company
and its private investment fund predecessors have experienced minimal actual
losses on their lending investments. Further, based on current reviews of its
portfolio, management is not aware of any factors relating to specific loans
which indicate that such losses may be experienced in the forseeable future.
Despite the Company's historical track record of having minimal credit
losses and loans on non-accrual status, the Company considers it prudent to
reflect provisions for loan losses on a portfolio basis based upon the Company's
assessment of general market conditions, the Company's internal risk management
policies and credit risk rating system, industry loss experience, the Company's
assessment of the likelihood of delinquencies or defaults, and the value of the
collateral underlying its investments. Accordingly, since its first full quarter
operating its current business as a public company (the quarter ended June 30,
1998), management has reflected quarterly provisions for loan losses in its
operating results.
SUMMARY OF INTEREST CHARACTERISTICS
As more fully discussed in Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
as well as in Item 7a.--"Quantitative and Qualitative Disclosures about Market
Risk," the Company utilizes certain interest rate risk management techniques,
including both asset/liability matching and certain other hedging techniques, in
order to mitigate the Company's exposure to interest rate risks.
8
As of December 31, 2002, the Company's Lending Business portfolio has the
following interest rate characteristics:
CURRENT
CARRYING %
VALUE OF TOTAL
-------------- --------
(IN THOUSANDS)
Fixed-rate loans....................................... $1,294,684 42.04%
Variable-rate loans.................................... 1,784,908 57.96%
---------- ------
Gross carrying value................................... $3,079,592 100.00%
========== ======
SUMMARY OF PREPAYMENT TERMS
The Company is exposed to risks of prepayment on its loan assets, and
generally seeks to protect itself from such risks by structuring its loans with
prepayment restrictions and/or penalties.
As of December 31, 2002, the Company's Lending Business portfolio has the
following call protection characteristics:
CURRENT
CARRYING %
VALUE OF TOTAL
-------------- --------
(IN THOUSANDS)
Fixed prepayment penalties............................. $1,052,432 34.17%
Substantial lock-out for original term................. 999,668 32.46%
Currently open to prepayment with no penalty........... 567,429 18.43%
Yield maintenance...................................... 288,069 9.36%
Other.................................................. 171,994 5.58%
---------- ------
Gross carrying value................................... $3,079,592 100.00%
========== ======
SUMMARY OF LENDING BUSINESS MATURITIES
As of December 31, 2002, the Company's Lending Business portfolio has the
following maturity characteristics:
NUMBER OF CURRENT
TRANSACTIONS CARRYING %
YEAR OF MATURITY MATURING VALUE OF TOTAL
- ---------------- ------------ -------------- --------
(IN THOUSANDS)
2003...................................... 13 $ 637,354 20.70%
2004...................................... 16 396,338 12.87%
2005...................................... 23 846,602 27.49%
2006...................................... 6 151,833 4.93%
2007...................................... 8 306,854 9.96%
2008...................................... 12 107,088 3.48%
2009...................................... 7 302,444 9.82%
2010...................................... -- -- 0.00%
2011...................................... 9 227,109 7.37%
2012...................................... -- -- 0.00%
2013 and thereafter....................... 8 103,970 3.38%
----------- --------
Gross carrying value.................. $ 3,079,592 100.00%
=========== ========
Weighted average maturity............. 3.6 years
===========
9
STRUCTURED FINANCE
The Company provides custom-tailored senior and subordinated loans that
typically range in size from $20 million to $100 million to borrowers holding
institutional-quality real estate. These loans may be either fixed or variable
rate and are structured to meet the specific financing needs of the borrowers,
including the acquisition or refinancing of large, high-quality real estate. The
Company offers borrowers a wide range of structured finance options, including
first mortgages, second mortgages, partnership loans, participating debt and
interim facilities. The Company's structured finance transactions have
maturities generally ranging from three to ten years.
As of December 31, 2002, the Company's structured finance investments have
the following characteristics:
CURRENT
# OF CURRENT PRINCIPAL
LOANS CARRYING BALANCE
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE(1) OUTSTANDING
- ---------------- ---------------------------------------- -------- ---------- -----------
First Mortgages......................... Office/Residential/Retail/ Industrial/ 24 $ 992,599 $ 997,963
Conference Center/Mixed Use/Hotel
Junior First Mortgages(5)............... Office/Residential/Mixed Use/Hotel 9 124,233 132,970
Second Mortgages........................ Office/Mixed Use/Hotel 8 229,646 224,422
Corporate Loans/Other................... Office/Retail/Mixed 14 169,848 165,295
Use/Hotel
-- ---------- ----------
Total................................... 55 $1,516,326 $1,520,650
== ========== ==========
WEIGHTED WEIGHTED
AVERAGE FIRST AVERAGE LAST
WEIGHTED DOLLAR DOLLAR
AVERAGE CURRENT CURRENT
STATED LOAN-TO- LOAN-TO-
INVESTMENT CLASS PAY RATE(2) VALUE(3) VALUE(4)
- ---------------- ----------- ------------- ------------
First Mortgages......................... 6.13% 0% 67%
Junior First Mortgages(5)............... 6.85% 52% 68%
Second Mortgages........................ 7.92% 53% 69%
Corporate Loans/Other................... 11.01% 61% 74%
Total...................................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value differs from Current Principal Balance
Outstanding, difference represents contractual amortization, partial
prepayment of loan principal, or amortization of acquired premiums,
discounts or deferred loan fees.
(2) All variable-rate loans assume a one-month LIBOR rate of 1.38% (the actual
one-month LIBOR rate at December 31, 2002). As of December 31, 2002, three
loans with a combined carrying value of $72.4 million have a stated accrual
rate that exceeds the stated pay rate.
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).
(5) Junior first mortgages represent promissory notes secured by first mortgages
which are junior to other promissory notes secured by the same first
mortgage.
PORTFOLIO FINANCE
The Company provides funding to regional and national borrowers who own
multiple facilities in geographically diverse portfolios. Loans are
cross-collateralized to give the Company the benefit of all available collateral
and underwritten to recognize inherent portfolio diversification. Property types
include multifamily, suburban office, hotels and other property types where
individual property values are less than $20 million on average. Loan terms are
structured to meet the specific requirements of the borrower and typically range
in size from $25 million to $150 million. The Company's portfolio finance
transactions have maturities generally ranging from three to ten years.
10
As of December 31, 2002, the Company's portfolio finance investments have
the following characteristics:
WEIGHTED
AVERAGE FIRST
CURRENT WEIGHTED DOLLAR
# OF CURRENT PRINCIPAL AVERAGE CURRENT
LOANS CARRYING BALANCE STATED LOAN-TO-
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE(1) OUTSTANDING PAY RATE(2) VALUE(3)
- ---------------- -------------------------- -------- -------- ----------- ----------- -------------
First Mortgages.................... Entertainment/Hotel 4 $152,637 $152,773 6.91% 0%
Junior First Mortgages(5).......... Hotel 1 49,500 50,000 7.61% 52%
Second Mortgages................... Hotel 2 71,950 71,093 9.28% 65%
Corporate Loans/Other.............. Office/Entertainment/Hotel 4 123,027 123,122 8.82% 60%
--- -------- --------
Total.............................. 11 $397,114 $396,988
=== ======== ========
WEIGHTED
AVERAGE LAST
DOLLAR
CURRENT
LOAN-TO-
INVESTMENT CLASS VALUE(4)
- ---------------- ------------
First Mortgages.................... 56%
Junior First Mortgages(5).......... 65%
Second Mortgages................... 87%
Corporate Loans/Other.............. 74%
Total..............................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value differs from Current Principal Balance
Outstanding, difference represents contractual amortization, partial
prepayment of loan principal, or amortization of acquired premiums,
discounts or deferred loan fees.
(2) All variable-rate loans assume a one-month LIBOR rate of 1.38% (the actual
one-month LIBOR rate at December 31, 2002).
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).
(5) Junior first mortgages represent promissory notes secured by first mortgages
which are junior to other promissory notes secured by the same first
mortgage.
CORPORATE FINANCE
The Company provides senior and subordinated capital to corporations engaged
in real estate or real estate-related businesses. Financings may be either
secured or unsecured and typically range in size from $20 million to
$150 million. The Company's corporate finance transactions have maturities
generally ranging from five to ten years.
As of December 31, 2002, the Company's corporate finance investments have
the following characteristics:
CURRENT
# OF CURRENT PRINCIPAL
LOANS CARRYING BALANCE
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE(1) OUTSTANDING
- ---------------- ----------------------------------------- -------- -------- -----------
First Mortgages.......................... Mixed Use/Entertainment/Hotel 5 $181,980 $197,269
Junior First Mortgages(5)................ Office/Hotel 2 117,047 115,090
Corporate Loans/Other.................... Office/Residential/Retail/Mixed Use/ 17 384,354 396,959
Entertainment
--- -------- --------
Total.................................... 24 $683,381 $709,318
=== ======== ========
WEIGHTED WEIGHTED
AVERAGE FIRST AVERAGE LAST
WEIGHTED DOLLAR DOLLAR
AVERAGE CURRENT CURRENT
STATED LOAN-TO- LOAN-TO-
INVESTMENT CLASS PAY RATE(2) VALUE(3) VALUE(4)
- ---------------- ----------- ------------- ------------
First Mortgages.......................... 8.23% 0% 64%
Junior First Mortgages(5)................ 4.96% 42% 60%
Corporate Loans/Other.................... 9.66% 56% 70%
Total....................................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value differs from Current Principal Balance
Outstanding, difference represents contractual amortization, partial
prepayment of loan principal, or amortization of acquired premiums,
discounts or deferred loan fees.
(2) All variable-rate loans assume a one-month LIBOR rate of 1.38% (the actual
one-month LIBOR rate at December 31, 2002).
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).
(5) Junior first mortgages represent promissory notes secured by first mortgages
which are junior to other promissory notes secured by the same first
mortgage.
LOAN ACQUISITION
The Company acquires whole loans and loan participations which represent
attractive risk-reward opportunities. Loans are generally acquired at a small
discount to the principal balance outstanding. Loan acquisitions typically range
in size from $5 million to $100 million and are collateralized by all major
property types. The Company's loan acquisition transactions have maturities
generally ranging from three to ten years.
For accounting purposes, these loans are initially reflected at the
Company's acquisition cost which represents the outstanding balance net of the
acquisition discount or premium. The Company amortizes
11
such discounts or premiums as an adjustment to increase or decrease the yield,
respectively, realized on these loans using the effective interest method. As
such, differences between carrying value and principal balances outstanding do
not represent embedded losses or gains as the Company generally plans to hold
such loans to maturity.
As of December 31, 2002, the Company's loan acquisition investments have the
following characteristics:
CURRENT WEIGHTED
CURRENT PRINCIPAL AVERAGE
# OF LOANS CARRYING BALANCE STATED
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE(1) OUTSTANDING PAY RATE(2)
- ---------------- ------------------------------------ ---------- -------- ----------- -----------
First Mortgages..................... Office/Retail/Hotel 5 $400,742 $417,078 6.65 %
Corporate Loans/Other............... Mixed Use/Hotel 7 82,029 114,839 7.52 %
-- -------- --------
Total............................... 12 $482,771 $531,917
== ======== ========
WEIGHTED WEIGHTED
AVERAGE FIRST AVERAGE LAST
DOLLAR DOLLAR
CURRENT CURRENT
LOAN-TO- LOAN-TO-
INVESTMENT CLASS VALUE(3) VALUE(4)
- ---------------- ---------------- ----------------
First Mortgages..................... 0% 78%
Corporate Loans/Other............... 55% 71%
Total...............................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value differs from Current Principal Balance
Outstanding, difference represents contractual amortization, partial
prepayment of loan principal, or amortization of acquired premiums,
discounts or deferred loan fees.
(2) All variable-rate loans assume a one-month LIBOR rate of 1.38% (the actual
one-month LIBOR rate at December 31, 2002).
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).
LOAN SERVICING
Through its iStar Asset Services division, the Company provides rated loan
servicing to third-party institutional loan portfolios, as well as to the
Company's own assets. iStar Asset Services is currently rated "above average" by
Standard & Poor's and "CPS2" as a primary servicer and "CMS2-" as a master
servicer by Fitch, Inc. The Company's servicing business focuses on maximizing
risk-adjusted investment returns through active, on-going asset management with
particular focus on risk management, asset financing strategies and
opportunistic responsiveness to changing customer needs.
CORPORATE TENANT LEASING:
The Company, directly and through its Leasing Subsidiary, provides capital
to corporations and borrowers who control facilities leased to single
creditworthy tenants. The Company's net leased assets are generally
mission-critical headquarters or distribution facilities that are subject to
long-term leases with rated corporate credit tenants, and which provide for all
expenses at the property to be paid by the corporate tenant on a triple net
lease basis. Corporate tenant lease ("CTL") transactions have terms generally
ranging from ten to 20 years and typically range in size from $20 million to
$150 million.
12
The Company pursues the origination of CTL transactions by structuring
purchase/leasebacks and by acquiring facilities subject to existing long-term
net leases. In a typical purchase/leaseback transaction, the Company purchases a
corporation's facility and leases it back to that corporation subject to a
long-term net lease. This structure allows the corporate customer to reinvest
the proceeds from the sale of its facilities into its core business, while the
Company capitalizes on its structured financing expertise.
The Company generally intends to hold its CTL assets for long-term
investment. However, subject to certain tax restrictions, the Company may
dispose of an asset if it deems the disposition to be in the Company's best
interests and may either reinvest the disposition proceeds, use the proceeds to
reduce debt, or distribute the proceeds to shareholders.
The Company's CTL investments primarily represent a diversified portfolio of
mission-critical headquarters or distribution facilities subject to net lease
agreements with creditworthy corporate tenants. The Company generally seeks
high-quality, general-purpose real estate with residual values that represent a
discount to current market values and replacement costs. Under a typical net
lease agreement, the corporate customer agrees to pay a base monthly operating
lease payment and all facility operating expenses (including taxes, maintenance
and insurance).
The Company generally seeks corporate tenants with the following
characteristics:
- Established companies with stable core businesses or market leaders in
growing industries.
- Investment-grade credit strength or appropriate credit enhancements if
corporate credit strength is not sufficient on a stand-alone basis.
- Commitment to the facility as a mission-critical asset to their on-going
businesses.
As of December 31, 2002, the Company had 164 corporate customers operating
in more than 21 major industry sectors, including aerospace, energy, finance,
healthcare, manufacturing, technology and telecommunications. The majority of
these customers represent well-recognized national and international companies,
such as Federal Express, IBM, Nike, Nokia, the U.S. Government and Verizon.
As of December 31, 2002, the Company's CTL portfolio has the following
tenant credit characteristics:
ANNUALIZED IN-PLACE % OF IN-PLACE
OPERATING OPERATING
LEASE INCOME(3) LEASE INCOME
------------------- -------------
(IN THOUSANDS)
Investment grade(1)............................... $132,548 47.85%
Implied investment grade(2)....................... 14,545 5.25%
Non-investment grade.............................. 45,725 16.50%
Unrated........................................... 84,204 30.40%
-------- ------
$277,022 100.00%
======== ======
EXPLANATORY NOTES:
- ------------------------------
(1) A customer's credit rating is considered "Investment Grade" if it has a
published senior unsecured credit rating of Baa3/BBB- or above by one or
more of the three national rating agencies. Where a customer's credit is
rated investment grade by one agency and non-investment grade by another,
the Company only classifies the credit "Investment Grade" if the agency
rating the credit investment grade is Standard & Poor's or Moody's Investors
Service.
(2) A customer's credit rating is considered "Implied Investment Grade" if it
has no published ratings, but has credit characteristics that the Company
believes warrant an investment grade senior unsecured credit rating.
Examples at December 31, 2002 include Cisco Systems Inc., Mitsubishi
Electronics and Volkswagen of America.
(3) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2002. The operating lease income includes the Company's pro
rata share from facilities owned by the Company's joint ventures.
13
RISK MANAGEMENT STRATEGIES. The Company believes that diligent risk
management of its CTL assets is an essential component of its long-term
strategy. There are several ways to optimize the performance and maximize the
value of CTL assets. The Company monitors its portfolio for changes that could
affect the performance of the markets, credits and industries in which it has
invested. As part of this monitoring, the Company's risk management group
reviews market, customer and industry data and frequently inspects its
facilities. In addition, the Company attempts to develop strong relationships
with its large corporate customers, which provide a source of information
concerning the customers' facilities needs. These relationships allow the
Company to be proactive in obtaining early lease renewals and in conducting
early marketing of assets where the customer has decided not to renew.
As of December 31, 2002, the Company owned 162 office and industrial
facilities principally subject to net leases to 163 customers, comprising
25.4 million square feet in 28 states. The Company also has a portfolio of 17
hotels under a long-term master lease with a single customer. Information
regarding the Company's CTL assets as of December 31, 2002 is set forth below:
% OF IN-PLACE
# OF OPERATING % OF TOTAL
SIC CODE LEASES LEASE INCOME(1) REVENUE(2)
- -------------------------------------------------------- -------- --------------- -----------------
73 Business Services 21 13.78% 6.80%
48 Communications 35 12.32% 6.08%
35 Industrial/Commercial Machinery, incl. Computers 21 10.63% 5.25%
37 Transportation Equipment 6 6.43% 3.17%
30 Rubber and Misc. Plastics Products 2 6.31% 3.12%
36 Electronic & Other Elec. Equipment 15 6.09% 3.01%
70 Hotels, Rooming, Housing & Lodging 1 5.41% 2.67%
50 Wholesale Trade--Durable Goods 10 3.23% 1.60%
49 Electric, Gas and Sanitary Services 9 3.15% 1.55%
61 Non-depository Institutions 3 2.66% 1.31%
64 Insurance Agents, Brokers & Service 5 2.63% 1.30%
63 Insurance Carriers 7 2.54% 1.25%
42 Motor Freight Transp. & Warehousing 2 2.18% 1.07%
58 Eating and Drinking Places 13 2.14% 1.06%
91 Executive, Legislative and General Gov't. 3 1.97% 0.97%
87 Engineering, Accounting & Research Services 10 1.82% 0.90%
60 Depository Institutions 3 1.59% 0.79%
38 Measuring & Analyzing Instruments 5 1.50% 0.74%
51 Wholesale Trade--Non-Durable Goods 4 1.31% 0.65%
45 Airports, Flying Fields & Terminal Services 1 1.25% 0.62%
23 Apparel and Other Finished Products 2 1.13% 0.56%
Various 39 9.93% 4.91%
--- ------
Total 217 100.00%
=== ======
EXPLANATORY NOTES:
- ------------------------------
(1) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2002. The operating lease income includes the Company's pro
rata share from facilities owned by the Company's joint ventures.
(2) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2002 as a percentage of annualized total revenue for the
quarter ended December 31, 2002.
14
As of December 31, 2002, lease expirations on the Company's CTL assets,
including facilities owned by the Company's joint ventures, are as follows:
NUMBER OF ANNUALIZED IN-PLACE % OF IN-PLACE
LEASES OPERATING OPERATING % OF TOTAL
YEAR OF LEASE EXPIRATION EXPIRING LEASE INCOME(1) LEASE INCOME REVENUE(2)
- ------------------------ --------- ------------------- ------------- ----------
(IN THOUSANDS)
2003........................... 15 $ 11,873 4.29% 2.12%
2004........................... 30 20,719 7.48% 3.69%
2005........................... 21 16,909 6.10% 3.01%
2006........................... 30 30,335 10.94% 5.40%
2007........................... 24 21,124 7.63% 3.76%
2008........................... 14 11,731 4.23% 2.09%
2009........................... 20 17,748 6.41% 3.16%
2010........................... 5 7,718 2.79% 1.38%
2011........................... 5 5,175 1.87% 0.92%
2012........................... 15 20,427 7.37% 3.64%
2013 and thereafter............ 38 113,263 40.89% 20.18%
---------- ------
Total........................ $ 277,022 100.00%
========== ======
Weighted average remaining
lease term................... 9.4 years
==========
EXPLANATORY NOTES:
- ------------------------------
(1) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2002. The operating lease income includes the Company's pro
rata share from facilities owned by the Company's joint ventures.
(2) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2002 as a percentage of annualized total revenue for the
quarter ended December 31, 2002.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
At all times, the Company intends to make investments in a manner consistent
with the requirements of the Code for the Company to qualify as a REIT.
INVESTMENT RESTRICTIONS OR LIMITATIONS
The Company does not have any prescribed allocation among investments or
product lines. Instead, the Company focuses on corporate and real estate credit
underwriting to develop an in-depth analysis of the risk/reward ratios in
determining the pricing and advisability of each particular transaction.
The Company believes that it is not, and intends to conduct its operations
so as not to become, regulated as an investment company under the Investment
Company Act. The Investment Company Act generally exempts entities that are
"primarily engaged in purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" (collectively, "Qualifying Interests").
The Company intends to rely on current interpretations of the Securities and
Exchange Commission in an effort to qualify for this exemption. Based on these
interpretations, the Company, among other things, must maintain at least 55.00%
of its assets in Qualifying Interests and at least 25.00% of its assets in real
estate-related assets (subject to reduction to the extent the Company invests
more than 55.00% of its assets in Qualifying Interests). Generally, the
Company's senior mortgages, corporate tenant lease assets and certain of its
subordinated mortgages constitute Qualifying Interests.
Subject to the limitations on ownership of certain types of assets and the
gross income tests imposed by the Code, the Company also may invest in the
securities of other REITs, other entities engaged in real estate activities or
other issuers, including for the purpose of exercising control over such
entities.
15
COMPETITION
The Company is engaged in a competitive business. In originating and
acquiring assets, the Company competes with public and private companies,
including other finance companies, mortgage banks, pension funds, savings and
loan associations, insurance companies, institutional investors, investment
banking firms and other lenders and industry participants, as well as individual
investors. Existing industry participants and potential new entrants compete
with the Company for the available supply of investments suitable for
origination or acquisition, as well as for debt and equity capital. Certain of
the Company's competitors are larger than the Company, have longer operating
histories, may have access to greater capital and other resources, may have
management personnel with more experience than the officers of the Company, and
may have other advantages over the Company in conducting certain businesses and
providing certain services.
REGULATION
The operations of the Company are subject, in certain instances, to
supervision and regulation by state and federal governmental authorities and may
be subject to various laws and judicial and administrative decisions imposing
various requirements and restrictions, which, among other things: (1) regulate
credit granting activities; (2) establish maximum interest rates, finance
charges and other charges; (3) require disclosures to customers; (4) govern
secured transactions; and (5) set collection, foreclosure, repossession and
claims-handling procedures and other trade practices. Although most states do
not regulate commercial finance, certain states impose limitations on interest
rates and other charges and on certain collection practices and creditor
remedies and require licensing of lenders and financiers and adequate disclosure
of certain contract terms. The Company is also required to comply with certain
provisions of the Equal Credit Opportunity Act that are applicable to commercial
loans.
In the judgment of management, existing statutes and regulations have not
had a material adverse effect on the business conducted by the Company. However,
it is not possible to forecast the nature of future legislation, regulations,
judicial decisions, orders or interpretations, nor their impact upon the future
business, financial condition or results of operations or prospects of the
Company.
The Company has elected and expects to continue to make an election to be
taxed as a REIT under Section 856 through 860 of the Code. As a REIT, the
Company must currently distribute, at a minimum, an amount equal to 90.00% of
its taxable income and must distribute 100.00% of its taxable income to avoid
paying corporate federal income taxes. REITs are also subject to a number of
organizational and operational requirements in order to elect and maintain REIT
status. These requirements include specific share ownership tests and assets and
gross income composition tests. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. Even if the Company qualifies for taxation as a REIT, the Company may
be subject to state and local income taxes and to federal income tax and excise
tax on its undistributed income.
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS STRATEGY
The implementation of the Company's business strategy and investment
policies are subject to certain risks, including the effect of economic and
other conditions on underlying property performance, the risks of borrower and
corporate tenant defaults, risks resulting from delays in enforcing remedies or
in gaining control over real estate collateral following a default, risks that
the properties collateralizing debt instruments held by the Company or CTL
assets owned by the Company will not generate revenues sufficient to meet
operating expenses and to pay scheduled debt service, the risk that prepayment
restrictions may be insufficient to deter prepayments, the existence of junior
mortgages that may affect the Company's rights, liability associated with
uninsurable losses and unknown environmental liabilities.
16
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real estate (including, in certain
circumstances, a secured lender that succeeds to ownership or control of a
property) may become liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. Those laws
typically impose cleanup responsibility and liability without regard to whether
the owner or control party knew of or was responsible for the release or
presence of such hazardous or toxic substances. The costs of investigation,
remediation or removal of those substances may be substantial. The owner or
control party of a site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from a site. Certain environmental laws also impose liability in connection with
the handling of or exposure to asbestos-containing materials, pursuant to which
third parties may seek recovery from owners of real properties for personal
injuries associated with asbestos-containing materials. Absent succeeding to
ownership or control of real property, a secured lender is not likely to be
subject to any of these forms of environmental liability. The Company is not
currently aware of any environmental issues which could materially affect the
Company.
EMPLOYEES
As of March 14, 2003, the Company had 143 employees and believes its
relationships with its employees to be good. The Company's employees are not
represented by a collective bargaining agreement.
WEBSITE ACCESS TO REPORTS
The Company maintains a website at www.istarfinancial.com. Effective as of
January 1, 2003, through the Company's website, the Company makes available free
of charge its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those Reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to, the SEC.
ITEM 2. PROPERTIES
The Company's principal executive and administrative offices are located at
1114 Avenue of the Americas, New York, NY 10036. Its telephone number, general
facsimile number and web address are (212) 930-9400, (212) 930-9494 and
www.istarfinancial.com, respectively. The lease for the Company's primary
corporate office space expires in February 2010. The Company believes that this
office space is suitable for its operations for the foreseeable future. The
Company also maintains super-regional offices in Atlanta, Georgia; Hartford,
Connecticut; and San Francisco, California, as well as regional offices in
Boston, Massachusetts; Dallas, Texas; and Denver, Colorado.
See Item 1--"Corporate Tenant Leasing" for a discussion of corporate tenant
lease facilities held by the Company and its Leasing Subsidiary for investment
purposes and Item 8--"Schedule III--Corporate Tenant Lease Assets and
Accumulated Depreciation" for a detailed listing of such facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation or legal proceedings,
or to the best of its knowledge, any threatened litigation or legal proceedings
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2002.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED SHARE MATTERS
The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol "SFI."
The high and low sales prices per share of Common Stock are set forth below
for the periods indicated.
QUARTER ENDED HIGH LOW
- ------------- -------- --------
2001
March 31, 2001.............................................. $ 25.25 $ 19.19
June 30, 2001............................................... $ 28.20 $ 22.85
September 30, 2001.......................................... $ 28.46 $ 22.49
December 31, 2001........................................... $ 26.05 $ 23.01
2002
March 31, 2002.............................................. $ 28.90 $ 24.59
June 30, 2002............................................... $ 31.45 $ 28.50
September 30, 2002.......................................... $ 29.55 $ 25.30
December 31, 2002........................................... $ 28.40 $ 25.90
On March 14, 2003, the closing sale price of the Common Stock as reported by
the NYSE was $28.50. The Company had approximately 2,619 holders of record of
Common Stock as of March 14, 2003.
At December 31, 2002, the Company had four series of preferred stock
outstanding: Series A Preferred Stock (which currently pays dividends at the
rate of 9.50% per annum), 9.375% Series B Preferred Stock, 9.20% Series C
Preferred Stock and 8.00% Series D Preferred Stock. Each of the Series B, C and
D preferred stock is publicly traded.
DIVIDENDS
The Company's management expects that any taxable income remaining after the
distribution of preferred dividends and the regular quarterly or other dividends
on its Common Stock will be distributed annually to the holders of the Common
Stock on or prior to the date of the first regular quarterly dividend payment
date of the following taxable year. The dividend policy with respect to the
Common Stock is subject to revision by the Board of Directors. All distributions
in excess of dividends on preferred stock or those required for the Company to
maintain its REIT status will be made by the Company at the sole discretion of
the Board of Directors and will depend on the taxable earnings of the Company,
the financial condition of the Company, and such other factors as the Board of
Directors deems relevant. The Board of Directors has not established any minimum
distribution level. In order to maintain its qualifications as a REIT, the
Company intends to make regular quarterly dividends to its shareholders that, on
an annual basis, will represent at least 90.00% of its taxable income (which may
not necessarily equal net income as calculated in accordance with generally
accepted accounting principles), determined without regard to the deduction for
dividends paid and excluding any net capital gains.
Holders of Common Stock will be entitled to receive distributions if, as and
when the Board of Directors authorizes and declares distributions. However,
rights to distributions may be subordinated to the rights of holders of
preferred stock, when preferred stock is issued and outstanding. In any
liquidation, dissolution or winding up of the Company, each outstanding share of
Common Stock will entitle its holder to a proportionate share of the assets that
remain after the Company pays its liabilities and any preferential distributions
owed to preferred shareholders.
18
The following table sets forth the dividends paid or declared by the Company
on its Common Stock:
SHAREHOLDER DIVIDEND/
QUARTER ENDED RECORD DATE SHARE
- ------------- ----------------- ---------
2001(1)
March 31, 2001..................................... April 16, 2001 $ 0.6125
June 30, 2001...................................... July 16, 2001 $ 0.6125
September 30, 2001................................. October 15, 2001 $ 0.6125
December 31, 2001.................................. December 17, 2001 $ 0.6125
2002(2)
March 31, 2002..................................... April 15, 2002 $ 0.6300
June 30, 2002...................................... July 15, 2002 $ 0.6300
September 30, 2002................................. October 15, 2002 $ 0.6300
December 31, 2002.................................. December 16, 2002 $ 0.6300
EXPLANATORY NOTES:
- ------------------------------
(1) For tax reporting purposes, the 2001 dividends were classified as 90.55%
($2.2206) ordinary income and 9.45% ($0.2318) return of capital for those
shareholders who held shares of the Company for the entire year.
(2) For tax reporting purposes, the 2002 dividends were classified as 87.61%
($2.2078) ordinary income, 1.80% ($0.0454) 20.00% capital gain and 10.59%
($0.2668) return of capital for those shareholders who held shares of the
Company for the entire year.
The Company declared dividends aggregating $20.9 million, $4.7 million,
$3.0 million and $8.0 million, respectively, on its Series A, B, C and D
preferred stock, respectively, for the year ended December 31, 2002. There are
no dividend arrearages on any of the preferred shares currently outstanding.
Distributions to shareholders will generally be taxable as ordinary income,
although a portion of such dividends may be designated by the Company as capital
gain or may constitute a tax-free return of capital. The Company annually
furnishes to each of its shareholders a statement setting forth the
distributions paid during the preceding year and their characterization as
ordinary income, capital gain or return of capital.
The Company intends to continue to declare quarterly distributions on its
Common Stock. No assurance, however, can be given as to the amounts or timing of
future distributions, as such distributions are subject to the Company's
earnings, financial condition, capital requirements and such other factors as
the Company's Board of Directors deems relevant.
19
DISCLOSURE OF EQUITY COMPENSATION PLAN INFORMATION
(C)
(A) NUMBER OF SECURITIES
NUMBER OF SECURITIES (B) REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
- ------------- -------------------- -------------------- ---------------------------
Equity compensation plans approved
by security holders--stock
options(1)...................... 4,339,751 $18.77 1,113,162
Equity compensation plans approved
by security holders--restricted
stock awards(2)................. 1,330,255 N/A N/A
Equity compensation plans approved
by security holders--high
performance units(3)............ -- N/A N/A
Equity compensation plans not
approved by security holders.... -- -- --
--------- ------ ---------
Total............................. 5,670,006 $18.77 1,113,162
========= ====== =========
EXPLANATORY NOTES:
- ------------------------------
(1) Stock Options--As more fully discussed in Note 10 to the Company's
Consolidated Financial Statements, there were 4.3 million stock options
outstanding as of December 31, 2002. These 4.3 million options, together
with their weighted-average exercise price, have been included in column (a)
and (b), above. The 1.1 million figure in column (c) represents the
aggregate amount of stock options or restricted stock awards that could be
granted under compensation plans approved by the Company's security holders.
(2) Restricted Stock--As of December 31, 2002, the Company has issued 787,949
shares of restricted stock. The restrictions on 330,255 of such shares
primarily relate to the passage of time for vesting periods which have not
lapsed, and are thus not included in the Company's outstanding share
balance.
Phantom Shares--As more fully discussed in Note 10 to the Company's
Consolidated Financial Statements, the Company has granted 2.0 million
unvested phantom shares, each of which represents one share of the Company's
Common Stock. As of December 31, 2002, 1.0 million of these shares have
contingently vested. These shares, together with their weighted-average
exercise price, have been included in column (a) and (b), above. Shares that
have contingently vested generally are not expected to become fully vested
until March 31, 2004.
(3) High Performance Unit Program--In May 2002, the Company's shareholders
approved the iStar Financial High Performance Unit Program. The Program is
more fully described in the Company's proxy statement dated April 8, 2002
and in Note 10 to the Company's Consolidated Financial Statements. The
program entitles the employee participants to receive cash distributions in
the nature of common stock dividends if the total rate of return on the
Company's Common Stock exceeds certain performance levels. The first tranche
of the program was completed on December 31, 2002. As a result of the
Company's superior performance during the valuation period for the first
tranche, the program participants are entitled to share in cash
distributions equivalent to dividends payable on 819,254 shares of the
Company's Common Stock, in the aggregate, as and when such dividends are
paid by the Company. Such dividend payments begin with the first quarter
2003 dividend and will reduce net income allocable to common stockholders
when paid. No shares of the Company's Common Stock will be issued in
connection with this program and thus no effect has been reflected in the
above table.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data on a consolidated
historical basis for the Company. However, prior to March 1998, the Company's
structured finance operations were conducted by two private investment
partnerships which contributed substantially all their structured finance assets
to the Company in exchange for cash and shares of the Company.
Further, on November 4, 1999, the Company acquired TriNet, which increased
the size of the Company's operations, and also acquired its former external
advisor. Operating results for the year ended December 31, 1999 reflect only the
effects of these transactions subsequent to their consummation.
20
Accordingly, the historical balance sheet information as of December 31,
1998, as well as the results of operations for the Company for all periods prior
to and including the year ended December 31, 1999, do not reflect the current
operations of the Company as a well capitalized, internally-managed finance
company operating in the commercial real estate industry. For these reasons, the
Company believes that the information should be read in conjunction with the
discussions set forth in Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations." Certain prior year amounts have
been reclassified to conform to the 2002 presentation.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
OPERATING DATA:
Interest income...................................... $ 255,631 $ 254,119 $ 268,011 $ 209,848 $ 112,914
Operating lease income............................... 242,100 185,943 177,581 41,665 12,378
Other income......................................... 27,993 31,057 17,927 12,900 2,708
----------- ---------- ---------- ---------- -----------
Total revenue.................................... 525,724 471,119 463,519 264,413 128,000
----------- ---------- ---------- ---------- -----------
Interest expense..................................... 185,375 169,974 173,741 91,159 44,697
Operating costs-corporate tenant lease assets........ 13,755 12,782 12,737 2,245 --
Depreciation and amortization........................ 47,821 35,411 34,384 10,324 4,287
General and administrative........................... 30,449 24,151 25,706 6,269 2,583
General and administrative-stock-based
compensation....................................... 17,998 3,574 2,864 412 5,985
Provision for loan losses............................ 8,250 7,000 6,500 4,750 2,750
Advisory fees........................................ -- -- -- 16,193 7,837
Costs incurred in acquiring former external
advisor(1)......................................... -- -- -- 94,476 --
----------- ---------- ---------- ---------- -----------
Total costs and expenses............................. 303,648 252,892 255,932 225,828 68,139
----------- ---------- ---------- ---------- -----------
Income before equity in earnings from joint ventures
and unconsolidated subsidiaries, minority interest
and other items.................................... 222,076 218,227 207,587 38,585 59,861
Equity in earnings from joint ventures and
unconsolidated subsidiaries........................ 1,222 7,361 4,796 235 96
Minority interest in consolidated entities........... (162) (218) (195) (41) (54)
Extraordinary loss on early extinguishment of debt... (12,166) (1,620) (705) -- --
Cumulative effect of change in accounting
principle(2)....................................... -- (282) -- -- --
----------- ---------- ---------- ---------- -----------
Net income before discontinued operations............ 210,970 223,468 211,483 38,779 59,903
Income from discontinued operations.................. 3,583 5,299 3,155 107 --
Gain from discontinued operations.................... 717 1,145 2,948 -- --
----------- ---------- ---------- ---------- -----------
Net income........................................... $ 215,270 $ 229,912 $ 217,586 $ 38,886 $ 59,903
Preferred dividend requirements...................... (36,908) (36,908) (36,908) (23,843) (944)
----------- ---------- ---------- ---------- -----------
Net income allocable to common shareholders.......... $ 178,362 $ 193,004 $ 180,678 $ 15,043 $ 58,959
=========== ========== ========== ========== ===========
Basic earnings per common share(3)................... $ 1.98 $ 2.24 $ 2.11 $ 0.25 $ 1.40
=========== ========== ========== ========== ===========
Diluted earnings per common share.................... $ 1.93 $ 2.19 $ 2.10 $ 0.25 $ 1.36
=========== ========== ========== ========== ===========
Dividends declared per common share(4)............... $ 2.52 $ 2.45 $ 2.40 $ 1.86 $ 1.14
=========== ========== ========== ========== ===========
SUPPLEMENTAL DATA:
Adjusted earnings allocable to common
shareholders(5)(7)................................. $ 281,686 $ 255,132 $ 230,688 $ 127,798 $ 65,949
EBITDA(6)(7)......................................... $ 471,444 $ 430,973 $ 420,508 $ 234,779 $ 116,778
Ratio of EBITDA to interest expense(8)............... 2.54x 2.54x 2.42x 2.58x 2.61x
Ratio of EBITDA to combined fixed charges(9)......... 2.12x 2.08x 2.00x 2.04x 1.70x
Ratio of earnings to fixed charges(10)............... 2.25x 2.34x 2.25x 1.43x 2.33x
Ratio of earnings to fixed charges and preferred
stock dividends(10)................................ 1.88x 1.93x 1.86x 1.13x 2.28x
Weighted average common shares
outstanding-basic(11).............................. 89,886 86,349 85,441 57,749 41,607
Weighted average common shares
outstanding-diluted(11)............................ 92,649 88,234 86,151 60,393 43,460
Cash flows from:
Operating activities............................... $ 348,793 $ 293,260 $ 219,868 $ 119,625 $ 54,915
Investing activities............................... (1,149,070) (349,525) (193,805) (143,911) (1,271,309)
Financing activities............................... 800,541 49,183 (37,719) 48,584 1,226,208
BALANCE SHEET DATA:
Loans and other lending investments, net............. $ 3,050,342 $2,377,763 $2,227,083 $2,003,506 $ 1,823,761
Corporate tenant lease assets, net................... 2,291,805 1,781,565 1,592,087 1,654,300 189,942
Total assets......................................... 5,611,697 4,380,640 4,034,775 3,813,552 2,059,616
Debt obligations..................................... 3,461,590 2,495,369 2,131,967 1,901,204 1,055,719
Minority interest in consolidated entities........... 2,581 2,650 6,224 2,565 --
Shareholders' equity................................. 2,025,300 1,787,778 1,787,885 1,801,343 970,728
SUPPLEMENTAL DATA:
Total debt to shareholders' equity................... 1.7x 1.4x 1.2x 1.1x 1.1x
21
EXPLANATORY NOTES:
- ------------------------------
(1) This amount represents a non-recurring, non-cash charge of approximately
$94.5 million relating to the acquisition of the Company's formal external
advisor in November 1999.
(2) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as of January 1, 2001.
(3) Prior to November 1999, earnings per common share excludes 1.00% of net
income allocable to the Company's former class B shares. The former
class B shares were exchanged for Common Stock in connection with the
acquisition of TriNet and other related transactions on November 4, 1999.
As a result, the Company now has a single class of Common Stock
outstanding.
(4) The Company generally declares common and preferred dividends in the month
subsequent to the end of the quarter.
(5) Adjusted earnings represents net income to common shareholders computed in
accordance with GAAP, before depreciation, amortization, gain (loss) from
discontinued operations, extraordinary items and cumulative effect of
change in accounting principle. For the year ended December 31, 2002,
adjusted earnings excludes the $15.0 million non-cash charge related to the
performance based vesting of restricted shares granted under the Company's
long-term incentive plan. For the year ended December 31, 1999, adjusted
earnings excludes the non-recurring, non-cash cost incurred in acquiring
the Company's former external advisor. (See reconciliation in Item 7--
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
(6) EBITDA is calculated as total revenue plus equity in earnings from joint
ventures and unconsolidated subsidiaries minus the sum of general and
administrative expenses, general and administrative- stock-based
compensation (excluding the non-cash charge related to the performance
based vesting of restricted shares granted under the Company's long-term
incentive plan for the year ended December 31, 2002), provision for loan
losses, operating costs on corporate tenant lease assets and advisory fees.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
Total Revenue......................................... $525,724 $471,119 $463,519 $264,413 $128,000
Plus: Equity in earnings from joint ventures and
unconsolidated subsidiaries...................... 1,222 7,361 4,796 235 96
Less: General and administrative...................... (30,449) (24,151) (25,706) (6,269) (2,583)
Less: General and administrative-stock-based
compensation.......................................... (3,048) (3,574) (2,864) (412) (5,985)
Less: Provision for loan losses....................... (8,250) (7,000) (6,500) (4,750) (2,750)
Less: Operating costs-corporate tenant lease assets... (13,755) (12,782) (12,737) (2,245) --
Less: Advisory fees................................... -- -- -- (16,193) --
-------- -------- -------- -------- --------
EBITDA................................................ $471,444 $430,973 $420,508 $234,779 $116,778
======== ======== ======== ======== ========
(7) Each of adjusted earnings and EBITDA should be examined in conjunction with
net income as shown in the Consolidated Statements of Operations. Neither
adjusted earnings nor EBITDA should be considered as an alternative to net
income (determined in accordance with GAAP) as an indicator of the
Company's performance, or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is either measure indicative of funds available to fund the
Company's cash needs or available for distribution to shareholders. The
Company's management believes that adjusted earnings and EBITDA more
closely approximate operating cash flow and are useful measures for
investors to consider, in conjunction with net income and other GAAP
measures, in evaluating the commercial finance company that focuses on real
estate lending and corporate tenant leasing; therefore, the Company's net
income (determined in accordance with GAAP) reflects significant non-cash
depreciation expense on corporate tenant lease assets. It should be noted
that the Company's manner of calculating adjusted earnings and EBITDA may
differ from the calculations of similarly-titled measures by other
companies.
(8) The 1999 and 1998 EBITDA to interest expense ratios on a pro forma basis
would have been 2.83x and 2.84x, respectively.
(9) Combined fixed charges are comprised of interest expense, capitalized
interest, amortization of loan costs and preferred stock dividend
requirements. The 1999 and 1998 EBITDA to combined fixed charges ratios on
a pro forma basis would have been 2.23x and 2.44x, respectively.
(10) For the purposes of calculating the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before income
taxes and cumulative effect of changes in accounting principles plus
"fixed charges" and certain other adjustments. "Fixed charges" consist of
interest incurred on all indebtedness related to continuing operations
(including amortization of original issue discount) and the implied
interest component of the Company's rent obligations in the years
presented. For 1999, these ratios include the effect of a non-recurring,
non-cash charge in the amount of approximately $94.5 million relating to
the November 1999 acquisition of the former external advisor to the
Company. Excluding the effect of this non-recurring, non-cash charge, the
ratio of earnings to fixed charges for that period would have been 2.5x
and the Company's ratio of earnings to fixed charges and preferred stock
dividends would have been 2.0x.
(11) As adjusted for one-for-six reverse stock split effected by the Company on
June 19, 1998.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company began its business in 1993 through private investment funds
formed to take advantage of the lack of well-capitalized lenders capable of
servicing the needs of high-end customers in its markets. In March 1998, the
private investment funds contributed their approximately $1.1 billion of assets
to the Company's predecessor in exchange for a controlling interest in that
public company. In November 1999, the Company acquired its leasing subsidiary,
TriNet Corporate Realty Trust, Inc. ("TriNet" or the "Leasing Subsidiary"),
which was then the largest publicly-traded company specializing in corporate
sale/leaseback for office and industrial facilities (the "TriNet Acquisition").
Concurrent with the TriNet Acquisition, the Company also acquired its former
external advisor in exchange for shares of its Common Stock and converted its
organizational form to a Maryland corporation. The Company's Common Stock began
trading on the New York Stock Exchange under the symbol "SFI" in November 1999.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
INTEREST INCOME--Interest income increased by $1.5 million to
$255.6 million for the 12 months ended December 31, 2002 from $254.1 million for
the same period in 2001. This increase was primarily due to $72.5 million of
interest income on new originations or additional fundings, net of a $50.5
million decrease from the repayment of loans and other lending investments. This
increase was partially offset by a decrease in interest income on the Company's
variable-rate lending investments as the result of lower average one-month LIBOR
rates of 1.77% in 2002, compared to 3.88% in 2001.
OPERATING LEASE INCOME--Operating lease income increased by $56.2 million to
$242.1 million for the 12 months ended December 31, 2002 from $185.9 million for
the same period in 2001. Of this increase, $59.5 million was attributable to new
corporate tenant lease investments. This increase was partially offset by
corporate tenant lease dispositions and lower operating lease income on certain
corporate tenant lease assets.
