-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PXoe8JxhbtTb0KlMXHBWeKi41q7h61xMIYbqYKp64Khli5pTennx60hJh6G8Mim7 BfGSZ3yi1veNP/+0wBNdsQ== 0000903112-98-001830.txt : 19981026 0000903112-98-001830.hdr.sgml : 19981026 ACCESSION NUMBER: 0000903112-98-001830 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981023 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL TRUST CENTRAL INDEX KEY: 0000016387 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946181186 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-08063 FILM NUMBER: 98730019 BUSINESS ADDRESS: STREET 1: 605 THIRD AVENUE 26TH FLOOR STREET 2: STE 200 CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126550220 MAIL ADDRESS: STREET 1: 605 THIRD AVENUE 26TH FLOOR STREET 2: #200 CITY: NEW YORK STATE: NY ZIP: 10016 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19920703 10-Q/A 1 FORM 10-Q/A As filed with the Securities and Exchange Commission on October 23, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number: 1-8063 CAPITAL TRUST (Exact name of registrant as specified in its charter) California 94-6181186 - ------------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 605 Third Avenue, 26th Floor, New York, NY 10016 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 655-0220 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the close of the latest practical date. Class Outstanding at August 13, 1998 - ------------------------------------------- ------------------------------ Class A Common Shares of Beneficial Interest, 18,213,816 $1.00 par value ("Class A Common Shares") CAPITAL TRUST INDEX
Part I. Financial Information Item 1: Financial Statements 1 Consolidated Balance Sheets - June 30, 1998 (unaudited) and December 31, 1997 (audited) 1 Consolidated Statements of Operations - Three and Six Months Ended June 30, 1998 and 1997 (unaudited) 2 Consolidated Statements of Changes in Shareholders' Equity - Six Months Ended June 30, 1998 and 1997 (unaudited) 3 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 (unaudited) 4 Notes to Consolidated Financial Statements (unaudited) 5 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Signatures 19
Capital Trust and Subsidiaries Consolidated Balance Sheets June 30, 1998 and December 31, 1997 (in thousands)
June 30, December 31, 1998 1997 -------------------- -------------------- (unaudited) (audited) Assets Cash and cash equivalents $ 9,804 $ 49,268 Other available-for-sale securities, at market value 7,367 11,975 Commercial mortgage-backed securities, available-for-sale and recorded at market value at June 30, 1998, held to maturity and recorded at amortized cost at December 31, 1998 60,321 49,490 Loans receivable, net of $1,702 (unaudited) and $462 reserve for possible credit losses at June 30, 1998 and December 31, 1997, respectively 545,530 202,322 Excess of purchase price over net tangible assets acquired, net 319 331 Deposits and other receivables 2,438 284 Accrued interest receivable 5,520 818 Prepaid and other assets 5,962 2,878 -------------------- -------------------- Total assets $ 637,261 $ 317,366 ==================== ==================== Liabilities and Shareholders' Equity Liabilities: Accounts payable and accrued expenses $ 8,758 $ 5,718 Notes payable 14,611 4,953 Credit Facilities 353,894 79,864 Repurchase obligations 105,954 82,173 Deferred origination fees and other revenue 4,989 1,369 -------------------- -------------------- Total liabilities 488,206 174,077 -------------------- -------------------- Commitments and contingencies Shareholders' equity: Class A Convertible Preferred Shares, $1.00 par value, $0.26 cumulative annual dividend, 12,639 shares authorized, 12,268 shares issued and outstanding (liquidation preference of $33,000) 12,268 12,268 Class A Common Shares, $1.00 par value; unlimited shares authorized, 18,157 shares issued and outstanding 18,157 18,157 Restricted Class A Common Shares, $1.00 par value, 72 shares issued and outstanding at June 30, 1998 72 - Additional paid-in capital 158,790 158,137 Unearned compensation (646) - Accumulated other comprehensive income (55) 387 Accumulated deficit (39,531) (45,660) -------------------- -------------------- Total shareholders' equity 149,055 143,289 -------------------- -------------------- Total liabilities and shareholders' equity $ 637,261 $ 317,366 ==================== ====================