OTHER INCOME--Other income generally consists of prepayment penalties and
realized gains from the early repayment of loans and other lending investments,
financial advisory and asset management fees, lease termination fees, mortgage
servicing fees, loan participation payments and dividends on certain
investments. During the 12 months ended December 31, 2002, other income included
prepayment penalties and realized gains on loan repayments of $12.6 million,
asset management, mortgage servicing and other fees of approximately $9.0
million, lease termination fees of $2.9 million, loan participation payments of
$3.3 million, and other miscellaneous income such as dividend payments and
insurance claims of $994,000.
During the 12 months ended December 30, 2001, other income included loan
participation payments of $13.1 million, prepayment penalties and gains on loan
repayments of $13.0 million and financial advisory, lease termination, asset
management and mortgage servicing fees of $5.3 million.
INTEREST EXPENSE--For the 12 months ended December 31, 2002, interest
expense increased by $15.4 million to $185.4 million from $170.0 million for the
same period in 2001. This increase was primarily due to the higher average
borrowings on the Company's debt obligations, term loans and secured notes, and
by approximately $2.7 million due to additional amortization of deferred
financing costs on the Company's debt obligations in 2002 compared to the same
period in 2001. This increase was partially offset by lower average one-month
LIBOR rates on the Company's variable-rate debt of 1.77% in 2002, compared to
3.88% in 2001.
OPERATING COSTS--CORPORATE TENANT LEASE ASSETS--For the 12 months ended
December 31, 2002, operating costs increased by $1.0 million from $12.8 million
to $13.8 million for the same period in 2001.
23
This increase is primarily related to new corporate tenant lease investments and
higher operating costs on certain corporate tenant lease assets, partially
offset by corporate tenant lease dispositions.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased by
$12.4 million to $47.8 million for the 12 months ended December 31, 2002 from
$35.4 million for the same period in 2001. This increase is primarily due to new
corporate tenant lease investments.
GENERAL AND ADMINISTRATIVE--For the 12 months ended December 31, 2002,
general and administrative expenses increased by $6.2 million to $30.4 million,
compared to $24.2 million for the same period in 2001. This increase is
primarily the result of an increase in personnel and related costs.
GENERAL AND ADMINISTRATIVE--STOCK-BASED COMPENSATION--General and
administrative-stock-based compensation increased by $14.4 million primarily due
to a non-cash charge related to the performance-based vesting of 500,000
restricted shares granted under the Company's long-term incentive plan and tied
to overall shareholder performance (see Note 10 to the Company's Consolidated
Financial Statements).
PROVISION FOR LOAN LOSSES--The Company's charge for provision for loan
losses increased to $8.3 million for the 12 months ended December 31, 2002 as
compared to $7.0 million for the same period in 2001. As more fully discussed in
Note 4 to the Company's Consolidated Financial Statements, the Company has
experienced minimal actual losses on its loan investments to date. The Company
considers it prudent to reflect provisions for loan losses on a portfolio basis
based upon the Company's assessment of general market conditions, the Company's
internal risk management policies and credit risk rating system, industry loss
experience, the Company's assessment of the likelihood of delinquencies or
defaults, and the value of the collateral underlying its investments.
Accordingly, since its first full quarter operating its current business as a
public company (the quarter ended June 30, 1998), management has reflected
quarterly provisions for loan losses in its operating results.
EQUITY IN EARNINGS FROM JOINT VENTURES AND UNCONSOLIDATED
SUBSIDIARIES--During the 12 months ended December 31, 2002, equity in earnings
from joint ventures and unconsolidated subsidiaries decreased by approximately
$6.2 million to $1.2 million from $7.4 million for the same period in 2001. This
decrease is primarily due to the consolidation of one of the Company's corporate
tenant lease joint venture investments (see Note 6 to the Company Consolidated
Financial Statements).
INCOME FROM DISCONTINUED OPERATIONS--For the 12-month periods ended
December 31, 2002 and 2001, operating income earned by the Company on corporate
tenant lease assets sold (prior to their sale) and assets held for sale of
approximately $3.6 million and $5.3 million, respectively, is classified as
"Income from discontinued operations," even though such income was earned by the
Company prior to the assets' disposition or classification as "Assets held for
sale."
GAIN FROM DISCONTINUED OPERATIONS--During 2002, the Company disposed of one
corporate tenant lease asset for total proceeds of $3.7 million and recognized a
gain of approximately $595,000. In addition, one of the Company's customers
exercised an option to terminate its lease on 50.00% of the land leased from the
Company. In connection with this termination, the Company realized
$17.5 million in cash lease termination payments, offset by a $17.4 million
impairment change in connection with the termination, resulting in a net gain of
approximately $123,000.
During 2001, the Company disposed of four corporate tenant lease assets for
total proceeds of $26.3 million and recognized net gains of $1.1 million.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the 12 months
ended December 31, 2002, the Company fully repaid the then remaining
$446.2 million of bonds outstanding under its STARs Series 2000-1 financing.
This prepayment resulted in an extraordinary loss of $12.2 million, which
represented approximately $8.2 million in unamortized deferred financing costs
and approximately $4.0 million in prepayment penalties.
24
During the 12 months ended December 31, 2001, the Company repaid a secured
term loan, which had an original maturity date of December 2004. In addition,
the Company prepaid an unsecured revolving credit facility, which had an
original maturity date of May 2002. In connection with these prepayments, the
Company expensed the remaining unamortized deferred financing costs and incurred
certain prepayment penalties, which resulted in an extraordinary loss of
approximately $1.6 million.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
INTEREST INCOME--Interest income decreased by $13.9 million to
$254.1 million for the 12 months ended December 31, 2001 from $268.0 million for
the same period in 2000. Approximately $12.7 million of this decrease is the
result of lower average LIBOR rates on the Company's variable-rate lending
investments of 3.88% in 2001, compared to 6.41% in 2000. This decrease was
partially offset by $55.1 million of interest income on new originations or
additional fundings, net of $51.6 million from the repayment of loans and other
lending investments, in addition to a decrease of $1.5 million from income
earned on cash and cash equivalents.
OPERATING LEASE INCOME--Operating lease income increased by $8.3 million to
$185.9 million for the 12 months ended December 31, 2001 from $177.6 million for
the same period in 2000. Of this increase, $11.8 million was attributable to new
corporate tenant lease investments. This increase was partially offset by
corporate tenant lease dispositions and lower operating lease income on certain
corporate tenant lease assets.
OTHER INCOME--Other income consists primarily of prepayment penalties and
gains from the early repayment of loans and other lending investments, financial
advisory and asset management fees, lease termination fees, mortgage servicing
fees, loan participation payments and dividends on certain investments. During
the year ended December 31, 2001, other income included loan participation
payments of $13.1 million, prepayment penalties and gains on loan repayments of
$13.0 million and financial advisory, lease termination, asset management and
mortgage servicing fees of $5.3 million.
During the year ended December 31, 2000, other income included prepayment
penalties and gains on loan repayments of $10.5 million, $2.1 million in
connection with a loan defeasance, loan participation payments of $1.9 million,
financial advisory, asset management and mortgage servicing fees of
$2.6 million and lease termination fees of $770,000.
INTEREST EXPENSE--For the 12 months ended December 31, 2001, interest
expense decreased by $3.7 million to $170.0 million from $173.7 million for the
same period in 2000. This decrease was primarily due to the lower average LIBOR
rates on the Company's variable-rate debt of 3.88% in 2001, compared to 6.41% in
2000. This decrease was partially offset by the higher average borrowings on the
Company's credit facilities, term loans and unsecured notes and $7.6 million
additional amortization of deferred financing costs on the Company's debt
obligations in 2001 compared to 2000.
OPERATING COSTS--CORPORATE TENANT LEASE ASSETS--For the 12 months ended
December 31, 2001, operating costs were substantially unchanged as compared to
the same period in 2000. Such operating costs represent unreimbursed operating
expenses associated with corporate tenant lease assets.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased by
$1.0 million to $35.4 million for the 12 months ended December 31, 2001 from
$34.4 million for the same period in 2000. This increase is due to new corporate
tenant lease investments and additional facility improvements, partially offset
by corporate tenant lease dispositions in 2000.
GENERAL AND ADMINISTRATIVE--For the 12 months ended December 31, 2001,
general and administrative expenses decreased by $1.5 million to $24.2 million,
compared to $25.7 million for the same period in 2000. This decrease is
primarily the result of a reduction in office and related costs and professional
fees, partially offset by an increase in personnel and related costs.
25
GENERAL AND ADMINISTRATIVE--STOCK-BASED COMPENSATION EXPENSE--General and
administrative--stock-based compensation expense increased by approximately
$710,000 as a result of charges relating to grants of stock options and
restricted shares.
PROVISION FOR LOAN LOSSES--The Company's charge for provision for loan
losses increased to $7.0 million for the 12 months ended December 31, 2001 from
$6.5 million for the same period in 2000 as a result of the continued expansion
of the Company's lending operations as well as additional seasoning of its
existing lending portfolio. As more fully discussed in Note 4 to the Company's
Consolidated Financial Statements, the Company has experienced minimal actual
losses on its loan investments to date. The Company considers it prudent to
reflect provisions for loan losses on a portfolio basis based upon the Company's
assessment of general market conditions, the Company's internal risk management
policies and credit risk rating system, industry loss experience, the Company's
assessment of the likelihood of delinquencies or defaults, and the values of the
collateral underlying its investments. Accordingly, since its first full quarter
operating its current business as a public company (the quarter ended June 30,
1998), management has reflected quarterly provisions for loan losses in its
operating results.
EQUITY IN EARNINGS FROM JOINT VENTURES AND UNCONSOLIDATED
SUBSIDIARIES--During the 12 months ended December 31, 2001, equity in earnings
from joint ventures and unconsolidated subsidiaries increased by approximately
$2.6 million to $7.4 million from $4.8 million for the same period in 2001. This
increase is primarily due to new leases commencing in 2001, in addition to a
lease termination payment received at one of the joint ventures (see Note 6 to
the Company Consolidated Financial Statements).
INCOME FROM DISCONTINUED OPERATIONS-- For the 12-month periods ended
December 31, 2001 and 2000, operating income earned by the Company on corporate
tenant lease assets sold (prior to their sale) and assets held for sale of
approximately $5.3 million and $3.2 million, respectively, is classified as
"Income from discontinued operations," even though such income was earned by the
Company prior to the assets' disposition or classification as "Assets held for
sale."
GAIN FROM DISCONTINUED OPERATIONS--During 2001, the Company disposed of four
corporate tenant lease assets for total proceeds of $26.3 million and recognized
net gains of $1.1 million.
During 2000, the Company disposed of 14 corporate tenant lease assets,
including six assets held in joint venture partnerships, for total proceeds of
$256.7 million, and recognized net gains of $2.9 million.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the 12 months
ended December 31, 2001 and 2000, the Company or its joint ventures prepaid debt
obligations of $133.0 million and $24.5 million, respectively. These
transactions resulted in an extraordinary loss on early extinguishment of debt
from prepayment penalties and the expense associated with remaining unamortized
deferred financing costs in the amount of $1.6 million and $705,000 for the
12 months ended December 31, 2001 and 2000, respectively.
ADJUSTED EARNINGS
Adjusted earnings represents net income to common shareholders computed in
accordance with GAAP, before depreciation, amortization, gain (loss) from
discontinued operations, extraordinary items and cumulative effect of change in
accounting principle. Adjustments for unconsolidated partnerships and joint
ventures reflect the Company's share of adjusted earnings calculated on the same
basis.
The Company believes that to facilitate a clear understanding of the
historical operating results of the Company, adjusted earnings should be
examined in conjunction with net income as shown in the Company's Consolidated
Statements of Operations. Adjusted earnings should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indicator
of the Company's performance, or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs or
available for distribution to the Company's shareholders. The Company's
management believes
26
that adjusted earnings more closely approximates operating cash flow and is a
useful measure for investors to consider, in conjunction with net income and
other GAAP measures, in evaluating the Company's financial performance. This is
primarily because the Company is a commercial finance company that focuses on
real estate lending and corporate tenant leasing; therefore, the Company's net
income (determined in accordance with GAAP) reflects significant non-cash
depreciation expense on corporate tenant lease assets. It should be noted that
the Company's manner of calculating adjusted earnings may differ from the
calculation of similarly-titled measures by other companies.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
Adjusted earnings:
Net income allocable to common
shareholders.......................... $178,362 $193,004 $180,678 $ 15,043 $ 58,959
Add: Joint venture income............... 991 965 937 1,603 --
Add: Depreciation....................... 48,041 35,642 34,514 11,016 4,302
Add: Joint venture depreciation and
amortization.......................... 4,433 4,044 3,662 365 --
Add: Amortization of deferred financing
costs................................. 23,460 20,720 13,140 6,121 3,354
Less: Gains from discontinued
operations............................ (717) (1,145) (2,948) -- --
Add: Extraordinary loss--early
extinguishment of debt................ 12,166 1,620 705 -- --
Add: Cumulative effect of change in
accounting principle(1)............... -- 282 -- -- --
Less: Net income allocable to class B
shares(2)............................. -- -- -- (826) (666)
Add: Cost incurred in acquiring former
external advisor...................... -- -- -- 94,476 --
-------- -------- -------- -------- --------
Adjusted diluted earnings allocable to
common shareholders:
Before non-cash incentive compensation
charge(3)............................. $281,686 $255,132 $230,688 $127,798 $ 65,949
======== ======== ======== ======== ========
After non-cash incentive compensation
charge................................ $266,736 $255,132 $230,688 $127,798 $ 65,949
======== ======== ======== ======== ========
Weighted average diluted common shares
outstanding........................... 93,020 88,606 86,523 61,750 43,460
======== ======== ======== ======== ========
EXPLANATORY NOTES:
- ------------------------------
(1) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as of January 1, 2001.
(2) Prior to November 1999, adjusted earnings per common share exludes 1.00% of
net income allocable to the Company's former class B shares. The former
class B shares were exchanged for Common Stock in connection with the
acquisition of TriNet and other related transactions on November 4, 1999. As
a result, the Company now has a single class of Common Stock outstanding.
(3) Excludes a $15.0 million non-cash charge related to performance-based
vesting of restricted shares granted under the Company's long-term incentive
plan for the 12 months ended December 31, 2002.
27
RISK MANAGEMENT
FIRST DOLLAR AND LAST DOLLAR EXPOSURE--One component of the Company's risk
management assessment is an analysis of the Company's first and last dollar
loan-to-value percentage with respect to the properties or companies the Company
finances. First dollar loan-to-value represents the average beginning point for
the Company's lending exposure in the aggregate capitalization of the underlying
properties or companies it finances. Last dollar loan-to-value represents the
average ending point for the Company's lending exposure in the aggregate
capitalization of the underlying properties or companies it finances.
NON-ACCRUAL LOANS--The Company transfers loans to non-accrual status at such
time as: (1) management believes that the potential risk exists that scheduled
debt service payments will not be met within the coming 12 months; (2) the loans
become 90 days delinquent; (3) management determines the borrower is incapable
of, or ceased efforts toward, curing the cause of an impairment; or (4) the net
realizable value of the loan's underlying collateral approximates the Company's
carrying value of such loan. Interest income is recognized only upon actual cash
receipt for loans on non-accrual status. As of December 31, 2002, the Company
had three assets on non-accrual status with an aggregate gross book value of
$11.1 million, or 0.20% of the gross book value of the Company's investments.
The Company is currently comfortable that it has adequate collateral to support
the book values of the assets.
One of the three non-accrual loans is a $3.5 million partnership loan on two
shopping malls located in the suburbs of Washington, D.C. This investment was
part of a larger loan originally made by affiliates of Lazard Freres prior to
the Company's acquisition of Lazard's structured finance portfolio in 1998. The
loan matures in September 2003 and bears interest at 12.00%. The Company
received cash payments equal to the interest due on the loan during the
12 months ended December 31, 2002, and the borrower remains current on its
obligations to the Company. However, the Company anticipates that this loan will
remain on non-accrual status for the foreseeable future.
The second non-accrual loan is a partnership loan with a balance of
$5.7 million as of December 31, 2002. The loan is presently secured by
partnership interests in two partnerships owning facilities in Colorado leased
to the U.S. Government. The Company made the loan in anticipation of buying the
facilities upon their completion. The loan matures on March 29, 2003 and bears
interest at LIBOR + 3.50%, with a LIBOR floor of 3.00%. In February 2003 the
borrower breached certain technical provisions of the loan documents,
constituting a technical event of default. The borrower remains current on its
regular interest obligations to the Company and the Company is currently
discussing a possible extension of the loan with the borrower. However, as a
result of the technical default and the uncertainty surrounding the extension
and the timing of the completion of the facilities for the Company's purchase,
the loan has been been placed on non-accrual status.
The third non-accrual loan is a $1.9 million investment in debt securities
of a real estate company which trades on the Mexican Stock Exchange. This
investment was made by TriNet prior to its acquisition by the Company in 1999.
The securities bear interest at 12.00% per annum payable in arrears in December
of each year. In January 2003, the Company received cash payments equal to the
interest due on the investment through December 31, 2002, and the borrower
remains current on its obligations to the Company. However, the Company
anticipates that this investment will remain on non-accrual status for the
foreseeable future.
WATCH LIST ASSETS--The Company conducts a quarterly comprehensive credit
review, resulting in an individual risk rating being assigned to each asset.
This review is designed to enable management to evaluate and proactively manage
asset-specific credit issues and identify credit trends on a portfolio-wide
basis as an "early warning system." As of December 31, 2002, the Company has
four loans and two CTL investments that are on its credit watch list.
In addition to the $5.7 million partnership loan mentioned above, the
Company had three other loans on its credit watch list. The second watch list
loan is a $40.8 million first mortgage secured by a hotel
28
property in New York, New York. This mortgage matures on April 30, 2005 and
bears interest at LIBOR + 4.50%. The borrower remains current on all of its debt
service payments to the Company, and the Company is currently comfortable that
it has adequate collateral to support the book value of the asset. However, due
to poor operating performance exacerbated by the decline in the hotel market in
the New York metropolitan area, this loan remains on the watch list.
The third watch list loan is a $12.9 million junior participation in a first
mortgage loan secured by a hotel property in New York, New York. This loan bears
interest at a fixed rate of 7.91% and matures in June 2006. The borrower remains
current on all of its debt service payments to the Company and has continued to
invest additional equity to fund on-going capital improvements at the property.
The Company is comfortable that it has adequate collateral to support the book
value of the asset. However, due to poor operating performance exacerbated by
the decline in the hotel market in the New York metropolitan area, this loan
remains on the watch list.
The fourth watch list loan is a $35.8 million junior interest in a
$104.5 million first mortgage loan secured by a retail shopping mall in Chicago,
IL. The whole loan bears interest at 8.88% and matures January 1, 2004. The
mall's cash flow has been negatively impacted by the departure of one of four
anchor tenants. The borrower is currently negotiating with one of the anchor
tenants to occupy the vacant space. In addition, the borrower has a significant
equity investment in the property (including approximately $15.0 million of
additional equity invested in 2001), and remains current on all of its debt
service payments to the Company. The Company is currently comfortable that it
has adequate collateral to support the book value of the asset.
The Company also has two CTL investments on its credit watchlist. In January
2002, a customer occupying two office facilities owned by the Company filed a
voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. The customer utilizes these facilities as the U.S. headquarters for one of
its major business lines. Since its bankruptcy filing, the customer has been
consolidating its space needs into the larger of the two facilities, including
approximately 150 of its employees from other area locations. The customer has
also invested approximately $3.0 million of its own capital in the facilities.
In December 2002, the bankruptcy court approved a plan of reorganization. As
part of the reorganization, the customer has attempted to affirm the lease on
the larger facility and terminate the lease on the smaller facility. Since the
two leases are cross-defaulted, the Company believes the the customer's
affirmation of the larger facility lease is also an affirmation of the smaller
facility. The customer remains current on the larger facility's lease payment to
the Company, but has withheld its March payment on the smaller facility pending
a potential negotiated settlement with the Company regarding termination of the
lease on the smaller facility. Therefore, the smaller facility (with a net
carrying value of $3.6 million at December 31, 2002) remains on the Company's
watch list.
The Company also placed on the watch list its investment in a corporate
tenant lease asset held in joint venture due to the financial uncertainty
surrounding one of the facility's primary tenants. As of December 31, 2002, the
Company's equity investment in the venture was $12.4 million and the Company's
share of income from this equity investment for the year ended December 31, 2002
was $1.4 million.
OTHER LOANS--As of December 31, 2002, the Company also has a $15.3 million
second mortgage on a Class A office building in Washington, D.C. which has paid
debt service two months in arrears since December 2002. The loan matures in
October 2005 and, but for a small working capital deficit resulting in the
two-month arrearage, continues to otherwise pay as agreed. Inclusive of the
senior debt on the property, the Company's last-dollar risk exposure on this
asset on a per square foot basis is significantly less than neighboring
buildings have sold for. As a result, the Company currently believes that it has
adequate collateral to support the book value of the asset.
29
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to fund its investment activities and operating
expenses. The Company has significant access to capital resources to fund its
existing business plan, which includes the expansion of its real estate lending
and corporate tenant leasing businesses. The Company's capital sources include
cash flow from operations, borrowings under lines of credit, additional term
borrowings, long-term financing secured by the Company's assets, unsecured
financing and the issuance of common, convertible and /or preferred equity
securities. Further, the Company may acquire other businesses or assets using
its capital stock, cash or a combination thereof.
The distribution requirements under the REIT provisions of the Code limit
the Company's ability to retain earnings and thereby replenish or increase
capital committed to its operations. However, the Company believes that its
significant capital resources and access to financing will provide it with
financial flexibility and market responsiveness at levels sufficient to meet
current and anticipated capital requirements, including expected new lending and
corporate tenant leasing transactions.
The Company believes that its existing sources of funds will be adequate for
purposes of meeting its short- and long-term liquidity needs. The Company's
ability to meet its long-term (i.e., beyond one year) liquidity requirements is
subject to obtaining additional debt and equity financing. Any decision by the
Company's lenders and investors to enter into such transactions with the Company
will depend upon a number of factors, such as compliance with the terms of its
existing credit arrangements, the Company's financial performance, industry or
market trends, the general availability of and rates applicable to financing
transactions, such lenders' and investors' resources and policies concerning the
terms under which they make such capital commitments and the relative
attractiveness of alternative investment or lending opportunities.
The Company's longstanding policy is to limit its book debt-to-equity ratio
to approximately 2.0x. As the Company's leverage approaches this level, the
Company will consider equity and other alternatives to reduce leverage. The
exact timing and nature of any equity issuance would be subject to market
conditions.
The following table outlines the contractual obligations related to the
Company's long-term debt agreements and operating lease obligations. There are
no other long-term liabilities of the Company that would constitute a
contractual obligation.
PRINCIPAL PAYMENTS DUE BY PERIOD(1)
------------------------------------------------------------
LESS THAN 2 - 3 4 - 5 6 - 10 AFTER 10
TOTAL 1 YEAR YEARS YEARS YEARS YEARS
---------- ---------- ---------- ---------- ---------- --------
(IN THOUSANDS)
LONG-TERM DEBT OBLIGATIONS:
Secured revolving credit facilities......... $1,273,754 -- $1,273,754 -- -- --
Unsecured revolving credit facilities....... -- -- -- -- -- --
Secured term loans.......................... 682,851 -- 142,211 245,975 180,292 114,373
iStar Asset Receivables secured notes(2).... 876,368 -- 236,694 -- 639,674 --
Unsecured notes............................. 625,000 -- -- 50,000 350,000 225,000
Other debt obligations...................... 15,961 15,961 -- -- -- --
---------- -------- ---------- ---------- ---------- --------
Total..................................... 3,473,934 15,961 1,652,659 295,975 1,169,966 339,373
OPERATING LEASE OBLIGATIONS:(3)............. 17,608 2,908 5,467 5,353 3,880 --
---------- -------- ---------- ---------- ---------- --------
Total..................................... $3,491,542 $ 18,869 $1,658,126 $ 301,328 $1,173,846 $339,373
========== ======== ========== ========== ========== ========
EXPLANATORY NOTES:
- ------------------------------
(1) Assumes exercise of extensions on the Company's long-term debt obligations
to the extent such extensions are at the Company's option.
(2) Based on expected proceeds from principal payments received on loan assets
collateralizing such notes.
(3) The Company also has a $1.0 million letter of credit outstanding as security
for its primary corporate office lease.
The Company has four LIBOR-based secured revolving credit facilities with an
aggregate maximum availability of $2.4 billion, of which $1.3 billion was drawn
as of December 31, 2002 (see Note 7 to the Company's Consolidated Financial
Statements). Availability under these facilities is based on collateral
30
provided under a borrowing base calculation. At December 31, 2002, the Company
also had an unsecured credit facility totaling $300.0 million which bears
interest at LIBOR + 2.125% and matures in July 2004, including a one-year
extension at the Company's option. At December 31, 2002, the Company had not
drawn any amounts under this facility.
RECENT FINANCING ACTIVITIES--On May 17, 2000, the Company closed the
inaugural offering under its proprietary matched funding program, STARs,
Series 2000-1. In the initial transaction, a wholly-owned subsidiary of the
Company issued $896.5 million of investment-grade bonds secured by the
subsidiary's assets, which had an aggregate outstanding principal balance of
approximately $1.2 billion at inception. Principal payments received on the
assets were utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funded the maturity of the
underlying assets financed under the program. Of the assets of the subsidiary
secured by this financing, 73.96% (by gross carrying value) consisted of first
mortgages and subsequent lien positions and the remaining 26.04% consisted of
junior loans. For accounting purposes, this transaction was treated as a secured
financing: the underlying assets and STARs liabilities remained on the Company's
Consolidated Balance Sheets and no gain on sale was recognized. On May 28, 2002,
the Company fully repaid these bonds.
On January 11, 2001, the Company closed a new $700.0 million secured
revolving credit facility which is led by a major commercial bank. The new
facility has a three-year primary term and one-year "term-out" extension option,
and bears interest at LIBOR + 1.40% to 2.15%, depending upon the collateral
contributed to the borrowing base. The new facility accepts a broad range of
structured finance assets and has a final maturity of January 2005. Subsequent
to December 31, 2002, the Company extended the final maturity on this facility
to January 2007.
On February 22, 2001, the Company extended the maturity of its
$350.0 million unsecured revolving credit facility to May 2002. On July 27,
2001, the Company repaid this facility and replaced it with a new
$300.0 million unsecured revolving credit facility.
On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured
notes. These notes were senior unsecured obligations of the Leasing Subsidiary
and ranked equally with the Leasing Subsidiary's other senior unsecured and
unsubordinated indebtedness.
On June 14, 2001, the Company closed $193.0 million of term loan financing
secured by 15 corporate tenant lease assets. The variable-rate loan bears
interest at LIBOR + 1.85% (not to exceed 10.00% in aggregate) and has two
one-year extensions at the Company's option. The Company used these proceeds to
repay a $77.8 million secured term loan maturing in June 2001 and to pay down a
portion of its revolving credit facilities. In addition, the Company extended
the maturity of its $500.0 million secured revolving credit facility to
August 2003. On March 29, 2002, the Company again extended the final maturity of
this facility to August 2005, which includes a one-year "term-out" extension at
the Company's option.
On July 6, 2001, the Company financed a $75.0 million structured finance
asset with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The loan
has a maturity of July 2006, including a one-year extension at the Company's
option. This investment is a $75.0 million term preferred investment in a
publicly-traded real estate customer. The Company's investment carries an
initial current yield of 10.50%, with annual increases of 0.50% in each of the
next two years. In addition, the Company's investment is convertible into the
customer's common stock at a strike price of $25.00 per share. The investment is
callable by the customer between months 13 and 30 of the term at a yield
maintenance premium, and after month 30, at a premium sufficient to generate a
14.62% internal rate of return on the Company's investment. The investment is
putable by the Company to the customer for cash after five years.
On July 27, 2001, the Company completed a $300.0 million unsecured revolving
credit facility with a group of leading financial institutions. The new facility
has an initial maturity of July 2003, with a one-year extension at the Company's
option and another one-year extension at the lenders' option. The new facility
replaces two prior credit facilities maturing in 2002 and 2003, and bears
interest at LIBOR + 2.125%.
31
On August 9, 2001, the Company issued $350.0 million of 8.75% senior notes
due in 2008. The notes are unsecured senior obligations of the Company. The
Company used the net proceeds to partially repay outstanding borrowings under
its secured credit facilities.
On March 29, 2002, the Company extended the maturity of its $500.0 million
secured facility to August 2005, which includes a one-year "term-out" extension
at the Company's option.
On May 28, 2002, the Company repaid the then remaining $446.2 million of
bonds outstanding under its STARs, Series 2000-1 financing. Simultaneously, a
wholly-owned subsidiary of the Company issued STARs, Series 2002-1, consisting
of $885.1 million of investment-grade bonds secured by the subsidiary's
structured finance and corporate tenant lease assets, which had an aggregate
outstanding principal balance of approximately $1.1 billion at inception.
Principal payments received on the assets will be utilized to repay the most
senior class of the bonds then outstanding. The maturity of the bonds match
funds the maturity of the underlying assets financed under the program. The
weighted average interest rate on the bonds, on an all-floating rate basis, is
approximately LIBOR + 0.56% at inception. For accounting purposes, this
transaction was treated as a secured financing: the underlying assets and STARs
liabilities remained on the Company's Consolidated Balance Sheets, and no gain
on sale was recognized.
On July 2, 2002, the Company purchased the remaining interest in the
Milpitas joint venture from the former Milpitas external member for
$27.9 million. Upon purchase of the interest, the Milpitas joint venture became
fully consolidated for accounting purposes and approximately $79.1 million of
secured term debt is reflected on the Company's Consolidated Balance Sheets.
On September 30, 2002, the Company closed a new $500.0 million secured
revolving credit facility with a leading financial institution. The new facility
has a three-year term and bears interest at LIBOR + 1.50% to 2.25%, depending
upon the collateral contributed to the borrowing base. The new facility accepts
a broad range of structured finance and corporate tenant assets and has a final
maturity date of September 2005.
On December 11, 2002, the Company closed a $61.5 million term loan financing
with a leading financial institution. The proceeds were used to fund a portion
of an $82.1 million CTL investment. The non-recourse loan is fixed rate and
bears interest at 6.412%, has a maturity date of December 2012 and amortizes
over a 30-year schedule.
HEDGING ACTIVITIES--The Company has variable-rate lending assets and
variable-rate debt obligations. These assets and liabilities create a natural
hedge against changes in variable interest rates. This means that as interest
rates increase, the Company earns more on its variable-rate lending assets and
pays more on its variable-rate debt obligations and, conversely, as interest
rates decrease, the Company earns less on its variable-rate lending assets and
pays less on its variable-rate debt obligations. When the amount of the
Company's variable-rate debt obligations exceeds the amount of its variable-rate
lending assets, the Company utilizes derivative instruments to limit the impact
of changing interest rates on its net income. The Company does not use
derivative instruments to hedge assets or for speculative purposes. The
derivatives instruments the Company uses are typically in the form of interest
rate swaps and interest rate caps. Interest rate swaps effectively change
variable-rate debt obligations to fixed-rate debt obligations. Interest rate
caps effectively limit the maximum interest rate on variable-rate debt
obligations.
In addition, when appropriate the Company may occasionally enter into
interest rate swaps that convert fixed-rate debt to variable rate in order to
mitigate the risk of changes in fair value of the fixed-rate debt obligations.
The primary risks from the Company's use of derivative instruments is the
risk that a counterparty to a hedging arrangement could default on its
obligation and the risk that the Company may have to pay certain costs, such as
transaction fees or breakage costs, if a hedging arrangement is terminated by
the Company. As a matter of policy, the Company enters into hedging arrangements
with counterparties that are large, creditworthy financial institutions
typically rated at least "A" by Standard & Poor's ("S&P") and "A2" by Moody's
Investors Service ("Moody's"). The Company's hedging strategy is approved and
monitored by
32
the Company's Audit Committee on behalf of its Board of Directors and may be
changed by the Board of Directors without stockholder approval.
The Company has entered into the following cash flow and fair value hedges
that are outstanding as of December 31, 2002. The net value associated with
these hedges is reflected on the Company's Consolidated Balance Sheets (in
thousands).
STRIKE ESTIMATED
TYPE OF NOTIONAL PRICE OR TRADE MATURITY VALUE AT
HEDGE AMOUNT SWAP RATE DATE DATE DECEMBER 31, 2002
- ------- -------- --------- -------- -------- -----------------
Pay-Fixed Swap....... $125,000 7.058% 6/15/00 6/25/03 $(3,598)
Pay-Fixed Swap....... 125,000 7.055% 6/15/00 6/25/03 (3,596)
Pay-Fixed Swap....... 75,000 5.580% 11/4/99(1) 12/1/04 (5,743)
Pay-Floating Swap.... 100,000 3.878% 11/27/02 8/15/08 2,761
Pay-Floating Swap.... 50,000 3.810% 11/27/02 8/15/08 1,203
LIBOR Cap............ 345,000 8.000% 5/22/02 5/28/14 12,088
LIBOR Cap............ 75,000 7.750% 11/4/99(1) 12/1/04 21
LIBOR Cap............ 35,000 7.750% 11/4/99(1) 12/1/04 9
-------
Total Estimated Value............................................... $ 3,145
=======
EXPLANATORY NOTE:
- ------------------------------
(1) Acquired in connection with the TriNet Acquisition (see Note 1 to the
Company's Consolidated Financial Statements).
Between January 1, 2001 and December 31, 2002, the Company also had
outstanding the following cash flow hedges that have expired or been settled (in
thousands):
STRIKE
TYPE OF NOTIONAL PRICE OR TRADE MATURITY
HEDGE AMOUNT SWAP RATE DATE DATE
- ------- -------- --------- -------- --------
LIBOR Cap..................................... $300,000 9.000% 3/16/98 3/16/01
Pay-Fixed Swap................................ 92,000 5.714% 8/10/98 3/1/01
LIBOR Cap..................................... 75,000 7.500% 7/16/98 6/19/01
LIBOR Cap..................................... 38,336 7.500% 4/30/98 6/1/01
In connection with STARs, Series 2002-1 in May 2002, the Company entered
into a LIBOR interest rate cap struck at 8.00% in the notional amount of
$345.0 million. The Company utilizes the provisions of Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities," with respect to such instruments. SFAS
No. 133 provides that the up-front fees paid on option-based products such as
caps should be expensed into earnings based on the allocation of the premium to
the affected periods as if the agreement were a series of "caplets." These
allocated premiums are then reflected as a charge to income (as part of interest
expense) in the affected period.
On May 28, 2002, in connection with the STARs, Series 2002-1 transaction,
the Company paid a premium of $13.7 million for an interest rate cap. Using the
"caplet" methodology discussed above, amortization of the cap premium is
dependent upon the actual value of the caplets at inception.
In connection with STARs, Series 2000-1 in May 2000, the Company entered
into a LIBOR interest rate cap struck at 10.00% in the notional amount of
$312.0 million, and simultaneously sold a LIBOR interest rate cap with the same
terms. Since these instruments did not change the Company's net interest rate
risk exposure, they did not qualify as hedges and changes in their respective
values were charged to earnings. As the terms of these arrangements were
substantially the same, the effects of a revaluation of these two instruments
substantially offset one another. On May 28, 2002, these instruments were
settled and are no longer outstanding.
33
In connection with a portion of the Company's fixed-rate corporate bonds,
the Company entered into two pay-floating interest rate swaps struck at 3.8775%
and 3.81% and in the notional amounts of $100.0 million and $50.0 million,
respectively. The Company pays one-month LIBOR and receives the stated fixed
rate in return. These swaps mitigate the risk of changes in the fair value of
$150.0 million of the Company's fixed-rate corporate bonds attributable to
changes in LIBOR. For accounting purposes, the difference between the fixed rate
received and the LIBOR rate paid on the notional amount of the swap is recorded
as "Interest expense" in the Company's Consolidated Statements of Operations. In
addition, the Company adjusts the value of the swap to its fair value and
adjusts the carrying amount of the hedged liability by an offsetting amount on a
quarterly basis.
Certain of the Company's CTL joint ventures, have hedging activities which
are more fully described in Note 6 to the Company's Consolidated Financial
Statements.
OFF-BALANCE SHEET TRANSACTIONS--The Company is not dependent on the use of
any off-balance sheet financing arrangements for liquidity. As of December 31,
2002, the Company had investments in three corporate tenant lease joint ventures
accounted for under the equity method, which had total debt obligations
outstanding of approximately $178.7 million. The Company's pro rata share of the
ventures' third-party debt was approximately $77.4 million (see Note 6 to the
Company's Consolidated Financial Statements). These ventures were formed for the
purpose of operating, acquiring and in certain cases, developing corporate
tenant lease facilities. The debt obligations of these joint ventures are
non-recourse to the ventures and the Company and mature between fiscal years
2004 and 2011. As of December 31, 2002, the debt obligations consisted of six
term loans bearing fixed rates per annum ranging from 7.61% to 8.43% and one
variable-rate term loan with a rate of LIBOR + 1.25% per annum.
The Company has certain discretionary and non-discretionary unfunded
commitments related to its loans and other lending investments that it may need
to, or choose to, fund in the future. Discretionary commitments are those under
which the Company has sole discretion with respect to future funding.
Non-discretionary commitments are those under which the Company is generally
obligated to fund at the request of the borrower or upon the occurrence of
events outside of the Company's direct control. As of December 31, 2002, the
Company had nine loans with unfunded commitments totaling $97.7 million, of
which $22.2 million was discretionary and $75.5 million was non-discretionary.
RATINGS TRIGGERS--On July 27, 2001, the Company completed a $300.0 million
unsecured revolving credit facility with a group of leading financial
institutions. The new facility has an initial maturity of July 2003 with a
one-year extension at the Company's option and another one-year extension at the
lenders' option. The new facility replaces two prior credit facilities maturing
in 2002 and 2003, and bears interest at LIBOR + 2.125% based on the Company's
senior unsecured credit ratings of BB+ from S&P, Ba1 from Moody's and BBB- from
Fitch Ratings. If the Company achieves a higher rating from either S&P or
Moody's, the facility's interest rate will improve to LIBOR + 2.00%. If the
Company's credit rating is downgraded by any of the rating agencies (regardless
of how far), the facility's interest rate will increase to LIBOR + 2.25%. In the
event the Company receives two credit ratings that are not equivalent, the
spread over LIBOR shall be determined by the lower of the two such ratings. As
of December 31, 2002, no amounts are outstanding on this facility. Accordingly,
management does not believe any rating changes would have a material adverse
impact on the Company's results of operations. There are no other ratings
triggers in any of the Company's debt instruments or other operating or
financial agreements.
During the 12 months ended December 31, 2002, the Company's senior unsecured
credit rating was upgraded to an investment grade rating of BBB- from BB+ by
Fitch Ratings. In addition, Moody's and S&P raised their ratings outlook for the
Company's senior unsecured credit rating to "positive."
TRANSACTIONS WITH RELATED PARTIES--The Company has an investment in iStar
Operating Inc. ("iStar Operating"), a taxable subsidiary that, through a
wholly-owned subsidiary, services the Company's loans and certain loan
portfolios owned by third parties. The Company owns all of the non-voting
preferred
34
stock and a 95.00% economic interest in iStar Operating. An affiliate of the
Company's largest shareholder is the owner of all the voting common stock and a
5.00% economic interest in iStar Operating. As of December 31, 2002, there have
never been any distributions to the common shareholder, nor does the Company
expect to make any in the future. At any time, the Company has the right to
acquire all of the common stock of iStar Operating at fair market value, which
the Company believes to be nominal. In addition to the direct general and
administrative costs of iStar Operating, the Company allocates a portion of its
general overhead expenses to iStar Operating based on the number of employees at
iStar Operating as a percentage of the Company's total employees.
In addition, the Company has an investment in TMOC, a taxable noncontrolled
subsidiary that has a $2.0 million investment in a real estate company based in
Mexico. The Company owns 95.00% of the outstanding voting and non-voting common
stock (representing 1.00% voting power and 95.00% of the economic interest) in
TMOC. The other two owners of TMOC stock are executives of the Company, who own
a combined 5.00% of the outstanding voting and non-voting common stock
(representing 99.00% voting power and 5.00% economic interest) in TMOC. As of
December 31, 2002, there have never been any distributions to the common
shareholders, nor does the Company expect to make any in the future. At any
time, the Company has the right to acquire all of the common stock of TMOC at
fair market value, which the Company believes to be nominal.
Both iStar Operating and TMOC have elected to be treated as taxable REIT
subsidiaries for purposes of maintaining compliance with the REIT provisions of
the Code and are accounted for under the equity method for financial statement
reporting purposes and are presented in "Investments in and advances to joint
ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance
Sheets. If they were consolidated with the Company for financial statement
purposes, they would not have a material impact on the Company's operations. As
of December 31, 2002, iStar Operating and TMOC have no debt obligations.
The Company entered into an employment agreement with its Chief Executive
Officer as of March 31, 2001. In addition to the salary and bonus provisions of
the agreement, the agreement provides for an award of 2.0 million phantom units
to the executive, each of which notionally represents one share of the Company's
Common Stock. Portions of these phantom units will vest on a contingent basis if
the average closing price of the Company's Common Stock achieves certain levels
(ranging from $25.00 to $37.00 per share) for 60 consecutive calendar days.
Contingently vested units will become fully vested, meaning that they are no
longer subject to forfeiture, if the executive remains employed through
March 30, 2004, or earlier upon certain change of control and termination
events. When and if contingently vested phantom units become fully vested units,
the Company must deliver to the executive either a number of shares of Common
Stock equal to the number of fully vested units or an amount of cash equal to
the then fair market value of that number of shares of Common Stock. If shares
were unavailable under the Company's then long-term incentive plans, this
obligation could require the Company to make a substantial cash payment to the
executive.
DRIP PROGRAM--The Company maintains a dividend reinvestment and direct stock
purchase plan. Under the dividend reinvestment component of the plan, the
Company's shareholders may purchase additional shares of Common Stock without
payment of brokerage commissions or service charges by automatically reinvesting
all or a portion of their Common Stock cash dividends. Under the direct stock
purchase component of the plan, the Company's shareholders and new investors may
purchase shares of Common Stock directly from the Company without payment of
brokerage commissions or service charges. All purchases of shares in excess of
$10,000 per month pursuant to the direct purchase component are at the Company's
sole discretion. Shares issued under the plan may reflect a discount of up to
3.00% from the prevailing market price of the Company's Common Stock. The
Company is authorized to issue up to 8.0 million shares of Common Stock pursuant
to the dividend reinvestment and direct stock purchase plan. During the 12-month
periods ended December 31, 2002 and 2001, the Company issued a total of
1.6 million and approximately 195,000 shares of its Common Stock, respectively,
through the direct stock
35
purchase component of the plan. Net proceeds during the 12-month periods ended
December 31, 2002 and 2001 were approximately $44.4 million and $4.7 million,
respectively.
STOCK REPURCHASE PROGRAM--The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets or loan
repayments and excess cash flow from operations, but also using borrowings under
its credit facilities if the Company determines that it is advantageous to do
so. As of December 31, 2001, the Company had repurchased a total of
approximately 2.3 million shares, at an aggregate cost of approximately
$40.7 million. The Company did not repurchase any shares under the stock
repurchase program in 2002.
CRITICAL ACCOUNTING POLICIES
The Company's Consolidated Financial Statements include the accounts of the
Company and all majority-owned and controlled subsidiaries. The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements. In preparing these
financial statements, management has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The Company does not believe that there is a great likelihood
that materially different amounts would be reported related to the accounting
policies described below. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
Management has the obligation to ensure that its policies and methodologies
are in accordance with GAAP. During 2002, management reviewed and evaluated its
critical accounting policies and believes them to be appropriate. The Company's
accounting policies are described in Note 3 to the Company's Consolidated
Financial Statements. Management believes the more significant of these to be as
follows:
REVENUE RECOGNITION--The most significant sources of the Company's revenue
come from its lending operations and its corporate tenant lease operations. For
its lending operations, the Company reflects income using the effective yield
method, which recognizes periodic income over the expected term of the
investment on a constant yield basis. For corporate tenant lease assets, the
Company recognizes income on the straight-line method, which effectively
recognizes contractual lease payments to be received by the Company evenly over
the term of the lease. Management believes the Company's revenue recognition
policies are appropriate to reflect the substance of the underlying
transactions.
PROVISION FOR LOAN LOSSES--The Company's accounting policies require that an
allowance for estimated credit losses be reflected in the financial statements
based upon an evaluation of known and inherent risks in its private lending
assets. While the Company and its private predecessors have experienced minimal
actual losses on their lending investments, management considers it prudent to
reflect provisions for loan losses on a portfolio basis based upon the Company's
assessment of general market conditions, the Company's internal risk management
policies and credit risk rating system, industry loss experience, the Company's
assessment of the likelihood of delinquencies or defaults, and the value of the
collateral underlying its investments. Actual losses, if any, could ultimately
differ from these estimates.
IMPAIRMENT OF LONG-LIVED ASSETS--Corporate tenant lease assets represent
"long-lived" assets for accounting purposes. The Company periodically reviews
long-lived assets to be held and used in its leasing operations for impairment
in value whenever any events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. In management's opinion,
based on this analysis, corporate tenant assets to be held and used are not
carried at amounts in excess of their estimated recoverable amounts.