See accompanying notes to unaudited consolidated financial statements. Capital Trust and Subsidiaries Consolidated Statements of Operations Three and Six Months Ended June 30, 1998 and 1997 (in thousands, except per share data) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------------------- -------------------------------------- 1998 1997 1998 1997 ---------------- ----------------- ----------------- ----------------- Income from loans and other investments: Interest and related income $ 14,066 $ 40 $ 22,043 $ 76 Less: interest and related expenses 6,516 - 9,597 - ---------------- ----------------- ----------------- ----------------- Net income from loans and other investments 7,550 40 12,446 76 ---------------- ----------------- ----------------- ----------------- Other revenues: Advisory and investment banking fees 5,790 - 8,650 - Rental income - 15 - 305 Other interest income 310 316 680 603 Loss on sale of rental properties - - - (432) ---------------- ----------------- ----------------- ---------------- Total other revenues 6,100 331 9,330 476 ---------------- ----------------- ----------------- ---------------- Other expenses: General and administrative 4,020 710 7,261 1,142 Other interest expense 105 24 211 123 Rental property expenses - (14) - 123 Depreciation and amortization 62 3 108 24 Provision for possible credit losses 760 - 1,240 - ---------------- ----------------- ----------------- ---------------- Total other expenses 4,947 723 8,820 1,412 ---------------- ----------------- ----------------- ---------------- Net income (loss) before income taxes 8,703 (352) 12,956 (860) Provision for income taxes 3,679 - 5,259 - ---------------- ----------------- ----------------- ---------------- Net income (loss) $ 5,024 $ (352) $ 7,697 $ (860) Less: Class A Preferred Share dividend and dividend requirement 784 - 1,568 - ---------------- ----------------- ----------------- ---------------- Net income (loss) allocable to Class A Common Shares $ 4,240 $ (352) $ 6,129 $ (860) ================ ================= ================= ================ Per share information: Net income (loss) per Class A Common Share: Basic $ 0.23 $ (0.04) $ 0.34 $ (0.09) ================ ================= ================= ================ Diluted $ 0.16 $ (0.04) $ 0.25 $ (0.09) ================ ================= ================= ================ Weighted average Class A Common Shares outstanding: Basic 18,229,650 9,157,150 18,218,835 9,157,150 ================ ================= ================= ================ Diluted 30,770,567 9,157,150 30,744,162 9,157,150 ================ ================= ================= ================
See accompanying notes to unaudited consolidated financial statements. Capital Trust and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the Six Months Ended June 30, 1998 and 1997 (in thousands) (unaudited)
Restricted Class A Class A Class A Additional Comprehensive Preferred Common Common Paid-In Income (Loss) Shares Shares Shares Capital ------------------ ------------------------------------------------- Six months ended June 30, 1997 - --------------------- Balance at December 31, 1996 $ - $ - $ 9,157 $ - $ 55,098 Net loss (860) - - - - Change in unrealized gain (loss) on available-for-sale securities 157 - - - - Other - - - - 27 -------------------------------------------------------------------- Balance at June 30, 1997 $ (703) $ - $ 9,157 $ - $ 55,125 ===================================================================== Six months ended June 30, 1998 - --------------------- Balance at December 31, 1997 $ - $ 12,268 $18,157 $ - $ 158,137 Net income 7,697 - - - - Change in unrealized gain (loss) on available-for-sale securities (442) - - - - Issuance of restricted Class A Common Shares - - - 72 653 Restricted Class A Common Shares earned - - - - - Class A Preferred Share Dividend - - - - - ------------------------------------------------------------------------- Balance at June 30, 1998 $ 7,255 $ 12,268 $18,157 $ 72 $ 158,790 =======================================================================
Accumulated Other Unearned Comprehensive Accumulated Compensation Income Deficit Total --------------------------------------------------------------- Six months ended June 30, 1997 - --------------------- Balance at December 31, 1996 $ - $ (22) $ (39,762) $ 24,471 Net loss - - (860) (860) Change in unrealized gain (loss) on available-for-sale - 157 - 157 securities Other - - - 27 --------------------------------------------------------------- Balance at June 30, 1997 $ - $ 135 $ (40,622) $ 23,795 =============================================================== Six months ended June 30, 1998 - --------------------- Balance at December 31, 1997 $ - $ 387 $ (45,660) $ 143,289 Net income - - 7,697 7,697 Change in unrealized gain (loss) on available-for-sale securities - (442) - (442) Issuance of restricted Class A Common Shares (725) - - - Restricted Class A Common Shares earned 79 - - 79 Class A Preferred Share Dividend - - (1,568) (1,568) --------------------------------------------------------------- Balance at June 30, 1998 $ (646) $