36
RISK MANAGEMENT AND FINANCIAL INSTRUMENTS--The Company has historically
utilized derivative financial instruments only as a means to help to manage its
interest rate risk exposure on a portion of its variable-rate debt obligations
(i.e., as 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 with major financial institutions. The Company's
accounting policies generally reflect these instruments at their fair value with
unrealized changes in fair value reflected in "Accumulated other comprehensive
income" on the Company's Consolidated Balance Sheets. Realized effects on the
Company's cash flows are generally recognized currently in income.
However, when appropriate the Company may occasionally enter into interest
rate swaps that convert fixed-rate debt to variable rate in order to mitigate
the risk of changes in fair value of its fixed-rate debt obligations. The
Company reflects these instruments at their fair value and adjusts the carrying
amount of the hedged liability by an offsetting amount.
INCOME TAXES--The Company's financial results generally do no reflect
provisions for current or deferred income taxes. Management believes that the
Company has and intends to continue to operate in a manner that will continue to
allow it to be taxed as a REIT and, as a result, does not expect to pay
substantial corporate-level taxes. Many of these requirements, however, are
highly technical and complex. If the Company were to fail to meet these
requirements, the Company would be subject to Federal income tax.
EXECUTIVE COMPENSATION--The Company's accounting policies generally provide
cash compensation to be estimated and recognized over the period of service.
With respect to stock-based compensation arrangements, as of July 1, 2002 (with
retroactive application to the beginning of the calendar year), the Company has
adopted the fair value method allowed under SFAS No. 123, which values options
on the date of grant and recognizes an expense equal to the fair value of the
option multiplied by the number of options granted over the related service
period. Prior to the third quarter 2002, the Company elected to use APB 25
accounting, which measured the compensation charges based on the intrinsic value
of such securities when they become fixed and determinable, and recognized such
expense over the related service period. These arrangements are often complex
and generally structured to align the interests of management with those of the
Company's shareholders. See Note 10 to the Company's Consolidated Financial
Statements for a detailed discussion of such arrangements and the related
accounting effects.
During 2001, the Company entered into new three-year employment agreements
with its Chief Executive Officer and its President. In addition, during 2002 the
Company entered into a three-year employment agreement with its new Chief
Financial Officer. See Note 10 to the Company's Consolidated Financial
Statements for a more detailed description of these employment agreements.
The following is a hypothetical illustration of the effects on the Company's
net income and adjusted earnings of the full vesting of phantom units under the
employment agreement with the Chief Executive Officer. During the 12 months
ended December 31, 2002, 1.0 million of the phantom shares awarded to the Chief
Executive Officer were contingently vested. Absent an earlier change of control
or termination of employment, these 1,000,000 shares will not become fully
vested until March 31, 2004. Assuming that the market price of the Common Stock
on March 31, 2004 is $28.05 (which was the market price of the Common Stock on
December 31, 2002), the Company would incur a one-time charge to both net income
and earnings at that time equal to $28.0 million (the fair market value of the
1,000,000 shares at $28.05 per share).
On April 29, 2002, the 500,000 unvested restricted shares awarded to the
President became contingently vested as the total shareholder return exceeded
60.00% and became fully vested on September 30, 2002 as all employment
contingencies were met. The Company incurred a non-cash charge of approximately
$15.0 million related to these vested shares, recognized ratably over the
service period from the date of contingent vesting through September 30, 2002.
Accordingly, the non-cash charge recognized for the 12 months ended
December 31, 2002 was approximately $15.0 million.
37
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative financial instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as:
(1) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment; (2) a hedge of the exposure to
variable cash flows of a forecasted transaction; or (3) in certain circumstances
a hedge of a foreign currency exposure. On January 1, 2001, the Company adopted
this pronouncement, as amended by Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133" and Statement of Financial
Accounting Standards No. 138 "Accounting for Certain Hedging Activities--an
Amendment of FASB No. 133." Because the Company has primarily used derivatives
as cash flow hedges of interest rate risk only, the adoption of SFAS No. 133 did
not have a material financial impact on the financial position and results of
operations of the Company. However, should the Company change its current use of
such derivatives, the adoption of SFAS No. 133 could have a more significant
effect on the Company prospectively.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company adopted SAB 101, as
required, in the fourth quarter of fiscal 2000. The adoption of SAB 101 did not
have a material financial impact on the financial position or results of
operations of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
was required to adopt FIN 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. FIN 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 FIN 44 did not have a
significant impact on the Company.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS 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. The Company adopted the provisions of this statement as
required for all transactions entered into on or after April 1, 2001. The
adoption of SFAS No. 140 did not have a significant impact on the Company.
In July 2001, the SEC released Staff Accounting Bulletin No. 102
("SAB 102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 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. Adoption of SAB 102 by the Company did not have a significant
impact on the Company.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141"), "Business Combinations" and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the purchase method of accounting to be used for
all business combinations initiated after June 30, 2001. SFAS 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.
SFAS 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. The Company adopted the
38
provisions of both statements, as required, on January 1, 2002 and the adoption
did not have a significant impact on the Company.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 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. SFAS 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 the Company's Consolidated
Statements of Operations. The provisions of SFAS 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. The Company adopted the
provisions of this statement on January 1, 2002, as required, and it did not
have a significant financial impact on the Company.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
rescinds both FASB Statements No. 4 ("SFAS No. 4"), "Reporting Gains and Losses
from Extinguishment of Debt," and the amendment to SFAS No. 4, FASB Statement
No. 64 ("SFAS No. 64"), "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." Through this rescission, SFAS No. 145 eliminates the requirement
(in both SFAS No. 4 and SFAS No. 64) that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. An entity is not
prohibited from classifying such gains and losses as extraordinary items, so
long as they meet the criteria in paragraph 20 of Accounting Principles Board
Opinion No. 30 ("APB 30"), "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions"; however, due to the nature of
the Company's operations, such treatment may not be available to the Company.
Any gains or losses on extinguishments of debt that were previously classified
as extraordinary items in prior periods presented that do not meet the criteria
in APB 30 for classification as an extraordinary item will be reclassified to
income from continuing operations. The provisions of SFAS No. 145 are effective
for financial statements issued for fiscal years beginning after May 15, 2002.
The Company will adopt the provisions of this statement, as required, on
January 1, 2003, at which time ($12.2) million and ($1.6) million will be
reclassified to continuing operations for 2002 and 2001, respectively.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS No. 146"), "Accounting for Exit or Disposal Activities," to
address significant issues regarding the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS No. 146 also includes: (1) costs related to
terminating a contract that is not a capital lease; and (2) termination benefits
received by employees involuntarily terminated under the terms of a one-time
benefit arrangement that is not an on-going benefit arrangement or an individual
deferred-compensation contract. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not expect SFAS No. 146 to have a material effect on the Company's
Consolidated Financial Statements.
In September 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 ("SFAS No. 147"), "Acquisitions of Certain Financial
Institutions," an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the
acquisitions of financial institutions, except those acquisitions between two or
more mutual enterprises. SFAS No. 147 removes acquisitions of financial
institutions from the scope of both FASB No. 72,
39
"Accounting for Certain Acquisitions of Banking or Thrift Institutions," and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, "When a Savings
and Loan Association or a Similar Institution is Acquired in a Business
Combination Accounted for by the Purchase Method," and requires that those
transactions be accounted for in accordance with SFAS No. 141 and
SFAS No. 142. SFAS No. 147 also amends SFAS No. 144 to include in its scope
long-term, customer-relationship intangible assets of financial institutions
such as depositor-relationship and borrower-relationship intangible assets and
credit cardholder intangible assets. The Company adopted the provisions of this
statement, as required, on October 1, 2002, and it did not have a significant
financial impact on the Company's Consolidated Financial Statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statement of Financial Accounting Standards No. 5 ("SFAS 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 rescinds FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others, an Interpretation of SFAS 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 if the Company receives
separately identifiable consideration (i.e., a premium). The new disclosure
requirements are effective December 31, 2002. The adoption of FIN 45 did not
have a material impact on the Company's Consolidated Financial Statements, nor
is it expected to have a material impact in the future.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation--Transition and Disclosure," an amendment of FASB Statement
No. 123 ("SFAS No. 123"). This statement provides alternative transition methods
for a voluntary change to the fair value basis of accounting for stock-based
employee compensation. However, this Statement does not permit the use of the
original SFAS No. 123 prospective method of transition for changes to the fair
value based method made in fiscal years beginning after December 15, 2003. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation,
description of transition method utilized and the effect of the method used on
reported results. The transition and annual disclosure provisions of
SFAS No. 148 shall be applied for fiscal years ending after December 15, 2002.
The new interim disclosure provisions are effective for the first interim period
beginning after December 15, 2002. The Company adopted SFAS No. 148 with
retroactive application to January 1, 2002 with no material effect on the
Company's Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," an interpretation of ARB 51.
FIN 46 provides guidance on identifying entities for which control is achieved
through means other than through voting rights (a "variable interest entity" or
"VIE"), and how to determine when and which business enterprise should
consolidate a VIE. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. The transitional disclosure requirements will
take effect almost immediately and are required for all financial statements
initially issued after January 31, 2003. The adoption of FIN 46 is not expected
to have a material impact on the Company.
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. In
pursuing its business plan, the primary market risk to which the Company is
exposed is interest rate risk. Consistent with its liability management
objectives, the Company has implemented an interest rate risk management policy
based on match funding, with the objective that variable-rate assets be
primarily financed by variable-rate liabilities and fixed-rate assets be
primarily financed by fixed-rate liabilities.
The Company's operating results will depend in part on the difference
between the interest and related income earned on its assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of real estate financing may lead to a decrease
in the interest rate earned on the Company's interest-bearing assets, which the
Company may not be able to offset by obtaining lower interest costs on its
borrowings. Changes in the general level of interest rates prevailing in the
financial markets may affect the spread (the difference in the principal amount
outstanding) between the Company's interest-earning assets and interest-bearing
liabilities. Any significant compression of the spreads between interest-earning
assets and interest-bearing liabilities could have a material adverse effect on
the Company. In addition, an increase in interest rates could, among other
things, reduce the value of the Company's interest-bearing assets and its
ability to realize gains from the sale of such assets, and a decrease in
interest rates could reduce the average life of the Company's interest-earning
assets.
A substantial portion of the Company's loan investments are subject to
significant prepayment protection in the form of lock-outs, yield maintenance
provisions or other prepayment premiums which provide substantial yield
protection to the Company. Those assets generally not subject to prepayment
penalties include: (1) variable-rate loans based on LIBOR, originated or
acquired at par, which would not result in any gain or loss upon repayment; and
(2) discount loans and loan participations acquired at discounts to face values,
which would result in gains upon repayment. Further, while the Company generally
seeks to enter into loan investments which provide for substantial prepayment
protection, in the event of declining interest rates, the Company could receive
such prepayments and may not be able to reinvest such proceeds at favorable
returns. Such prepayments could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.
While the Company has not experienced any significant credit losses, in the
event of a significant rising interest rate environment and/or economic
downturn, defaults could increase and result in credit losses to the Company
which adversely affect its liquidity and operating results. Further, such
delinquencies or defaults could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
conditions, and other factors beyond the control of the Company. As more fully
discussed in Note 9 to the Company's Consolidated Financial Statements, the
Company employs match funding-based hedging strategies to limit the effects of
changes in interest rates on its operations, including engaging in interest rate
caps, floors, swaps, futures and other interest rate-related derivative
contracts. These strategies are specifically designed to reduce the Company's
exposure, on specific transactions or on a portfolio basis, to changes in cash
flows as a result of interest rate movements in the market. The Company does not
enter into derivative contracts for speculative purposes nor as a hedge against
changes in credit risk of its borrowers or of the Company itself.
Each interest rate cap or floor agreement is a legal contract between the
Company and a third party (the "counterparty"). When the Company purchases a cap
or floor contract, the Company makes an up-front payment to the counterparty and
the counterparty agrees to make payments to the Company in
41
the future should the reference rate (typically one- or three-month LIBOR) rise
above (cap agreements) or fall below (floor agreements) the "strike" rate
specified in the contract. Each contract has a notional face amount. Should the
reference rate rise above the contractual strike rate in a cap, the Company will
earn cap income. Should the reference rate fall below the contractual strike
rate in a floor, the Company will earn floor income. Payments on an annualized
basis will equal the contractual notional face amount multiplied by the
difference between the actual reference rate and the contracted strike rate. The
Company utilizes the provisions of SFAS No. 133 with respect to such
instruments. SFAS No. 133 provides that the up-front fees paid on option-based
products such as caps should be expensed into earnings based on the allocation
of the premium to the affected periods as if the agreement were a series of
"caplets." These allocated premiums are then reflected as a charge to income and
are included in "Interest expense" on the Company's Consolidated Statements of
Operations in the affected period.
Interest rate swaps are agreements in which a series of interest rate flows
are exchanged over a prescribed period. The notional amount on which swaps are
based is not exchanged. In general, the Company's swaps are "pay fixed" swaps
involving the exchange of variable-rate interest payments from the counterparty
for fixed interest payments from the Company. However, when appropriate the
Company may occasionally enter into "pay floating" swaps involving the exchange
of fixed-rate interest payments from the counterparty for variable-rate interest
payments from the Company, which mitigates the risk of changes in fair value of
the Company's fixed-rate debt obligations.
Interest rate futures are contracts, generally settled in cash, in which the
seller agrees to deliver on a specified future date the cash equivalent of the
difference between the specified price or yield indicated in the contract and
the value of the specified instrument (i.e., U.S. Treasury securities) upon
settlement. Under these agreements, the Company would generally receive
additional cash flow at settlement if interest rates rise and pay cash if
interest rates fall. The effects of such receipts or payments would be deferred
and amortized over the term of the specific related fixed-rate borrowings. In
the event that, in the opinion of management, it is no longer probable that a
forecasted transaction will occur under terms substantially equivalent to those
projected, the Company would cease recognizing such transactions as hedges and
immediately recognize related gains or losses based on actual settlement or
estimated settlement value.
While a REIT may freely utilize the types of derivative instruments
discussed above to hedge interest rate risk on its liabilities, the use of
derivatives for other purposes, including hedging asset-related risks such as
credit, prepayment or interest rate exposure on the Company's loan assets, could
generate income which is not qualified income for purposes of maintaining REIT
status. As a consequence, the Company may only engage in such instruments to
hedge such risks on a limited basis.
There can be no assurance that the Company's profitability will not be
adversely affected during any period as a result of changing interest rates. In
addition, hedging transactions using derivative instruments involve certain
additional risks such as counterparty credit risk, legal enforceability of
hedging contracts and the risk that unanticipated and significant changes in
interest rates will cause a significant loss of basis in the contract. With
regard to loss of basis in a hedging contract, indices upon which contracts are
based may be more or less variable than the indices upon which the hedged assets
or liabilities are based, thereby making the hedge less effective. The
counterparties to these contractual arrangements are major financial
institutions with which the Company and its affiliates may also have other
financial relationships. The Company is potentially exposed to credit loss in
the event of nonperformance by these counterparties. However, because of their
high credit ratings, the Company does not anticipate that any of the
counterparties will fail to meet their obligations. There can be no assurance
that the Company will be able to adequately protect against the foregoing risks
and that the Company will ultimately realize an economic benefit from any
hedging contract it enters into which exceeds the related costs incurred in
connection with engaging in such hedges.
42
The following table quantifies the potential changes in net investment
income and net fair value of financial instruments should interest rates
increase or decrease 100 or 200 basis points, assuming no change in the shape of
the yield curve (i.e., relative interest rates). Net investment income is
calculated as revenue from loans and other lending investments and operating
leases (as of December 31, 2002), less related interest expense and operating
costs on corporate tenant lease assets, for the year ended December 31, 2002.
Net fair value of financial instruments is calculated as the sum of the value of
derivative instruments and the present value of cash in-flows generated from
interest-earning assets, less cash out-flows in respect of interest-bearing
liabilities as of December 31, 2002. The cash flows associated with the
Company's assets are calculated based on management's best estimate of expected
payments for each loan based on loan characteristics such as loan-to-value
ratio, interest rate, credit history, prepayment penalty, term and collateral
type. Most of the Company's loans are protected from prepayment as a result of
prepayment penalties and contractual terms which prohibit prepayments during
specified periods. However, for those loans where prepayments are not currently
precluded by contract, declines in interest rates may increase prepayment
speeds. The base interest rate scenario assumes the one-month LIBOR rate of
1.38% as of December 31, 2002. Actual results could differ significantly from
those estimated in the table.
ESTIMATED PERCENTAGE CHANGE IN
NET INVESTMENT NET FAIR VALUE OF
CHANGE IN INTEREST RATES INCOME FINANCIAL INSTRUMENTS(1)
- ------------------------ -------------- ------------------------
- -100 Basis Points....................... 1.44% 5.00%
- -50 Basis Points........................ 0.72% 2.38%
Base Interest Rate...................... 0.00% 0.00%
+100 Basis Points....................... (1.44)% (3.23)%
+200 Basis Points....................... (2.88)% (1.52)%
EXPLANATORY NOTE:
- ------------------------------
(1) Amounts exclude fair values of non-financial investments, primarily CTL
assets and certain forms of corporate finance investments.
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Financial Statements
PAGE
--------
Financial Statements:
Report of Independent Accountants......................... 45
Consolidated Balance Sheets at December 31, 2002 and
2001.................................................... 46
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 2002....... 47
Consolidated Statements of Changes in Shareholders' Equity
for each of the three years in the period ended
December 31, 2002....................................... 48
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2002....... 49
Notes to Consolidated Financial Statements................ 50
Financial Statement Schedules:
For the period ended December 31, 2002:
Schedule II--Valuation and Qualifying Accounts and
Reserves................................................ 87
Schedule III--Corporate Tenant Lease Assets and
Accumulated Depreciation................................ 88
Schedule IV--Loans and Other Lending Investments.......... 94
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Financial statements of five owned companies or joint ventures accounted for
under the equity method have been omitted because the Company's proportionate
share of the income from continuing operations before income taxes is less than
20.00% of the respective consolidated amount and the investments in and advances
to each company are less than 20.00% of consolidated total assets.
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of iStar Financial Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of iStar
Financial Inc. and its subsidiaries (the "Company") at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, NY
February 14, 2003, except for Note 17, which is as of March 11, 2003
45
ISTAR FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF DECEMBER 31,
-----------------------
2002 2001*
---------- ----------
ASSETS
Loans and other lending investments, net.................... $3,050,342 $2,377,763
Corporate tenant lease assets, net.......................... 2,291,805 1,781,565
Investments in and advances to joint ventures and
unconsolidated subsidiaries............................... 30,611 60,794
Assets held for sale........................................ 28,501 --
Cash and cash equivalents................................... 15,934 15,670
Restricted cash............................................. 40,211 17,852
Accrued interest and operating lease income receivable...... 26,804 31,797
Deferred operating lease income receivable.................. 36,739 21,195
Deferred expenses and other assets.......................... 90,750 74,004
---------- ----------
Total assets.............................................. $5,611,697 $4,380,640
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities.... $ 117,001 $ 89,618
Dividends payable........................................... 5,225 5,225
Debt obligations............................................ 3,461,590 2,495,369
---------- ----------
Total liabilities......................................... 3,583,816 2,590,212
---------- ----------
Commitments and contingencies............................... -- --
Minority interest in consolidated entities.................. 2,581 2,650
Shareholders' equity:
Series A Preferred Stock, $0.001 par value, liquidation
preference $50.00 per share, 4,400 shares issued and
outstanding at December 31, 2002 and December 31, 2001.... 4 4
Series B Preferred Stock, $0.001 par value, liquidation
preference $25.00 per share, 2,000 shares issued and
outstanding at December 31, 2002 and December 31, 2001.... 2 2
Series C Preferred Stock, $0.001 par value, liquidation
preference $25.00 per share, 1,300 shares issued and
outstanding at December 31, 2002 and December 31, 2001.... 1 1
Series D Preferred Stock, $0.001 par value, liquidation
preference $25.00 per share, 4,000 shares issued and
outstanding at December 31, 2002 and December 31, 2001.... 4 4
High Performance Units...................................... 1,359 --
Common Stock, $0.001 par value, 200,000 shares authorized,
98,114 and 87,387 shares issued and outstanding at
December 31, 2002 and December 31, 2001, respectively..... 98 87
Warrants and options........................................ 20,322 20,456
Additional paid-in capital.................................. 2,281,636 1,997,931
Retained earnings (deficit)................................. (227,769) (174,874)
Accumulated other comprehensive income (losses) (See
Note 12).................................................. (2,301) (15,092)
Treasury stock (at cost).................................... (48,056) (40,741)
---------- ----------
Total shareholders' equity................................ 2,025,300 1,787,778
---------- ----------
Total liabilities and shareholders' equity................ $5,611,697 $4,380,640
========== ==========
- ------------------------------
* RECLASSIFIED TO CONFORM TO 2002 PRESENTATION.
The accompanying notes are an integral part of the financial statements.
46
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001* 2000*
--------- --------- ---------
REVENUE:
Interest income........................................... $255,631 $254,119 $268,011
Operating lease income.................................... 242,100 185,943 177,581
Other income.............................................. 27,993 31,057 17,927
-------- -------- --------
Total revenue........................................... 525,724 471,119 463,519
-------- -------- --------
COSTS AND EXPENSES:
Interest expense.......................................... 185,375 169,974 173,741
Operating costs--corporate tenant lease assets............ 13,755 12,782 12,737
Depreciation and amortization............................. 47,821 35,411 34,384
General and administrative................................ 30,449 24,151 25,706
General and administrative--stock-based compensation
expense................................................. 17,998 3,574 2,864
Provision for loan losses................................. 8,250 7,000 6,500
-------- -------- --------
Total costs and expenses................................ 303,648 252,892 255,932
-------- -------- --------
Net income before equity in earnings from joint ventures and
unconsolidated subsidiaries, minority interest and other
items..................................................... 222,076 218,227 207,587
Equity in earnings from joint ventures and unconsolidated
subsidiaries.............................................. 1,222 7,361 4,796
Minority interest in consolidated entities.................. (162) (218) (195)
Extraordinary loss on early extinguishment of debt.......... (12,166) (1,620) (705)
Cumulative effect of change in accounting principle (See
Note 3)................................................... -- (282) --
-------- -------- --------
Net income before discontinued operations................... 210,970 223,468 211,483
Income from discontinued operations......................... 3,583 5,299 3,155
Gain from discontinued operations........................... 717 1,145 2,948
-------- -------- --------
Net income.................................................. $215,270 $229,912 $217,586
Preferred dividend requirements............................. (36,908) (36,908) (36,908)
-------- -------- --------
Net income allocable to common shareholders................. $178,362 $193,004 $180,678
======== ======== ========
Basic earnings per common share............................. $ 1.98 $ 2.24 $ 2.11
======== ======== ========
Diluted earnings per common share........................... $ 1.93 $ 2.19 $ 2.10
======== ======== ========
- ------------------------------
* RECLASSIFIED TO CONFORM TO 2002 PRESENTATION.
The accompanying notes are an integral part of the financial statements.
47
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
SERIES A SERIES B SERIES C SERIES D HIGH COMMON WARRANTS ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED PERFORMANCE STOCK AND PAID-IN
STOCK STOCK STOCK STOCK UNITS AT PAR OPTIONS CAPITAL
--------- --------- --------- --------- ----------- -------- -------- ----------
Balance at January 1, 2000......... $ 4 $ 2 $ 1 $ 4 $ -- $ 85 $17,935 $1,953,972
Exercise of options................ -- -- -- -- -- -- (992) 7,089
Dividends declared-preferred....... -- -- -- -- -- -- -- 330
Dividends declared-common.......... -- -- -- -- -- -- -- --
Acquisition of ACRE Partners....... -- -- -- -- -- -- -- 3,637
Restricted stock units issued to
employees in lieu of cash
bonuses.......................... -- -- -- -- -- -- -- 1,125
Restricted stock units granted to
employees........................ -- -- -- -- -- -- -- 212
Issuance of stock--DRIP plan....... -- -- -- -- -- -- -- 31
Purchase of treasury shares........ -- -- -- -- -- -- -- --
Net income for the period.......... -- -- -- -- -- -- -- --
Change in accumulated other
comprehensive income............. -- -- -- -- -- -- -- --
---- ---- ---- ---- ------ ---- ------- ----------
Balance at December 31, 2000....... $ 4 $ 2 $ 1 $ 4 -- $ 85 $16,943 $1,966,396
Exercise of options................ -- -- -- -- -- 2 (835) 22,550
Dividends declared-preferred....... -- -- -- -- -- -- -- 330
Dividends declared-common.......... -- -- -- -- -- -- -- --
Acquisition of ACRE Partners....... -- -- -- -- -- -- -- 1,219
Restricted stock units issued to
employees in lieu of cash
bonuses.......................... -- -- -- -- -- -- -- 1,478
Restricted stock units granted to
employees........................ -- -- -- -- -- -- -- 1,250
Options granted to employees....... -- -- -- -- -- -- 4,348 --
Issuance of stock--DRIP plan....... -- -- -- -- -- -- -- 4,708
Net income for the period.......... -- -- -- -- -- -- -- --
Cumulative effect of change in
accounting principle............. -- -- -- -- -- -- -- --
Change in accumulated other
comprehensive income............. -- -- -- -- -- -- -- --
---- ---- ---- ---- ------ ---- ------- ----------
Balance at December 31, 2001....... $ 4 $ 2 $ 1 $ 4 -- $ 87 $20,456 $1,997,931
Exercise of options................ -- -- -- -- -- 2 (443) 16,170
Proceeds from equity offering...... -- -- -- -- -- 8 -- 202,891
Dividends declared-preferred....... -- -- -- -- -- -- -- 330
Dividends declared-common.......... -- -- -- -- -- -- -- --
Restricted stock units granted to
employees........................ -- -- -- -- -- -- -- 19,048
Options granted to employees....... -- -- -- -- -- -- 309 --
High performance units sold to
employees........................ -- -- -- -- 1,359 -- -- --
Contributions from significant
shareholder...................... -- -- -- -- -- -- -- 506
Issuance of stock--DRIP plan....... -- -- -- -- -- 1 -- 44,426
Purchase of treasury shares........ -- -- -- -- -- -- -- 334
Net income for the period.......... -- -- -- -- -- -- -- --
Change in accumulated other
comprehensive income............. -- -- -- -- -- -- -- --
---- ---- ---- ---- ------ ---- ------- ----------
Balance at December 31, 2002....... $ 4 $ 2 $ 1 $ 4 $1,359 $ 98 $20,322 $2,281,636
==== ==== ==== ==== ====== ==== ======= ==========
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TREASURY
(DEFICIT) (LOSSES) STOCK TOTAL
--------- ------------- -------- ----------
Balance at January 1, 2000......... $(129,992) $ (229) $(40,439) $1,801,343
Exercise of options................ -- -- -- 6,097
Dividends declared-preferred....... (36,906) -- -- (36,576)
Dividends declared-common.......... (205,477) -- -- (205,477)
Acquisition of ACRE Partners....... -- -- -- 3,637
Restricted stock units issued to
employees in lieu of cash
bonuses.......................... -- -- -- 1,125
Restricted stock units granted to
employees........................ -- -- -- 212
Issuance of stock--DRIP plan....... -- -- -- 31
Purchase of treasury shares........ -- -- (302) (302)
Net income for the period.......... 217,586 217,586
Change in accumulated other
comprehensive income............. -- 209 -- 209
--------- -------- -------- ----------
Balance at December 31, 2000....... $(154,789) $ (20) $(40,741) $1,787,885
Exercise of options................ -- -- -- 21,717
Dividends declared-preferred....... (36,908) -- -- (36,578)
Dividends declared-common.......... (213,089) -- -- (213,089)
Acquisition of ACRE Partners....... -- -- -- 1,219
Restricted stock units issued to
employees in lieu of cash
bonuses.......................... -- -- -- 1,478
Restricted stock units granted to
employees........................ -- -- -- 1,250
Options granted to employees....... -- -- -- 4,348
Issuance of stock--DRIP plan....... -- -- -- 4,708
Net income for the period.......... 229,912 -- -- 229,912
Cumulative effect of change in
accounting principle............. -- (9,445) -- (9,445)
Change in accumulated other
comprehensive income............. -- (5,627) -- (5,627)
--------- -------- -------- ----------
Balance at December 31, 2001....... $(174,874) $(15,092) $(40,741) $1,787,778
Exercise of options................ -- -- -- 15,729
Proceeds from equity offering...... -- -- -- 202,899
Dividends declared-preferred....... (36,908) -- -- (36,578)
Dividends declared-common.......... (231,257) -- -- (231,257)
Restricted stock units granted to
employees........................ -- -- -- 19,048
Options granted to employees....... -- -- -- 309
High performance units sold to
employees........................ -- -- -- 1,359
Contributions from significant
shareholder...................... -- -- -- 506
Issuance of stock--DRIP plan....... -- -- -- 44,427
Purchase of treasury shares........ -- -- (7,315) (6,981)
Net income for the period.......... 215,270 -- -- 215,270
Change in accumulated other
comprehensive income............. -- 12,791 -- 12,791
--------- -------- -------- ----------
Balance at December 31, 2002....... $(227,769) $ (2,301) $(48,056) $2,025,300
========= ======== ======== ==========
The accompanying notes are an integral part of the financial statements.
48
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001* 2000*
----------- ----------- -----------
Cash flows from operating activities:
Net income.................................................. $ 215,270 $ 229,912 $ 217,586
Adjustments to reconcile net income to cash flows provided
by operating activities:
Minority interest in consolidated entities................ 162 218 195
Non-cash expense for stock-based compensation............. 18,059 3,574 2,864
Depreciation and amortization............................. 71,287 55,831 47,290
Depreciation and amortization from discontinued
operations.............................................. 219 213 112
Amortization of discounts/premiums, deferred interest and
costs on lending investments............................ (33,086) (41,067) (27,059)
Discounts, loan fees and deferred interest received....... 36,714 28,425 17,153
Equity in earnings from joint ventures and unconsolidated
subsidiaries............................................ (1,222) (7,358) (4,753)
Distributions from operations of joint ventures........... 5,802 4,802 4,511
Deferred operating lease income receivable................ (15,265) (10,923) (9,130)
Realized (gains)/losses on sale of securities............. -- -- 233
Gain from discontinued operations......................... (717) (1,145) (2,948)
Extraordinary loss on early extinguishment of debt........ 12,166 1,620 705
Cumulative effect of change in accounting principle....... -- 282 --
Provision for loan losses................................. 8,250 7,000 6,500
Change in investments in and advances to joint ventures
and unconsolidated subsidiaries......................... (6,598) (2,568) (447)
Changes in assets and liabilities:
Decrease (increase) in accrued interest and operating
lease income receivable................................ 3,809 5,083 (5,401)
Decrease (increase) in deferred expenses and other
assets................................................. 1,758 (204) (25,841)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities......................... 32,185 19,565 (1,702)
----------- ----------- -----------
Cash flows provided by operating activities............. 348,793 293,260 219,868
----------- ----------- -----------
Cash flows from investing activities:
New investment originations............................... (1,812,993) (924,455) (850,144)
Add-on fundings under existing loan commitments........... (21,619) (99,626) (56,039)
Net proceeds from sale of corporate tenant lease assets... 3,702 26,306 146,265
Net proceeds from lease termination payments.............. 17,500 -- --
Proceeds from sale of investment securities............... -- -- 30
Repayments of and principal collections on loans and other
lending investments..................................... 671,965 650,970 571,846
Investments in and advances to joint ventures and
unconsolidated subsidiaries............................. (127) (1,601) (27,490)
Distributions from unconsolidated joint ventures.......... -- 24,265 34,759
Capital improvements for build-to-suit projects........... (1,064) (14,266) (5,022)
Capital improvement projects on corporate tenant lease
assets.................................................. (2,277) (6,629) (6,831)
Other capital expenditures on corporate tenant lease
assets.................................................. (4,157) (4,489) (1,179)
----------- ----------- -----------
Cash flows used in investing activities................. (1,149,070) (349,525) (193,805)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under revolving credit facilities.............. 2,496,200 2,420,638 2,304,099
Repayments under revolving credit facilities.............. (2,122,994) (2,285,892) (2,487,936)
Borrowings under term loans............................... 115,099 277,664 90,000
Repayments under term loans............................... (18,279) (120,333) (300,799)
Borrowings under secured bond offerings................... 885,079 -- 863,254
Repayments under secured bond offerings................... (475,679) (125,962) (274,919)
Borrowings under unsecured bond offerings................. -- 350,000 --
Repayments under unsecured notes.......................... -- (100,000) --
Borrowings under other debt obligations................... 1,094 279 65,067
Repayments under other debt obligations................... (1,668) (56,008) (31,564)
(Increase) decrease in restricted cash held in connection
with debt obligations................................... (22,359) 2,590 (10,246)
Payments on early extinguishment of debt.................. (3,950) (1,037) (317)
Payments for deferred financing costs..................... (45,702) (30,382) (21,048)
Distributions to minority interest in consolidated
entities................................................ (231) (3,794) (164)
Common dividends paid(1).................................. (231,257) (264,527) (202,397)
Preferred dividends paid.................................. (36,578) (36,578) (36,576)
Proceeds from equity offering............................. 202,899 -- --
Purchase of treasury stock................................ (6,981) -- (302)
Contribution from significant shareholder................. 506 -- --
Proceeds from exercise of options and issuance of DRIP
shares.................................................. 63,983 22,525 6,129
Proceeds from high performance units issued to
employees............................................... 1,359 -- --
----------- ----------- -----------
Cash flows provided by (used in) financing activities... 800,541 49,183 (37,719)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents............ 264 (7,082) (11,656)
Cash and cash equivalents at beginning of period............ 15,670 22,752 34,408
----------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 15,934 $ 15,670 $ 22,752
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amount
capitalized............................................. $ 157,618 $ 141,271 $ 141,632
=========== =========== ===========
- ----------------------------------
* RECLASSIFIED TO CONFORM TO 2002 PRESENTATION.
EXPLANATORY NOTE:
(1) For the year ended December 31, 2001, the $264.5 million of common dividends
shown in the table represents five quarters of dividends, of which
$51.4 million relates to the fourth quarter 2000 dividend (paid in January
2001).
The accompanying notes are an integral part of the financial statements.
49
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND ORGANIZATION.
BUSINESS--iStar Financial Inc. (the "Company") is the leading
publicly-traded finance company focused on the commercial real estate industry.
The Company provides structured financing to private and corporate owners of
real estate nationwide, including senior and junior mortgage debt, corporate
mezzanine and subordinated capital, and corporate net lease financing. The
Company, which is taxed as a real estate investment trust ("REIT"), seeks to
deliver strong dividends and superior risk-adjusted returns on equity to
shareholders by providing innovative and value-added financing solutions to its
customers.
The Company's primary product lines include:
- STRUCTURED FINANCE. The Company provides senior and subordinated loans
that typically range in size from $20 million to $100 million to borrowers
holding high-quality real estate. These loans may be either fixed or
variable rate and are structured to meet the specific financing needs of
the borrowers, including the acquisition or financing of large,
high-quality real estate. The Company offers borrowers a wide range of
structured finance options, including first mortgages, second mortgages,
partnership loans, participating debt and interim facilities. The
Company's structured finance transactions have maturities generally
ranging from three to ten years. As of December 31, 2002, based on gross
carrying values, the Company's structured finance assets represented
27.02% of its assets.
- PORTFOLIO FINANCE. The Company provides funding to regional and national
borrowers who own multiple facilities in geographically diverse
portfolios. Loans are cross-collateralized to give the Company the benefit
of all available collateral and underwritten to recognize inherent
portfolio diversification. Property types include multifamily, suburban
office, hotels and other property types where individual property values
are less than $20 million on average. Loan terms are structured to meet
the specific requirements of the borrower and typically range in size from
$25 million to $150 million. The Company's portfolio finance transactions
have maturities generally ranging from three to ten years. As of
December 31, 2002, based on gross carrying values, the Company's portfolio
finance assets represented 7.08% of its assets.
- CORPORATE FINANCE. The Company provides senior and subordinated capital to
corporations engaged in real estate or real estate-related businesses.
Financings may be either secured or unsecured and typically range in size
from $20 million to $150 million. The Company's corporate finance
transactions have maturities generally ranging from five to ten years. As
of December 31, 2002, based on gross carrying values, the Company's
corporate finance assets represented 12.18% of its assets.
- LOAN ACQUISITION. The Company acquires whole loans and loan participations
which present attractive risk-reward opportunities. Loans are generally
acquired at a small discount to the principal balance outstanding. Loan
acquisitions typically range in size from $5 million to $100 million and
are collateralized by all major property types. The Company's loan
acquisition transactions have maturities generally ranging from three to
ten years. As of December 31, 2002, based on gross carrying values, the
Company's loan acquisition assets represented 8.60% of its assets.
- CORPORATE TENANT LEASING. The Company provides capital to corporations and
borrowers who control facilities leased to single creditworthy tenants.
The Company's net leased assets are generally mission-critical
headquarters or distribution facilities that are subject to long-term
leases with rated corporate credit tenants, and which provide for all
expenses at the property to be paid by
50
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS AND ORGANIZATION. (CONTINUED)
the corporate tenant on a triple net lease basis. Corporate tenant lease
transactions have terms generally ranging from ten to 20 years and
typically range in size from $20 million to $150 million. As of
December 31, 2002, based on gross carrying values, the Company's corporate
tenant lease assets represented 43.64% of its assets.
- SERVICING. Through its iStar Asset Services division, the Company provides
rated loan servicing to third-party institutional loan portfolios, as well
as to the Company's own assets. The servicing business did not represent a
meaningful percentage of the gross carrying value of the Company's assets
as of December 31, 2002.
The Company's investment strategy targets specific sectors of the real
estate credit markets in which it believes it can deliver value-added, flexible
financial solutions to its customers, thereby differentiating its financial
products from those offered by other capital providers.
The Company has implemented its investment strategy by:
- Focusing on the origination of large, structured mortgage, corporate and
lease financings where customers require flexible financial solutions.
- Avoiding commodity businesses in which there is significant direct
competition from other providers of capital such as conduit lending and
investment in commercial or residential mortgage-backed securities.
- Developing direct relationships with borrowers and corporate customers as
opposed to sourcing transactions solely through intermediaries.
- Adding value beyond simply providing capital by offering borrowers and
corporate customers specific lending expertise, flexibility, certainty and
continuing relationships beyond the closing of a particular financing
transaction.
- Taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of
capital, such as the spread between lease yields and the yields on
corporate customers' underlying credit obligations.
ORGANIZATION--The Company began its business in 1993 through private
investment funds formed to capitalize on inefficiencies in the real estate
finance market. In March 1998, these funds contributed their approximately
$1.1 billion of assets to the Company's predecessor in exchange for a
controlling interest in that company. Since that time, the Company has grown by
originating new lending and leasing transactions, as well as through corporate
acquisitions.
Specifically, in September 1998, the Company acquired the loan origination
and servicing business of a major insurance company, and in December 1998, the
Company acquired the mortgage and mezzanine loan portfolio of its largest
private competitor. Additionally, in November 1999, the Company acquired TriNet
Corporate Realty Trust, Inc. ("TriNet" or the "Leasing Subsidiary"), then the
largest publicly-traded company specializing in corporate sale/leaseback
transactions for office and industrial facilities (the "TriNet Acquisition").
The TriNet Acquisition was structured as a stock-for-stock merger of TriNet with
a subsidiary of the Company.
Concurrent with the TriNet Acquisition, the Company also acquired its former
external advisor in exchange for shares of the Company's common stock ("Common
Stock") and converted its organizational form to a Maryland corporation. As part
of the conversion to a Maryland corporation, the Company
51
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS AND ORGANIZATION. (CONTINUED)
replaced its former dual class common share structure with a single class of
Common Stock. The Company's Common Stock began trading on the New York Stock
Exchange on November 4, 1999. Prior to this date, the Company's common shares
were traded on the American Stock Exchange.
NOTE 2--BASIS OF PRESENTATION
The accompanying audited Consolidated Financial Statements have been
prepared in conformity with generally accepted accounting principles in the
United States of America ("GAAP") for complete financial statements. The
Consolidated Financial Statements include the accounts of the Company, its
qualified REIT subsidiaries, and its majority-owned and controlled partnerships.
Certain other investments in partnerships or joint ventures which the
Company does not control are also accounted for under the equity method (see
Note 5 and 6). All significant intercompany balances and transactions have been
eliminated in consolidation.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 4, "Loans and
Other Lending Investments" includes the following investments: senior mortgages,
subordinate mortgages, corporate/ partnership loans, other lending
investments-loans and other lending investments-securities. Management considers
nearly all of its loan and other lending investments to be held-to-maturity,
although a small number of investments may be classified as available-for-sale.
Items classified as held-to-maturity are reflected at amortized historical cost,
while items classified as available-for-sale are reported at fair values.
Unrealized gains and losses on available-for-sale investments are included in
"Accumulated other comprehensive income" on the Company's Consolidated Balance
Sheets, and are not included in the Company's net income.
CORPORATE TENANT LEASE ASSETS AND DEPRECIATION--Corporate tenant lease
assets are generally recorded at cost less accumulated depreciation. Certain
improvements and replacements are capitalized when they extend the useful life,
increase capacity or improve the efficiency of the asset. Repairs and
maintenance items are expensed as incurred. Depreciation is computed using the
straight-line method of cost recovery over estimated useful lives of 40.0 years
for facilities, five years for furniture and equipment, the shorter of the
remaining lease term or expected life for tenant improvements and the remaining
life of the facility for facility improvements.
Corporate tenant lease assets to be disposed of are reported at the lower of
their carrying amount or fair value less costs to sell. The Company also
periodically reviews long-lived assets to be held and used for an impairment in
value whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. In management's opinion, corporate
tenant lease assets to be held and used are not carried at amounts in excess of
their estimated recoverable amounts.
CAPITALIZED INTEREST--The Company capitalizes interest costs incurred during
the construction period on qualified build-to-suit projects for corporate
tenants, including investments in joint ventures accounted for under the equity
method. Interest capitalized was approximately $70,000 and $1.0 million during
the 12-month periods ended December 31, 2002 and 2001, respectively.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash held in
banks or invested in money market funds with original maturity terms of less
than 90 days.
52
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH--Restricted cash represents amounts required to be
maintained in escrow under certain of the Company's debt obligations and leasing
transactions.
REVENUE RECOGNITION--The Company's revenue recognition policies are as
follows:
LOANS AND OTHER LENDING INVESTMENTS: Management considers nearly all of its
loans and other lending investments to be held-to-maturity, although a small
number of investments may be classified as available-for-sale. The Company
reflects held-to-maturity investments at amortized cost less allowance for loan
losses, acquisition premiums or discounts, deferred loan fees and undisbursed
loan funds. Unrealized gains and losses on available-for-sale investments are
included in "Accumulated other comprehensive income" on the Company's
Consolidated Balance Sheets and are not included in the Company's net income. On
occasion, the Company may acquire loans at small premiums or discounts based on
the credit characteristics of such loans. These premiums or discounts are
recognized as yield adjustments over the lives of the related loans. If loans
that were acquired at a premium or discount are prepaid, the Company immediately
recognizes the unamortized premium or discount as a decrease or increase,
respectively, in the prepayment gain or loss. Loan origination or exit fees, as
well as direct loan origination costs, are also deferred and recognized over the
lives of the related loans as a yield adjustment. Interest income is recognized
using the effective interest method applied on a loan-by-loan basis.
A small number of the Company's loans provide for accrual of interest at
specified rates which differ from current payment terms. Interest is recognized
on such loans at the accrual rate subject to management's determination that
accrued interest and outstanding principal are ultimately collectible, based on
the underlying collateral and operations of the borrower.
Prepayment penalties or yield maintenance payments from borrowers are
recognized as additional income when received. Certain of the Company's loan
investments provide for additional interest based on the borrower's operating
cash flow or appreciation of the underlying collateral. Such amounts are
considered contingent interest and are reflected as income only upon certainty
of collection.
LEASING INVESTMENTS: Operating lease revenue is recognized on the
straight-line method of accounting from the later of the date of the origination
of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized evenly
over the term of the lease. The cumulative difference between lease revenue
recognized under this method and contractual lease payment terms is recorded as
"Deferred operating lease income receivable" on the Company's Consolidated
Balance Sheets.
PROVISION FOR LOAN LOSSES--The Company's accounting policies require that an
allowance for estimated loan losses be maintained at a level that management,
based upon an evaluation of known and inherent risks in the portfolio, considers
adequate to provide for loan losses. In establishing loan loss provisions,
management periodically evaluates and analyzes the Company's assets, historical
and industry loss experience, economic conditions and trends, collateral values
and quality, and other relevant factors. Specific valuation allowances are
established for impaired loans in the amount by which the carrying value, before
allowance for estimated losses, exceeds the fair value of collateral less
disposition costs on an individual loan basis. Management considers a loan to be
impaired when, based upon current information and events, it believes that it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement on a timely basis. Management
measures these impaired loans at the fair value of the loans' underlying
collateral less estimated disposition costs. Impaired loans may be left on
accrual status during the period the Company is pursuing repayment of the
53
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
loan; however, these loans are placed on non-accrual status at such time as:
(1) management believes that the potential risk exists that scheduled debt
service payments will not be met within the coming 12 months; (2) the loans
become 90 days delinquent; (3) management determines the borrower is incapable
of, or has ceased efforts toward, curing the cause of the impairment; or
(4) the net realizable value of the loan's underlying collateral approximates
the Company's carrying value of such loan. While on non-accrual status, interest
income is recognized only upon actual receipt. Impairment losses are recognized
as direct write-downs of the related loan with a corresponding charge to the
provision for loan losses. Charge-offs occur when loans, or a portion thereof,
are considered uncollectible and of such little value that further pursuit of
collection is not warranted. Management also provides a loan portfolio reserve
based upon its periodic evaluation and analysis of the portfolio, historical and
industry loss experience, economic conditions and trends, collateral values and
quality, and other relevant factors.
The Company's loans are generally secured by real estate assets or are
corporate lending arrangements to entities with significant rental real estate
operations (i.e., an unsecured loan to a company which operates residential
apartments or retail, industrial or office facilities as rental real estate).
While the underlying real estate assets for the corporate lending instruments
may not serve as collateral for the Company's investments in all cases, the
Company evaluates the underlying real estate assets when estimating loan loss
exposure because the Company's loans generally have preclusions as to how much
senior and/or secured debt the customer may borrow ahead of the Company's
position.
INCOME TAXES--The Company is subject to federal income taxation at corporate
rates on its "REIT taxable income"; however, the Company is allowed a deduction
for the amount of dividends paid to its shareholders, thereby subjecting the
distributed net income of the Company to taxation at the shareholder level only.
In addition, the Company is allowed several other deductions in computing its
"REIT taxable income," including non-cash items such as depreciation expense.
These deductions allow the Company to shelter a portion of its operating cash
flow from its dividend payout requirement under federal tax laws. The Company
intends to operate in a manner consistent with and to elect to be treated as a
REIT for tax purposes. iStar Operating Inc. ("iStar Operating") and TriNet
Management Operating Company, Inc. ("TMOC"), the Company's REIT taxable
subsidiaries, are not consolidated for federal income tax purposes and are taxed
as corporations. For financial reporting purposes, current and deferred taxes
are provided for in the portion of earnings recognized by the Company with
respect to its interest in iStar Operating and TMOC. Accordingly, except for the
Company's taxable subsidiaries, no current or deferred taxes are provided for in
the Consolidated Financial Statements. See Note 6 for a detailed discussion on
the ownership structure and operations of iStar Operating and TMOC.
EARNINGS (LOSS) PER COMMON SHARE--In accordance with the Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), the Company presents
both basic and diluted earnings per share ("EPS"). Basic earnings per share
("Basic EPS") excludes dilution and is computed by dividing net income available
to common shareholders by the weighted average number of shares outstanding for
the period. Diluted earnings per share ("Diluted EPS") reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock, where such exercise or conversion
would result in a lower earnings per share amount.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified in the
Consolidated Financial Statements and the related notes to conform to the 2002
presentation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities
54
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
CHANGE IN ACCOUNTING PRINCIPLE--In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as: (1) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment; (2) a hedge of the exposure to variable cash flows of a forecasted
transaction; or (3) in certain circumstances, a hedge of a foreign currency
exposure. On January 1, 2001, the Company adopted this pronouncement, as amended
by Statement of Financial Accounting Standards No. 137 "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133" and Statement of Financial Accounting Standards No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an Amendment of FASB Statement No. 133." Because the Company has
primarily used derivatives as cash flow hedges of interest rate risk only, the
adoption of SFAS No. 133 did not have a material financial impact on the
financial position and results of operations of the Company. However, should the
Company change its current use of such derivatives, the adoption of SFAS
No. 133 could have a more significant effect on the Company prospectively.
Upon adoption, the Company recognized a charge to net income of
approximately $282,000 and an additional charge of $9.4 million to "Accumulated
other comprehensive income," representing the cumulative effect of the change in
accounting principle.
OTHER NEW ACCOUNTING STANDARDS--In December 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." In June 2000, the SEC
staff amended SAB 101 to provide registrants with additional time to implement
SAB 101. The Company adopted SAB 101, as required, in the fourth quarter of
fiscal 2000. The adoption of SAB 101 did not have a material financial impact on
the financial position or the results of operations of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
was required to adopt FIN 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. FIN 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 FIN 44 by the Company did
not have a significant impact on the Company.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS 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. The Company adopted the provisions of this statement as
required for all transactions entered into on or after April 1, 2001. The
adoption of SFAS No. 140 did not have a significant impact on the Company.
55
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In July 2001, the SEC released Staff Accounting Bulletin No. 102 ("SAB
102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 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. Adoption of SAB 102 by the Company did not have a significant
impact on the Company.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141"), "Business Combinations" and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the purchase method of accounting to be used for
all business combinations initiated after June 30, 2001. SFAS 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. SFAS
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. The Company adopted the provisions of both statements on January 1,
2002, as required, and the adoption did not have a significant impact on the
Company.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 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. SFAS 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 the Company's Consolidated
Statements of Operations. The provisions of SFAS 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. The Company adopted the
provisions of this statement on January 1, 2002, as required, and it did not
have a significant financial impact on the Company.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
rescinds both FASB Statements No. 4 ("SFAS No. 4"), "Reporting Gains and Losses
from Extinguishment of Debt," and the amendment to SFAS No. 4, FASB Statement
No. 64 ("SFAS No. 64"), "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." Through this rescission, SFAS No. 145 eliminates the requirement
(in both SFAS No. 4 and SFAS No. 64) that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. An entity is not
prohibited from classifying such gains and losses as extraordinary items, so
long as they meet the criteria in paragraph 20 of Accounting Principles Board
Opinion No. 30 ("APB 30"), "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions"; however, due to the nature of
the Company's operations, such treatment may not be available to the Company.
Any gains or losses on extinguishments of debt that were previously classified
as extraordinary items in prior periods presented that do not meet the criteria
in APB 30 for classification as an extraordinary item will be reclassified to
income from continuing operations. The provisions of SFAS No. 145 are effective
for financial statements issued for fiscal years beginning after May 15, 2002.
The Company will adopt the provisions of this statement, as required, on
January 1, 2003, at
56
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which time ($12.2) million and ($1.6) million will be reclassified to continuing
operations for 2002 and 2001, respectively.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS No. 146"), "Accounting for Exit or Disposal Activities," to
address significant issues regarding the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS No. 146 also includes: (1) costs related to
terminating a contract that is not a capital lease; and (2) termination benefits
received by employees involuntarily terminated under the terms of a one-time
benefit arrangement that is not an on-going benefit arrangement or an individual
deferred-compensation contract. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not expect SFAS No. 146 to have a material effect on the Company's
Consolidated Financial Statements.
In September 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 ("SFAS No. 147"), "Acquisitions of Certain Financial
Institutions," an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the
acquisitions of financial institutions, except those acquisitions between two or
more mutual enterprises. SFAS No. 147 removes acquisitions of financial
institutions from the scope of both FASB No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," and FASB Interpretation No. 9,
Applying APB Opinions No. 16 and 17, "When a Savings and Loan Association or a
Similar Institution is Acquired in a Business Combination Accounted for by the
Purchase Method," and requires that those transactions be accounted for in
accordance with SFAS No. 141 and SFAS No. 142. SFAS No. 147 also amends SFAS
No. 144 to include in its scope long-term, customer-relationship intangible
assets of financial institutions such as depositor-relationship and
borrower-relationship intangible assets and credit cardholder intangible assets.
The Company adopted the provisions of this statement, as required, on
October 1, 2002, and it did not have a significant financial impact on the
Company's Consolidated Financial Statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statement of Financial Accounting Standards No. 5 ("SFAS 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 rescinds FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others, an Interpretation of SFAS 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 if the Company receives
separately identifiable consideration (i.e., a premium). The new disclosure
requirements are effective December 31, 2002. The adoption of FIN 45 did not
have a material impact on the Company's Consolidated Financial Statements, nor
is it expected to have a material impact in the future.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation--
Transition and Disclosure," an amendment of FASB Statement No. 123 ("SFAS
No. 123"). This statement provides alternative transition methods for a
voluntary change to the fair value basis of accounting for stock-based employee
compensation. However,
57
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
this Statement does not permit the use of the original SFAS No. 123 prospective
method of transition for changes to the fair value based method made in fiscal
years beginning after December 15, 2003. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation, description of transition method utilized and
the effect of the method used on reported results. The transition and annual
disclosure provisions of SFAS No. 148 shall be applied for fiscal years ending
after December 15, 2002. The new interim disclosure provisions are effective for
the first interim period beginning after December 15, 2002. The Company adopted
SFAS No. 148 with retroactive application to January 1, 2002 with no material
effect on the Company's Consolidated Financial Statements.
SFAS No. 148 disclosure requirements, including the effect on net income and
earnings per share if the fair value-based method had been applied to all
outstanding and unvested stock awards in each period, are presented below (in
thousands except per share amounts):
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
BASIC EPS BASIC EPS BASIC EPS
--------- --------- ---------
Net income allocable to common shareholders, as reported.... $178,362 $193,004 $180,678
Total stock-based compensation expense determined under fair
value-based method for all awards, net of related tax
effects................................................... (565) (705) (275)
-------- -------- --------
Pro forma net income.................................... $177,797 $192,299 $180,403
======== ======== ========
Earnings per share:
Basic--as reported........................................ $ 1.98 $ 2.24 $ 2.11
Basic--pro forma.......................................... 1.98 2.23 2.11
Diluted--as reported...................................... $ 1.93 $ 2.19 $ 2.10
Diluted--pro forma........................................ 1.92 2.18 2.09
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," an interpretation of ARB 51. FIN
46 provides guidance on identifying entities for which control is achieved
through means other than through voting rights (a "variable interest entity" or
"VIE"), and how to determine when and which business enterprise should
consolidate a VIE. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. The transitional disclosure requirements will
take effect almost immediately and are required for all financial statements
initially issued after January 31, 2003. The adoption of FIN 46 is not expected
to have a material impact on the Company.
58
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LOANS AND OTHER LENDING INVESTMENTS
The following is a summary description of the Company's loans and other
lending investments (in thousands)(1):
CARRYING VALUE AS OF
# OF PRINCIPAL ----------------------------- EFFECTIVE
BORROWERS BALANCES DECEMBER 31, DECEMBER 31, MATURITY
TYPE OF INVESTMENT UNDERLYING PROPERTY TYPE IN CLASS OUTSTANDING 2002 2001 DATES
- ------------------ ------------------------ --------- ----------- ------------- ------------- ------------
Senior
Mortgages............... Office/Residential/Retail/ 29 $1,712,967 $1,675,797 $1,158,669 2003 to 2019
Industrial/Conference
Center/Mixed Use/Hotel/
Entertainment
Subordinate
Mortgages(4)............ Office/Residential/Retail/ 22 630,683 629,486 585,698 2003 to 2011
Mixed Use/Hotel
Corporate/Partnership
Loans................... Office/Residential/Retail/ 20 463,507 441,028 395,083 2003 to 2011
Mixed Use/Hotel/
Entertainment
Other Lending
Investments--Loans(6)... Office/Mixed Use 4 29,411 23,167 10,818 2006 to 2008
Other Lending
Investments--Securities(7).. Office/Residential/Retail/ 10 322,305 310,114 248,495 2003 to 2013
Industrial/ Mixed Use/
Entertainment
---------- ----------
Gross Carrying Value.... $3,079,592 $2,398,763
Provision for Loan
Losses.................. (29,250) (21,000)
---------- ----------
Total, Net.............. $3,050,342 $2,377,763
========== ==========
CONTRACTUAL INTEREST CONTRACTUAL INTEREST PRINCIPAL PARTICIPATION
TYPE OF INVESTMENT PAYMENT RATES(2) ACCRUAL RATES(2) AMORTIZATION FEATURES
- ------------------ ------------------------ ------------------------ ------------ -------------
Senior
Mortgages............... Fixed: 7.03% to 15.00% Fixed: 7.03% to 15.00% Yes(3) No
Variable: LIBOR + 1.50% Variable: LIBOR + 1.50%
to 6.50% to 6.50%
Subordinate
Mortgages(4)............ Fixed: 7.00% to 15.00% Fixed: 7.32% to 17.00% Yes(3) No
Variable: LIBOR + 1.79% Variable: LIBOR + 1.79%
to 5.80% to 5.80%
Corporate/Partnership
Loans................... Fixed: 7.33% to 15.00% Fixed: 7.33% to 17.50% Yes(3) Yes(5)
Variable: LIBOR + 3.50% Variable: LIBOR + 3.50%
to 6.50% to 6.50%
Other Lending
Investments--Loans(6)... Fixed: 10.00% Fixed: 10.00% No Yes(5)
Variable: LIBOR + 4.75% Variable: LIBOR + 4.75%
Other Lending
Investments--Securities( Fixed: 6.75% to 12.50% Fixed: 6.75% to 12.50% Yes(3) No
Variable: LIBOR + 5.00% Variable: LIBOR + 5.00%
Gross Carrying Value....
Provision for Loan
Losses..................
Total, Net..............
EXPLANATORY NOTES:
- ----------------------------------
(1) Amounts and details are for loans outstanding as of December 31, 2002.
(2) Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly. The 30-day LIBOR on December 31, 2002 was 1.38%. As of
December 31, 2002, three loans with a combined carrying value of
$72.4 million have a stated accrual rate that exceeds the stated pay rate.
(3) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity.
(4) Includes a participation interest in a second mortgage and a subordinate
interest in a private REMIC whose sole asset is a single first mortgage
loan.
(5) Under some of these loans, the lender receives additional payments
representing additional interest from participation in available cash flow
from operations of the property.
(6) Includes one unsecured loan with a carrying value of $403 as of
December 31, 2001 which was subsequently repaid in October 2002.
(7) Generally consists of term preferred stock or debt interests that are
specifically originated or structured to meet customer financing
requirements and the Company's investment criteria. These investments do not
typically consist of securities purchased in the open market or as part of
broadly-distributed offerings. In addition, one of these securities is
classified as available-for-sale and is reflected at fair value with a
corresponding entry to "Accumulated other comprehensive income" on the
Company's Consolidated Balance Sheets.
59
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LOANS AND OTHER LENDING INVESTMENTS (CONTINUED)
During the 12-month periods ended December 31, 2002 and 2001, respectively,
the Company and its affiliated ventures originated or acquired an aggregate of
approximately $1,403.8 million and $700.6 million in loans and other lending
investments, funded $21.6 million and $99.6 million under existing loan
commitments, and received principal repayments of $672.0 million and
$651.0 million.
As of December 31, 2002, the Company had nine loans with unfunded
commitments. The total unfunded commitment amount was approximately
$97.7 million, of which $22.2 million was discretionary and $75.5 million was
non-discretionary.
The Company's loans and other lending investments are predominantly pledged
as collateral under either the iStar Asset Receivables secured notes, the
secured revolving credit facilities or secured term loans (see Note 7).
The Company has reflected provisions for loan losses of approximately
$8.3 million, $7.0 million and $6.5 million during the years ended December 31,
2002, 2001 and 2000, respectively. These provisions represent loan portfolio
reserves based on management's evaluation of general market conditions, the
Company's internal risk management policies and credit risk ratings system,
industry loss experience, the likelihood of delinquencies or defaults, and the
credit quality of the underlying collateral. No direct impairment reserves on
specific loans were considered necessary.
NOTE 5--CORPORATE TENANT LEASE ASSETS
During the 12-month periods ended December 31, 2002 and 2001, respectively,
the Company acquired an aggregate of approximately $409.1 million and
$223.9 million in corporate tenant lease assets and disposed of corporate tenant
lease assets for net proceeds of approximately $3.7 million and $26.3 million.
The Company's investments in corporate tenant lease assets, at cost, were as
follows (in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Facilities and improvements......................... $1,959,309 $1,504,956
Land and land improvements.......................... 428,365 356,830
Direct financing lease.............................. 32,640 --
Less: accumulated depreciation...................... (128,509) (80,221)
---------- ----------
Corporate tenant lease assets, net............ $2,291,805 $1,781,565
========== ==========
The Company's CTL assets are leased to customers with initial term
expiration dates from 2003 to 2023. Future operating lease payments under
non-cancelable leases, excluding customer reimbursements of expenses, in effect
at December 31, 2002, are approximately as follows (in thousands):
YEAR AMOUNT
- ---- ----------
2003........................................................ $ 245,462
2004........................................................ 231,605
2005........................................................ 218,209
2006........................................................ 200,433
2007........................................................ 177,352
Thereafter.................................................. 1,481,235
Under certain leases, the Company receives additional participating lease
payments to the extent gross revenues of the corporate tenant exceed a base
amount. The Company earned $0, $0.4 million and $0.6 million of such additional
participating lease payments in the years ended December 31, 2002, 2001
60
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--CORPORATE TENANT LEASE ASSETS (CONTINUED)
and 2000, respectively. In addition, the Company also receives reimbursements
from customers for certain facility operating expenses including common area
costs, insurance and real estate taxes. Customer expense reimbursements for the
12 months ended December 31, 2002, 2001 and 2000 were approximately
$30.3 million, $25.8 million and $25.3 million, respectively, and are included
as a reduction of "Operating costs--corporate tenant lease assets" on the
Company's Consolidated Statements of Operations.
The Company is subject to expansion option agreements with two existing
customers which could require the Company to fund and to construct up to 161,000
square feet of additional adjacent space on which the Company would receive
additional operating lease income under the terms of the option agreements. In
addition, upon exercise of such expansion option agreements, the corporate
tenants would be required to simultaneously extend their existing lease terms
for additional periods ranging from six to ten years.
On September 30, 2002, one of the Company's customers exercised an option to
terminate its lease on 50.00% of the land leased from the Company. In connection
with this termination, the Company realized $17.5 million in cash lease
termination payments, offset by a $17.4 million impairment charge in connection
with the termination, resulting in net gain of approximately $123,000. In the
fourth quarter of 2002, the customer completed a recapitalization transaction
that significantly enhanced its credit. In connection with this
recapitalization, the Company agreed to amend the customer's lease, effective
October 1, 2002. In the lease amendment, the Company received $12.5 million in
cash as prepaid lease payments and the customer agreed to fixed minimum
increases on future lease payments. In exchange, the Company agreed to reduce
the customer's lease obligations for a period not to exceed nine quarters.
Following the reduction period, the customer is required to make additional
lease payments over a 10-year period sufficient to reimburse the Company for a
portion of the temporary reduction in lease payments.
In addition, on May 30, 2002, the Company sold one tenant lease asset for
net proceeds of $3.7 million, and realized a gain of approximately $595,000. As
of December 31, 2002, there were two corporate tenant lease assets with a
combined book value of $28.5 million classified as "Assets held for sale" on the
Company's Consolidated Balance Sheets. The results of operations from corporate
tenant lease assets sold or held for sale in the current period are classified
as "Income from discontinued operations" even though such income was actually
received by the Company prior to the asset sale. Gains on sale from corporate
tenant lease assets are also classified as "Gain from discontinued operations"
on the Company's Consolidated Statements of Operations.
61
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--JOINT VENTURES AND UNCONSOLIDATED SUBSIDIARIES
The Company's ownership percentages, its investments in and advances to
unconsolidated joint ventures and subsidiaries, its respective income (loss) and
the Company's pro rata share of its ventures' third-party, non-recourse debt as
of December 31, 2002 are presented below (in thousands):
JV INCOME PRO RATA
(LOSS) FOR THE SHARE OF THIRD-PARTY DEBT
UNCONSOLIDATED JOINT YEAR ENDED THIRD-PARTY --------------------------------------------
VENTURES AND OWNERSHIP EQUITY DECEMBER 31, NON-RECOURSE INTEREST SCHEDULED
SUBSIDIARIES % INVESTMENT 2002 DEBT(1) RATE MATURITY DATE
- -------------------- --------- ---------- -------------- ------------ --------------------- --------------------
UNCONSOLIDATED JOINT
VENTURES:
Sunnyvale........ 44.70% $12,323 $2,144 $10,728 LIBOR + 1.25% November 2004(2)
CTC I............ 50.00% 12,407 1,429 60,115 7.66% - 7.87% Various through 2011
ACRE Simon....... 20.00% 5,147 32 6,511 7.61% - 8.43% Various through 2011
Milpitas......... N/A N/A 1,512 N/A N/A N/A
Sierra........... N/A N/A (36) N/A N/A N/A
UNCONSOLIDATED
SUBSIDIARIES:
iStar Operating.. 95.00% 599 (3,859) -- N/A N/A
TMOC............. 95.00% 135 -- -- N/A N/A
------- ------ -------
Total.......... $30,611 $1,222 $77,354
======= ====== =======
EXPLANATORY NOTES:
- ------------------------------
(1) The Company reflects its pro rata share of third-party, non-recourse debt,
rather than the total amount of the joint venture debt, because the
third-party, non-recourse debt held by the joint ventures is not guaranteed
by the Company nor does the Company have any additional commitments to fund
such debt obligations.
(2) Maturity date reflects a one-year extension at the venture's option.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES: At
December 31, 2002, the Company had investments in three joint ventures:
(1) TriNet Sunnyvale Partners L.P. ("Sunnyvale"), whose external partners are
John D. O'Donnell, Trustee, John W. Hopkins, and Donald S. Grant, Trustee;
(2) Corporate Technology Centre Associates, LLC ("CTC I"), whose external member
is Corporate Technology Centre Partners, LLC; and (3) ACRE Simon, LLC ("ACRE"),
whose external partner is William E. Simon & Sons Realty Investments, LLC. These
ventures were formed for the purpose of operating, acquiring and, in certain
cases, developing corporate tenant lease facilities.
At December 31, 2002, the ventures comprised 12 net leased facilities. The
Company's combined investment in these joint ventures at December 31, 2002 was
$30.6 million. The joint ventures' carrying value for the 12 facilities owned at
December 31, 2002 was $196.2 million. In aggregate, the joint ventures had total
assets of $236.2 million and total liabilities of $186.4 million as of
December 31, 2002, and net income of $7.0 million for the 12 months ended
December 31, 2002. The Company accounts for these investments under the equity
method because the Company's joint venture partners have certain participating
rights giving them shared control over the ventures.
Effective September 29, 2000, iStar Sunnyvale Partners, LP, which is wholly
owned by Sunnyvale, entered into an interest rate cap agreement limiting the
venture's exposure to interest rate movements on its $24.0 million LIBOR-based
mortgage loan to an interest rate of 9.00% through November 9, 2003. Currently,
the limited partners of Sunnyvale have the option to convert their partnership
interest into cash; however, the Company may elect to deliver 297,728 shares of
Common Stock in lieu of cash.
62
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--JOINT VENTURES AND UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
On April 1, 2002, the former Sierra Land Ventures ("Sierra") joint venture
partner assigned its 50.00% ownership interest in Sierra to a wholly owned
subsidiary of the Company. There was no cash or shares exchanged in this
transaction. As of April 1, 2002, the Company owns 100.00% of the corporate
tenant lease asset previously held by Sierra and therefore consolidates this
asset for accounting purposes.
On July 2, 2002, the Company paid approximately $27.9 million in cash to the
former member of TriNet Milpitas Associates ("Milpitas") joint venture in
exchange for its 50.00% ownership interest. Pursuant to the terms of the joint
venture agreement, the former external member had the right to convert its
interest into 984,476 shares of Common Stock of the Company at any time during
the period February 1, 2002 through January 31, 2003. On May 2, 2002, the former
Milpitas external member exercised this right. Upon the external member's
exercise of its conversion right, the Company had the option to acquire the
partner's interest for cash, instead of shares, for a payment equal to the value
of 984,476 shares of Common Stock multiplied by the ten-day average closing
stock price as of the transaction date. The Company made such election and, as
of July 2, 2002, owns 100.00% of Milpitas, and therefore consolidates these
assets for accounting purposes. The Company accounted for the acquisition of the
external interest using the purchase method.
Income generated from the Company's joint venture investments and
unconsolidated subsidiaries is included in "Equity in earnings from joint
ventures and unconsolidated subsidiaries" on the Company's Consolidated
Statements of Operations.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES: The Company has
an investment in iStar Operating, a taxable subsidiary that, through a
wholly-owned subsidiary, services the Company's loans and certain loan
portfolios owned by third parties. The Company owns all of the non-voting
preferred stock and a 95.00% economic interest in iStar Operating. An affiliate
of the Company's largest shareholder is the owner of all the voting common stock
and a 5.00% economic interest in iStar Operating. As of December 31, 2002, there
have never been any distributions to the common shareholder, nor does the
Company expect to make any in the future. At any time, the Company has the right
to acquire all of the common stock of iStar Operating at fair market value,
which the Company believes to be nominal. In addition to the direct general and
administrative costs of iStar Operating, the Company allocates a portion of its
general overhead expenses to iStar Operating based on the number of employees at
iStar Operating as a percentage of the Company's total employees.
In addition, the Company has an investment in TMOC, a taxable noncontrolled
subsidiary that has a $2.0 million investment in a real estate company based in
Mexico. The Company owns 95.00% of the outstanding voting and non-voting common
stock (representing 1.00% voting power and 95.00% of the economic interest) in
TMOC. The other two owners of TMOC stock are executives of the Company, who own
a combined 5.00% of the outstanding voting and non-voting common stock
(representing 99.00% voting power and 5.00% economic interest) in TMOC. As of
December 31, 2002, there have never been any distributions to the common
shareholders, nor does the Company expect to make any in the future. At any
time, the Company has the right to acquire all of the common stock of TMOC at
fair market value, which the Company believes to be nominal.
Both iStar Operating and TMOC have elected to be treated as taxable REIT
subsidiaries for purposes of maintaining compliance with the REIT provisions of
the Code and are accounted for under the equity method for financial statement
reporting purposes and are presented in "Investments in and advances to joint
ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance
Sheets. If they were consolidated with the Company for financial statement
purposes, they would not have a material impact on the Company's operations. As
of December 31, 2002, iStar Operating and TMOC have no debt obligations.
63
NOTE 7--DEBT OBLIGATIONS
As of December 31, 2002 and 2001, the Company has debt obligations under
various arrangements with financial institutions as follows (in thousands):
CARRYING VALUE AS OF
MAXIMUM --------------------------- STATED SCHEDULED
AMOUNT DECEMBER 31, DECEMBER 31, INTEREST MATURITY
AVAILABLE 2002 2001 RATES(1) DATE
---------- ------------ ------------ -------------------------- ----------------------
SECURED REVOLVING CREDIT
FACILITIES:
Line of credit............... $ 700,000 $ 412,550 $ 312,300 LIBOR + 1.75% -- 2.25% March 2005 (2)
Line of credit............... 700,000 462,920 439,309 LIBOR + 1.40% -- 2.15% January 2005 (2)
Line of credit............... 500,000 283,884 148,937 LIBOR + 1.50% -- 1.75% August 2005 (2)
Line of credit............... 500,000 114,400 -- LIBOR + 1.50% -- 2.25% September 2005
UNSECURED REVOLVING CREDIT
FACILITIES:
Line of credit............... 300,000 -- -- LIBOR + 2.125% July 2004 (3)
---------- ---------- ----------
Total revolving credit $2,700,000 $1,273,754 900,546
facilities.................
==========
SECURED TERM LOANS:
Secured by corporate tenant lease 193,000 193,000 LIBOR + 1.85% July 2006 (4)
assets..................................
Secured by corporate tenant lease 144,114 147,520 7.44% March 2009
assets..................................
Secured by corporate tenant lease 95,074 55,819 6.00% -- 11.38% Various through 2022
assets..................................
Secured by corporate lending 79,126 -- 6.55% November 2005
investments.............................
Secured by corporate lending 61,537 -- 6.41% December 2012
investments.............................
Secured by corporate lending 60,000 60,000 LIBOR + 2.50% June 2004 (3)
investments.............................
Secured by corporate lending 50,000 50,000 LIBOR + 2.50% July 2006 (3)
investments.............................
---------- ----------
Total term loans......................... 682,851 506,339
Less: debt (discount) premium............ (236) 274
---------- ----------
Total secured term loans................. 682,615 506,613
ISTAR ASSET RECEIVABLES SECURED
NOTES:
STARs Series 2000-1:
Class A.................................. -- 81,152 LIBOR + 0.30% August 2003
Class B.................................. -- 94,055 LIBOR + 0.50% October 2003
Class C.................................. -- 105,813 LIBOR + 1.00% January 2004
Class D.................................. -- 52,906 LIBOR + 1.45% June 2004
Class E.................................. -- 123,447 LIBOR + 2.75% January 2005
Class F.................................. -- 5,000 LIBOR + 3.15% January 2005
STARs Series 2002-1:
Class A1................................. 236,694 -- LIBOR + 0.26% June 2004 (5)
Class A2................................. 381,296 -- LIBOR + 0.38% December 2009 (5)
Class B.................................. 39,955 -- LIBOR + 0.65% April 2011 (5)
Class C.................................. 26,637 -- LIBOR + 0.75% May 2011 (5)
Class D.................................. 21,310 -- LIBOR + 0.85% January 2012 (5)
Class E.................................. 42,619 -- LIBOR + 1.235% January 2012 (5)
Class F.................................. 26,637 -- LIBOR + 1.335% January 2012 (5)
Class G.................................. 21,309 -- LIBOR + 1.435% January 2012 (5)
Class H.................................. 26,637 -- 6.35% January 2012 (5)
Class J.................................. 26,637 -- 6.35% May 2012 (5)
Class K.................................. 26,637 -- 6.35% May 2012 (5)
---------- ----------
Total iStar Asset Receivables secured 876,368 462,373
notes...................................
Less: debt discount...................... (4,425) --
---------- ----------
Total iStar Asset Receivables secured 871,943 462,373
notes...................................
UNSECURED NOTES:
6.75% Dealer Remarketable Securities 125,000 125,000 6.75% March 2013
(6)(7)(8)...............................
7.70% Notes (6)(8)....................... 100,000 100,000 7.70% July 2017
7.95% Notes (6)(8)....................... 50,000 50,000 7.95% May 2006
8.75% Notes.............................. 350,000 350,000 8.75% August 2008
---------- ----------
Total unsecured notes.................... 625,000 625,000
Less: debt discount...................... (11,603) (15,698)
Plus: impact of pay-floating swap 3,920 --
agreements (9)..........................
---------- ----------
Total unsecured notes.................... 617,317 609,302
OTHER DEBT OBLIGATIONS....................... 15,961 16,535 Various Various
---------- ----------
TOTAL DEBT OBLIGATIONS....................... $3,461,590 $2,495,369
========== ==========
64
EXPLANATORY NOTES:
- ----------------------------------
(1) Substantially all variable-rate debt obligations are based on 30-day LIBOR
and reprice monthly. The 30-day LIBOR rate on December 31, 2002 was 1.38%.
(2) Maturity date reflects a one-year "term-out" extension at the Company's
option. Subsequent to December 31, 2002, the Company extended the final
maturity date on the $700.0 million facility maturing January 2005 to
January 2007.
(3) Maturity date reflects a one-year extension at the Company's option.
(4) Maturity date reflects two one-year extensions at the Company's option.
(5) Principal payments on these bonds are a function of the principal
repayments on loan or corporate tenant lease assets which collateralize
these obligations. The dates indicated above represent the expected date on
which the final payment would occur for such class based on the assumptions
that the loans which collateralize the obligations are not voluntarily
prepaid, the loans are paid on their effective maturity dates and no
extensions of the effective maturity dates of any of the loans are granted.
The final maturity date for the underlying indenture on class A1 is
May 28, 2017 and the final maturity date for classes A2, B, C, D, E, F, G,
H, J and K is May 28, 2020.
(6) The notes are callable by the Company at any time for an amount equal to
the total of principal outstanding, accrued interest and the applicable
make-whole prepayment premium.
(7) Subject to mandatory tender on March 1, 2003, to either the dealer or the
Company. The initial coupon of 6.75% applies to the first five-year term
through the mandatory tender date. If tendered to the dealer, the notes
must be remarketed. The rates reset to then-prevailing market rates upon
remarketing. Subsequent to December 31, 2002, the Company modified the
terms of these notes (see Note 17).
(8) These obligations were assumed as part of the acquisition of TriNet. As
part of the accounting for the purchase, these fixed-rate obligations were
considered to have stated interest rates which were below the
then-prevailing market rates at which the Leasing Subsidiary could issue
new debt obligations and, accordingly, the Company ascribed a market
discount to each obligation. Such discounts are amortized as an adjustment
to interest expense using the effective interest method over the related
term of the obligations. As adjusted, the effective annual interest rates
on these obligations were 8.81%, 9.51% and 9.04% for the 6.75% Dealer
Remarketable Securities, 7.70% Notes and 7.95% Notes, respectively.
(9) On November 27, 2002, the Company entered into two pay-floating interest
rate swaps struck at 3.8775% and 3.81% and in the notional amounts of
$100.0 million and $50.0 million, respectively. These swaps mitigate the
risk of changes in the fair value of $150.0 million of the Company's 8.75%
Notes attributable to changes in LIBOR. For accounting purposes, quarterly
the Company adjusts the value of the swap to its fair value and adjusts the
carrying amount of the hedged liability by an offsetting amount.
65
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
Availability of amounts under the secured revolving credit facilities are
based on percentage borrowing base calculations. In addition, certain of the
Company's debt obligations contain covenants. These covenants are both financial
and non-financial in nature. Significant financial covenants include limitations
on the Company's ability to incur indebtedness beyond specified levels,
restrictions on the Company's ability to incur liens on assets and limitations
on the amount and type of restricted payments, such as repurchases of its own
equity securities, that the Company makes. Significant non-financial covenants
include a requirement in its publicly-held debt securities that the Company
offer to repurchase those securities at a premium if the Company undergoes a
change of control. As of December 31, 2002, the Company believes it is in
compliance with both financial and non-financial covenants on its debt
obligations.
On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, STARs, Series 2000-1. In the initial
transaction, a wholly-owned subsidiary of the Company issued $896.5 million of
investment-grade bonds secured by the subsidiary's assets, which had an
aggregate outstanding principal balance of approximately $1.2 billion at
inception. Principal payments received on the assets were utilized to repay the
most senior class of the bonds then outstanding. The maturity of the bonds match
funded the maturity of the underlying assets financed under the program. Of the
assets of the subsidiary secured by this financing, 73.96% (by gross carrying
value) consisted of first mortgages and subsequent lien positions and the
remaining 26.04% consisted of junior loans. For accounting purposes, this
transaction was treated as a secured financing: the underlying assets and STARs
liabilities remained on the Company's Consolidated Balance Sheets and no gain on
sale was recognized. On May 28, 2002, the Company fully repaid these bonds.
On January 11, 2001, the Company closed a new $700.0 million secured
revolving credit facility which is led by a major commercial bank. The new
facility has a three-year primary term and one-year "term-out" extension option,
and bears interest at LIBOR + 1.40% to 2.15%, depending upon the collateral
contributed to the borrowing base. The new facility accepts a broad range of
structured finance assets and has a final maturity of January 2005. Subsequent
to December 31, 2002, the Company extended the final maturity on this facility
to January 2007.
On February 22, 2001, the Company extended the maturity of its
$350.0 million unsecured revolving credit facility to May 2002. On July 27,
2001, the Company repaid this facility and replaced it with a new
$300.0 million unsecured revolving credit facility.
On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured
notes. These notes were senior unsecured obligations of the Leasing Subsidiary
and ranked equally with the Leasing Subsidiary's other senior unsecured and
unsubordinated indebtedness.
On June 14, 2001, the Company closed $193.0 million of term loan financing
secured by 15 corporate tenant lease assets. The variable-rate loan bears
interest at LIBOR + 1.85% (not to exceed 10.00% in aggregate) and has two
one-year extensions at the Company's option. The Company used these proceeds to
repay a $77.8 million secured term loan maturing in June 2001 and to pay down a
portion of its revolving credit facilities. In addition, the Company extended
the maturity of its $500.0 million secured revolving credit facility to
August 2003. On March 29, 2002, the Company again extended the final maturity of
this facility to August 2005, which includes a one-year "term-out" extension at
the Company's option.
On July 6, 2001, the Company financed a $75.0 million structured finance
asset with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The loan
has a maturity of July 2006, including a one-year
66
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
extension at the Company's option. This investment is a $75.0 million term
preferred investment in a publicly-traded real estate customer. The Company's
investment carries an initial current yield of 10.50%, with annual increases of
0.50% in each of the next two years. In addition, the Company's investment is
convertible into the customer's common stock at a strike price of $25.00 per
share. The investment is callable by the customer between months 13 and 30 of
the term at a yield maintenance premium, and after month 30, at a premium
sufficient to generate a 14.62% internal rate of return on the Company's
investment. The investment is putable by the Company to the customer for cash
after five years.
On July 27, 2001, the Company completed a $300.0 million unsecured revolving
credit facility with a group of leading financial institutions. The new facility
has an initial maturity of July 2003, with a one-year extension at the Company's
option and another one-year extension at the lenders' option. The new facility
replaces two prior credit facilities maturing in 2002 and 2003, and bears
interest at LIBOR + 2.125%.
On August 9, 2001, the Company issued $350.0 million of 8.75% senior notes
due in 2008. The notes are unsecured senior obligations of the Company. The
Company used the net proceeds to repay outstanding borrowings under its secured
credit facilities.
On March 29, 2002, the Company extended the maturity of its $500.0 million
secured facility to August 2005, which includes a one-year "term-out" extension
at the Company's option.
On May 28, 2002, the Company fully repaid the then remaining $446.2 million
of bonds outstanding under its STARs, Series 2000-1 financing. Simultaneously, a
wholly-owned subsidiary of the Company issued STARs, Series 2002-1, consisting
of $885.1 million of investment-grade bonds secured by the subsidiary's
structured finance and corporate tenant lease assets, which had an aggregate
outstanding principal balance of approximately $1.1 billion at inception.
Principal payments received on the assets will be utilized to repay the most
senior class of the bonds then outstanding. The maturity of the bonds match
funds the maturity of the underlying assets financed under the program. The
weighted average interest rate on the bonds, on an all-floating rate basis, was
approximately LIBOR + 0.56% at inception. For accounting purposes, this
transaction was treated as a secured financing: the underlying assets and STARs
liabilities remained on the Company's Consolidated Balance Sheets, and no gain
on sale was recognized.
On July 2, 2002, the Company purchased the remaining interest in the
Milpitas joint venture from the former Milpitas external member for
$27.9 million. Upon purchase of the interest, the Milpitas joint venture became
fully consolidated for accounting purposes and approximately $79.1 million of
secured term debt is reflected on the Company's Consolidated Balance Sheets.
On September 30, 2002, the Company closed a new $500.0 million secured
revolving credit facility with a leading financial institution. The new facility
has a three-year term and bears interest at LIBOR + 1.50% to 2.25%, depending
upon the collateral contributed to the borrowing base. The new facility accepts
a broad range of structured finance and corporate tenant assets and has a final
maturity date of September 2005.
On December 11, 2002, the Company closed a $61.5 million term loan financing
with a leading financial institution. The proceeds were used to fund a portion
of an $82.1 million CTL investment. The non-recourse loan is fixed rate and
bears interest at 6.412%, has a maturity date of December 2012 and amortizes
over a 30-year schedule.
67
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
During the years ended December 31, 2002 and 2001, the Company incurred an
extraordinary loss of approximately $12.2 million and $1.6 million,
respectively, as a result of the early retirement of certain debt obligations.
Subsequent to December 31, 2002, the Company modified the terms of the 6.75%
Dealer Remarketable Securities (see Note 17).
As of December 31, 2002, future expected/scheduled maturities of outstanding
long-term debt obligations are as follows (in thousands)(1):
2003........................................................ $ 15,961
2004........................................................ 296,694
2005........................................................ 1,355,965
2006........................................................ 293,000
2007........................................................ 2,975
Thereafter.................................................. 1,509,339
----------
Total principal maturities.................................. 3,473,934
Net unamortized debt discounts.............................. (16,264)
Impact of pay-floating swap agreement....................... 3,920
----------
Total debt obligations...................................... $3,461,590
==========
EXPLANATORY NOTE:
- ------------------------------
(1) Assumes exercise of extensions to the extent such extensions are at the
Company's option.
NOTE 8--SHAREHOLDERS' EQUITY
The Company's charter provides for the issuance of up to 200.0 million shares
of Common Stock, par value $0.001 per share, and 30.0 million shares of
preferred stock. The Company has 4.4 million shares of 9.50% Series A Cumulative
Redeemable Preferred Stock, 2.3 million shares of 9.375% Series B Cumulative
Redeemable Preferred Stock, 1.5 million shares of 9.20% Series C Cumulative
Redeemable Preferred Stock, and 4.6 million shares of 8.00% Series D Cumulative
Redeemable Preferred Stock. The Series A, B, C and D Cumulative Redeemable
Preferred Stock are redeemable without premium at the option of the Company at
their respective liquidation preferences beginning on December 15, 2003,
June 15, 2001, August 15, 2001 and October 8, 2002, respectively.
On December 15, 1998, the Company issued warrants to acquire 6.1 million
shares of Common Stock, as adjusted for dilution, at $34.35 per share. The
warrants are exercisable on or after December 15, 1999 at a price of $34.35 per
share and expire on December 15, 2005.
CONCENTRATION OF SHAREHOLDER OWNERSHIP--On October 30, 2001, SOF IV SMT
Holdings, L.P. ("SOF IV") and certain of its affiliates sold 18.975 million
shares of Common Stock owned by them (including the subsequently-exercised
2.475 million share over-allotment option granted to the underwriters). In
addition, on May 15, 2002, SOF IV sold 10.808 million shares of Common Stock
owned by them (including the subsequently-exercised 808,200 share over-allotment
option granted to the underwriters). Further, on November 14, 2002, SOF IV sold
3.5 million shares of Common Stock owned by them (including the
subsequently-exercised 1.5 million over-allotment option granted to the
underwriters). The Company did not sell any shares in the first two offerings.
In the November 2002 offering, the
68
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--SHAREHOLDERS' EQUITY (CONTINUED)
Company sold 8.0 million primary shares and received net proceeds of
approximately $202.9 million. As a result of the secondary offerings, SOF IV
currently owns approximately 19.84% of the Company's Common Stock (based on the
diluted sharecount as of December 31, 2002).
DRIP PROGRAM--The Company maintains a dividend reinvestment and direct stock
purchase plan. Under the dividend reinvestment component of the plan, the
Company's shareholders may purchase additional shares of Common Stock without
payment of brokerage commissions or service charges by automatically reinvesting
all or a portion of their Common Stock cash dividends. Under the direct stock
purchase component of the plan, the Company's shareholders and new investors may
purchase shares of Common Stock directly from the Company without payment of
brokerage commissions or service charges. All purchases of shares in excess of
$10,000 per month pursuant to the direct purchase component are at the Company's
sole discretion. Shares issued under the plan may reflect a discount of up to
3.00% from the prevailing market price of the Company's Common Stock. The
Company is authorized to issue up to 8.0 million shares of Common Stock pursuant
to the dividend reinvestment and direct stock purchase plan. During the 12-month
periods ended December 31, 2002 and 2001, the Company issued a total of
1.6 million and approximately 195,000 shares of its Common Stock, respectively,
through the direct stock purchase component of the plan. Net proceeds during the
12-month periods ended December 31, 2002 and 2001 were approximately
$44.4 million and $4.7 million, respectively.
STOCK REPURCHASE PROGRAM--The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets or loan
repayments and excess cash flow from operations, but also using borrowings under
its credit facilities if the Company determines that it is advantageous to do
so. As of December 31, 2001, the Company had repurchased a total of
approximately 2.3 million shares at an aggregate cost of approximately
$40.7 million. The Company did not repurchase any shares under the stock
repurchase program in 2002.
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
RISK MANAGEMENT--In the normal course of its on-going business operations,
the Company encounters economic risk. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's
lending investments that results from a property's, borrower's or corporate
tenant's inability or unwillingness to make contractually required payments.
Market risk reflects changes in the value of loans due to changes in interest
rates or other market factors, including the rate of prepayments of principal
and the value of the collateral underlying loans and the valuation of corporate
tenant lease facilities held by the Company.
69
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
USE OF DERIVATIVE FINANCIAL INSTRUMENTS--The Company's use of derivative
financial instruments is primarily limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposure. The
principal objective of such arrangements is to minimize the risks and/or costs
associated with the Company's operating and financial structure as well as to
hedge specific anticipated transactions. The counterparties to these contractual
arrangements are major financial institutions with which the Company and its
affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of nonperformance by these
counterparties. However, because of their high credit ratings, the Company does
not anticipate that any of the counterparties will fail to meet their
obligations.
The Company has entered into the following cash flow and fair value hedges
that are outstanding as of December 31, 2002. The net value associated with
these hedges is reflected on the Company's Consolidated Balance Sheets (in
thousands).
STRIKE ESTIMATED
TYPE OF NOTIONAL PRICE OR TRADE MATURITY VALUE AT
HEDGE AMOUNT SWAP RATE DATE DATE DECEMBER 31, 2002
- ------- -------- --------- -------- -------- -----------------
Pay-Fixed Swap....... $125,000 7.058% 6/15/00 6/25/03 $(3,598)
Pay-Fixed Swap....... 125,000 7.055% 6/15/00 6/25/03 (3,596)
Pay-Fixed Swap....... 75,000 5.580% 11/4/99(1) 12/1/04 (5,743)
Pay-Floating Swap.... 100,000 3.878% 11/27/02 8/15/08 2,761
Pay-Floating Swap.... 50,000 3.810% 11/27/02 8/15/08 1,203
LIBOR Cap............ 345,000 8.000% 5/22/02 5/28/14 12,088
LIBOR Cap............ 75,000 7.750% 11/4/99(1) 12/1/04 21
LIBOR Cap............ 35,000 7.750% 11/4/99(1) 12/1/04 9
-------
Total Estimated Value............................................... $ 3,145
=======
EXPLANATORY NOTE:
- ------------------------------
(1) Acquired in connection with the TriNet Acquisition (see Note 1 to the
Company's Consolidated Financial Statements).
Between January 1, 2001 and December 31, 2002, the Company also had
outstanding the following cash flow hedges that have expired or been settled (in
thousands):
STRIKE
TYPE OF NOTIONAL PRICE OR TRADE MATURITY
HEDGE AMOUNT SWAP RATE DATE DATE
- ------- -------- --------- -------- --------
LIBOR Cap.............................. $300,000 9.000% 3/16/98 3/16/01
Pay-Fixed Swap......................... 92,000 5.714% 8/10/98 3/1/01
LIBOR Cap.............................. 75,000 7.500% 7/16/98 6/19/01
LIBOR Cap.............................. 38,336 7.500% 4/30/98 6/1/01
In connection with STARs, Series 2002-1 in May 2002, the Company entered
into a LIBOR interest rate cap struck at 8.00% in the notional amount of
$345.0 million. The Company utilizes the provisions of SFAS No. 133 with respect
to such instruments. SFAS No. 133 provides that the up-front fees paid on
option-based products such as caps should be expensed into earnings based on the
allocation of the premium to the affected periods as if the agreement were a
series of "caplets." These allocated premiums are then reflected as a charge to
income (as part of interest expense) in the affected period.
On May 28, 2002, in connection with the STARs, Series 2002-1 transaction,
the Company paid a premium of $13.7 million for an interest rate cap. Using the
"caplet" methodology discussed above, amortization of the cap premium is
dependent upon the actual value of the caplets at inception.
70
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
In connection with STARs, Series 2000-1 in May 2000, the Company entered
into a LIBOR interest rate cap struck at 10.00% in the notional amount of
$312.0 million, and simultaneously sold a LIBOR interest rate cap with the same
terms. Since these instruments did not change the Company's net interest rate
risk exposure, they did not qualify as hedges and changes in their respective
values were charged to earnings. As the terms of these arrangements were
substantially the same, the effects of a revaluation of these two instruments
substantially offset one another. On May 28, 2002, these instruments were
settled and are no longer outstanding.
In connection with the Company's $350.0 million of fixed-rate corporate
bonds, the Company entered into two pay-floating interest rate swaps struck at
3.8775% and 3.81% and in the notional amounts of $100.0 million and
$50.0 million, respectively. The Company pays one-month LIBOR and receives the
fixed rate in return. These swaps mitigate the risk of changes in the fair value
of $150.0 million of the Company's fixed-rate corporate bonds attributable to
changes in LIBOR. For accounting purposes, the difference between the fixed rate
received and the LIBOR rate paid on the notional amount of the swap is recorded
as "Interest expense" in the Company's Consolidated Statements of Operations. In
addition, quarterly the Company adjusts the value of the swap to its fair value
and adjusts the carrying amount of the hedged liability by an offsetting amount.
During the year ended December 31, 1999, the Company settled an aggregate
notional amount of approximately $63.0 million that was outstanding under
certain hedging agreements which the Company had entered into in order to hedge
the potential effects of interest rate movements on anticipated fixed-rate
borrowings. The settlement of such agreements resulted in a receipt of
approximately $0.6 million which had been deferred pending completion of the
planned fixed-rate financing transaction. Subsequently, the transaction was
modified and was actually consummated as a variable-rate financing transaction.
As a result, the previously deferred receipt no longer qualified for hedge
accounting treatment and the $0.6 million was recognized as a gain included in
"Other income" in the Company's Consolidated Statements of Operations for the
year ended December 31, 2000 in connection with the closing of STARs,
Series 2000-1 in May 2000.
During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented forecasted transactions for which the Company had
previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of such hedges has been deferred and is
being amortized as an increase to the effective financing cost of the new term
loan over its effective ten-year term.
CREDIT RISK CONCENTRATIONS--Concentrations of credit risks arise when a
number of borrowers or customers related to the Company's investments are
engaged in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their ability to meet
contractual obligations, including those to the Company, to be similarly
affected by changes in economic conditions. The Company regularly monitors
various segments of its portfolio to assess potential concentrations of credit
risks. Management believes the current credit risk portfolio is reasonably well
diversified and does not contain any unusual concentration of credit risks.
Substantially all of the Company's corporate tenant lease assets (including
those held by joint ventures) and loans and other lending investments are
collateralized by facilities located in the United States, with significant
concentrations (i.e., greater than 10.00%) as of December 31, 2002 in California
71
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
(22.72%) and Texas (10.32%). As of December 31, 2002, the Company's investments
also contain greater than 10.00% concentrations in the following asset types:
office-CTL (27.42%), office-lending (19.67%), industrial (15.00%) and
hotel-lending (11.99%).
The Company underwrites the credit of prospective borrowers and customers
and often requires them to provide some form of credit support such as corporate
guarantees, letters of credit and/or cash security deposits. Although the
Company's loans and other lending investments and corporate customer lease
assets are geographically diverse and the borrowers and customers operate in a
variety of industries, to the extent the Company has a significant concentration
of interest or operating lease revenues from any single borrower or customer,
the inability of that borrower or customer to make its payment could have an
adverse effect on the Company. As of December 31, 2002, the Company's five
largest borrowers or corporate tenants collectively accounted for approximately
15.67% of the Company's aggregate annualized interest and operating lease
revenue.
NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS
The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to
provide incentive compensation for officers, other key employees and directors
of the Company. The Plan provides for awards of stock options and shares of
restricted stock and other performance awards. The maximum number of shares of
Common Stock available for awards under the Plan is 9.00% of the outstanding
shares of Common Stock, calculated on a fully diluted basis, from time to time;
provided that the number of shares of Common Stock reserved for grants of
options designated as incentive stock options is 5.0 million, subject to certain
antidilution provisions in the Plan. All awards under the Plan, other than
automatic awards to non-employee directors, are at the discretion of the Board
or a committee of the Board. At December 31, 2002, a total of approximately
9.1 million shares of Common Stock were available for awards under the Plan, of
which options to purchase approximately 4.3 million shares of Common Stock were
outstanding and approximately 330,000 shares of restricted stock were
outstanding.
In March 1998, the Company issued approximately 2.5 million (as adjusted)
fully vested and immediately exercisable options to purchase shares of Common
Stock at $14.72 per share (as adjusted) to its former advisor with a term of ten
years. The former advisor granted a portion of these options to its employees
and the remainder was allocated to an affiliate. Upon the Company's acquisition
of its former advisor, these individuals became employees of the Company. In
general, the grants to these employees provided for scheduled vesting over a
predefined service period of three to five years and, under certain conditions,
provide for accelerated vesting. These options expire on March 15, 2008.
72
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
Changes in options outstanding during each of fiscal 2000, 2001 and 2002 are
as follows:
NUMBER OF SHARES
------------------------------------- AVERAGE
NON-EMPLOYEE STRIKE
EMPLOYEES DIRECTORS OTHER PRICE
---------- ------------ --------- --------
OPTIONS OUTSTANDING, DECEMBER 31, 1999............ 2,778,252 146,379 881,163 $19.03
Granted in 2000................................. 1,852,059 80,000 80,000 $17.34
Exercised in 2000............................... (412,734) -- -- $15.67
Forfeited in 2000............................... (682,005) -- -- $25.47
---------- -------- ---------
OPTIONS OUTSTANDING, DECEMBER 31, 2000............ 3,535,572 226,379 961,163 $18.97
Granted in 2001................................. 1,618,400 90,000 100,000 $20.31
Exercised in 2001............................... (1,262,811) (20,000) (25,000) $16.48
Forfeited in 2001............................... (107,939) -- -- $27.27
---------- -------- ---------
OPTIONS OUTSTANDING, DECEMBER 31, 2001............ 3,783,222 296,379 1,036,163 $18.98
Granted in 2002................................. -- 90,000 -- $27.83
Exercised in 2002............................... (488,674) (190,650) (164,683) $18.63
Forfeited in 2002............................... (17,406) (4,600) -- $24.87
---------- -------- ---------
OPTIONS OUTSTANDING, DECEMBER 31, 2002............ 3,277,142 191,129 871,480
========== ======== =========
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2002:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE CURRENTLY EXERCISE
EXERCISE PRICE RANGE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- ----------- ----------- -------- ----------- --------
$14.72--$15.00(1) 1,000,213 5.62 $14.72 751,618 $14.72
$16.69--$16.88 716,207 7.02 $16.86 350,586 $16.87
$17.38--$17.56 422,490 7.22 $17.39 256,658 $17.40
$19.63--$19.69 1,536,584 8.08 $19.69 426,763 $19.69
$20.00--$21.44 138,466 7.28 $20.91 82,984 $20.92
$22.44 13,333 7.75 $22.44 6,667 $22.44
$23.32--$23.64 43,901 1.37 $23.53 31,316 $23.52
$24.13--$24.94 183,700 5.05 $24.54 183,034 $24.54
$25.10--$26.09 14,800 3.74 $26.02 14,134 $26.06
$26.30--$26.97 77,900 1.60 $26.80 76,567 $26.80
$27.00 25,000 8.48 $27.00 8,334 $27.00
$28.54--$29.82 90,188 8.94 $29.68 90,188 $29.68
$30.33 67,275 0.40 $30.33 67,275 $30.33
$33.70 4,600 0.01 $33.70 4,600 $33.70
$55.39 5,094 6.42 $55.39 5,094 $55.39
--------- ----- ------ --------- ------
4,339,751 6.79 $18.77 2,355,818 $19.00
========= ===== ====== ========= ======
EXPLANATORY NOTE:
- ------------------------------
(1) Includes approximately 764,000 options which were granted, on a fully
exercisable basis, in March 1998, and which are now held by an affiliate of
SOF IV. Beneficial interests in these options were subsequently regranted by
that affiliate to employees of it and its affiliates, subject to vesting
requirements. In the event that these employees forfeit such options, they
revert to an affiliate of SOF IV, which may regrant them at its discretion.
As of December 31, 2002, approximately 468,000 of these options have become
exercisable by the beneficial owners. Of this total, approximately 288,000
have been exercised as of December 31, 2002.
73
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
In the third quarter 2002 (with retroactive application to the beginning of
the calendar year), the Company adopted the fair value method for accounting for
options issued to employees or directors, as allowed under Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, the Company recognizes a charge equal to
the fair value of these options at the date of grant multiplied by the number of
options issued. This charge will be amortized over the related remaining vesting
terms to individual employees as additional compensation. The impact for options
issued since January 1, 2002 is approximately $110,000, which is reflected under
"General and administrative--stock-based compensation" on the Company's
Consolidated Statements of Operations.
Prior to the third quarter 2002, the Company had elected to use the
intrinsic method for accounting for options issued to employees or directors, as
allowed under SFAS No. 123 and, accordingly, recognized no expense in connection
with these options to the extent that the options' exercise prices equaled or
exceeded the quoted prices of the Company's shares of Common Stock on the grant
or investment dates. However, in connection with the acquisition of the
Company's former external advisor, the Company recognized a deferred stock-based
compensation charge of approximately $5.1 million. This deferred charge
represents the difference between the Company's closing stock price on the date
it acquired its former external advisor (which was $20.25), and the strike price
of $14.72 per share (as adjusted) for the unvested portion of the options
granted to the former external advisor's employees, who are now employees of the
Company. This deferred charge is being amortized over the related remaining
vesting terms to the individual employees as an additional expense under
"General and administrative--stock-based compensation" on the Company's
Consolidated Statements of Operations.
If the Company's compensation costs had been determined using the fair value
method of accounting for stock options issued under the Plan to employees and
directors prescribed by SFAS No. 123 prior to 2002, the Company's net income for
the fiscal years ended December 31, 2002, 2001 and 2000 would have been reduced
on a pro forma basis by approximately $565,000, $705,000 and $275,000
respectively. This would not have significantly impacted the Company's earnings
per share.
The fair value of each significant option grant is estimated on the date of
grant (May 29, 2002 for the 2002 options) using the Black-Scholes model. For the
above SFAS No. 123 calculation, the following assumptions were used for the
Company's fair value calculations of stock options:
2002 2001 2000
-------- -------- --------
Expected life (in years)...................... 5 5 5
Risk-free interest rate....................... 4.38% 4.96% 5.30%
Volatility.................................... 16.23% 20.83% 26.80%
Dividend yield................................ 8.45% 12.00% 13.50%
Weighted average grant date fair value........ $ 1.38 $ 0.76 $ 0.46
Future charges may be taken to the extent of additional option grants, which
are at the discretion of the Board of Directors.
During the 12 months ended December 31, 2002, the Company granted 194,558
restricted shares to employees. Of these shares, 39,558 will vest
proportionately over three years on the anniversary date of the initial grant.
The balance of 155,000 restricted shares will vest on March 31, 2004 if:
(1) the employee remains employed until that date; and (2) the 60-day average
closing price of the Company's Common Stock equals or exceeds a set floor price
as of such date. Dividends will be paid on the restricted shares as dividends
are paid on shares of the Company's Common Stock. Assuming the shares become
fully vested
74
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
on March 31, 2004 and the market price of the stock is $28.05 (which was the
market price of the Common Stock on December 31, 2002), the Company would incur
a one-time charge to both net income and earning at that time equal to
$4.3 million (the fair market value of the 155,000 shares at $28.05 per share).
During the 12 months ended December 31, 2002, the Company also granted 208,980
restricted shares to its Chief Financial Officer (see detailed information
below).
During the year ended December 31, 2001, the Company granted 94,943
restricted shares to employees in lieu of cash bonuses for the year ended
December 31, 2000 at the employees' election. These restricted shares were
immediately vested on the date of grant and were not transferable for a period
of one year following vesting.
During the year ended December 31, 2000, the Company granted 140,402
restricted shares to employees. Of this total, 71,752 restricted shares were
granted in lieu of cash bonuses at the employees' election, were immediately
vested on the date of grant, and were not transferable for a period of one year
following vesting. An additional 68,650 of such restricted shares vest over
periods ranging from one to three years following the date of grant and are
transferable upon vesting.
For accounting purposes, the Company measures compensation costs for these
shares, not including the contingently issuable shares, as of the date of the
grant and expenses such amounts against earnings, either at the grant date (if
no vesting period exists) or ratably over the respective vesting period. Such
amounts appear on the Company's Consolidated Statements of Operations under
"General and administrative--stock-based compensation expense."
During the year ended December 31, 2002, the Company entered into a
three-year employment agreement with its new Chief Financial Officer. Under the
agreement, the Chief Financial Officer receives an annual base salary of
$225,000. She may also receive a bonus, which is targeted to be $325,000,
subject to an annual review for upward or downward adjustment. In addition, the
Company granted the Chief Financial Officer 108,980 contingently vested
restricted stock awards. These awards become vested on December 31, 2005 if the
executive's employment with the Company has not terminated before such date.
Dividends will be paid on the restricted shares as dividends are paid on shares
of the Company's Common Stock. For accounting purposes, the Company will take a
total charge of approximately $3.0 million related to the restricted stock
awards, which will be amortized over the period from November 6, 2002 through
December 31, 2005. This charge is reflected on the Company's Consolidated
Statements of Operations under "General and administrative--stock-based
compensation."
Further, the Company granted the Chief Financial Officer 100,000 restricted
shares which vest in whole or in part if the Company's shareholders realize
total rates of shareholder return (dividends plus share price appreciation) of
between 0.00% and 20.00%, achieved by the Company between January 2, 2003 and
January 31, 2004. Vested shares would be subject to forfeiture if the
executive's employment with the Company terminated under certain circumstances.
Assuming the shares became fully vested on January 31, 2004 and the market price
of the stock is $28.05 (which was the market price of the Common Stock on
December 31, 2002), the Company would incur a one-time charge to both net income
and earnings at that time equal to $2.8 million (the fair market value of the
100,000 shares at $28.05 per share). For accounting purposes, the employment
arrangement described above is treated as a contingent, variable plan until
January 31, 2004.
During the year ended December 31, 2001, the Company entered into a new
three-year employment agreement with its Chief Executive Officer. Under the
agreement, the Chief Executive Officer receives an annual base salary of
$1.0 million. He may also receive a bonus, which is targeted to be an amount
equal to
75
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
his base salary, if the Company achieves certain performance targets set by the
Compensation Committee. The bonus award may be increased or reduced from the
target depending upon the degree to which the performance goals are exceeded or
are not met, and may not exceed 200.00% of his base salary. The bonus is reduced
by the amount of any dividends paid to the Chief Executive Officer in respect of
phantom shares (described below) which are awarded to him and have contingently
vested. The Chief Executive Officer received approximately $2.1 million in such
dividends in 2002. As such, no additional bonus was paid. As part of this
agreement, the Company confirmed a prior grant of 750,000 stock options made to
the executive on March 2, 2001 with an exercise price of $19.69, which
represented the market price at the date of the original contingent grant.
However, because the grant required further approval by the Compensation
Committee and the Board of Directors, no measurement date occurred for
accounting purposes until such approvals were made, at which point the market
price of the Company's Common Stock was $24.90. Accordingly, an aggregate charge
of approximately $3.9 million is being recognized with respect to these options
over the term of this agreement and is reflected on the Company's Consolidated
Statements of Operations under "General and administrative--stock-based
compensation." These options will vest in three equal installments of 250,000
shares in each January beginning in January 2002.
The Company also granted the executive 2.0 million unvested phantom shares,
each of which represents one share of the Company's Common Stock. These shares
will vest in installments of 350,000 shares, 650,000 shares, 600,000 shares and
400,000 shares on a contingent basis if the 60-day average closing price of the
Company's Common Stock achieves thresholds of $25.00, $30.00, $34.00 and $37.00,
respectively. As of December 31, 2002, the $25.00 and $30.00 thresholds have
been attained, and a total of 1.0 million of these shares have contingently
vested. Assuming that the market price of the Common Stock on March 31, 2004) is
$28.05 (which was the market price of the Common Stock on December 31, 2002),
the Company would incur a one-time charge to both net income and earnings at
that time equal to $28.0 million (the fair market value of the
1.0 million shares at $28.05 per share). Shares that have contingently vested
generally will not become fully vested until the end of the three-year term of
the agreement, except upon certain termination or change of control events.
Further, if the average stock price drops below certain specified levels for a
60-day period prior to such date, such phantom shares would not fully vest and
would be forfeited. If the Company is not authorized to issue shares to the
executive upon full vesting of the phantom shares, then the vesting will be
settled through a cash payment based upon the market price of the Common Stock
during a recent trading period. The executive will receive dividends on shares
that have contingently or fully vested and have not been forfeited under the
terms of the agreement, if and when the Company declares and pays dividends on
its Common Stock. Because no shares have been issued, dividends received on
these phantom shares, if any, will be reflected as compensation expense by the
Company. For accounting purposes, this arrangement will be treated as a
contingent, variable plan and no additional compensation expense will be
recognized until the shares, in whole or in part, become irrevocably vested,
whereupon the Company will reflect a charge equal to the then fair value of the
phantom shares irrevocably vested.
In addition, during the year ended December 31, 2001, the Company entered
into a three-year employment agreement with its former President. Under the
agreement, in lieu of salary and bonus, the Company granted the executive
500,000 restricted shares. These shares became fully-vested on September 30,
2002 as a result of the Company achieving a 60.00% total shareholder rate of
return (dividends plus share price appreciation) since January 1, 2001. Upon the
restricted shares becoming fully vested, the Company withheld 250,000 of such
shares from the executive to cover the tax obligations associated with the
vesting of such shares. These shares are reflected as "Treasury stock" on the
Company's Consolidated Statements of Changes in Shareholders' Equity. For
accounting purposes, the
76
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
employment arrangement described above was treated as a contingent, variable
plan until the April 29, 2002 contingent vesting date. The Company incurred a
total non-cash charge of approximately $15.0 million related to the vesting of
the shares, recognized ratably over the period from April 29, 2002 through
September 30, 2002. Accordingly, the non-cash charge recognized for the
12 months ended December 31, 2002 was approximately $15.0 million.
The executive received dividends on the share grant from the date of the
agreement as and when the Company declared and paid dividends on its Common
Stock. For financial statement purposes, such dividends were accounted for in a
manner consistent with the Company's normal Common Stock dividends as a
reduction to retained earnings.
Certain affiliates of SOF IV and the Company's Chief Executive Officer have
agreed to reimburse the Company for the value of restricted shares awarded to
the President in excess of 350,000 shares, net of tax benefits realized by the
Company or its shareholders on account of compensation expense deductions. The
reimbursement obligation arose once the restricted share award became fully
vested on September 30, 2002. In the case of the SOF IV affiliates, the
reimbursement payment must be made through the delivery of approximately
$2.4 million in cash or 131,250 shares of Common Stock. As of December 31, 2002,
the SOF IV affiliates have paid approximately $506,000 in cash, which is
reflected as "Additional paid-in capital" on the Company's Consolidated Balance
Sheets. In the case of the Chief Executive Officer, the reimbursement payment
was made through the delivery of 12,343 vested shares of Common Stock as of
December 31, 2002. These reimbursement payments are reflected as "Additional
paid-in capital" on the Company's Consolidated Balance Sheets, and not as an
offset to the non-cash charge referenced above.
On July 28, 2000, the Company granted to its employees profits interests in
a wholly-owned subsidiary of the Company called iStar Venture Direct Holdings,
LLC. At December 31, 2002, iStar Venture Direct Holdings, LLC had a net
investment of approximately $606,000 in the preferred stock of a real estate-
related software company. The profits interests have three-year vesting
schedules, and are subject to forfeiture in the event of termination of
employment for cause or a voluntary resignation. The Company currently estimates
that the profits interests have minimal or no value.
HIGH PERFORMANCE UNIT PROGRAM
In May 2002, the Company's shareholders approved the iStar Financial High
Performance Unit Program. The program, as more fully described in the Company's
annual proxy statement dated April 8, 2002, is a performance-based employee
compensation plan that only has material value to the participants if the
Company provides superior returns to its shareholders. The program entitles the
employee participants to receive cash distributions in the nature of common
stock dividends if the total rate of return on the Company's Common Stock (share
price appreciation plus dividends) exceeds certain performance levels.
Initially, there were three plans within the program: the 2002 plan, the
2003 plan, and the 2004 plan. Each plan has 5,000 shares of High Performance
Common Stock associated with it. Each share of High Performance Common Stock
carries 0.25 votes per share.
For these three plans, the Company's performance is measured over a one-,
two-, or three-year valuation period, beginning on January 1, 2002 and ending on
December 31, 2002, December 31, 2003 and December 31, 2004, respectively. The
end of the valuation period (i.e., the "valuation date") will be accelerated if
there is a change in control of the Company. The High Performance Common Stock
has a nominal value unless the total rate of shareholder return for the relevant
valuation period exceeds the greater of: (1) 10.00%, 20.00%, or 30.00% for the
2002 plan, the 2003 plan and the 2004 plan, respectively;
77
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
and (2) a weighted industry index total rate of return consisting of equal
weightings of the Russell 1000 Financial Index and the Morgan Stanley REIT Index
for the relevant period.
If the total rate of return on the Company's Common Stock exceeds the
threshold performance levels for a particular plan, then distributions will be
paid on the shares of High Performance Common Stock related to that plan in the
same amounts and at the same times as distributions are paid on a number of
shares of the Company's Common Stock equal to the following: 7.50% of the
Company's excess total rate of return (over the higher of the two threshold
performance levels) multiplied by the weighted average market value of the
Company's common equity capitalization during the measurement period, all as
divided by the average closing price of a share of the Company's Common Stock
for the 20 trading days immediately preceding the applicable valuation date.
If the total rate of return on the Company's Common Stock does not exceed
the threshold performance levels for a particular plan, then the shares of High
Performance Common Stock related to that plan will have only nominal value. In
this event, each of the 5,000 shares will be entitled to dividends equal to 0.01
times the dividend paid on a share of Common Stock, if and when dividends are
declared on the common stock.
Regardless of how much the Company's total rate of return exceeds the
threshold performance levels, the dilutive impact to the Company's shareholders
resulting from distributions on High Performance Common Stock in each plan is
limited to 1.00% of the number of shares of the Company's Common Stock
outstanding, on a fully diluted basis, on the valuation date for each plan.
The employee participants have purchased their interests in High Performance
Common Stock through a limited liability company at purchase prices approved by
the Company's Board of Directors. The Company's Board has established the prices
of the High Performance Common Stock based upon, among other things, an
independent valuation from a major securities firm. The aggregate initial
purchase prices were set on June 25, 2002 and were approximately $2.8 million,
$1.8 million and $1.3 million for the 2002, 2003 and 2004 plans, respectively.
No employee is permitted to exchange his or her interest in the LLC for shares
of High Performance Common Stock prior to the applicable valuation date.
The total shareholder return for the valuation period under the 2002 plan
was 21.94%, which exceeded both the fixed performance threshold of 10.00% and
the industry index return of (5.83%). As a result of this superior performance,
the participants in the 2002 plan are entitled to receive cash distributions
equivalent to the amount of cash dividends payable on 819,254 shares of the
Company's Common Stock, as and when such dividends are paid. Such dividend
payments begin with the first quarter 2003 dividend and will reduce net income
allocable to common shareholders when paid. The Company will pay dividends on
the 2002 plan shares in the same amount per share and on the same distribution
dates that shares of the Company's Common Stock are paid. The Company has the
right, but not the obligation, to repurchase at cost 50.00% of the interests
earned by an employee in the 2002 plan if the employee breaches certain
non-competition, non-solicitation and confidentiality covenants through January
1, 2005.
A new 2005 plan has been established with a three-year valuation period
ending December 31, 2005. Awards under the 2005 plan were approved on
January 14, 2003. The 2005 plan has 5,000 shares of High Performance Common
Stock with an aggregate initial purchase price of $573,000. The provisions of
the 2005 plan are substantially the same as the prior plans.
The additional equity from the issuance of the High Performance Common Stock
is recorded as a separate class of stock and included within shareholders'
equity. Future distributions, if any, will be deducted from net income available
for common shareholders.
78
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
401(K) PLAN
Effective November 4, 1999, the Company implemented a savings and retirement
plan (the "401(k) Plan"), which is a voluntary, defined contribution plan. All
employees are eligible to participate in the 401(k) Plan following completion of
three months of continuous service with the Company. Each participant may
contribute on a pretax basis between 2.00% and 15.00% of such participant's
compensation. At the discretion of the Board of Directors, the Company may make
matching contributions on the participant's behalf of up to 50.00% of the first
10.00% of the participant's annual compensation. The Company made gross
contributions of approximately $356,000, $319,000 and $320,000 to the 401(k)
Plan for the years ended December 31, 2002, 2001 and 2000, respectively.
79
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted EPS calculations for the years ended
December 31, 2002, 2001 and 2000, respectively (in thousands, except per share
data):
2002 2001 2000
-------- -------- --------
Numerator:
Net income before income from discontinued operations,
gain from discontinued operations, extraordinary loss
and cumulative effect of change in accounting
principle............................................... $223,136 $225,370 $212,188
Preferred dividend requirements........................... (36,908) (36,908) (36,908)
-------- -------- --------
Net income allocable to common shareholders before income
from discontinued operations, gain from discontinued
operations, extraordinary loss and cumulative effect of
change in accounting principle.......................... 186,228 188,462 175,280
Income from discontinued operations....................... 3,583 5,299 3,155
Gain from discontinued operations......................... 717 1,145 2,948
Extraordinary loss on early extinguishment of debt........ (12,166) (1,620) (705)
Cumulative effect of change in accounting principle....... -- (282) --
-------- -------- --------
Net income allocable to common shareholders............... $178,362 $193,004 $180,678
======== ======== ========
Denominator:
Weighted average common shares outstanding for basic
earnings per common share............................... 89,886 86,349 85,441
Add: effect of assumed shares issued under treasury stock
method for stock options and restricted shares.......... 1,645 1,680 710
Add: effect of contingent shares.......................... 1,118 205 --
-------- -------- --------
Weighted average common shares outstanding for diluted
earnings per common share............................... 92,649 88,234 86,151
======== ======== ========
Basic earnings per common share:
Net income allocable to common shareholders before income
from discontinued operations, gain from discontinued
operations, extraordinary loss and cumulative effect of
change in accounting principle.......................... $ 2.07 $ 2.18 $ 2.05
Income from discontinued operations....................... 0.04 0.06 0.04
Gain from discontinued operations......................... 0.01 0.02 0.03
Extraordinary loss on early extinguishment of debt........ (0.14) (0.02) (0.01)
Cumulative effect of change in accounting principle....... -- (0.00) --
-------- -------- --------
Net income allocable to common shareholders............... $ 1.98 $ 2.24 $ 2.11
======== ======== ========
Diluted earnings per common share:
Net income allocable to common shareholders before income
from discontinued operations, gain from discontinued
operations, extraordinary loss and cumulative effect of
change in accounting principle.......................... $ 2.01 $ 2.14 $ 2.04
Income from discontinued operations....................... 0.04 0.06 0.04
Gain from discontinued operations......................... 0.01 0.01 0.03
Extraordinary loss on early extinguishment of debt........ (0.13) (0.02) (0.01)
Cumulative effect of change in accounting principle....... -- (0.00) --
-------- -------- --------
Net income allocable to common shareholders............... $ 1.93 $ 2.19 $ 2.10
======== ======== ========
80
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EARNINGS PER SHARE (CONTINUED)
In addition, there were approximately 167,000, 261,000 and 632,000 stock
options, 6.1 million, 6.1 million and 6.1 million warrants and 371,000, 373,000
and 373,000 joint venture shares that were antidilutive for the 12-month periods
ended December 31, 2002, 2001 and 2000, respectively.
NOTE 12--COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items currently reported as changes in the shareholders' equity section
of the balance sheet and establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income shall be reported in the financial statements in the period in which they
are recognized. Furthermore, a total amount for comprehensive income shall be
displayed in the financial statements. The Company has adopted this standard
effective January 1, 1998. Total comprehensive income was $228.1 million,
$214.8 million and $217.8 million for the years ended December 31, 2002, 2001
and 2000, respectively. The primary components of comprehensive income other
than net income consist of amounts attributable to the adoption and continued
application of SFAS No. 133 to the Company's cash flow hedges and changes in the
fair value of the Company's available-for-sale investments.
For the years ended December 31, 2002 and 2001, the change in fair market
value of the Company's cash flow hedges and fair value hedges was an increase of
$5.2 million and a decrease of $11.3 million, respectively, and was recorded as
an adjustment to other comprehensive income. The reconciliation to other
comprehensive income is as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Net income.................................................. $215,270 $229,912 $217,586
Other comprehensive income:
Unrealized gains on available-for-sale investments........ 7,601 5,709 209
Cumulative effect of change in accounting principle (SFAS
No. 133) on other comprehensive income.................. -- (9,445) --
Unrealized gains (losses) on cash flow and fair value
hedges.................................................. 5,190 (11,336) --
-------- -------- --------
Comprehensive income........................................ $228,061 $214,840 $217,795
======== ======== ========
Unrealized gains on available-for-sale investments are recorded as
adjustments to shareholders' equity (through "Accumulated other comprehensive
income" on the Company's Consolidated Balance Sheets), and are not included in
adjusted earnings or net income unless realized.
81
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--COMPREHENSIVE INCOME (CONTINUED)
As of December 31, 2002 and 2001, accumulated other comprehensive income
reflected in the Company's shareholders' equity is comprised of the following
(in thousands):
AS OF DECEMBER 31,
-------------------
2002 2001
-------- --------
Unrealized gains on available-for-sale investments.......... $ 13,290 $ 5,689
Unrealized losses on cash flow and fair value hedges........ (15,591) (20,781)
-------- --------
Accumulated other comprehensive income (loss)............... $ (2,301) $(15,092)
======== ========
NOTE 13--DIVIDENDS
In order to maintain its election to qualify as a REIT, the Company must
currently distribute, at a minimum, an amount equal to 90.00% of its taxable
income and must distribute 100.00% of its taxable income to avoid paying
corporate federal income taxes. The Company anticipates it will distribute all
of its taxable income to its shareholders. Because taxable income differs from
cash flow from operations due to non-cash revenues or expenses (such as
depreciation), in certain circumstances, the Company may generate operating cash
flow in excess of its dividends or, alternatively, may be required to borrow to
make sufficient dividend payments.
For the year ended December 31, 2002, total dividends declared by the
Company aggregated $231.3 million, or $2.52 per common share, consisting of
quarterly dividends of $0.63 per share which were declared on April 1, 2002,
July 1, 2002, October 1, 2002 and December 2, 2002. The Company also declared
dividends aggregating $20.9 million, $4.7 million, $3.0 million and
$8.0 million, respectively, on its Series A, B, C and D preferred stock,
respectively, for the year ended December 31, 2002. There are no divided
arrearages on any of the preferred shares currently outstanding.
The Series A preferred stock has a liquidation preference of $50.00 per
share and carries an initial dividend yield of 9.50% per annum. The dividend
rate on the preferred shares will increase to 9.75% on December 15, 2005, to
10.00% on December 15, 2006 and to 10.25% on December 15, 2007 and thereafter.
Dividends on the Series A preferred shares are payable quarterly in arrears and
are cumulative.
Holders of shares of the Series B preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.375% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.34 per share. Dividends are cumulative from the date of
original issue and are payable quarterly in arrears on or before the 15th day of
each March, June, September and December or, if not a business day, the next
succeeding business day. Any dividend payable on the Series B preferred stock
for any partial dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as of the close of business on the first day of the calendar month in
which the applicable dividend payment date falls or on another date designated
by the Board of Directors of the Company for the payment of dividends that is
not more than 30 nor less than ten days prior to the dividend payment date.
Holders of shares of the Series C preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.20% per annum of the $25.00 liquidation preference, equivalent to a fixed
82
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--DIVIDENDS (CONTINUED)
annual rate of $2.30 per share. The remaining terms relating to dividends of the
Series C preferred stock are substantially identical to the terms of the
Series B preferred stock described above.
Holders of shares of the Series D preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 8.00% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.00 per share. The remaining terms relating to dividends of the
Series D preferred stock are substantially identical to the terms of the
Series B preferred stock described above.
The 2002 High Performance Common Stock plan reached its valuation date on
December 31, 2002 and shares of High Performance Common Stock, equivalent to
819,254 shares of Common Stock became vested. The Company will pay dividends on
these units in the same amount per share and on the same distribution dates as
shares of the Company's Common Stock. Such dividends payments begin with the
first quarter 2003 dividend and will reduce net income allocable to common
shareholders when paid.
The exact amount of future quarterly dividends to common shareholders will
be determined by the Board of Directors based on the Company's actual and
expected operations for the fiscal year and the Company's overall liquidity
position.
NOTE 14--FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS
No. 107"), requires the disclosure of the estimated fair values of financial
instruments. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Quoted market prices, if available,
are utilized as estimates of the fair values of financial instruments. Because
no quoted market prices exist for a significant part of the Company's financial
instruments, the fair values of such instruments have been derived based on
management's assumptions, the amount and timing of future cash flows and
estimated discount rates. The estimation methods for individual classifications
of financial instruments are described more fully below. Different assumptions
could significantly affect these estimates. Accordingly, the net realizable
values could be materially different from the estimates presented below. The
provisions of SFAS No. 107 do not require the disclosure of the fair value of
non-financial instruments, including intangible assets or the Company's
corporate tenant lease assets.
In addition, the estimates are only indicative of the value of individual
financial instruments and should not be considered an indication of the fair
value of the Company as an operating business.
SHORT-TERM FINANCIAL INSTRUMENTS--The carrying values of short-term
financial instruments including cash and cash equivalents and short-term
investments approximate the fair values of these instruments. These financial
instruments generally expose the Company to limited credit risk and have no
stated maturities, or have an average maturity of less than 90 days and carry
interest rates which approximate market.
LOANS AND OTHER LENDING INVESTMENTS--For the Company's interests in loans
and other lending investments, the fair values were estimated by discounting the
future contractual cash flows (excluding participation interests in the sale or
refinancing proceeds of the underlying collateral) using estimated current
market rates at which similar loans would be made to borrowers with similar
credit ratings for the same remaining maturities.
83
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
MARKETABLE SECURITIES--Securities held for investment, securities available
for sale, loans held for sale, trading account instruments, long-term debt and
trust preferred securities traded actively in the secondary market have been
valued using quoted market prices.
OTHER FINANCIAL INSTRUMENTS--The carrying value of other financial
instruments including, restricted cash, accrued interest receivable, accounts
payable, accrued expenses and other liabilities approximate the fair values of
the instruments.
DEBT OBLIGATIONS--A substantial portion of the Company's existing debt
obligations bear interest at fixed margins over LIBOR. Such margins may be
higher or lower than those at which the Company could currently replace the
related financing arrangements. Other obligations of the Company bear interest
at fixed rates, which may differ from prevailing market interest rates. As a
result, the fair values of the Company's debt obligations were estimated by
discounting current debt balances from December 31, 2002 and 2001 to maturity
using estimated current market rates at which the Company could enter into
similar financing arrangements.
INTEREST RATE PROTECTION AGREEMENTS--The fair value of interest rate
protection agreements such as interest rate caps, floors, collars and swaps used
for hedging purposes (see Note 9) is the estimated amount the Company would
receive or pay to terminate these agreements at the reporting date, taking into
account current interest rates and current creditworthiness of the respective
counterparties.
The book and fair values of financial instruments as of December 31, 2002
and 2001 were (in thousands):
2002 2001
----------------------- -----------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
FINANCIAL ASSETS:
Loans and other lending investments......... $3,079,592 $3,301,452 $2,398,763 $2,508,119
Marketable securities....................... 35 35 285 285
Provision for loan losses................... (29,250) (29,250) (21,000) (21,000)
FINANCIAL LIABILITIES:
Debt obligations............................ 3,461,590 $3,500,927 2,495,369 2,506,046
Interest rate protection agreements......... 3,145 3,145 (18,925) (18,925)
NOTE 15--SEGMENT REPORTING
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131")
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected financial information about operating
segments in interim financial reports issued to shareholders.
The Company has two reportable segments: Real Estate Lending and Corporate
Tenant Leasing. The Company does not have substantial foreign operations. The
accounting policies of the segments are the same as those described in Note 3.
The Company has no single customer that accounts for more than 4.03% of revenues
(see Note 9 for other information regarding concentrations of credit risk).
84
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT REPORTING (CONTINUED)
The Company evaluates performance based on the following financial measures
for each segment:
CORPORATE
REAL ESTATE TENANT CORPORATE/ COMPANY
LENDING LEASING OTHER (1) TOTAL
----------- ---------- ---------- ----------
(IN THOUSANDS)
2002:
Total revenues(2):.............................. $ 279,158 $ 246,890 $ (324) $ 525,724
Equity in earnings from joint ventures and
unconsolidated subsidiaries:.................. -- 5,081 (3,859) 1,222
Total operating and interest expense(3):........ 94,274 105,607 103,767 303,648
Net operating income before minority
interests(4):................................. 184,884 146,364 (107,950) 223,298
Total long-lived assets(5):..................... 3,050,342 2,291,805 N/A 5,342,147
Total assets:................................... 3,126,219 2,442,087 43,391 5,611,697
2001:
Total revenues(2):.............................. $ 282,802 $ 188,688 $ (371) $ 471,119
Equity in earnings from joint ventures and
unconsolidated subsidiaries:.................. -- 9,617 (2,256) 7,361
Total operating and interest expense(3):........ 109,568 77,481 65,843 252,892
Net operating income before minority
interests(4):................................. 173,234 120,824 (68,470) 225,588
Total long-lived assets(5):..................... 2,377,763 1,781,565 N/A 4,159,328
Total assets:................................... 2,448,493 1,889,879 42,268 4,380,640
2000:
Total revenues(2):.............................. $ 280,474 $ 179,412 $ 3,633 $ 463,519
Equity in earnings from joint ventures and
unconsolidated subsidiaries:.................. -- 5,058 (262) 4,796
Total operating and interest expense(3):........ 115,906 79,662 60,364 255,932
Net operating income before minority
interests(4):................................. 164,568 104,808 (56,993) 212,383
Total long-lived assets(5):..................... 2,227,083 1,592,087 N/A 3,819,170
Total assets:................................... 2,285,506 1,706,949 42,320 4,034,775
EXPLANATORY NOTES:
- ------------------------------
(1) Corporate and Other represents all corporate level items, including general
and administrative expenses and any intercompany eliminations necessary to
reconcile to the consolidated Company totals. This caption also includes the
Company's servicing business, which is not considered a material separate
segment.
(2) Total revenues represents all revenues earned during the period from the
assets in each segment. Revenue from the Real Estate Lending business
primarily represents interest income and revenue from the Corporate Tenant
Leasing business primarily represents operating lease income.
(3) Total operating and interest expense represents provision for loan losses
for the Real Estate Lending business and operating costs on corporate tenant
lease assets for the Corporate Tenant Leasing business, as well as interest
expense specifically related to each segment. Interest expense on unsecured
notes, general and administrative expense and general and
administrative-stock-based compensation is included in Corporate and Other
for all periods. Depreciation and amortization of $47,821, $35,411 and
$34,384 in 2002, 2001 and 2000, respectively, are included in the amounts
presented above.
(4) Net operating income represents net operating income before minority
interest, income from discontinued operations, gain (loss) from discontinued
operations, extraordinary loss on early extinguishment of debt and
cumulative effect of change in accounting principle. Net operating income
excludes income from discontinued operations of $3,583, $5,299 and $3,155
for the years ended December 31, 2002, 2001 and 2000, respectively.
(5) Total long-lived assets is comprised of Loans and Other Lending Investments,
net and Corporate Tenant Lease Assets, net, for each respective segment.
85
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the selected quarterly financial data for the
Company (in thousands, except per share amounts).
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
2002:
Revenue......................................... $140,321 $135,035 $130,790 $119,578
Net income...................................... 62,976 52,670 42,513 57,111
Net income allocable to common shares........... 53,749 43,443 33,286 47,884
Net income per common share--basic.............. $ 0.57 $ 0.49 $ 0.38 $ 0.55
Weighted average common shares
outstanding--basic............................ 93,671 89,431 88,656 87,724
2001:
Revenue......................................... $116,757 $117,430 $118,497 $118,435
Net income...................................... 58,755 57,553 58,960 54,644
Net income allocable to common shares........... 49,528 48,326 49,733 45,417
Net income per common share--basic.............. $ 0.57 $ 0.56 $ 0.58 $ 0.53
Weighted average common shares
outstanding--basic............................ 86,969 86,470 86,081 85,833
NOTE 17--SUBSEQUENT EVENTS
Subsequent to December 31, 2002, the Company modified the terms of the 6.75%
Dealer Remarketable Securities, increased the principal amount and sold
additional notes in an amount totaling $150.0 million. The notes were modified
to become obligations of the Company (as opposed to the Leasing Subsidiary), the
covenants were modified to reflect the covenants contained in the Company's
other unsecured notes, and the maturity date was modified to be March 2008. The
new interest rate on the modified notes is set at 7.00%.
86
ISTAR FINANCIAL INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO CHARGES TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
FOR THE YEAR ENDED DECEMBER 31, 2000
Provision for loan losses(1)............ $ 7,500 $6,500 $ -- $ -- $14,000
FOR THE YEAR ENDED DECEMBER 31, 2001
Provision for loan losses(1)............ $14,000 $7,000 $ -- $ -- $21,000
FOR THE YEAR ENDED DECEMBER 31, 2002
Provision for loan losses(1)............ $21,000 $8,250 $ -- $ -- $29,250
EXPLANATORY NOTE:
- ------------------------------
(1) See Note 4 to the Company's Consolidated Financial Statements.
87
ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
INITIAL COST TO COMPANY COST
------------------------ CAPITALIZED
BUILDING AND SUBSEQUENT TO
LOCATION STATE ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
- -------- -------- ------------ --------- ------------ -------------
OFFICE FACILITIES:
Tempe........................... AZ $ -- $ 1,512 $ 9,731 $ --
Tempe........................... AZ -- 1,033 6,652 --
Tempe........................... AZ -- 1,033 6,652 56
Tempe........................... AZ -- 1,033 6,652 --
Tempe........................... AZ 3,534 701 4,339 --
Anaheim......................... CA -- 2,227 8,519 --
Anaheim......................... CA 12,879 3,512 13,379 46
Commerce........................ CA 9,936 3,454 12,915 --
Cupertino....................... CA 17,093 7,994 19,037 --
Dublin.......................... CA 49,954 17,040 84,549 --
Fremont......................... CA -- 880 4,846 --
Milpitas........................ CA 8,646 9,526 11,655 785
Milpitas........................ CA 5,500 4,139 5,064 529
Milpitas........................ CA 20,243 9,802 12,116 115
Mountain View................... CA -- 12,834 28,158 --
Mountain View................... CA -- 5,798 12,720 --
Palo Alto....................... CA -- -- 19,168 37
Redondo Beach................... CA 8,331 2,598 9,212 --
San Diego....................... CA 3,662 1,530 3,060 --
Thousand Oaks................... CA 17,418 4,563 24,911 --
Aurora.......................... CO 3,025 580 3,677 --
Englewood....................... CO -- 1,757 16,930 412
Englewood....................... CO -- 2,967 15,008 --
Englewood....................... CO -- 8,536 27,428 7,596
Ft. Collins..................... CO 12,765 -- 16,752 --
Westminster..................... CO -- 307 3,524 --
Westminster..................... CO -- 616 7,290 --
Jacksonville.................... FL -- 1,384 3,911 --
Jacksonville.................... FL -- 877 2,237 39
Jacksonville.................... FL -- 2,366 6,072 --
Tampa........................... FL 11,653 1,920 18,435 --
Alpharetta...................... GA -- 905 6,744 18
Atlanta......................... GA 37,153 5,709 49,091 6,771
Duluth.......................... GA 7,803 1,655 14,484 48
Lisle........................... IL -- 6,153 14,993 --
Vernon Hills.................... IL 8,999 1,400 12,597 --
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD
------------------------------------ DEPRECIABLE
BUILDING AND ACCUMULATED DATE LIFE
LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED (YEARS)
- -------- -------- ------------ ---------- ------------ -------- -----------
OFFICE FACILITIES:
Tempe........................... $ 1,512 $ 9,731 $ 11,243 $ 770 1999 40.0
Tempe........................... 1,033 6,652 7,685 527 1999 40.0
Tempe........................... 1,033 6,708 7,741 527 1999 40.0
Tempe........................... 1,033 6,652 7,685 527 1999 40.0
Tempe........................... 701 4,339 5,040 343 1999 40.0
Anaheim......................... 2,227 8,519 10,746 674 1999 40.0
Anaheim......................... 3,512 13,425 16,937 1,063 1999 40.0
Commerce........................ 3,454 12,915 16,369 1,022 1999 40.0
Cupertino....................... 7,994 19,037 27,031 1,507 1999 40.0
Dublin.......................... 17,040 84,549 101,589 1,868 2002 40.0
Fremont......................... 880 4,846 5,726 384 1999 40.0
Milpitas........................ 9,526 12,440 21,966 465 2002 40.0
Milpitas........................ 4,139 5,593 9,732 308 2002 40.0
Milpitas........................ 9,802 12,231 22,033 541 2002 40.0
Mountain View................... 12,834 28,158 40,992 2,229 1999 40.0
Mountain View................... 5,798 12,720 18,518 1,007 1999 40.0
Palo Alto....................... -- 19,205 19,205 1,519 1999 40.0
Redondo Beach................... 2,598 9,212 11,810 729 1999 40.0
San Diego....................... 1,530 3,060 4,590 242 1999 40.0
Thousand Oaks................... 4,563 24,911 29,474 1,972 1999 40.0
Aurora.......................... 580 3,677 4,257 92 2001 40.0
Englewood....................... 1,757 17,342 19,099 1,389 1999 40.0
Englewood....................... 2,967 15,008 17,975 1,188 1999 40.0
Englewood....................... 8,536 35,024 43,560 2,346 1999 40.0
Ft. Collins..................... -- 16,752 16,752 319 2002 40.0
Westminster..................... 307 3,524 3,831 279 1999 40.0
Westminster..................... 616 7,290 7,906 577 1999 40.0
Jacksonville.................... 1,384 3,911 5,295 310 1999 40.0
Jacksonville.................... 877 2,276 3,153 180 1999 40.0
Jacksonville.................... 2,366 6,072 8,438 481 1999 40.0
Tampa........................... 1,920 18,435 20,355 448 2002 40.0
Alpharetta...................... 905 6,762 7,667 535 1999 40.0
Atlanta......................... 5,709 55,862 61,571 4,510 1999 40.0
Duluth.......................... 1,655 14,532 16,187 1,150 1999 40.0
Lisle........................... 6,153 14,993 21,146 1,187 1999 40.0
Vernon Hills.................... 1,400 12,597 13,997 997 1999 40.0
88
ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
INITIAL COST TO COMPANY COST
------------------------ CAPITALIZED
BUILDING AND SUBSEQUENT TO
LOCATION STATE ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
- -------- -------- ------------ --------- ------------ -------------
OFFICE FACILITIES (CONTINUED):
New Orleans..................... LA -- 1,427 24,252 1,846
New Orleans..................... LA 52,439 1,665 16,653 1,253
Andover......................... MA -- 639 7,176 10
Andover......................... MA -- 1,787 8,486 --
Braintree....................... MA -- 792 4,929 44
Braintree....................... MA -- 2,225 7,403 91
Canton.......................... MA -- 742 3,155 103
Canton.......................... MA -- 1,409 3,890 41
Canton.......................... MA -- 1,077 2,746 81
Chelmsford...................... MA 20,864 1,600 21,947 --
Concord......................... MA 11,296 1,656 -- 8,475
Concord......................... MA 8,425 1,852 10,839 138
Concord......................... MA 5,975 1,302 7,864 183
Concord......................... MA 8,185 1,834 10,483 146
Concord......................... MA -- 1,928 8,218 551
Foxborough...................... MA 2,975 1,218 3,756 --
Mansfield....................... MA 823 584 1,443 42
Norwell......................... MA -- 1,140 1,658 32
Norwell......................... MA 1,953 506 2,277 522
Norwell......................... MA -- 1,357 5,429 635
Norwell......................... MA -- 973 3,805 29
Quincy.......................... MA 13,447 3,562 23,420 290
Rockland........................ MA -- 2,011 11,761 83
Westborough..................... MA 7,265 1,651 10,758 --
Lanham.......................... MD 10,435 2,486 12,047 164
Largo........................... MD 19,207 1,800 18,706 --
Arden Hills..................... MN -- 719 6,541 --
Roseville....................... MN 3,533 1,113 4,452 --
Mt. Laurel...................... NJ 61,538 7,726 74,429 --
Las Vegas (1)................... NV 20,100 -- 32,640 --
Columbus........................ OH 8,645 1,275 10,326 13
Harrisburg...................... PA 17,430 690 26,098 --
Spartanburg..................... SC 7,245 800 11,192 5
Memphis......................... TN 17,387 2,702 25,129 --
Dallas.......................... TX 4,579 1,918 4,632 --
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD
------------------------------------ DEPRECIABLE
BUILDING AND ACCUMULATED DATE LIFE
LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED (YEARS)
- -------- -------- ------------ ---------- ------------ -------- -----------
OFFICE FACILITIES (CONTINUED):
New Orleans..................... 1,427 26,098 27,525 2,185 1999 40.0
New Orleans..................... 1,665 17,906 19,571 1,514 1999 40.0
Andover......................... 639 7,186 7,825 568 1999 40.0
Andover......................... 1,787 8,486 10,273 672 1999 40.0
Braintree....................... 792 4,973 5,765 393 1999 40.0
Braintree....................... 2,225 7,494 9,719 589 1999 40.0
Canton.......................... 742 3,258 4,000 255 1999 40.0
Canton.......................... 1,409 3,931 5,340 310 1999 40.0
Canton.......................... 1,077 2,827 3,904 225 1999 40.0
Chelmsford...................... 1,600 21,947 23,547 417 2002 40.0
Concord......................... 1,656 8,475 10,131 453 1999 40.0
Concord......................... 1,874 10,955 12,829 864 1999 40.0
Concord......................... 1,302 8,047 9,349 633 1999 40.0
Concord......................... 1,834 10,629 12,463 837 1999 40.0
Concord......................... 1,928 8,769 10,697 683 1999 40.0
Foxborough...................... 1,218 3,756 4,974 297 1999 40.0
Mansfield....................... 584 1,485 2,069 116 1999 40.0
Norwell......................... 1,140 1,690 2,830 133 1999 40.0
Norwell......................... 506 2,799 3,305 244 1999 40.0
Norwell......................... 1,357 6,064 7,421 469 1999 40.0
Norwell......................... 973 3,834 4,807 303 1999 40.0
Quincy.......................... 3,562 23,710 27,272 1,867 1999 40.0
Rockland........................ 2,011 11,844 13,855 933 1999 40.0
Westborough..................... 1,651 10,758 12,409 852 1999 40.0
Lanham.......................... 2,486 12,211 14,697 965 1999 40.0
Largo........................... 1,800 18,706 20,506 274 2002 40.0
Arden Hills..................... 719 6,541 7,260 518 1999 40.0
Roseville....................... 1,113 4,452 5,565 352 1999 40.0
Mt. Laurel...................... 7,726 74,429 82,155 115 2002 40.0
Las Vegas (1)................... -- 32,640 32,640 -- 2002
Columbus........................ 1,275 10,339 11,614 325 2001 40.0
Harrisburg...................... 690 26,098 26,788 837 2001 40.0
Spartanburg..................... 800 11,197 11,997 293 2001 40.0
Memphis......................... 2,702 25,129 27,831 1,989 1999 40.0
Dallas.......................... 1,918 4,632 6,550 367 1999 40.0
89
ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
INITIAL COST TO COMPANY COST
------------------------ CAPITALIZED
BUILDING AND SUBSEQUENT TO
LOCATION STATE ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
- -------- -------- ------------ --------- ------------ -------------
OFFICE FACILITIES (CONTINUED):
Houston......................... TX 20,064 2,500 25,743 --
Irving.......................... TX -- 6,083 42,016 --
Irving.......................... TX -- 1,364 10,628 --
Irving.......................... TX -- 1,804 5,815 323
Irving.......................... TX 17,307 3,363 21,376 --
Richardson...................... TX -- 1,233 15,160 --
Richardson...................... TX -- 2,932 31,235 --
Richardson...................... TX -- 1,230 5,660 238
Salt Lake City.................. UT -- 1,179 12,861 --
McLean.......................... VA 66,191 20,110 125,516 --
Reston.......................... VA -- 4,436 22,362 101
Milwaukee....................... WI 10,833 1,875 13,914 --
---------- -------- ---------- ------
Subtotal........................ 656,735 232,616 1,283,334 31,891
---------- -------- ---------- ------
INDUSTRIAL FACILITIES:
Phoenix......................... AZ -- 1,000 1,997 --
Burlingame...................... CA -- 1,219 3,470 --
City of Industry................ CA -- 5,002 11,766 --
East Los Angeles................ CA -- 9,334 12,501 --
Millbrae........................ CA -- 741 2,107 --
Fremont......................... CA -- 1,086 7,964 --
Fremont......................... CA -- 654 4,591 --
Milpitas........................ CA 6,637 5,051 6,170 329
Milpitas........................ CA 8,703 6,856 8,378 --
Milpitas........................ CA 2,247 2,633 3,219 280
Milpitas........................ CA 3,733 4,119 5,034 --
Milpitas........................ CA 2,704 3,044 3,716 590
Milpitas........................ CA 9,227 4,095 8,323 566
Milpitas........................ CA 9,965 5,617 6,877 477
Milpitas........................ CA -- 4,880 12,367 1,498
Milpitas........................ CA 7,645 4,600 5,627 165
Milpitas........................ CA 3,104 3,000 3,669 --
San Jose........................ CA -- 9,677 23,288 --
Walnut Creek.................... CA 8,380 808 8,306 552
Walnut Creek.................... CA -- 571 5,874 --
Jacksonville.................... FL -- 2,310 5,435 --
Miami........................... FL -- 3,048 8,676 --
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD
------------------------------------ DEPRECIABLE
BUILDING AND ACCUMULATED DATE LIFE
LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED (YEARS)
- -------- -------- ------------ ---------- ------------ -------- -----------
OFFICE FACILITIES (CONTINUED):
Houston......................... 2,500 25,743 28,243 644 2001 40.0
Irving.......................... 6,083 42,016 48,099 3,326 1999 40.0
Irving.......................... 1,364 10,628 11,992 841 1999 40.0
Irving.......................... 1,804 6,138 7,942 477 1999 40.0
Irving.......................... 3,363 21,376 24,739 1,692 1999 40.0
Richardson...................... 1,233 15,160 16,393 916 1999 40.0
Richardson...................... 2,932 31,235 34,167 2,473 1999 40.0
Richardson...................... 1,230 5,898 7,128 450 1999 40.0
Salt Lake City.................. 1,179 12,861 14,040 1,018 1999 40.0
McLean.......................... 20,110 125,516 145,626 1,982 2002 40.0
Reston.......................... 4,436 22,463 26,899 1,775 1999 40.0
Milwaukee....................... 1,875 13,914 15,789 1,102 1999 40.0
-------- ---------- ---------- --------
Subtotal........................ 232,638 1,315,203 1,547,841 72,755
-------- ---------- ---------- --------
INDUSTRIAL FACILITIES:
Phoenix......................... 1,000 1,997 2,997 158 1999 40.0
Burlingame...................... 1,219 3,470 4,689 275 1999 40.0
City of Industry................ 5,002 11,766 16,768 931 1999 40.0
East Los Angeles................ 9,334 12,501 21,835 990 1999 40.0
Millbrae........................ 741 2,107 2,848 167 1999 40.0
Fremont......................... 1,086 7,964 9,050 630 1999 40.0
Fremont......................... 654 4,591 5,245 363 1999 40.0
Milpitas........................ 5,051 6,499 11,550 289 2002 40.0
Milpitas........................ 6,856 8,378 15,234 371 2002 40.0
Milpitas........................ 2,633 3,499 6,132 155 2002 40.0
Milpitas........................ 4,119 5,034 9,153 221 2002 40.0
Milpitas........................ 3,044 4,306 7,350 324 2002 40.0
Milpitas........................ 4,095 8,889 12,984 666 1999 40.0
Milpitas........................ 5,617 7,354 12,971 375 2002 40.0
Milpitas........................ 4,880 13,865 18,745 1,439 1999 40.0
Milpitas........................ 4,600 5,792 10,392 294 2002 40.0
Milpitas........................ 3,000 3,669 6,669 165 2002 40.0
San Jose........................ 9,677 23,288 32,965 1,844 1999 40.0
Walnut Creek.................... 808 8,858 9,666 691 1999 40.0
Walnut Creek.................... 571 5,874 6,445 465 1999 40.0
Jacksonville.................... 2,310 5,435 7,745 430 1999 40.0
Miami........................... 3,048 8,676 11,724 687 1999 40.0
90
ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
INITIAL COST TO COMPANY COST
------------------------ CAPITALIZED
BUILDING AND SUBSEQUENT TO
LOCATION STATE ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
- -------- -------- ------------ --------- ------------ -------------
INDUSTRIAL FACILITIES
(CONTINUED):
Miami........................... FL -- 1,394 3,967 --
Miami........................... FL -- 1,612 4,586 --
Orlando......................... FL -- 1,475 4,198 --
St. Petersburg.................. FL -- 723 3,061 --
St. Petersburg.................. FL -- 634 2,685 224
McDonough....................... GA 12,362 1,900 14,318 --
Stockbridge..................... GA 15,050 1,350 18,393 --
DeKalb.......................... IL 22,575 1,600 28,015 --
Lincolnshire.................... IL -- 3,192 7,508 --
Marion.......................... IN -- 131 4,254 --
Seymour......................... IN 16,626 550 22,240 121
South Bend...................... IN -- 140 4,640 --
Wichita......................... KS -- 213 3,189 --
Campbellsville.................. KY 12,575 400 17,219 --
Lakeville....................... MA -- 1,012 4,048 --
Randolph........................ MA 2,432 615 3,471 --
Baltimore....................... MD 5,884 1,535 9,324 123
Bloomington..................... MN -- 403 1,147 --
O'Fallon........................ MO -- 1,388 12,700 --
Reno............................ NV -- 248 707 --
Astoria......................... NY -- 897 2,555 --
Astoria......................... NY -- 1,796 5,109 --
Lockbourne...................... OH 14,727 2,000 17,320 --
Columbus........................ OH -- 375 7,191 --
Richfield....................... OH 12,071 2,327 -- 12,210
York............................ PA 25,584 2,850 30,713 --
Philadelphia.................... PA -- 620 1,765 --
Spartanburg..................... SC -- 943 16,836 --
Memphis......................... TN 15,884 1,486 23,279 --
Allen........................... TX -- 1,238 9,224 --
Farmers Branch.................. TX 6,935 1,314 8,903 --
Richardson...................... TX 6,803 858 8,556 --
Terrell......................... TX 17,200 400 22,163 --
Seattle......................... WA -- 828 2,355 --
---------- -------- ---------- ------
Subtotal........................ 249,053 117,792 484,994 17,135
---------- -------- ---------- ------
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD
------------------------------------ DEPRECIABLE
BUILDING AND ACCUMULATED DATE LIFE
LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED (YEARS)
- -------- -------- ------------ ---------- ------------ -------- -----------
INDUSTRIAL FACILITIES
(CONTINUED):
Miami........................... 1,394 3,967 5,361 314 1999 40.0
Miami........................... 1,612 4,586 6,198 363 1999 40.0
Orlando......................... 1,475 4,198 5,673 332 1999 40.0
St. Petersburg.................. 723 3,061 3,784 242 1999 40.0
St. Petersburg.................. 634 2,909 3,543 214 1999 40.0
McDonough....................... 1,900 14,318 16,218 366 2001 40.0
Stockbridge..................... 1,350 18,393 19,743 470 2001 40.0
DeKalb.......................... 1,600 28,015 29,615 715 2001 40.0
Lincolnshire.................... 3,192 7,508 10,700 594 1999 40.0
Marion.......................... 131 4,254 4,385 337 1999 40.0
Seymour......................... 550 22,361 22,911 1,121 2000 40.0
South Bend...................... 140 4,640 4,780 367 1999 40.0
Wichita......................... 213 3,189 3,402 252 1999 40.0
Campbellsville.................. 400 17,219 17,619 47 2002 40.0
Lakeville....................... 1,012 4,048 5,060 320 1999 40.0
Randolph........................ 615 3,471 4,086 275 1999 40.0
Baltimore....................... 1,535 9,447 10,982 742 1999 40.0
Bloomington..................... 403 1,147 1,550 91 1999 40.0
O'Fallon........................ 1,388 12,700 14,088 1,005 1999 40.0
Reno............................ 248 707 955 56 1999 40.0
Astoria......................... 897 2,555 3,452 202 1999 40.0
Astoria......................... 1,796 5,109 6,905 404 1999 40.0
Lockbourne...................... 2,000 17,320 19,320 442 2001 40.0
Columbus........................ 375 7,191 7,566 569 1999 40.0
Richfield....................... 2,327 12,210 14,537 372 2000 40.0
York............................ 2,850 30,713 33,563 784 2001 40.0
Philadelphia.................... 620 1,765 2,385 140 1999 40.0
Spartanburg..................... 943 16,836 17,779 1,333 1999 40.0
Memphis......................... 1,486 23,279 24,765 1,843 1999 40.0
Allen........................... 1,238 9,224 10,462 730 1999 40.0
Farmers Branch.................. 1,314 8,903 10,217 705 1999 40.0
Richardson...................... 858 8,556 9,414 677 1999 40.0
Terrell......................... 400 22,163 22,563 566 2001 40.0
Seattle......................... 828 2,355 3,183 186 1999 40.0
-------- ---------- ---------- --------
Subtotal........................ 117,792 502,129 619,921 29,106
-------- ---------- ---------- --------
91
ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
INITIAL COST TO COMPANY COST
------------------------ CAPITALIZED
BUILDING AND SUBSEQUENT TO
LOCATION STATE ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
- -------- -------- ------------ --------- ------------ -------------
GROUND LEASE:
San Jose........................ CA -- 41,106 -- --
LAND:
Concord......................... MA -- 1,267 -- --
Irving.......................... TX -- 5,243 -- --
---------- -------- ---------- --------
Subtotal........................ -- 6,510 -- --
---------- -------- ---------- --------
PARKING GARAGE:
New Orleans..................... LA -- 4,241 6,462 4
HOTEL:
Sacramento...................... CA 144,114 1,281 9,809 --
San Diego....................... CA -- 4,394 27,030 --
Sonoma.......................... CA -- 3,308 20,623 --
Durango......................... CO -- 1,242 7,865 --
Boise........................... ID -- 968 6,405 --
Missoula........................ MT -- 210 1,607 --
Astoria......................... OR -- 269 2,043 --
Bend............................ OR -- 233 1,726 --
Coos Bay........................ OR -- 404 3,049 --
Eugene.......................... OR -- 361 2,721 --
Medford......................... OR -- 609 4,668 --
Pendleton....................... OR -- 556 4,245 --
Salt Lake City.................. UT -- 5,620 32,695 --
Kelso........................... WA -- 502 3,779 --
Seattle......................... WA -- 5,101 32,080 --
Vancouver....................... WA -- 507 3,981 --
Wenatchee....................... WA -- 513 3,825 --
---------- -------- ---------- --------
Subtotal........................ 144,114 26,078 168,151 --
---------- -------- ---------- --------
Total corporate tenant lease
assets........................ $1,049,902 $428,343 $1,942,941 $ 49,030
========== ======== ========== ========
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD
------------------------------------ DEPRECIABLE
BUILDING AND ACCUMULATED DATE LIFE
LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED (YEARS)
- -------- -------- ------------ ---------- ------------ -------- -----------
GROUND LEASE:
San Jose........................ 41,106 -- 41,106 -- 2000
LAND:
Concord......................... 1,267 -- 1,267 -- 1999
Irving.......................... 5,243 -- 5,243 -- 2002
-------- ---------- ---------- --------
Subtotal........................ 6,510 -- 6,510 --
-------- ---------- ---------- --------
PARKING GARAGE:
New Orleans..................... 4,241 6,466 10,707 514 1999 40.0
HOTEL:
Sacramento...................... 1,281 9,809 11,090 1,525 1998 40.0
San Diego....................... 4,394 27,030 31,424 4,201 1998 40.0
Sonoma.......................... 3,308 20,623 23,931 3,205 1998 40.0
Durango......................... 1,242 7,865 9,107 1,222 1998 40.0
Boise........................... 968 6,405 7,373 995 1998 40.0
Missoula........................ 210 1,607 1,817 250 1998 40.0
Astoria......................... 269 2,043 2,312 318 1998 40.0
Bend............................ 233 1,726 1,959 268 1998 40.0
Coos Bay........................ 404 3,049 3,453 474 1998 40.0
Eugene.......................... 361 2,721 3,082 423 1998 40.0
Medford......................... 609 4,668 5,277 726 1998 40.0
Pendleton....................... 556 4,245 4,801 660 1998 40.0
Salt Lake City.................. 5,620 32,695 38,315 5,081 1998 40.0
Kelso........................... 502 3,779 4,281 587 1998 40.0
Seattle......................... 5,101 32,080 37,181 4,986 1998 40.0
Vancouver....................... 507 3,981 4,488 619 1998 40.0
Wenatchee....................... 513 3,825 4,338 594 1998 40.0
-------- ---------- ---------- --------
Subtotal........................ 26,078 168,151 194,229 26,134
-------- ---------- ---------- --------
Total corporate tenant lease
assets........................ $428,365 $1,991,949 $2,420,314 $128,509
======== ========== ========== ========
EXPLANATORY NOTE:
- ------------------------------
(1) Represents a direct financing lease.
92
ISTAR FINANCIAL INC.
NOTES TO SCHEDULE III
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
1. RECONCILIATION OF CORPORATE TENANT LEASE ASSETS:
The following table reconciles Corporate Tenant Lease Assets from
January 1, 2000 to December 31, 2002:
2002 2001 2000
---------- ---------- ----------
Balance at January 1..................................... $1,861,786 $1,639,062 $1,647,779
Additions................................................ 606,653 248,804 137,998
Dispositions............................................. (3,106) (26,080) (146,715)
Assets classified as held for sale....................... (45,019) -- --
---------- ---------- ----------
Balance at December 31................................... $2,420,314 $1,861,786 $1,639,062
========== ========== ==========
2. RECONCILIATION OF ACCUMULATED DEPRECIATION:
The following table reconciles Accumulated Depreciation from January 1, 2000
to December 31, 2002:
2002 2001 2000
---------- ---------- ----------
Balance at January 1..................................... $ (80,221) $ (46,975) $ (14,860)
Additions................................................ (48,615) (33,898) (33,739)
Dispositions............................................. 131 652 1,624
Assets classified as held for sale....................... 196 -- --
---------- ---------- ----------
Balance at December 31................................... $ (128,509) $ (80,221) $ (46,975)
========== ========== ==========
93
ISTAR FINANCIAL INC.
SCHEDULE IV-LOANS AND OTHER LENDING INVESTMENTS
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
INTEREST ACCRUAL INTEREST PAYMENT FINAL MATURITY
TYPE OF LOAN/BORROWER DESCRIPTION/LOCATION RATES(3) RATES DATE
- --------------------- ----------------------- -------------------- ---------------- --------------
Senior Mortgages:
Borrower A(1)...................
Office, Detroit, MI 7.03% 7.03% 9/11/09
Borrower B(1)...................
Office, San Diego, CA LIBOR + 1.50% LIBOR + 1.50% 12/31/11
Borrower C(1)...................
Hotel, Various States LIBOR + 1.75% LIBOR + 1.75% 9/15/03
Borrower D......................
Office, Charlotte, NC LIBOR + 3.25% LIBOR + 3.25% 10/10/07
Borrower E......................
Office, New York, NY LIBOR + 3.00% LIBOR + 3.00% 7/24/05
Borrower F......................
Hotel, Various States LIBOR + 4.50% LIBOR + 4.50% 4/30/05
All other senior mortgages
individually < 3%...............
Subordinate Mortgages:
Borrower B(1)...................
Office, San Diego, CA 9.00% 9.00% 12/31/11
Borrower C(1)...................
Hotel, Various States LIBOR + 5.80% LIBOR + 5.80% 9/15/03
Borrower G......................
Office, New York, NY LIBOR + 4.00% LIBOR + 4.00% 7/31/03
All other subordinate mortgages
individually < 3%...............
Corporate/Partnership Loans:
Borrower A(1)...................
Office, Detroit, MI 12.67% 12.67% 5/15/08
Borrower C(1)...................
Hotel, Various States LIBOR + 5.37% LIBOR + 5.37% 9/15/03
Borrower H(1)...................
Residential, Various
States LIBOR + 5.00% LIBOR + 5.00% 3/01/05
All other corporate/partnership
loans individually < 3%.......
Other Lending Investments--Loans:
All other lending
investments--loans
individually < 3%.............
Other Lending
Investments--Securities:
Borrower H(1)...................
Residential, Various
States 10.00% 10.00% 8/15/05
All other lending
investments--securities
individually < 3%.............
Subtotal..........................
Provision for Loan Losses.........
Total:............................
PERIODIC FACE CARRYING
PAYMENT PRIOR AMOUNT OF AMOUNT OF
TYPE OF LOAN/BORROWER TERMS(3) LIENS(2) LOANS LOANS
- --------------------- -------- ---------- ---------- ----------
Senior Mortgages:
Borrower A(1)...................
P&I $ -- $ 178,857 $ 162,243
Borrower B(1)...................
P&I -- 103,883 103,883
Borrower C(1)...................
P&I -- 102,539 102,539
Borrower D......................
IO -- 100,000 99,048
Borrower E......................
IO -- 100,000 98,877
Borrower F......................
P&I -- 98,773 98,679
All other senior mortgages
individually < 3%............... 1,206(4) 1,028,915 1,010,528
---------- ---------- ----------
1,206 1,712,967 1,675,797
---------- ---------- ----------
Subordinate Mortgages:
Borrower B(1)...................
IO -- 29,000 29,000
Borrower C(1)...................
IO -- 40,000 39,954
Borrower G......................
IO 500,000 100,000 100,000
All other subordinate mortgages
individually < 3%............... 1,574,309 461,683 460,532
---------- ---------- ----------
2,074,309 630,683 629,486
---------- ---------- ----------
Corporate/Partnership Loans:
Borrower A(1)...................
IO -- 8,339 8,202
Borrower C(1)...................
IO 129,977 76,700 76,605
Borrower H(1)...................
IO 940,044 33,870 33,870
All other corporate/partnership
loans individually < 3%....... 1,531,311 344,598 322,351
---------- ---------- ----------
2,601,332 463,507 441,028
---------- ---------- ----------
Other Lending Investments--Loans:
All other lending
investments--loans
individually < 3%............. -- 29,411 23,167
Other Lending
Investments--Securities:
Borrower H(1)...................
IO -- 150,000 132,363
All other lending
investments--securities
individually < 3%............. 1,970,322 172,305 177,751
---------- ---------- ----------
1,970,322 351,716 333,281
---------- ---------- ----------
Subtotal.......................... 6,647,169 3,158,873 3,079,592
---------- ---------- ----------
Provision for Loan Losses......... -- -- (29,250)
---------- ---------- ----------
Total:............................ $6,647,169 $3,158,873 $3,050,342
========== ========== ==========
EXPLANATORY NOTES:
- ----------------------------------
(1) Loan is a part of a common borrowing provided by the Company (see
corresponding letter reference).
(2) Represents only third-party liens and excludes senior loans held by the
Company from the same borrower on the same collateral.
(3) P&I = principal and interest, IO = interest only.
(4) Represents value of a ground lease senior to the Company's first mortgage.
94
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Portions of the Company's definitive proxy statement for the 2003 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Portions of the Company's definitive proxy statement for the 2003 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Portions of the Company's definitive proxy statement for the 2003 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Portions of the Company's definitive proxy statement for the 2003 annual
meeting of the shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Securities
and Exchange Act of 1934 (the "Exchange Act") reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. The Company has formed a Disclosure Committee that is responsible
for considering the materiality of information and determining the disclosure
obligations of the Company on a timely basis. The Disclosure Committee reports
directly to the Company's Chief Executive Officer and the Audit Committee.
Within the 90-day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Disclosure Committee and other members of management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to timely alert them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's Exchange Act filings.
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date that the Company carried out its evaluation.
ITEM 16. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Portions of the Company's definitive proxy statement for the 2003 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated by reference.
95
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. and (d). Financial statements and schedules--see Index to Financial
Statements and Schedules included in Item 8.
b. Reports on Form 8-K.
On November 12, 2002, a Current Report on Form 8-K was filed which
included financial statements and exhibits on Company information used as
materials for the Company's primary equity offering on November 14, 2002.
On November 14, 2002, a Current Report on Form 8-K was filed which
included the certification of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
On November 19, 2002, a Current Report on Form 8-K was filed which
included the purchase agreement for the 8,000,000 shares of Common Stock
sold by the Company in its primary equity offering on November 14, 2002.
c. Exhibits--see index on following page.
96
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1 Underwriting Agreement dated August 9, 2001 relating to the
Company's 8 3/4% Senior Notes due 2008. (10)
1.2 Purchase Agreement dated November 14, 2002. (15)
2.1 Agreement and Plan of Merger, dated as of June 15, 1999, by
and among Starwood Financial Trust, ST Merger Sub, Inc. and
TriNet Corporate Realty Trust, Inc. (4)
2.2 Agreement and Plan of Merger, dated as of June 15, 1999, by
and among Starwood Financial Trust, Starwood
Financial, Inc. and to the extent described therein, TriNet
Corporate Realty Trust, Inc. (4)
2.3 Agreement and Plan of Merger, dated as of June 15, 1999, by
and among Starwood Financial Trust, SA Merger Sub, Inc., STW
Holdings I, Inc., the Stockholders named therein, Starwood
Capital Group, L.L.C. and, to the extent described therein,
TriNet Corporate Realty Trust, Inc. (4)
3.1 Amended and Restated Charter of the Company (including the
Articles Supplementary for the Series A, B, C and D
Preferred Stock). (7)
3.2 Bylaws of the Company (8)
3.3 Articles Supplementary for the High Performance Common
Stock--Series 1. (14)
3.4 Articles Supplementary for the High Performance Common
Stock--Series 2. (14)
3.5 Articles Supplementary for the High Performance Common
Stock--Series 3. (14)
3.6 Articles Supplementary for the High Performance Common
Stock--Series 4.
4.1 Amended and Restated Registration Rights Agreement dated
March 18, 1998 among Starwood Financial Trust and Starwood
Mezzanine Investors, L.P., SAHI Partners and SOFI-IV SMT
Holdings, L.L.C. (2)
4.2 Investor Rights Agreement, dated as of December 15, 1998
among Starwood Financial Trust, a Maryland real estate
investment trust, Starwood Mezzanine Investors, L.P., a
Delaware limited partnership, SOFI-IV SMT Holdings, L.L.C.,
a Delaware limited liability company, B Holdings, L.L.C., a
Delaware limited liability company, and Lazard Freres Real
Estate Fund II, L.P., a Delaware limited partnership, Lazard
Freres Real Estate Offshore Fund II L.P., a Delaware limited
Partnership, and LF Mortgage REIT, a Maryland real estate
investment trust. (3)
4.3 Form of warrant certificates. (3)
4.4 Form of stock certificate for the Company's Common
Stock. (6)
4.5 Form of certificate for Series A Preferred Shares of
beneficial interest. (3)
4.6 Form of Supplemental Indenture, dated as of August 16,
2001. (10)
4.7 Form of Global Note evidencing 8 3/4% Senior
Notes 2008. (10)
10.1 Starwood Financial Trust 1996 Share Incentive Plan. (2)
10.2 Contribution Agreement dated as of February 11, 1998,
between Starwood Financial Trust, Starwood Mezzanine
Investors, L.P. and Starwood Opportunity Fund IV, L.P. (2)
10.3 Second Amended and Restated Shareholder's Agreement dated
March 18, 1998 among B Holdings, L.L.C., SAHI Partners,
Starwood Mezzanine Investors, L.P., SOFI-IV SMT
Holdings, L.L.C., and Starwood Financial Trust. (2)
97
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
10.4 Securities Purchase Agreement, dated as of December 15,
1998, by and between Starwood Financial Trust, Lazard Freres
Real Estate Fund II, L.P., a Delaware limited partnership,
Lazard Freres Real Estate Offshore Fund II, L.P., a Delaware
limited partnership, and LF Mortgage REIT, a Maryland real
estate investment trust. (2)
10.5 Asset Purchase and Sale Agreement, dated as of December 15,
1998 by and between Lazard Freres Real Estate Fund, L.P., a
Delaware limited partnership, Lazard Freres Real Estate
Fund II, L.P., a Delaware limited partnership, Prometheus
Mid-Atlantic Holding, L.P., a Delaware limited partnership,
Pacific Preferred LLC, a New York limited liability company,
Atlantic Preferred II LLC, a New York limited liability
company, Indian Preferred LLC, a New York limited liability
company and Prometheus Investment Holding, L.P., a Delaware
limited partnership and Starwood Financial Trust. (3)
10.6 Form of Advisor Lock-Up Agreement, dated as of June 15,
1999, among Greenhill & Co., LLC and each owner of
interests in the Advisor. (5)
10.7 Form of Option Standstill Agreement, dated as of June 15,
1999, among Starwood Financial Trust and each of George R.
Puskar, Willis Anderson, Jr., Stephen B. Oresman, Robert W.
Holman Jr. and John G. McDonald. (5)
10.8 Form of Starwood Financial Trust Affiliate Lock-Up
Agreement, dated as of June 15, 1999, between Greenhill &
Co., LLC and each of B Holdings L.L.C., SOFI-IV SMT
Holdings, L.L.C. and Starwood Mezzanine
Investors, L.P. (5)
10.9 Stock Purchase Agreement dated as of June 15, 1999 among Jay
Sugarman, Spencer B. Haber, A. William Stein and Robert
Holman, Jr. (5)
10.10 Amendment No. 1 to the Stock Purchase Agreement dated as of
July 26, 1999, which amends the Stock Purchase Agreement
dated as of June 15, 1999 among Jay Sugarman, Spencer B.
Haber, A. William Stein and Robert Holman, Jr.(5)
10.11 Shareholder Agreement, dated as of June 15, 1999, among
SOFI-IV SMT Holdings, L.L.C., Starwood Mezzanine
Investors, L.P., B Holdings, L.L.C. and TriNet Corporate
Realty Trust, Inc. (5)
10.12 First Amendment to Shareholder Agreement dated as of
July 15, 1999, which amends the Shareholder Agreement, dated
as of June 15, 1999, among SOFI-IV SMT Holdings, L.L.C.,
Starwood Mezzanine Investors, L.P., B Holdings L.L.C. and
TriNet Corporate Realty Trust, Inc. (5)
10.14 Indenture, dated May 17, 2000, among iStar Asset Receivables
Trust, La Salle Bank National Association and ABN AMRO BANK
N.V. (9)
10.15 Purchase Agreement dated October 14, 2001. (11)
10.16 Employment Agreement dated as of April 1, 2001 by and
between iStar Financial Inc. and Spencer B. Haber. (12)
10.17 Employment Agreement, dated as of March 31, 2001, by and
between iStar Financial Inc. and Jay Sugarman. (12)
10.18 Reimbursement Agreement, dated as of June 24, 2001, by and
between iStar Financial Inc. and certain of its
shareholders. (12)
10.19 Master Agreement between iStar DB Seller, LLC, Seller and
Deutsche Bank AG, New York Branch, Buyer dated January 11,
2001. (13)
98
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
10.20 Employment Agreement, dated November 1, 2002, by and between
iStar Financial Inc. and Catherine D. Rice.
10.21 iStar Financial Inc. Code of Conduct.
12.1 Computation of Ratio of EBITDA to interest expense.
12.2 Computation of Ratio of EBITDA to combined fixed charges.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
EXPLANATORY NOTES:
- ------------------------
(1) Incorporated by reference from the Company's Registration Statement on
Form S-4 filed on May 12, 1998.
(2) Incorporated by reference from the Company's Annual Report on Form 10- K
for the year ended December 31, 1997 filed on April 2, 1998.
(3) Incorporated by reference from the Company's Form 8-K filed on
December 23, 1998.
(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on June 22, 1999.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-4 filed on August 25, 1999.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 filed on March 30, 2000.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000 filed on May 15, 2000.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 filed on August 14, 2000.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 filed on March 30, 2001.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 filed on November 14, 2001.
(11) Incorporated by reference from the Company's Form 8-K filed on November 5,
2001.
(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 filed on August 3, 2001.
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001 filed on May 15, 2001.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002.
(15) Incorporated by reference from the Company's Form 8-K filed on
November 19, 2002.
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
iSTAR FINANCIAL INC.
REGISTRANT
Date: March 27, 2003 /s/ JAY SUGARMAN
------------------------------------------------
Jay Sugarman
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER
Date: March 27, 2003 /s/ CATHERINE D. RICE
------------------------------------------------
Catherine D. Rice
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following person on behalf of
the registrant and in the capacities and on the dates indicated.
Date: March 27, 2003 /s/ JAY SUGARMAN
-------------------------------------------
Jay Sugarman
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Date: March 27, 2003 /s/ WILLIS ANDERSEN JR.
-------------------------------------------
Willis Andersen Jr.
DIRECTOR
Date: March 27, 2003 /s/ JEFFREY G. DISHNER
-------------------------------------------
Jeffrey G. Dishner
DIRECTOR
Date: March 27, 2003 /s/ ANDREW L. FARKAS
-------------------------------------------
Andrew L. Farkas
DIRECTOR
Date: March 27, 2003 /s/ MADISON F. GROSE
-------------------------------------------
Madison F. Grose
DIRECTOR
100
Date: March 27, 2003 /s/ SPENCER B. HABER
-------------------------------------------
Spencer B. Haber
DIRECTOR
Date: March 27, 2003 /s/ ROBERT W. HOLMAN, JR.
-------------------------------------------
Robert W. Holman, Jr.
DIRECTOR
Date: March 27, 2003 /s/ ROBIN JOSEPHS
-------------------------------------------
Robin Josephs
DIRECTOR
Date: March 27, 2003 /s/ MERRICK R. KLEEMAN
-------------------------------------------
Merrick R. Kleeman
DIRECTOR
Date: March 27, 2003 /s/ H. CABOT LODGE III
-------------------------------------------
H. Cabot Lodge III
DIRECTOR
Date: March 27, 2003 /s/ MATTHEW J. LUSTIG
-------------------------------------------
Matthew J. Lustig
DIRECTOR
Date: March 27, 2003 /s/ WILLIAM M. MATTHES
-------------------------------------------
William M. Matthes
DIRECTOR
Date: March 27, 2003 /s/ JOHN G. MCDONALD
-------------------------------------------
John G. McDonald
DIRECTOR
Date: March 27, 2003 /s/ STEPHEN B. ORESMAN
-------------------------------------------
Stephen B. Oresman
DIRECTOR
Date: March 27, 2003 /s/ GEORGE R. PUSKAR
-------------------------------------------
George R. Puskar
DIRECTOR
Date: March 27, 2003
-------------------------------------------
Barry S. Sternlicht
DIRECTOR
101
CERTIFICATIONS
I, Jay Sugarman, certify that:
1. I have reviewed this annual report on Form 10-K of iStar
Financial Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 27, 2003 /s/ JAY SUGARMAN
---------------------------------------------
Name: Jay Sugarman
Title: Chief Executive Officer
102
I, Catherine D. Rice, certify that:
1. I have reviewed this annual report on Form 10-K of iStar
Financial Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 27, 2003 /s/ CATHERINE D. RICE
---------------------------------------------
Name: Catherine D. Rice
Title: Chief Financial Officer
103
EXHIBIT 3.6
iSTAR FINANCIAL INC.
Articles Supplementary
iStar Financial Inc., a Maryland corporation, (the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Under a power contained in Article V of the Charter of the
Corporation (the "Charter"), the Board by duly adopted resolutions classified
and designated 5,000 shares of authorized but unissued shares of Common Stock
(as defined in the Charter) as shares of High Performance Common Stock-Series 4,
with the following preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications, and terms and conditions of redemption, which, upon any
restatement of the Charter, shall become part of Article V of the Charter, with
any necessary or appropriate renumbering or relettering of the sections or
subsections hereof.
HIGH PERFORMANCE COMMON STOCK- SERIES 4
1. DESIGNATION AND NUMBER. A series of Common Stock, designated High
Performance Common Stock-Series 4 ("HP Series 4 Stock"), is hereby established.
The number of shares of HP Series 4 Stock shall be 5,000. The number of shares
of HP Series 4 Stock may be increased or decreased (but not below the number of
shares of HP Series 4 Stock then issued and outstanding) from time to time by
resolution of the Board. HP Series 4 Stock repurchased by the Corporation shall
be canceled and shall revert to authorized but unissued shares of Common Stock,
undesignated as to class or series, subject to reclassification and reissuance
by the Corporation in accordance with the Charter.
2. RANK. The HP Series 4 Stock shall, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Corporation, rank (a)
on a parity with the Common Stock; and (b) junior to the Corporation's 9.5%
Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"),
9-3/8% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred
Stock"), 9.2% Series C Cumulative Redeemable Preferred Stock (the "Series C
Preferred Stock") and 8% Series D Cumulative Redeemable Preferred Stock (the
"Series D Preferred Stock"), and all equity securities issued by the Corporation
the terms of which specifically provide that such equity securities rank senior
to the HP Series 4 Stock.
3. VOTING RIGHTS. Each share of HP Series 4 Stock (voting together as a single
class with all Common Stock (including any High Performance Common Stock-Series
1, High Performance Common Stock-Series 2, High Performance Common Stock-Series
3, and High Performance Common Stock-Series 5) and all Preferred Stock entitled
to vote) will be entitled to cast twenty-five one-hundredths of one vote with
respect to all matters on which the holders of Common Stock are entitled to
vote. Shares of HP Series 4 Stock shall not have cumulative voting rights.
4. DIVIDENDS
(a) Each share of HP Series 4 Stock shall be entitled to receive dividends
in the same amount and at the same times as regular quarterly cash dividends are
paid on a number of shares of Common Stock equal to the Common Stock Equivalent,
as defined below. For the avoidance of doubt, shares of HP Series 4 Stock shall
not be entitled to receive dividends in respect of any dividend or other
distribution paid on the Common Stock other than regular quarterly cash
dividends.
(b) Each dividend will be payable to holders of record of the HP Series 4
Stock on a date (a "Record Date") selected by the Board which is the same date
as the Record Date for the payment of the related dividend or other distribution
on the Common Stock.
(c) Except as otherwise provided in paragraph (d), the Common Stock
Equivalent shall be 0.01 shares of Common Stock.
(d) If the Cumulative Total Return of the Common Stock during the
Measurement Period exceeds the Threshold Return, then with respect to each
dividend declared after the Valuation Date, the Common Stock Equivalent shall be
deemed to equal: (1) the product of (w) 7.5% of the amount by which the
Cumulative Total Return of the Common Stock during the Measurement Period
exceeds the Threshold Return multiplied by (x) the Average Market Capitalization
of the Common Stock for the Measurement Period; divided by (2) the product of
(y) the Security Price of one share of Common Stock as of the Valuation Date and
(z) the number of shares of HP Series 4 Stock Outstanding at the close of
business, New York time, on the Valuation Date; PROVIDED, HOWEVER, that in no
event shall the Common Stock Equivalent exceed the quotient of (A) 1.0% of the
average number of shares of Common Stock outstanding on the last day of each
full calendar month during the Measurement Period, on a fully diluted basis,
divided by (B) the number of shares of HP Series 4 Stock outstanding on the
Valuation Date.
5. RIGHTS UPON LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, each share of HP Series 4 Stock shall be entitled, on the same
basis as the Common Stock Equivalent and any other class of stock hereafter
classified or reclassified that does not have a preference on distributions in
the liquidation, dissolution or winding up of the Company, to share ratably in
the net assets of the Company remaining, after payment or provision for payment
of the debts and other liabilities of the Company and the amount to which the
holders of any class of stock of the Company that has a preference on
distributions in the liquidation, dissolution or winding up of the Company shall
be entitled. The consolidation or merger of the Corporation with or into any
other corporation, trust or entity or of any other corporation with or into the
Corporation, or the sale, lease or conveyance of all or substantially all of the
property or business of the Corporation, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Corporation.
6. REDEMPTION. The HP Series 4 Stock is not redeemable, except in the
following instances:
(a) In order to ensure that the Corporation remains a qualified real
estate investment trust for Federal income tax purposes, the HP Series 4 Stock
will be subject to the provisions of Article IX of the Charter. Without limiting
the generality of the foregoing, pursuant to Article IX, HP Series 4 Stock,
together with other equity stock of the Corporation, owned by a stockholder in
excess of the Ownership Limit will automatically be transferred to a Charitable
Trust for the benefit of a Charitable Beneficiary and the Corporation will have
the right to purchase such transferred shares from the Charitable Trust.
(b) The Corporation shall have the right, but not the obligation, to
redeem shares of HP Series 4 Stock held by iStar HPU 2005, L.L.C. (the "LLC")
upon receipt of a written notice (an "LLC Redemption Notice") from the managing
member of the LLC of a proposed redemption by the LLC of units of interest in
the LLC pursuant to the LLC's operating agreement. The LLC Redemption Notice
shall specify the number of units of LLC interest to be redeemed, the redemption
price and the date on which the redemption shall take place. The number of
shares of HP Series 4 Stock that may be redeemed by the Corporation and the
redemption price to be paid by the Corporation shall be the same as the number
of units of LLC interest proposed to be redeemed and the redemption price to be
paid for such units, in each case as set forth in the LLC Redemption Notice. In
order for the Corporation to exercise its right of redemption hereunder, the
Corporation shall advise the LLC in writing, as promptly as practicable
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and in any event within 10 business days after receipt of the LLC Redemption
Notice, of its intent to redeem HP Series 4 Stock in response to the LLC
Redemption Notice and shall specify a date for such redemption, which date shall
be no later than 10:00 a.m., New York time, on the redemption date specified in
the LLC Redemption Notice.
(c) Notice of redemption of HP Series 4 Stock having been given in
accordance with the previous paragraph, on or before the redemption date, the
LLC shall surrender the certificates representing the shares of HP Series 4
Stock to be redeemed to the Corporation. Promptly after the certificates
representing HP Series 4 Stock are surrendered to the Corporation, the
Corporation will deliver to the LLC the consideration for such shares.
(d) The Corporation shall redeem for cash all outstanding shares of HP
Series 4 Stock at a redemption price per share equal to the Security Price of
the Common Stock as of the first date on which the Corporation is no longer
treated as a real estate investment trust for U.S. federal income tax purposes.
Such redemption shall take place no later than 60 days after the first date on
which the Corporation is no longer treated as a real estate investment trust for
U.S. federal income tax purposes.
(e) At the close of business on the redemption date for shares of HP
Series 4 Stock, the holders of the shares called for redemption will cease to be
stockholders with respect to those shares, will have no interest in or claims
against the Corporation by virtue of the shares and will have no voting or other
rights with respect to the shares (except the right to receive the redemption
price, and except the right to receive dividends or distributions payable
thereafter to the holder of the HP Series 4 Stock as of a Record Date preceding
such redemption date) and, from and after the close of business on the
redemption date the shares of HP Series 4 Stock to be redeemed or exchanged will
no longer be deemed outstanding.
(f) If a Record Date occurs prior to a redemption date for shares of HP
Series 4 Stock but the corresponding dividend payment date occurs after the
redemption date, the dividend payable on such dividend payment date will be
payable on the dividend payment date to the holder of record of the shares of HP
Series 4 Stock on the Record Date notwithstanding the redemption of the shares
of HP Series 4 Stock on the redemption date.
7. CONVERSION. If the Corporation consolidates or merges with or into any
person, or sells, assigns, transfers, leases or otherwise disposes of all or
substantially all of its consolidated assets to another person, in a single
transaction or a series of related transactions in which (1) the Corporation is
not the surviving or continuing person and (2) the common stock of the
Corporation is converted or exchanged into cash or other property or securities
of the surviving or continuing person (a "Change of Control"), then at the
effective time of the completion of such Change of Control transaction, each
share of HP Series 4 Common Stock shall automatically be converted into the same
type and amount of consideration as a number of shares of common stock equal to
the Common Stock Equivalent in effect at the effective time of the completion of
the transaction.
8. DEFINITIONS. As used herein, the following terms shall have the following
meanings:
"AVERAGE MARKET CAPITALIZATION" means the weighted average of the common
equity market capitalization of the Corporation for each calendar month of the
Measurement Period, as calculated by multiplying the number of basic shares of
Common Stock outstanding on the last day of each calendar month by the average
daily closing price of the Common Stock for each such month.
"CHANGE OF CONTROL" means, a transaction of the type contemplated by
paragraph 7 "Conversion" of these Articles.
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"CHANGE OF CONTROL PRICE" means, if the Common Stock is publicly traded on
a U.S. national securities exchange or automated quotation system prior to the
occurrence of a Change of Control, then the closing price of the Common Stock at
the end of regular trading on the last trading day prior to the occurrence of
the Change of Control, and otherwise shall mean the fair market value of the
Common Stock on the day prior to the occurrence of the Change of Control as
determined by the Board.
"CUMULATIVE TOTAL RETURN" means, for any security and for any period, the
cumulative total return for such security over such period, as measured by (1)
the sum of (a) the cumulative amount of dividends paid in respect of such
security for such period (assuming that all cash dividends are reinvested in
such security as of the payment date for such dividend based on the Security
Price as of the dividend payment date), and (b) an amount equal to (x) the
Change of Control Price or, if no Change of Control has occurred, the Security
Price as of the last day of the Measurement Period, minus (y) the closing price
of the security, as reported by the principal stock exchange or automated
quotation system on which the security is then traded, on the last trading day
prior to the first day of the Measurement Period, divided by (2) the closing
price of the security, as reported by the principal stock exchange or automated
quotation system on which the security is then traded, on the last trading day
prior to the first day of the Measurement Period; provided, however, that if the
foregoing calculation results in a negative number, the "Cumulative Total
Return" shall be equal to zero.
"INDEX RETURN" means the Cumulative Total Return, expressed as a
percentage, achieved by the Peer Group Index during the Measurement Period.
"SECURITY PRICE" means, for any security, the average of the closing prices
for such security on the principal securities exchange or automated quotation
system on which the security is traded or listed for the 20 trading days ended
on the trading date immediately preceding the date as of which the Security
Price is being determined; provided, however, that if the security is not
publicly-traded, then the Security Price shall be equal to the fair market value
of the security as determined by the Board.
"MEASUREMENT PERIOD" means the period from and including January 1, 2005 to
and including the Valuation Date.
"PEER GROUP INDEX" means, initially, a combination of The Morgan Stanley
Dean Witter REIT Index and the Russell 1000 Financial Index, with each such
index being accorded equal weighting. The Board may select one or more different
indices to serve as the Peer Group Index from time to time if the Board
determines that the applicable indices no longer serve as an appropriate
comparison for the Company, or if they are not maintained throughout the
Measurement Period or for any other reason the Board may determine.
"THRESHOLD RETURN" means the greater of (1) 10% and (2) the Index Return.
"VALUATION DATE" means the earlier of (1) December 31, 2005, (2) the date
of the occurrence of a Change of Control of the Company and (3) the date of any
liquidation, dissolution or winding up of the Company.
SECOND: The shares of High Performance Common Stock-Series 4 have been
classified and designated by the Board of Directors under the authority
contained in the Charter.
THIRD: These Articles Supplementary have been approved by the Board of
Directors in the manner and by the vote required by law.
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FOURTH: The undersigned Chairman and Chief Executive Officer of the
Corporation acknowledges these Articles Supplementary to be the corporate act of
the Corporation and, as to all matters or facts required to be verified under
oath, the undersigned Chairman and Chief Executive Officer acknowledges that, to
the best of his knowledge, information and belief, these matters and facts are
true in all material respects and that this statement is made under the
penalties for perjury.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary to
be signed in its name and on its behalf by its Chairman and attested to by its
Secretary on this 22 day of January, 2003.
ATTEST: iSTAR FINANCIAL INC.
By: /s/ Catherine D. Rice By: /s/ Jay Sugarman (SEAL)
--------------------------------- -----------------------------
Name: Catherine D. Rice Name: Jay S. Sugarman
Title: Chief Financial Officer Title: Chairman and CEO
and Secretary
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EXHIBIT 10.20
EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of November 1, 2002 by and between iStar
Financial Inc., a Maryland corporation (together with its successors and
assigns, the "Company"), and Catherine D. Rice (the "Executive").
WITNESSETH :
WHEREAS, the Company wishes to offer employment to the Executive, and the
Executive desires to accept such offer, on the terms and conditions set forth
below;
NOW, THEREFORE, IT IS AGREED by and between the Company and the Executive
(the "Parties") as follows:
1. EMPLOYMENT PERIOD. The Company agrees to employ the Executive, and the
Executive agrees to such employment on the terms and conditions set forth in
this Agreement. The term of the Executive's employment under this Agreement
shall be deemed to have commenced as of November 6, 2002 (the "Effective Date")
and, unless earlier terminated in accordance with Section 5, shall continue
through December 31, 2005 (the "Initial Employment Period"); provided, however,
that the Effective Date shall not be deemed to have occurred unless and until
the parties execute and deliver the agreements contemplated by Section 4 hereof.
Upon the expiration of the Initial Employment Period and upon each anniversary
thereof, the term of Executive's employment hereunder, if not previously ended,
shall automatically be extended for an additional employment period of one year,
subject to earlier termination in accordance with Section 5 (collectively, the
"Additional Employment Period"), unless either Party shall have given written
notice to the other Party of its decision not to extend the Initial Employment
Period or to further extend the Additional Employment Period at least 30 days
prior to the scheduled expiration of the Initial Employment Period or the
Additional Employment Period, as the case may be. (the period during which the
Executive is employed hereunder being hereinafter referred to as the "Term").
2. POSITION AND DUTIES.
(a) The Executive shall become an employee of the Company as of the
Effective Date and shall serve as Chief Financial Officer of the Company
beginning on November 16, 2002 and during the remainder of the Term. The
Executive shall have the authorities, duties and responsibilities that are
customarily assigned to the chief financial officer of a company of the size and
nature of the Company, including, but not limited to, raising capital;
financial, accounting, treasury and investor relations functions; financial
reporting; communicating with external parties (including, but not limited to,
shareholders, bondholders and research analysts); and reporting to the Audit
Committee. The Executive agrees that upon the termination of her employment as
Chief Financial Officer of the Company, she shall promptly execute any documents
evidencing such termination that the Company may reasonably request her to
execute.
(b) In her capacity as Chief Financial Officer of the Company, the
Executive shall report directly to the President of the Company. In the event
the President position is unfilled, the Executive shall report to the Chief
Executive Officer of the Company.
(c) During the Term, Executive shall devote substantially all of her
business time and attention to the business and affairs of the Company and shall
perform, faithfully and diligently, her duties
and responsibilities hereunder. It shall not be considered a violation of the
foregoing for the Executive to: (i) serve on corporate, industry, civic, social
or charitable boards or committees or engage in charitable activities and
community affairs, provided that the Chief Executive Officer approves
Executive's service on any such corporate or industry boards or committees; or
(ii) manage her own personal investments and affairs; provided that the
foregoing activities do not materially interfere with the performance of the
Executive's responsibilities hereunder.
(d) The Executive agrees to discharge her duties and obligations under
this Agreement in accordance with such reasonable policies, consistent with the
express terms of this Agreement, as the Company may from time to time (either
before or after the Effective Date) adopt and communicate to the Executive.
(e) During the Term, the Executive's principal office, and principal
place of employment, shall be at the Company's principal executive offices in
Manhattan.
3. COMPENSATION.
(a) BASE SALARY. During the Term, Executive shall receive a base
salary ("Base Salary") at a rate of $225,000 per annum, subject to annual review
for upward (but not downward) adjustment by the Company's Board of Directors
(the "Board"), or its Compensation Committee (the "Compensation Committee"), in
their sole discretion. The Base Salary shall be paid in accordance with the
Company's customary payroll practices for its senior executives.
(b) ANNUAL BONUS. Executive shall, to the extent provided in this
Section 3(b), be entitled to receive an annual cash incentive award in respect
of each fiscal year of the Company that ends during the Term, beginning with the
fiscal year ending December 31, 2003. Beginning with the bonus for the fiscal
year ending December 31, 2003, the Executive's annual incentive award target for
any such year shall be $325,000, subject to annual review for upward or downward
adjustment. Such Annual Bonus shall be payable in cash to the Executive on or
about January 31 of the year following the last day of the fiscal year to which
the bonus relates.
(c) FRINGE BENEFITS.
(i) REIMBURSEMENT OF EXPENSES. The Company shall promptly
pay or reimburse Executive in accordance with the Company's standard policies as
in effect from time to time, upon the presentation of appropriate documentation
of such expenses, for all reasonable travel and other expenses incurred by the
Executive in the course of performing services for or on behalf of the Company.
(ii) PARTICIPATION IN BENEFIT PLANS. The Executive shall be
entitled to participate, during the Term, in all welfare and retirement benefit
plans, programs and arrangements that are generally available to senior
executives of the Company, including but not limited to qualified and
non-qualified pension and retirement plans, supplemental pension and retirement
plans, group hospitalization, health, medical, vision, dental care, death
benefit, disability, and post-retirement welfare plans, and other present and
future welfare and retirement benefit plans, programs and arrangements, on no
less favorable terms than those that apply to other senior executives of the
Company generally. For avoidance of doubt, the foregoing shall not be construed
as a guaranty of, or as an obligation on the part of the Company to provide, any
future awards (including, but not limited to, stock options, restricted stock,
phantom shares, or other performance awards) under any Company incentive plan
from time to time in effect for its senior executives or other employees.
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(iii) VACATION. During the Term, Executive shall be entitled
to four weeks' paid vacation per annum. Executive shall not be entitled to any
cash payment in respect of any unused vacation time.
(iv) OTHER FRINGE BENEFITS AND PERQUISITES. During the Term,
the Executive shall be entitled to participate in all fringe benefits and
perquisites available to senior executives of the Company generally at levels,
and on terms and conditions, that are commensurate with her position and
responsibilities at the Company and shall be entitled to receive such additional
fringe benefits and perquisites as the Company may, in its discretion, from time
to time provide.
(v) RELOCATION; CORPORATE APARTMENT. The Company shall
reimburse the Executive for relocation expenses in accordance with the Company's
relocation policy, as in effect from time to time. Reimbursable relocation
expenses will include reasonable travel costs between New York City and San
Francisco related to the Executive's relocation. Commencing on the Effective
Date through December 31, 2002, the Executive shall have use of the Company's
corporate apartment in Manhattan. Thereafter, the Executive shall be permitted
to use such apartment consistent with Company policies.
4. EQUITY-BASED COMPENSATION; HIGH PERFORMANCE UNITS. It is acknowledged
that, commencing herewith, the Executive is being granted certain equity-based
compensation in accordance with and subject to the terms of two award
agreements, copies of which are attached hereto as Exhibit A and Exhibit B. In
addition, the Executive is purchasing interests in each of the Company's 2003,
2004, 2005 and 2006 High Performance Unit Plans pursuant to a subscription
agreement, a copy of which is attached hereto as Exhibit C. The Executive is
hereby granted the right to purchase interests representing 12.5% of the total
interests in the Company's 2007 High Performance Unit Plan; provided, however,
that in the event such 2007 High Performance Unit Plan is required to be
approved by the Company's shareholders, and, after submission to the
shareholders, the Plan is not approved, then this right shall terminate with no
liability on the part of the Company or the Executive. The purchase price for
interests in the 2007 High Performance Unit Plan shall be the fair market value
for such interests as determined by the Company, subject to review by its
independent auditors.
5. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. The Executive's employment with the Company
shall terminate automatically upon the Executive's death. To the extent
permitted by applicable law, the Company shall be entitled to terminate the
Executive's employment with the Company in the event of the Executive's
Disability. "Disability" shall mean that the Executive shall have been unable,
for a period of not less than six consecutive months, to substantially perform
her duties for the Company, as a result of physical or mental illness, injury or
impairment.
(b) BY THE COMPANY.
(i) The Company may terminate the Executive's employment
with the Company for Cause or Without Cause. "Cause" shall mean (i) the
conviction of the Executive (including a guilty or NOLO CONTENDERE plea) for the
commission of any felony; (ii) the Executive's engagement in fraud or
embezzlement or intentional misappropriation of the Company's funds or other
assets of the Company; (iii) willful engagement by the Executive in significant
activities resulting in material and demonstrable harm to the reputation of the
Company; (iv) the willful and repeated refusal to perform or substantial
disregard of the duties properly assigned to the Executive by the Company (other
than as a result of Disability); (v) a material violation by the Executive of
any statutory or common law duty of loyalty to the Company; or (vi) a material
breach by the Executive of this Agreement or the Company's Code of Conduct.
Notwithstanding the foregoing, (i) the Executive shall be given written notice
of any
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action or failure to act that is alleged to constitute Cause (a "Default"), and
an opportunity for 20 business days from the date of such notice to cure such
Default, such period to be subject to extension in the discretion of the CEO or
the Board of Directors; and (ii) regardless of whether the Executive is able to
cure any Default, the Executive shall not be deemed to have been terminated for
Cause without (x) an opportunity for the Executive, together with her counsel,
to be heard by the Board of Directors, and (y) following any such hearing by the
Board of Directors, delivery to the Executive of a notice of termination stating
that the Company has determined that the actions or inactions of the Executive
described in the Company's prior notice of Default constitute Cause.
(ii) A termination of the Executive's employment by the
Company "Without Cause" (that is, neither for Cause nor for death, nor
Disability, in each case as determined in accordance with this Agreement) shall
be effected by the Company giving the Executive prior written notice of the
termination, which notice shall specify the Date of Termination (as defined
below). A termination of Executive's employment Without Cause by the Company
shall not constitute a breach of this Agreement.
(c) BY THE EXECUTIVE.
(i) The Executive may terminate her employment hereunder for
Good Reason or without Good Reason. "Good Reason" means any of the following
that is not cured within 30 calendar days following written notice thereof from
the Executive to the Company:
(A) failure by the Company to maintain the Executive as
CFO of the Company with such duties as are described in Section
2(a);
(B) the assignment to the Executive of any duties or
responsibilities inconsistent in any respect with those
customarily associated with the position to be held by Executive
pursuant to this Agreement or any diminution in Executive's
position, authority, duties or responsibilities in a manner
inconsistent with the terms and provisions of this Agreement;
(C) any requirement that the Executive's services
hereunder be rendered primarily at a location or locations other
than the offices of the Company located in the borough of
Manhattan in New York City and in San Francisco, California;
(D) the failure of any successor to all or
substantially all of the assets or business of the Company to
promptly assume in writing all of the obligations of the Company
under this Agreement; or
(E) any other material breach of this Agreement by the
Company.
(ii) A termination of employment by the Executive (including
a termination for Good Reason), other than for death or Disability, in each case
determined in accordance with this Agreement, and not by notice of non-extension
in accordance with Section 1, shall be effected by her giving the Company prior
written notice, no less than 30 days before the Date of Termination, specifying
the Date of Termination. Termination of the Executive's employment in accordance
with this Section 5(c)(ii) shall not constitute a breach of this Agreement.
(d) NO WAIVER. The failure to set forth any fact or circumstance shall
not constitute a waiver of the right to assert, and shall not preclude the Party
giving notice from asserting, such fact or circumstance in an attempt to enforce
any right under, or in connection with, this Agreement.
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(e) DATE OF TERMINATION. "Date of Termination" means the date of the
Executive's death, the date on which the termination of the Executive's
employment with the Company by the Company on account of Disability is effected,
the date on which the termination of the Executive's employment with the Company
by the Company for Cause or Without Cause is effective, the date on which the
termination of the Executive's employment for Good Reason is effective, or the
date on which the Executive terminates her employment without Good Reason.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) DEATH. In the event that the Executive's employment hereunder is
terminated by the Executive's death, then:
(i) the Executive's estate or beneficiaries shall be
entitled to receive any Base Salary and other benefits earned and accrued under
this Agreement prior to the Date of Termination (and reimbursement under this
Agreement for expenses incurred prior to the Date of Termination); and
(ii) the Executive shall receive such additional rights and
benefits as may be provided under the benefit plans and programs of the Company
and its affiliates in accordance with the provisions of such plans and programs,
if any; and
(iii) the Executive's estate and beneficiaries shall have no
further rights to any other compensation or benefits hereunder on or after the
termination of employment, or any other rights hereunder, except as may
otherwise be provided under the agreements described in Section 4 of this
Agreement.
(b) DISABILITY. In the event that the Executive's employment hereunder
is terminated for Disability in accordance with this Agreement, then:
(i) the Executive or her legal representative, as the case
may be, shall be entitled to receive any Base Salary and other benefits earned
and accrued under this Agreement prior to the Date of Termination (and
reimbursement under this Agreement for expenses incurred prior to the Date of
Termination);
(ii) the Executive shall receive Company-paid, continued
medical insurance coverage, as then provided generally to employees of the
Company and their eligible dependents, for the Executive and her eligible
dependents for a period of one year following the Date of Termination; which
coverage shall be included as part of any required COBRA coverage; provided,
however, that the COBRA coverage shall terminate with respect to the Executive
and her eligible dependents as of the earliest date allowed by law;
(iii) the Executive shall receive such additional rights and
benefits as may be provided under the benefit plans and programs of the Company
and its affiliates in accordance with the provisions of such plans and programs,
if any; and
(iv) the Executive shall have no further rights to any other
compensation or benefits hereunder on or after the termination of employment, or
any other rights hereunder, except as may otherwise be provided under the
agreements described in Section 4 of this Agreement.
(c) WITHOUT CAUSE BY THE COMPANY OR FOR GOOD REASON BY THE EXECUTIVE.
In the event that the Executive's employment hereunder is terminated Without
Cause by the Company or for Good Reason by the Executive, in each case in
accordance with this Agreement, then:
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(i) the Executive shall be entitled to receive any Base
Salary and other benefits earned and accrued under this Agreement prior to the
Date of Termination (and reimbursement under this Agreement for expenses
incurred prior to the Date of Termination);
(ii) the Executive shall continue to receive Base Salary at
the then-current rate for 12 months, payable at such times as the Base Salary
would otherwise be payable without regard to such termination;
(iii) the Executive shall receive Company-paid, continued
medical insurance coverage, as then provided generally to employees of the
Company and their eligible dependents, for the Executive and her eligible
dependents for a period of one year following the Date of Termination; which
coverage shall be included as part of any required COBRA coverage; provided,
however, that the COBRA coverage shall terminate with respect to the Executive
and her eligible dependents as of the earliest date allowed by law;
(iv) the Executive shall receive such additional rights and
benefits as may be provided under the benefit plans and programs of the Company
and its affiliates in accordance with the provisions of such plans and programs,
if any; and
(v) the Executive shall have no further rights to any other
compensation or benefits hereunder on or after the termination of employment, or
any other rights hereunder, except as may otherwise be provided under the
agreements described in Section 4 of this Agreement.
(d) FOR CAUSE BY THE COMPANY, OR BY THE EXECUTIVE WITHOUT GOOD REASON;
BY EXPIRATION OF THE TERM. In the event that the Executive's employment
hereunder is terminated (i) by the Company for Cause in accordance with this
Agreement, (ii) by the Executive without Good Reason, or (iii) upon the
scheduled expiration of the Initial Employment Period or any Additional
Employment Period in accordance with Section 1, then Executive shall be entitled
solely to the following benefits:
(i) the Executive shall be entitled to receive any Base
Salary and other benefits earned and accrued under this Agreement prior to the
Date of Termination (and reimbursement under this Agreement for expenses
incurred prior to the Date of Termination), and
(ii) the Executive shall have no further rights to any other
compensation or benefits hereunder on or after the termination of employment, or
any other rights hereunder.
(e) GENERAL RELEASE. The Company's obligation to make any payment
pursuant to Section 6(c)(ii) shall be contingent upon, and is the consideration
for, the Executive executing and delivering to the Company, a general release
(the "Release"), in customary form, releasing the Company, its affiliates and
all current and former members, officers and employees of the Company (the
"Releasees") from any claims relating to her employment hereunder, other than
claims relating to continuing obligations under, or preserved by, (x) this
Agreement or (y) any compensation or benefit plan, program or arrangement in
which the Executive was participating as of the Date of Termination, and no such
amounts shall be provided until the Executive executes and delivers to the
Company a letter which provides that the Executive had not revoked such Release
after seven days following the date of the Release; subject to no Releasee
initiating or maintaining any proceeding or claim against the Executive or any
of her heirs, beneficiaries or legal representatives or against her estate,
other than proceedings and claims relating solely to enforcing the Executive's
continuing obligations under this Agreement or any of the agreements, plans,
programs and arrangements referred to in clause (y) of this Section Section
6(e).
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(f) NO OFFSET, ETC.. The Company's obligation to make the payments
provided for in, and otherwise to perform its obligations under, this Agreement
shall not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action that the Company or any Releasee may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amount payable
to the Executive under any of the provisions of this Agreement, and such amounts
shall not be reduced, regardless of whether the Executive obtains other
employment or receives benefits or compensation in connection therewith. Amounts
due under this Section 6 are considered to be reasonable by the Company and are
not in the nature of a penalty. The payments and benefits provided for in this
Section 6 are intended to constitute both liquidated damages and, in the case of
the payment described in Section 6(c)(ii), consideration for the general release
described in Section 6(e).
7. WITHHOLDING. Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all Federal,
state, local and foreign taxes that it determines are required to be withheld by
applicable law or regulation.
8. CONFIDENTIAL INFORMATION.
(a) The Executive shall hold all secret or confidential information,
knowledge or data relating to the Company or any of its affiliates and their
respective businesses that the Executive obtains during her employment hereunder
and that is not public knowledge (other than as a result of the Executive's
violation of this Section 8) ("Confidential Information") in strict confidence.
The Executive shall not communicate, divulge or disseminate Confidential
Information at any time during or after the Executive's employment with the
Company, except (i) in the course of performing her duties for the Company or
its affiliates, (ii) in confidence to any attorney, accountant or other
professional for the purpose of securing professional advice, (iii) to the
extent reasonably necessary to enforce her rights, (iv) with the prior written
consent of the Company or (v) as otherwise required by law, regulation or legal
process. If the Executive is requested pursuant to, or required by, applicable
law, regulation or legal process to disclose any Confidential Information, the
Executive shall provide the Company, as promptly as the circumstances reasonably
permit, with notice of such request or requirement and, unless a protective
order or other appropriate relief is previously obtained, the Confidential
Information subject to such request may be disclosed pursuant to and in
accordance with the terms of such request or requirement, provided that the
Executive shall use her best reasonable efforts, at the Company's reasonable
request and sole expense, to limit any such disclosure to the precise terms of
such request or requirement.
(b) All memoranda, notes, lists, records, property and any other
tangible product and documents (and all copies thereof), whether visually
perceptible, machine-readable or otherwise, made, produced or compiled by the
Executive or made available to the Executive concerning the business of the
Company or its affiliates, (i) shall at all times be the property of the Company
(and, as applicable, any affiliates) and shall be delivered to the Company at
any time upon its request, and (ii) upon the Executive's termination of
employment, shall be immediately returned to the Company.
9. NON-COMPETITION/NON-SOLICITATION. The Executive acknowledges that the
services to be rendered by her to the Company (which, as used in this Section 9,
shall be deemed to include the Company and each of its Subsidiaries) are of a
special and unique character. In consideration of her employment hereunder, the
Executive agrees, for the benefit of the Company, that she will not (other than
in connection with performing her duties for the Company or its affiliates):
(a) during the Term and, if the Executive's employment hereunder is
terminated (x) by the Company for any reason other than a termination Without
Cause or (y) by the Executive other than for
7
Good Reason, for 12 months thereafter: (i) engage, directly or indirectly,
whether as principal, agent, representative, consultant, employee, partner,
stockholder, limited partner or other investor (other than an investment of not
more than (x) 5% of the stock or equity of any corporation the capital stock of
which is publicly traded or (y) 5% of the ownership interest of any limited
partnership or other entity) or otherwise, within the United States of America,
in any business that competes directly or materially with the business conducted
by the Company as of the Date of Termination or (ii) solicit or entice, or
attempt to solicit or entice, away from the Company, either for her own account
or for any individual, firm or corporation, any person known by her to have
been, at any time during the 12 months prior to such solicitation, enticement or
attempt, a borrower from, a lender to, or a direct and material participant in a
substantial financial transaction with, the Company, or to have been actively
solicited by the Company to become a borrower from, a lender to, or a direct and
material participant in a substantial financial transaction with, the Company;
or
(b) during the Term and for 12 months thereafter: (i) solicit or
entice, or attempt to solicit or entice, away from the Company any individual
who is known by the Executive to then be an officer or employee of the Company
either for her own account or for any individual, firm or corporation, whether
or not such individual would commit a breach of a contract of employment by
reason of leaving the service of the Company or (ii) employ, directly or
indirectly, any person who has been, during the 12 months prior to employment by
the Executive, an officer, employee or sales representative of the Company.
(c) The Executive understands that the provisions of this Section 9
may limit her ability to earn a livelihood in a business similar to the business
of the Company but nevertheless agrees and hereby acknowledges that (A) such
provisions do not impose a greater restraint than is necessary to protect the
goodwill or other business interests of the Company, (B) such provisions contain
reasonable limitations as to time and scope of activity to be restrained, (C)
such provisions are not harmful to the general public, (D) such provisions are
not unduly burdensome to the Executive, and (E) the consideration provided
hereunder is sufficient to compensate the Executive for the restrictions
contained in such provisions. In consideration thereof and in light of the
Executive's education, skills and abilities, the Executive agrees that the
Executive will not assert in any forum that such provisions prevent the
Executive from earning a living or otherwise are void or unenforceable or should
be held void or unenforceable.
(d) Notwithstanding anything herein to the contrary, the Executive
shall not be restricted from engaging in a non-competing business pursuant to
Section 9(a) even if another division, subsidiary or affiliate of that
enterprise does compete with the Company, so long as she does not perform any
services for such division, subsidiary or affiliate.
10. RIGHTS AND REMEDIES UPON BREACH OF SECTION 8 OR 9.
(a) The Executive acknowledges and agrees that any breach by her of
any of the provisions of Sections 8 or 9 (the "Restrictive Covenants") would
result in irreparable injury and damage for which money damages would not
provide an adequate remedy. Therefore, if the Executive breaches, or threatens
to commit a breach of, any of the provisions of Section 8 or Section 9, the
Company and its affiliates shall have the following rights and remedies, each of
which rights and remedies shall be independent of the other and severally
enforceable, and all of which rights and remedies shall be in addition to, and
not in lieu of, any other rights and remedies available to the Company and its
affiliates under law or in equity (including, without limitation, the recovery
of damages);
(i) The right and remedy to have the Restrictive Covenants
specifically enforced (without posting bond and without the need to prove
damages) by any court having equity
8
jurisdiction, including, without limitation, the right to an entry against the
Executive of restraining orders and injunctions (preliminary, mandatory,
temporary and permanent) against violations, threatened or actual, and whether
or not then continuing, of such covenants.
(ii) The right and remedy to require the Executive to account
for and pay over to the Company and its affiliates all compensation, profits,
monies, accruals, increments or other benefits (collectively, "Benefits")
derived or received by her as the result of any transactions constituting a
breach of the Restrictive Covenants, and the Executive shall account for and pay
over such Benefits to the Company and, if applicable, its affected affiliates.
(b) The Executive agrees that in any action seeking specific
performance or other equitable relief, she will not assert or contend that any
of the provisions of Sections 8 or 9 are unreasonable or otherwise
unenforceable. The existence of any claim or cause of action by the Executive,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement of the Restrictive Covenants.
11. ARBITRATION. Any claim or dispute arising out of or relating to this
Agreement (other than a controversy or claim arising under Section 8 or Section
9, to the extent necessary for the Company (or its affiliates, where applicable)
to avail itself of the rights and remedies referred to in Section 10), any other
agreement between the Executive and the Company or any of its affiliates, the
Executive's employment with the Company or the termination thereof
(collectively, "Covered Claims") shall be resolved by binding arbitration, to be
held in the Borough of Manhattan, in accordance with the Commercial Arbitration
Rules (and not the National Rules for the Resolution of Employment Disputes) of
the American Arbitration Association and this Section 11. Judgment upon the
award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
12. SUCCESSORS; BENEFICIARIES.
(a) This Agreement is personal to the Executive and, without the prior
written consent of the Company, shall not be assignable by the Executive;
provided, however, that any of the Executive's rights to compensation hereunder
may be transferred by will or by the laws of descent and distribution or as
provided in Section 12(d).
(b) This Agreement shall inure to the benefit of and be binding upon
the Parties and their respective successors, heirs (in the case of the
Executive) and assigns.
(c) No rights of the Company under this Agreement may be assigned or
transferred by the Company, other than to a successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company that promptly and
expressly agrees to assume and perform this Agreement in the same manner and to
the same extent that the Company would have been required to perform it if no
such succession had taken place. As used in this Agreement, the term "Board"
shall include both the "Board" as defined in the first sentence of Section 2(b)
and the board of directors, board of trustees, or analogous governing person or
body of any successor to all or substantially all of the business or assets of
the Company.
(d) The Executive shall be entitled, to the extent permitted under any
applicable law, any applicable plans, programs and arrangements of the Company,
to select and change the beneficiary or beneficiaries to receive any
compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of her incompetence, references in this Agreement to
the Executive shall be deemed, where appropriate, to refer to her beneficiary,
estate or other legal representative.
9
(e) Except to the extent otherwise provided in Sections 12(a) and
12(d), the rights and benefits of the Executive under this Agreement may not be
anticipated, assigned, alienated or subjected to attachment, garnishment, levy,
execution or other legal or equitable process. Any attempt by the Executive to
anticipate, alienate, assign, sell, transfer, pledge, encumber or charge such
rights or benefits, except as required by law or court order or as provided in
Sections 12(a) and 12(d), shall be void. Payments hereunder shall not be
considered assets of the Executive in the event of insolvency or bankruptcy
unless and until paid, or due to be paid, to the Executive.
13. REPRESENTATIONS. The Executive represents to the Company that she is
not subject or a party to any employment or consulting agreement,
non-competition covenant or other agreement, covenant or understanding which
might prohibit her from executing this Agreement or limit her ability to fulfill
her responsibilities hereunder.
14. INDEMNIFICATION OF EXECUTIVE. To the extent permitted under applicable
law, the Company agrees that if the Executive is made a party, or is threatened
to be made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that she is or was a director, officer or
employee of the Company or is or was serving at the request of the Company as a
director, officer, member, employee or agent of another Company, partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether or not the basis of such Proceeding is the
Executive's alleged action in an official capacity while serving as a director,
officer, member, employee or agent, the Executive shall be indemnified and held
harmless by the Company to the fullest extent permitted or authorized by the
Company's certificate of incorporation or bylaws or, if greater, by the laws of
the State of Maryland, against all costs, expenses, liabilities and losses
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by the Executive in connection therewith (including,
without limitation, investigating, preparing for and defending any such
Proceeding), and such indemnification shall continue as to the Executive even if
she has ceased to be a director, officer, member, employee or agent of the
Company or other entity and shall inure to the benefit of the Executive's heirs,
executors and administrators. To the extent permitted by law, the Company shall
advance to the Executive all reasonable costs and expenses incurred by her in
connection with a Proceeding within 20 days after receipt by the Company of a
written request for such advance. Such request shall include an undertaking by
the Executive to repay the amount of such advance if it shall ultimately be
determined that she is not entitled to be indemnified against such costs and
expenses. Without in any way limiting the foregoing or the scope or generality
thereof, to the extent permitted by law, the Company agrees to indemnify and
hold harmless the Executive to the fullest extent permitted or authorized by the
Company's certificate of incorporation or bylaws or, if greater, by the laws of
the State of Maryland, against all costs, expenses, liabilities and losses
reasonably incurred or suffered by the Executive by reason of, arising from or
relating to any written statement of the Executive that (1) is required to be,
and is, filed with the Securities and Exchange Commission regarding the accuracy
of reports or statements filed by the Company with such Commission pursuant to
Federal securities laws or (2) is made to another officer or executive of the
Company to support such a required filed statement of such other officer or
executive, PROVIDED that, in making (and, if applicable, filing) such written
statement, the Executive acted in good faith and in a manner the Executive
reasonably believed to be in and not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that the Executive's conduct was unlawful. The
indemnification provided for in this Section shall not extend to any claims or
disputes arising between the Executive and the Company under, pursuant to, or
with respect to, this Agreement or the agreements referred to in Section 4.
10
15. MISCELLANEOUS.
(a) This Agreement shall be governed, construed, performed and
enforced in accordance with its express terms, and otherwise in accordance with
the laws of the State of New York, without reference to principles of conflict
of laws. No provision of this Agreement may be amended or modified except by a
written agreement that is executed by the Parties or their respective successors
and legal representatives and that expressly refers to the provision(s) of this
Agreement that are being amended or modified. In the event of any inconsistency
between any provision of this Agreement and any provision of any plan, employee
handbook, personnel manual, program, policy, arrangement or agreement of the
Company or any of its affiliates, the provisions of this Agreement shall control
unless the Executive otherwise agrees in a writing that expressly refers to the
provision of this Agreement whose control she is waiving.
(b) All notices, requests, consents and other communications under
this Agreement shall be in writing and shall be given (i) by hand delivery or
(ii) by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows or (iii) by nationally recognized overnight courier,
addressed as follows:
IF TO EXECUTIVE:
Catherine D. Rice
c/o iStar Financial Inc.
1114 Avenue of the Americas, 27th Floor
New York, NY 10036
with a copy to the Executive at the address of her primary residence
as it then appears in the records of the Company and a copy to:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166-0193
Attn: Charles F. Feldman, Esq.
IF TO THE COMPANY:
iStar Financial Inc.
1114 Avenue of the Americas, 27th Floor
New York, NY 10036
Attn: General Counsel
with copy each to:
iStar Financial Inc.
1114 Avenue of the Americas, 27th Floor
New York, NY 10036
Attn: Chairman, Compensation Committee of the Board of Directors
11
and
Clifford Chance US LLP
200 Park Avenue
New York, NY 10166-0513
Attn: Kathleen L. Werner, Esq.
or to such other address or addresses as either Party furnishes to the other in
writing in accordance with this Section 15(b). Notices and other communications
shall be effective when actually received by the addressee.
(c) If any provision of this Agreement, including but not limited to
Section 8, 9 or 10 or the application of any such provision to any person or
circumstances shall be determined by any court or arbitrator of competent
jurisdiction to be invalid or unenforceable to any extent, then (i) the
remainder of this Agreement, and the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid or unenforceable, shall not be affected thereby, and each provision
hereof shall be enforced to the fullest extent permitted by law and (ii) such
court or arbitrator shall have the power, and is hereby directed, to reduce the
scope, duration or area of the provision, to delete specific words or phrases
and to replace any invalid or unenforceable provision with a provision that is
valid and enforceable and that comes closest to expressing the intention of the
invalid or unenforceable provision, and this Agreement shall be enforced as so
modified.
(d) Anything contained in this Agreement to the contrary
notwithstanding, the provisions of Sections 7 through 11, and the other
provisions of this Agreement to the extent necessary to effectuate the survival
of Sections 7 through 11, shall survive termination of this Agreement and any
termination of the Executive's employment hereunder.
(e) The Company agrees to reimburse the Executive for legal fees
incurred by her in connection with the negotiation and execution of this
Agreement, up to a maximum amount of $10,000.00.
(f) The captions and headings in this Agreement are not part of the
provisions hereof and shall have no force or effect.
(g) No waiver by any person or entity of any breath of any condition
or provision contained in this Agreement shall be deemed a waiver of any similar
or dissimilar condition or provision at the same or any prior or subsequent
time. To be effective, any waiver must be set forth in a writing signed by (or
on behalf of) the waiving person or entity and must specifically refer to the
condition(s) or provision(s) of this Agreement being waived.
(h) The Parties acknowledge that this Agreement supersedes any other
agreement between them concerning the specific subject matter hereof.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
12
This Agreement may be executed in several counterparts, each of which shall
be deemed an original, and said counterparts shall constitute one and the same
instrument. Signatures delivered by facsimile shall be valid and binding for all
purposes.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day
and year first above written.
CATHERINE D. RICE
/s/ Catherine D. Rice
-----------------------------
Catherine D. Rice
iSTAR FINANCIAL INC.
By: /s/ Jay S. Sugarman
-------------------------
Name: Jay S. Sugarman
Title: Chairman and CEO
13
EXHIBIT A
STOCK UNIT AWARD AGREEMENT
THIS AGREEMENT, entered into as of November 6, 2002, by and between
Catherine D. Rice (the "EXECUTIVE"), and iStar Financial Inc. (together with its
successors and assigns, the "COMPANY").
WITNESSETH:
WHEREAS, the Executive is a key employee of the Company; and
WHEREAS, the Company desires to grant Stock Units to the Executive
subject to the terms and conditions set forth below.
NOW, THEREFORE, IT IS AGREED by and between the Company and the Executive
as follows:
1. AWARD.
Subject to the terms of this Agreement, the Executive is hereby awarded
100,000 Stock Units.
2. DEFINITIONS.
For purposes of this Agreement, the following definitions shall apply, in
addition to definitions set forth elsewhere herein:
(a) "AWARD" shall mean this grant of Stock Units to the Executive.
(b) "BASE PRICE" shall mean the closing price of a Share as reported on
the New York Stock Exchange on January 2, 2003.
(c) "BOARD" shall mean the Board of Directors of the Company.
(d) "BUSINESS DAY" shall mean any day on which banks in New York city are
open for business.
(e) "CAUSE" or "WITHOUT CAUSE" shall mean "Cause" or "Without Cause" as
defined in, and determined in accordance with, the Employment Agreement.
(f) "CHANGE OF CONTROL" shall have the meaning ascribed to such term
under the Long-Term Incentive Plan.
(g) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(h) "COMMITTEE" shall mean the Committee designated by the Board, if any
is so designated (the Board being under no obligation to establish or maintain
such a committee) consisting of two or more members of the Board, each of whom
shall be (i) a "Non-Employee Director" within the meaning of Rule 16b-3 under
the Exchange Act, and (ii) at the election of the Board, an "outside director"
within the meaning of Section 162(m) of the Code.
(i) "COMMON STOCK" shall mean the common stock, par value $0.001 of the
Company.
(j) "DETERMINATION DATE" shall mean the earliest to occur of (i) January
31, 2004, (ii) the first date on which the Executive's employment with the
Company terminates by reason of death or Disability, or (iii) the date of the
occurrence of a Change of Control.
(k) "DISABILITY" shall mean "Disability" as defined in, and determined in
accordance with, the Employment Agreement.
(l) "EMPLOYMENT AGREEMENT" shall mean the Employment Agreement made as of
November 1, 2002 between the Company and the Executive, as from time to time
amended in accordance with its terms, or any successor to such Employment
Agreement then in effect (or, if none is in effect at a point in time, such
Employment Agreement or successor as last in effect).
(m) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" per Stock Unit shall mean the closing price of a
Share as reported on the New York Stock Exchange on the first trading day
immediately preceding the date as of which such value is being determined;
provided, however, that if the Fair Market Value of a Share for any date cannot
be determined as above provided, Fair Market Value of a Share shall be
determined by the Administrator by whatever means or method as to which the
Administrator, in the good faith exercise of its discretion, shall at such time
deem appropriate.
(o) "LONG-TERM INCENTIVE PLAN" shall mean the iStar Financial Inc. 1996
Long-Term Incentive Plan (amended and restated as of March 13, 1998) or any
successor plan thereto, as may be in effect from time to time.
(p) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
(q) "SHARE" shall mean a share of Common Stock.
(r) "STOCK UNIT" shall mean a right, granted pursuant to this Agreement,
of the Executive to receipt of one Share (or cash in lieu thereof pursuant to
Section 5).
(s) "TRR" shall mean, as of the Determination Date, the quotient of (i)
the sum of (A) the total amount of dividends per Share declared and paid from
the date of this Agreement through the Determination Date and (B) the net gain
or loss per Share between the Base Price and the average of the closing prices
of a Share as reported on the New York Stock Exchange for the 20 trading days
immediately preceding and including the Determination Date, divided by (ii) the
Base Price.
3. VESTING.
(a) In determining the number of Stock Units which vest as of a
Determination Date pursuant to this Agreement, the following schedule shall
apply:
-2-
TRR NUMBER OF SHARE UNITS VESTING
--- -----------------------------
0.00%-9.99% 0
Between 10.00%, and 20.00% 0-100,000 using straight
line interpolation
20.00% or more 100,000
(b) On the Determination Date, that number of Stock Units determined by
reference to the TRR calculation described in Section 3(a) shall become vested
and the remaining Stock Units shall be forfeited.
4. DIVIDEND EQUIVALENT.
No dividends or any equivalent thereof shall be provided to the Executive
with respect to any unvested Stock Units.
5. SETTLEMENT OF UNITS.
(a) Each outstanding Stock Unit shall be settled as soon as practicable,
and in any event within five Business Days, after the Determination Date by the
transfer to the Executive of one Share or, at the option of the Company, cash in
lieu thereof; provided, however, that, Stock Units must be settled in cash if
the Shares to be delivered in settlement of Stock Units are not registered under
the Securities Act or listed on the principal U.S. securities exchange on which
the Shares are then listed. If the Company elects to deliver cash in settlement
of Stock Units, the amount of cash per Stock Unit to be delivered to the
Executive shall be equal to the average of the closing prices of a Share as
reported on the New York Stock Exchange (or other principal stock exchange on
which the Shares are then traded) for the 20 trading days ending on and
including the Determination Date. Upon any settlement of Stock Units in Shares,
the Company shall deliver or cause to be delivered one or more certificates
representing the applicable number of Shares.
(b) Upon any termination of employment, any Stock Units that have not
previously vested and do not thereupon vest as provided herein shall
automatically, and with no further action, cease to be outstanding and be
forfeited.
6. TAX WITHHOLDING.
(a) The Company shall have the right to require, prior to the delivery of
any Shares or the payment of any cash pursuant to this Award, payment by the
Executive of any federal, state, local or other taxes which may be required to
be withheld or paid in connection with such award. The Administrator may provide
that the Executive may satisfy any such obligation by any of the following
means: (i) a cash payment to the Company; (ii) withholding of whole Shares from
the Shares otherwise to be distributed upon settlement and having an aggregate
Fair Market Value, determined as of the date the obligation to withhold or pay
taxes arises in connection with this award, equal to the amount necessary to
satisfy any such obligation; or (iii) any combination of (i) and (ii); provided,
however, that the Administrator shall have sole discretion to disapprove of an
election pursuant to any of the foregoing clauses (ii) and (iii). Any fraction
of a Share which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the Executive.
-3-
(b) Notwithstanding anything contained in this Agreement to the contrary,
the Executive's satisfaction of any tax-withholding requirements imposed by the
Administrator shall be a condition precedent to the Company's obligation as may
otherwise be provided hereunder to provide Shares to the Executive.
7. TRANSFERABILITY.
This Award is not transferable except as designated by the Executive by
will or by the laws of descent and distribution or, subject to such procedures
as the Administrator may establish, to or for the benefit of members of the
Executive's family. Except to the extent permitted by the Administrator in the
case of transfers to or for the benefit of members of the Executive's family,
during the Executive's lifetime this award shall be settled only by the
Executive or the Executive's legal representative. Except as permitted by the
foregoing, this Award may not be sold transferred, assigned, pledged,
hypothecated, voluntarily encumbered or otherwise disposed of (whether by
operation of law or otherwise) or be subject to execution, attachment or similar
process. Any sale, transfer, assignment, pledge, hypothecation, voluntary
encumbrance or other disposition of this Award not permitted by the foregoing
shall be wholly null and void.
8. REPRESENTATIONS.
The Shares, when and if issued, will be registered under the Securities
Act and any applicable state securities laws, pursuant to an effective
registration statement on Form S-8 (or any successor form). The Executive hereby
represents and covenants that any subsequent sale of any such Shares shall be
made either pursuant to an effective registration statement under the Securities
Act and any applicable state securities laws, or pursuant to an exemption from
registration under the Securities Act and such state securities laws.
9. ADJUSTMENT OF STOCK UNITS.
In the event of any change in the outstanding Shares by reason of any
stock dividend, split, spin-off, recapitalization or other similar change, the
terms and the number of any outstanding Stock Units shall be equitably adjusted
by the Administrator in its discretion to the extent the Administrator
determines that such adjustment is necessary to preserve the benefit of this
Award for the Executive and the Company. In the event of any adjustment pursuant
to this Section 9, the Administrator shall promptly deliver to the Executive a
notice (i) setting forth in reasonable detail (A) the transactions and/or events
that lead to the adjustment and (B) the method by which the adjustment was
calculated or otherwise determined and (ii) specifying the adjustment made.
10. ADMINISTRATION.
This Award shall be administered by the Board or, if so determined by the
Board, the Committee (the Board or Committee, as applicable, the
"Administrator"). Notwithstanding the foregoing, except as otherwise determined
by the Board, for any period during which the Company's Long-Term Incentive Plan
is in effect, the Administrator hereunder shall be the "Administrator" under
such plan (the "LTIP Administrator"), and the rules applicable to the LTIP
Administrator's internal procedures shall apply.
11. AWARD CONFERS NO RIGHTS AS SHAREHOLDER.
The Executive shall not be entitled to any privileges of ownership with
respect to Shares subject to this Award unless and until such Shares are
delivered upon a settlement of a Stock Unit and the Executive becomes a
shareholder of record with respect to such delivered Shares; and the Executive
shall
-4-
not be considered a shareholder of the Company with respect to any such Shares
not so purchased and delivered.
12. NO RIGHTS TO CONTINUED EMPLOYMENT.
In no event shall the granting of this Award or its acceptance by the
Executive give or be deemed to give the Executive any rights to continued
employment by the Company or any affiliate of the Company.
13. DISPUTE RESOLUTION.
Any controversy, dispute or claim arising out of or related to this
Agreement shall be resolved by binding arbitration in accordance with the
dispute resolution provisions of the Employment Agreement, after proceeding in
accordance with any claims procedures adopted for purposes hereof.
14. WAIVER OF RESPONSIBILITY.
The Executive understands that the Company has assumed no responsibility
for advising the Executive as to the tax consequences to the Executive of the
grant of this Award. The Executive should consult with her individual tax
advisor concerning the applicability of Federal, state and local tax laws to
this Award and to her personal tax circumstances.
15. NOTICES AND OTHER MISCELLANEOUS PROVISIONS.
(a) CERTAIN PROCEDURAL TERMS. The provisions of Section 14(a) through
14(d) of the Employment Agreement as in effect when this Agreement is executed
shall apply to this Agreement as if fully set forth herein, to the extent not
inconsistent herewith, with references to the "Executive" being deemed to be
references to the Executive and with references to the "Parties" being deemed to
be references to the Executive and the Company.
(b) DESIGNATION OF BENEFICIARY. If permitted by the Company, the
Executive may file with the Administrator a written designation of one or more
persons as such Executive's beneficiary or beneficiaries (both primary and
contingent) in the event of the Executive's death.
16. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same instrument. Signatures delivered by facsimile shall be valid and
binding for all purposes.
[Rest of Page Intentionally Left Blank]
-5-
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement, as of the date first above written.
CATHERINE D. RICE
-----------------------------------------
ISTAR FINANCIAL INC.
By:
-------------------------------------
-6-
EXHIBIT B
STOCK UNIT AWARD AGREEMENT
THIS AGREEMENT, entered into as of November 6, 2002, by and between
Catherine D. Rice (the "EXECUTIVE"), and iStar Financial Inc. (together with its
successors and assigns, the "COMPANY").
WITNESSETH:
WHEREAS, the Executive is a key employee of the Company; and
WHEREAS, the Company desires to grant Stock Units to the Executive
subject to the terms and conditions set forth below.
NOW, THEREFORE, IT IS AGREED by and between the Company and the Executive
as follows:
1. AWARD.
Subject to the terms of this Agreement, the Executive is hereby awarded
108,980 Stock Units.
2. DEFINITIONS.
For purposes of this Agreement, the following definitions shall apply, in
addition to definitions set forth elsewhere herein:
(a) "AWARD" shall mean this grant of Stock Units to the Executive.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "BUSINESS DAY" shall mean any day on which banks in New York City are
open for business.
(d) "CAUSE" or "WITHOUT CAUSE" shall mean "Cause" or "Without Cause" as
defined in, and determined in accordance with, the Employment Agreement.
(e) "CHANGE OF CONTROL" shall have the meaning ascribed to such term
under the Long-Term Incentive Plan.
(f) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(g) "COMMITTEE" shall mean the Committee designated by the Board, if any
is so designated (the Board being under no obligation to establish or maintain
such a committee) consisting of two or more members of the Board, each of whom
shall be (i) a "Non-Employee Director" within the meaning of Rule 16b-3 under
the Exchange Act, and (ii) at the election of the Board, an "outside director"
within the meaning of Section 162(m) of the Code.
(h) "COMMON STOCK" shall mean the common stock, par value $0.001 of the
Company.
(i) "DISABILITY" shall mean "Disability" as defined in, and determined in
accordance with, the Employment Agreement.
(j) "EMPLOYMENT AGREEMENT" shall mean the Employment Agreement made as of
November 1, 2002 between the Company and the Executive, as from time to time
amended in accordance with its terms, or any successor to such Employment
Agreement then in effect (or, if none is in effect at a point in time, such
Employment Agreement or successor as last in effect).
(k) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" per Stock Unit shall mean the closing price of a
Share as reported on the New York Stock Exchange on the first trading day
immediately preceding the date as of which such value is being determined;
provided, however, that if the Fair Market Value of a Share for any date cannot
be determined as above provided, Fair Market Value of a Share shall be
determined by the Administrator by whatever means or method as to which the
Administrator, in the good faith exercise of its discretion, shall at such time
deem appropriate.
(m) "GOOD REASON" shall mean "Good Reason" as defined in, and determined
in accordance with, the Employment Agreement.
(n) "LONG-TERM INCENTIVE PLAN" shall mean the iStar Financial Inc. 1996
Long-Term Incentive Plan (amended and restated as of March 13, 1998) or any
successor plan thereto, as may be in effect from time to time.
(o) "STOCK UNIT" shall mean a right, granted pursuant to this Agreement,
of the Executive to receipt of one Share (or cash in lieu thereof pursuant to
Section 5).
(p) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.).
(q) "SHARE" shall mean a share of Common Stock.
3. VESTING.
Subject to the provisions hereof, the Stock Units shall become vested on
December 31, 2005 if the Executive's employment with the Company has not
terminated before such date; provided, however, that this Award shall vest prior
to such date (i) if the Executive's employment with the Company terminates by
reason of death or Disability, (ii) upon the occurrence of a Change of Control,
(iii) if the Company terminates the Executive's employment with the Company
Without Cause or (iv) if the Executive terminates her employment with the
Company for Good Reason.
4. DIVIDEND EQUIVALENT; VOTING.
(a) The Executive shall not be entitled to receive any cash payment, in
the nature of common stock dividend equivalents or otherwise, until the earlier
of (i) the first date on which the Company determines that there is sufficient
availability under the Long-Term Incentive Plan, in terms of the number of
Shares reserved for awards under the Long-Term Incentive Plan, to permit the
issuance of the same number of Shares as Stock Units then outstanding, and (ii)
May 31, 2003. From and after the date contemplated by the prior sentence, the
Company shall make an aggregate payment to the Executive in an amount equal to
the aggregate amount of ordinary cash dividends paid in respect of a number of
Shares equal to the number of Stock Units (or Shares issued in respect of the
Stock Units pursuant to Section 5), then held by the Executive. Such payments
shall take the form of either actual dividends (if Shares have been issued in
respect of Stock Units) or cash dividend equivalents. Such payments shall be
made on the same dates on which the related ordinary cash dividends are paid on
Shares.
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(b) Any Shares issued to Executive in respect of Stock Units (or Shares)
shall carry full voting rights (i.e., one vote per Share) which shall be
exercisable from and after the date that such Shares are issued.
5. ISSUANCE OF SHARES; CASH SETTLEMENT.
(a) Within five Business Days after the Company determines that there is
sufficient availability under the Long-Term Incentive Plan to permit the
issuance of the same number of Shares as Stock Units then outstanding, the
Company will deliver to the Executive one or more certificates representing such
Shares.
(b) If, as of the date on which the Stock Units (or Shares if they have
been issued in respect thereof) vest, the Company has not delivered certificates
representing such vested Shares to the Executive in accordance with paragraph
(a), then the Executive shall be entitled to received a cash payment from the
Company, in lieu of such vested Shares, in an amount equal to the product of (1)
the number of Stock Units (or Shares) that have become vested multiplied by (2)
the average of the closing prices of a Share as reported on the New York Stock
Exchange (or other principal exchange on which the Shares are then trading) for
the 20 trading days ending on and including the vesting date. Any such cash
payment will be made no later than five Business Days after the date on which
such Stock Units (or Shares) become vested.
(c) Upon any termination of employment, any Stock Units (or Shares) that
have not previously vested and do not thereupon vest as provided herein shall
automatically, and with no further action, cease to be outstanding and be
forfeited.
6. ADDITIONAL PAYMENTS BY THE COMPANY.
(a) If it is determined (as hereafter provided) that any payment or
distribution by the Company to or for the benefit of Executive, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement,
or the lapse or termination of any restriction on the Stock Units and Shares
which are the subject of this Agreement, (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Code (or any successor provision
thereto) or to any similar tax imposed by state or local law, or any interest or
penalties with respect to such excise tax (such tax or taxes, together with any
such interest and penalties, are hereafter collectively referred to as the
"Excise Tax"), then Executive will be entitled to receive an additional payment
or payments (a "Gross-Up Payment") in an amount such that, after payment by
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment,
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
(b) All determinations required to be made under this Section, including
whether an Excise Tax is payable by Executive and the amount of such Excise Tax
and whether a Gross-Up Payment is required and the amount of such Gross-Up
Payment, will be made by a nationally recognized firm of certified public
accountants (the "Accounting Firm") selected by the mutual consent of Executive
and the Company; provided that if Executive and the Company cannot agree on the
identity of the Accounting Firm, then the Accounting Firm shall be
PricewaterhouseCoopers unless that firm is unwilling or unable to provide such
services, in which case the Accounting Firm may be selected by the Company. The
Company will direct the Accounting Firm to submit its determination and detailed
supporting calculations to both the Company and Executive within 30 calendar
days after the date of the Change of Control. If the Accounting Firm determines
that any Excise Tax is payable by Executive, the Company will pay the required
Gross-Up Payment to Executive no later than five calendar days prior to the date
such Excise Tax is paid by the Executive or by withholding, or due to be paid.
If the Accounting Firm determines that
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no Excise Tax is payable by Executive, it will, at the same time as it makes
such determination, furnish Executive with an opinion that she has substantial
authority not to report any Excise Tax on her federal, state, local income or
other tax return. Any determination by the Accounting Firm as to the amount of
the Gross-Up Payment will be binding upon the Company and Executive. As a result
of the uncertainty in the application of Section 4999 of the Code (or any
successor provision thereto) and the possibility of similar uncertainty
regarding applicable state or local tax law at the time of any determination by
the Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not have been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts or fails to pursue its remedies pursuant to Section
6(f) hereof and Executive thereafter is required to make a payment of any Excise
Tax, Executive shall so notify the Company, which will direct the Accounting
Firm to determine the amount of the Underpayment that has occurred and to submit
its determination and detailed supporting calculations to both the Company and
Executive as promptly as possible. Any such Underpayment will be promptly paid
by the Company to, or for the benefit of, Executive within five business days
after receipt of such determination and calculations.
(c) The Company and Executive will each provide the Accounting Firm
access to and copies of any books, records and documents in the possession of
the Company or Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determination contemplated by Section
6(b) hereof.
(d) The federal, state and local income or other tax returns filed by
Executive will be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
Executive. Executive will make proper payment of the amount of any Excise Tax,
and at the request of the Company, provide to the Company true and correct
copies (with any amendments) of her federal income tax return as filed with the
Internal Revenue Service and corresponding state and local tax returns, if
relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If prior
to the filing of Executive's federal income tax return, or corresponding state
or local tax return, if relevant, the Accounting Firm determines that the amount
of the Gross-Up Payment should be reduced, Executive will within five business
days pay to the Company the amount of such reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by Sections
6(b) and (d) hereof will be borne by the Company. If such fees and expenses are
initially advanced by Executive, the Company will reimburse Executive the full
amount of such fees and expenses within five business days after receipt from
Executive of a statement therefor and reasonable evidence of her payment
thereof.
(f) Executive will notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of a Gross-Up Payment. Such notification will be given as promptly as
practicable but no later than ten (10) business days after Executive actually
receives notice of such claim and Executive will further apprise the Company of
the nature of such claim and the date on which such claim is requested to be
paid (in each case, to the extent known by Executive). Executive will not pay
such claim prior to the earlier of (x) the expiration of the 30-calendar-day
period following the date on which she gives such notice to the Company and (y)
the date that any payment or amount with respect to such claim is due. If the
Company notifies Executive in writing prior to the expiration of such period
that it desires to contest such claim, Executive will:
(A) provide the Company with any written records or documents in
her possession relating to such claim reasonably requested by the Company;
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(B) take such action in connection with contesting such claim as
the Company will reasonably request in writing from time to time, including
without limitation accepting legal representation with respect to such claim by
an attorney competent in respect of the subject matter and reasonably selected
by the Company;
(C) cooperate with the Company in good faith in order effectively
to contest such claim; and
(D) permit the Company to participate in any proceedings relating
to such claim; PROVIDED, HOWEVER, that the Company will bear and pay directly
all costs and expenses (including interest and penalties) incurred in connection
with such contest and will indemnify and hold harmless Executive, on an
after-tax basis, for and against any Excise Tax or income tax, including
interest and penalties with respect thereto, imposed in connection with such
claim and payment of costs and expenses. Without limiting the foregoing
provisions of this Section 6(f), the Company may control all proceedings taken
in connection with the contest of any claim contemplated by this Section 6(f)
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim (provided that Executive may participate therein at her
own cost and expense) and may, at its option, either direct Executive to pay the
tax claimed and sue for a refund or contest the claim in any permissible manner,
and Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company will determine; provided, however, that if the
Company directs Executive to pay the tax claimed and sue for a refund, the
Company will advance the amount of such payment to Executive on an interest-free
basis and will indemnify and hold Executive harmless, on an after-tax basis,
from any Excise Tax or income tax, including interest or penalties with respect
thereto, imposed with respect to such advance; and PROVIDED FURTHER, HOWEVER,
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of Executive with respect to which the contested amount is
claimed to bc due is limited solely to such contested amount. Furthermore, the
Company's control of any such contested claim will be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder and Executive
will be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(g) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 6(f) hereof, Executive receives any refund with
respect to such claim, Executive will (subject to the Company's complying with
the requirements of Section 6(f) hereof) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after any
taxes applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 6(f) hereof, a determination is made
that Executive will not be entitled to any refund with respect to such claim and
the Company does not notify Executive in writing of its intent to contest such
denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance will be forgiven and will not be required to be
repaid and the amount of such advance will offset, to the extent thereof, the
amount of Gross-Up Payment required to be paid pursuant to this Section 6. If,
after the receipt by Executive of a Gross-Up Payment but before the payment by
Executive of the Excise Tax, it is determined by the Accounting Firm that the
Excise Tax payable by Executive is less than the amount originally computed by
the Accounting Firm and consequently that the amount of the Gross-Up Payment is
larger than that required by this Section 6, Executive shall promptly refund to
the Company the amount by which the Gross-Up Payment initially made to Executive
exceeds the Gross-Up Payment required under this Section 6.
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7. TAX WITHHOLDING.
(a) The Company shall have the right to require, prior to the delivery of
any Shares or the payment of any cash pursuant to this Award, payment by the
Executive of any federal, state, local or other taxes which may be required to
be withheld or paid in connection with such award. The Administrator may provide
that the Executive may satisfy any such obligation by any of the following
means: (i) a cash payment to the Company; (ii) withholding of whole Shares from
the Shares otherwise to be distributed upon settlement and having an aggregate
Fair Market Value, determined as of the date the obligation to withhold or pay
taxes arises in connection with this award, equal to the amount necessary to
satisfy any such obligation; or (iii) any combination of (i) and (ii); provided,
however, that the Administrator shall have sole discretion to disapprove of an
election pursuant to any of the foregoing clauses (ii) and (iii). Any fraction
of a Share which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the Executive.
(b) Notwithstanding anything contained in this Agreement to the contrary,
the Executive's satisfaction of any tax-withholding requirements imposed by the
Administrator shall be a condition precedent to the Company's obligation as may
otherwise be provided hereunder to provide Shares to the Executive.
8. TRANSFERABILITY.
This Award is not transferable except as designated by the Executive by
will or by the laws of descent and distribution or, subject to such procedures
as the Administrator may establish, to or for the benefit of members of the
Executive's family. Except to the extent permitted by the Administrator in the
case of transfers to or for the benefit of members of the Executive's family,
during the Executive's lifetime this award shall be settled only by the
Executive or the Executive's legal representative. Except as permitted by the
foregoing, this Award may not be sold transferred, assigned, pledged,
hypothecated, voluntarily encumbered or otherwise disposed of (whether by
operation of law or otherwise) or be subject to execution, attachment or similar
process. Any sale, transfer, assignment, pledge, hypothecation, voluntary
encumbrance or other disposition of this Award not permitted by the foregoing
shall be wholly null and void.
9. REPRESENTATIONS.
The Shares, when and if issued, will be registered under the Securities
Act and any applicable state securities laws, pursuant to an effective
registration statement on Form S-8 (or any successor form). The Executive hereby
represents and covenants that any subsequent sale of any such Shares shall be
made either pursuant to an effective registration statement under the Securities
Act and any applicable state securities laws, or pursuant to an exemption from
registration under the Securities Act and such state securities laws.
10. ADJUSTMENT OF STOCK UNITS.
In the event of any change in the outstanding Shares by reason of any
stock dividend, split, spin-off, recapitalization or other similar change, the
terms and the number of any outstanding Stock Units shall be equitably adjusted
by the Administrator in its discretion to the extent the Administrator
determines that such adjustment is necessary to preserve the benefit of this
Award for the Executive and the Company. In the event of any adjustment pursuant
to this Section 10, the Administrator shall promptly deliver to the Executive a
notice (i) setting forth in reasonable detail (A) the transactions and/or events
that lead to the adjustment and (B) the method by which the adjustment was
calculated or otherwise determined and (ii) specifying the adjustment made.
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11. ADMINISTRATION; PLAN GOVERNS.
(a) This Award shall be administered by the Board or, if so determined by
the Board, the Committee (the Board or Committee, as applicable, the
"Administrator"). Notwithstanding the foregoing, except as otherwise determined
by the Board, for any period during which the Company's Long-Term Incentive Plan
is in effect, the Administrator hereunder shall be the "Administrator" under
such plan (the "LTIP Administrator"), and the rules applicable to the LTIP
Administrator's internal procedures shall apply.
(b) From and after the date, if any, on which Shares are issued in
respect of Stock Units, the terms of this Agreement shall be subject to the
terms of the Long-Term Incentive Plan, a copy of which may be obtained by the
Executive from the office of the Secretary of the Company.
12. AWARD CONFERS NO RIGHTS AS SHAREHOLDER. The Executive shall not be
entitled to any privileges of ownership with respect to Shares subject to this
Award unless and until such Shares are delivered upon a settlement of a Stock
Unit and the Executive becomes a shareholder of record with respect to such
delivered Shares; and the Executive shall not be considered a shareholder of the
Company with respect to any such Shares not so purchased and delivered.
13. NO RIGHTS TO CONTINUED EMPLOYMENT.
In no event shall the granting of this Award or its acceptance by the
Executive give or be deemed to give the Executive any rights to continued
employment by the Company or any affiliate of the Company.
14. DISPUTE RESOLUTION.
Any controversy, dispute or claim arising out of or related to this
Agreement shall be resolved by binding arbitration in accordance with the
dispute resolution provisions of the Employment Agreement, after proceeding in
accordance with any claims procedures adopted for purposes hereof.
15. WAIVER OF RESPONSIBILITY.
The Executive understands that the Company has assumed no responsibility
for advising the Executive as to the tax consequences to the Executive of the
grant of this Award. The Executive should consult with her individual tax
advisor concerning the applicability of Federal, state and local tax laws to
this Award and to her personal tax circumstances.
16. NOTICES AND OTHER MISCELLANEOUS PROVISIONS.
(a) CERTAIN PROCEDURAL TERMS. The provisions of Section 14(a) through
14(d) of the Employment Agreement as in effect when this Agreement is executed
shall apply to this Agreement as if fully set forth herein, to the extent not
inconsistent herewith, with references to the "Executive" being deemed to be
references to the Executive and with references to the "Parties" being deemed to
be references to the Executive and the Company.
(b) DESIGNATION OF BENEFICIARY. If permitted by the Company, the
Executive may file with the Administrator a written designation of one or more
persons as such Executive's beneficiary or beneficiaries (both primary and
contingent) in the event of the Executive's death.
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17. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same instrument. Signatures delivered by facsimile shall be valid and
binding for all purposes.
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement, as of the date first above written.
CATHERINE D. RICE
-----------------------------------------
ISTAR FINANCIAL INC.
By:
-------------------------------------
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EXHIBIT 10.21
[iSTAR FINANCIAL LOGO]
CODE OF CONDUCT
INTRODUCTION
It is the policy of iStar Financial Inc. that our business shall be
conducted in accordance with the highest moral, legal and ethical standards. Our
reputation for integrity is our most important asset and each employee and
director must contribute to the care and preservation of that asset.
This reputation for integrity is the cornerstone of the public's faith and
trust in our Company; it is what provides us an opportunity to serve our
investors, customers and other stakeholders. A single individual's misconduct
can do much to damage a hard-earned reputation. No code of business conduct or
ethics can effectively substitute for the thoughtful behavior of an ethical
director, officer or employee. This Code of Conduct is presented to assist you
in guiding your conduct to enhance the reputation of our Company. The Code
supersedes all previous codes and policy statements.
The Code is drafted broadly. In that respect, it is the Company's intent to
exceed the minimum requirements of the law and industry practice. Mere
compliance with the letter of the law is not sufficient to attain the highest
ethical standards. Good judgment and great care must also be exercised to comply
with the SPIRIT of the law and of this Code.
The provisions of the Code apply to you, your spouse and members of your
immediate family. In addition, it covers any partnership, trust, or other
entity, which you, your spouse or members of your immediate family control.
The Company intends to enforce the provisions of this Code vigorously.
Violations could lead to sanctions, including dismissal in the case of an
employee, as well as, in some cases, civil and criminal liability.
Inevitably, the Code addresses questions and situations that escape easy
definition. No corporate code can cover every possible question of business
practice. There will be times when you are unsure about how the Code applies.
When in doubt, ask before you act.
The Company has established a Compliance Committee that administers the
Company's overall compliance program, including the Code of Conduct. The
Committee consists of Nina Matis, the Company's Executive Vice President and
General Counsel, Tim O'Connor, Executive Vice President and Chief Operating
Officer, and Geoff Dugan, Senior Vice President and Assistant General Counsel.
Upholding the Code is the responsibility of every employee and director.
Department heads are responsible for Code enforcement in their departments and
managers are accountable for the employees who report to them.
11/1/02
QUESTIONS ABOUT THE CODE; REPORTING SUSPECTED VIOLATIONS
Any questions about how to interpret the Code of Conduct should be raised
with the Compliance Committee. Geoff Dugan, Senior Vice President and Assistant
General Counsel, has been designated as Compliance Officer for purposes of
enforcing the Code and he may be contacted by telephone at (415) 263-8639, by
confidential fax at (415) 391-3092, or by e-mail at gdugan@istarfinancial.com.
If you know of or suspect any illegal or unethical conduct, or any other
violation of the Code, you should promptly report this to your supervisor or the
Compliance Officer. If you are not comfortable doing so for any reason, or if
you feel appropriate action is not being taken, you should contact any other
member of the Compliance Committee, or the Chief Executive Officer, or the
Chairman of the Audit Committee of the Board of Directors. You are not required
to identify yourself when reporting a violation.
To the extent possible, we will endeavor to keep confidential the identity
of anyone reporting a violation of the Code of Conduct. We will also keep
confidential the identities of employees about whom allegations of violations
are brought, unless or until it is established that a violation has occurred. It
is the Company's policy that retaliation against employees who report actual or
suspected Code violations is prohibited; anyone who attempts to retaliate will
be subject to disciplinary action, up to and including dismissal.
CONFLICTS OF INTEREST
The Company relies on the integrity and undivided loyalty of our employees
and directors to maintain the highest level of objectivity in performing their
duties. Each employee is expected to avoid any situation in which your personal
interests conflict, or have the appearance of conflicting, with those of the
Company. Individuals must not allow personal considerations or relationships to
influence them in any way when representing the Company in business dealings.
A conflict situation can arise when an employee or director takes actions
or has interests that may make it difficult to perform work on behalf of the
Company objectively and effectively. Conflicts also arise when an employee or
director, or a member of his or her family, receives improper personal benefits
as a result of his or her position with the Company. Loans to, or guarantees of
obligations of, such persons are of special concern.
All employees and directors must exercise great care any time their
personal interests might conflict with those of the Company. The APPEARANCE of a
conflict often can be as damaging as an ACTUAL conflict. PROMPT AND FULL
DISCLOSURE IS ALWAYS THE CORRECT FIRST STEP TOWARDS IDENTIFYING AND RESOLVING
ANY POTENTIAL CONFLICT OF INTEREST. Non-employee directors are expected to make
appropriate disclosures to the Board and to take appropriate steps to recuse
themselves from Board decisions with respect to transactions or other matters
involving the Company as to which
2
they are interested parties or with respect to which a real or apparent conflict
of interest exists.
The following sections review several common problems involving conflicts
of interest. The list is not exhaustive. Each individual has a special
responsibility to use his or her best judgment to assess objectively whether
there might be even the appearance of acting for reasons other than to benefit
the Company, and to discuss any conflict openly and candidly with the Company.
PAYMENTS AND GIFTS
Employees who deal with the Company's borrowers, tenants, suppliers or
other third parties are placed in a special position of trust and must exercise
great care to preserve their independence. As a general rule, no employee should
ever receive a payment or anything of value in exchange for a decision involving
the Company's business. Similarly, no employee of the Company should ever offer
anything of value to government officials or others to obtain a particular
result for the Company. Bribery, kickbacks or other improper payments have no
place in the Company's business.
The Company recognizes exceptions for token gifts of nominal value (less
than $250) or customary business entertainment, when a clear business purpose is
involved. If you are in doubt about the policy's application, the Compliance
Committee should be consulted.
PERSONAL FINANCIAL INTERESTS; OUTSIDE BUSINESS INTERESTS
Employees should avoid any outside financial interests that might be in
conflict with the interests of the Company. No employee may have any significant
direct or indirect financial interest in, or any business relationship with, a
person or entity that does business with the Company or is a competitor of the
Company. A financial interest includes any interest as an owner, creditor or
debtor. Indirect interests include those through an immediate family member or
other person acting on his or her behalf. This policy does not apply to an
employee's arms-length purchases of goods or services for personal or family
use, or to the ownership of shares in a publicly held corporation.
Employees should not engage in outside jobs or other business activities
that compete with the Company in any way. Further, any outside or secondary
employment ("moonlighting") may interfere with the job being performed for the
Company and is discouraged. Under no circumstances may employees have outside
interests that are in any way detrimental to the best interests of the Company.
You must disclose to the Compliance Committee any personal activities or
financial interests that could negatively influence, or give the appearance of
negatively influencing, your judgment or decisions as a Company employee. The
Compliance Committee will then determine if there is a conflict and, if so, how
to resolve it without compromising the Company's interests.
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CORPORATE BOARDS
The director of an organization has access to sensitive information and
charts the course of the entity. If you are invited to serve as a director of an
outside organization, the Company must take safeguards to shield both the
Company and you from even the appearance of impropriety. For that reason, any
employee invited to join the Board of Directors of another organization
(including a nonprofit or other charitable organization) must obtain the
approval of the Compliance Committee. Directors who are invited to serve on
other Boards should promptly notify the Chairman.
CORPORATE OPPORTUNITIES
An employee or director must not divert for personal gain any business
opportunity available to the Company. The duty of loyalty to the Company is
violated if the employee or director personally profits from a business
opportunity that rightfully belongs to the Company. This problem could arise,
for example, if an employee or director becomes aware through the use of
corporate property, information or position of an investment opportunity (either
a loan or equity transaction) in which the Company is or may be interested, and
then participates in the transaction personally or informs others of the
opportunity before the Company has the chance to participate in the transaction.
An employee or director also is prohibited from using corporate property,
information or position for personal gain. Employees and directors owe a duty to
the Company to advance its legitimate interests when the opportunity to do so
arises and, in the case of a non-employee director, such director is aware of
the Company's possible interest through use of corporate property, information
or position.
USE AND PROTECTION OF COMPANY ASSETS
Proper use and protection of the Company's assets is the responsibility of
all employees. Company facilities, materials, equipment, information and other
assets should be used only for conducting the Company's business and are not to
be used for any unauthorized purpose. Employees should guard against waste and
abuse of Company assets in order to improve the Company's productivity.
CONFIDENTIALITY
One of the Company's most important assets is its confidential corporate
information. The Company's legal obligations and its competitive position often
mandate that this information remain confidential.
Confidential corporate information relating to the Company's financial
performance (e.g. quarterly financial results of the Company's operations) or
other transactions or events can have a significant impact on the value of the
Company's securities. Premature or improper disclosure of such information may
expose the individual involved to onerous civil and criminal penalties.
4
You must not disclose confidential corporate information to anyone outside
the Company, except for a legitimate business purpose (such as contacts with the
Company's accountants or its outside lawyers). Even within the Company,
confidential corporate information should be discussed only with those who have
a need to know the information. Your obligation to safeguard confidential
corporate information continues even after you leave the Company.
The same rules apply to confidential information relating to other
companies with which we do business. In the course of the many pending or
proposed transactions that this Company has under consideration at any given
time, there is a great deal of non-public information relating to other
companies to which our employees may have access. This could include "material"
information that is likely to affect the value of the securities of the other
companies.
Employees and directors who learn material information about suppliers,
customers, venture partners, acquisition targets or competitors through their
work at the Company must keep it confidential and must not buy or sell stock in
such companies until after the information becomes public. Employees and
directors must not give tips about such companies to others who may buy or sell
the stocks of such companies.
The Company has issued a detailed "Statement of Policy Concerning Insider
Trading and Special Trading Procedures" regarding the use of confidential
information in connection with trading in securities. You should become familiar
with this policy and the procedures it requires. If you have any questions
regarding trading in the Company's securities or on the basis of confidential
information, you should contact Geoff Dugan, the Compliance Officer.
DEALINGS WITH THE PRESS AND COMMUNICATIONS WITH THE PUBLIC
The Company's Chief Executive Officer and President are the Company's
principal spokesmen. If someone outside the Company asks you questions or
requests information regarding the Company, its business or financial results,
do not attempt to answer. All requests for information - from reporters,
securities analysts, shareholders or the general public - should be referred to
the President, who will handle the request or delegate it to an appropriate
person.
ACCOUNTING MATTERS
INTERNAL ACCOUNTING CONTROLS
The Company places the highest priority on "best practices" disclosure. Our
annual reports, quarterly reports and press releases, and other public
disclosure of the Company's financial results, reflect how seriously we take
this responsibility.
To this end, we have established an internal Disclosure Committee, which
includes key members of senior management responsible for our internal financial
and risk management controls. This Committee, which currently consists of
Spencer
5
Haber, Tim O'Connor, Andy Richardson, Colette Tretola, Steven Sinnett and Geoff
Dugan, meets on a quarterly basis, and additionally when issues arise, to
discuss the state of the Company's internal controls, reporting systems and the
integrity of our financial information relative to our disclosure obligations.
This Committee assists senior management and the Audit Committee of the Board in
overseeing the Company's internal control systems and evaluating our public
disclosure processes.
Each employee shares this responsibility with senior management and the
Board of Directors and must help maintain the integrity of the Company's
financial records. We trust that every employee understands that protecting the
integrity of our information gathering, information quality, internal control
systems and public disclosures is one of the highest priorities we have as a
firm.
If you ever observe conduct that causes you to question the integrity of
our internal accounting controls and/or disclosure, or you otherwise have reason
to doubt the accuracy of our financial reporting, it is imperative that you
bring these concerns to our attention immediately. You should promptly report
any concerns to any member of the Disclosure Committee. If you are not
comfortable providing your name, you may report anonymously. Any kind of
retaliation against an employee for raising these issues is strictly prohibited
and will not be tolerated.
IMPROPER INFLUENCE ON THE CONDUCT OF AUDITS
It is unlawful for any officer or director of the Company, or any other
person acting under the direction of such person, to take any action to
fraudulently influence, coerce, manipulate, or mislead the independent
accountants engaged in the performance of an audit of the Company's financial
statements for the purpose of rendering such financial statements materially
misleading. Any such action is a violation of this Code of Conduct. Types of
conduct that might constitute improper influence include the following:
- Offering or paying bribes or other financial incentives, including offering
future employment or contracts for non-audit services,
- Providing an auditor with inaccurate or misleading legal analysis,
- Threatening to cancel or canceling existing non-audit or audit engagements
if the auditor objects to the Company's accounting practices or procedures,
- Seeking to have a partner removed from the audit engagement because the
partner objects to the Company's accounting practices or procedures,
- Blackmailing, and
- Making physical threats.
Any employee or director who engages in such conduct will be subject to
sanctions under the Code, including dismissal in the case of an employee, in
addition to potential civil and criminal liability.
6
RECORDS RETENTION
You should retain documents and other records for such period of time as
you and your colleagues will reasonably need such records in connection with the
Company's business activities. All documents not required to be retained for
business or legal reasons, including draft work product, should not be retained
and should be destroyed in order to reduce the high cost of storing and handling
the vast amounts of material that would otherwise accumulate. However, under
unusual circumstances, such as litigation, governmental investigation or if
required by applicable state and federal law and regulations, the Compliance
Committee may notify you if retention of documents or other records is
necessary.
LEGAL COMPLIANCE
Pertinent laws of every jurisdiction in which the Company operates must be
followed. Each employee is charged with the responsibility of acquiring
sufficient knowledge of the laws relating to his or her particular duties in
order to recognize potential dangers and to know when to seek legal advice. In
any instance where the law is ambiguous or difficult to interpret, the matter
should be reported to the Company's management who in turn will seek legal
advice from the Company's legal counsel as appropriate.
FAIR DEALING
It is the Company's policy to deal fairly with its customers, suppliers,
competitors and employees. In the course of business dealings on behalf of the
Company, no employee should take advantage of another person or party through
manipulation, concealment, abuse of privileged information, misrepresentation of
material facts or any other unfair business practice.
ENFORCEMENT
The conduct of each employee matters vitally to the Company. A misstep by a
single employee can cost the Company dearly; it undermines all of our
reputations. For these reasons, violations of this Code of Conduct may lead to
significant penalties, including dismissal.
WAIVERS
Any waiver of this Code of Conduct for executive officers or directors of
the Company may be made only by the Board of Directors, or by a Board Committee
specifically authorized for this purpose, and must be promptly disclosed to the
Company's shareholders.
7
EXHIBIT 12.1
Computation of Ratio of EBITDA to interest expense
For the 12 Months Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
EBITDA:
Total Revenue $ 525,724 $ 471,119 $ 463,519
Plus: Equity in earnings from joint ventures and unconsolidated subsidiares 1,222 7,361 4,796
Less: General and administrative 30,449 24,151 25,706
Less: General and administrative-stock-based compensation 3,048 3,574 2,864
Less: Provision for loan losses 8,250 7,000 6,500
Less: Operating costs-corporate tenant lease assets 13,755 12,782 12,737
Less: Advisory fees - - -
---------- ---------- ----------
Total EBIDTA $ 471,444 $ 430,973 $ 420,508
INTEREST EXPENSE: $ 185,375 $ 169,974 $ 173,741
EBITDA/INTEREST EXPENSE 2.54 2.54 2.42
EXHIBIT 12.2
Computation of Ratio of EBITDA to combined fixed charges
For the 12 Months Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
EBITDA:
Total Revenue $ 525,724 $ 471,119 $ 463,519
Plus: Equity in earnings from joint ventures and unconsolidated subsidiares 1,222 7,361 4,796
Less: General and administrative 30,449 24,151 25,706
Less: General and administrative-stock-based compensation 3,048 3,574 2,864
Less: Provision for loan losses 8,250 7,000 6,500
Less: Operating costs-corporate tenant lease assets 13,755 12,782 12,737
Less: Advisory fees - - -
---------- ---------- ----------
Total EBIDTA $ 471,444 $ 430,973 $ 420,508
COMBINED FIXED CHARGES:
Interest expense 185,375 169,974 173,741
Preferred dividends 36,908 36,908 36,908
---------- ---------- ----------
Total combined fixed charges $ 222,283 $ 206,882 $ 210,649
EBITDA/COMBINED FIXED CHARGES 2.12 2.08 2.00
EXHIBIT 21.1
STATE OF
SUBSIDIARY ORGANIZATION/INCORPORATION OTHER NAMES USED
767 STARS LLC Delaware None
1001 East Palm, LLC Delaware None
7555-7575 Colshire LLC Delaware None
Acquest Government Holdings, L.L.C. New York None
Acquest Government Holdings II, L.L.C. New York None
Acquest Holdings FC, LLC New York None
ACRE CLS, LLC Delaware None
ACRE Dublin LLC Delaware None
ACRE HPC, LLC Delaware None
ACRE IDG Manager, LLC Delaware None
ACRE IDG, LLC Delaware None
ACRE Partners, LLC Delaware None
ACRE Seymour, LLC Delaware None
ACRE Simon, L.L.C. Delaware None
American Corporate Real Estate, Inc. Massachusetts None
BM Center, LLC Delaware None
Corporate Technology Centre Associates II LLC California None
Corporate Technology Centre Associates LLC California None
CTC Associates I GenPar, LLC California None
CTC Associates I, L.P. Delaware None
CTC Associates II GenPar, LLC Delaware None
CTC Associates II, L.P. Delaware None
CTL I Maryland, Inc. Delaware None
F/S Subsidiary, L.L.C. Delaware None
FMAC StarFund, L.L.P Connecticut None
iStar 85 10th L/C LLC Delaware None
iStar Asset Receivables Trust Delaware None
iStar Asset Services, Inc. Delaware None
iStar BEST Finance LLC Delaware None
iStar Bishops Gate LLC Delaware None
iStar Campbellsville, LLC Delaware None
iStar CTL I GenPar, Inc. Delaware None
iStar CTL I, L.P. Delaware None
iStar D.C., Inc. Delaware None
iStar DB Seller, LLC Delaware None
iStar Denver Place, LLC Delaware None
iStar Eagle GenPar LLC Delaware None
iStar Eagle L.P. Delaware None
iStar Finance Sub V Inc. Delaware None
iStar Finance Preferred, Inc. Delaware None
iStar Funding, LLC Delaware None
iStar GT GenPar, LLC Delaware None
iStar GT, L.P. Delaware None
iStar Harborside LLC Delaware None
iStar Harrisburg Business Trust Delaware None
iStar Harrisburg GenPar LLC Delaware None
iStar Harrisburg, L.P. Delaware None
iStar HQ GT Inc. Delaware None
iStar HQ GT Illinous Inc. Delaware None
iStar HQ I GenPar, Inc. Delaware None
iStar HQ I Maryland, Inc. Delaware None
iStar HQ I, L.P. Delaware None
iStar HQ I Inc. Delaware None
iStar Las Vegas LLC Delaware None
iStar Merger Co. I Delaware None
iStar Merger Co. II Delaware None
iStar Poydras, LLC Delaware None
iStar Preferred Holdings, LLC Delaware None
iStar Real Estate Services, Inc. Maryland None
iStar San Jose, L.L.C. Delaware None
iStar Safeguard Preferred Holdings LLC Delaware None
iStar Sunnyvale Partners, L.P. Delaware None
iStar Sunnyvale, LLC Delaware None
iStar Ventures, Inc. Delaware None
iStar Ventures Direct Holdings, LLC Delaware None
iStar Walden, LLC Delaware None
MD3 Cayman L.P. Cayman None
NewPar, LLC Delaware None
NewPar/New LLC Delaware None
P Funding Inc. Delaware None
Red Lion G.P., Inc. Delaware None
RLH Partnership, L.P. Delaware None
SFI I, LLC Delaware None
SFT I, Inc. Delaware None
SFT II, Inc. Delaware None
SFT Starbonds Inc. Delaware None
SFT Venturer, LLC Delaware None
SFT Whole Loans A, Inc. Delaware None
SFT/RLH, Inc. Delaware None
Star Liberty Funding, LLC Delaware None
STARS I Corp. Delaware None
STARS Investment I Corp. Delaware None
Starwood Financial Advisors II, LLC Connecticut None
Starwood Operating, Inc. Delaware None
STW Holdings I, Inc. Delaware None
TN-CP Ventures One Texas None
TriNet Concord Farms III Limited Partnership Massachusetts None
TriNet Corporate Partners II, L.P. Delaware None
TriNet Corporate Realty Trust, Inc. Maryland None
TriNet Essential Facilities III, Inc. Maryland None
TriNet Essential Facilities VII, Inc. Maryland None
TriNet Essential Facilities VIIIR, Inc. Maryland None
TriNet Essential Facilities X, Inc. Maryland None
TriNet Essential Facilities XI, Inc. Maryland None
TriNet Essential Facilities XII, Inc. Maryland None
TriNet Essential Facilities XVIII, Inc. Maryland None
TriNet Essential Facilities XIX, Inc. Maryland None
TriNet Essential Facilities XX, Inc. Maryland None
TriNet Essential Facilities XXIII, Inc. Maryland None
TriNet Essential Facilities XXIV, Inc. Maryland None
TriNet Essential Facilities XXVI, Inc. Maryland None
TriNet Essential Facilities XXVII, Inc. Maryland None
TriNet Essential Facilities XXVIII, Inc. Maryland None
TriNet Essential Facilities XXIX, Inc. Maryland None
TriNet Management Operating Company, Inc. Maryland None
TriNet Milpitas Associates, LLC Maryland None
TriNet Property Partners, L.P. Maryland None
TriNet Realty Capital, Inc. Maryland None
TriNet Realty Investors I, Inc. Maryland None
TriNet Realty Investors II, Inc. Maryland None
TriNet Realty Investors III, Inc. Maryland None
TriNet Realty Investors IV, Inc. Maryland None
TriNet Realty Investors V, Inc. Maryland None
TriNet Sunnyvale Partners, L.P. Maryland None
TriNet XVII Realty Trust Massachusetts None
W9/TriNet Poydras, LLC Maryland None
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-32946, 333-38486, 333-73592, 333-83646) and the
Registration Statement on Form S-8 (No. 333-34300) of iStar Financial, Inc. of
our report dated February 14, 2003, except for Note 17, which is as of
March 11, 2003 relating to the financial statements and financial statement
schedules, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
New York, NY
March 26, 2003
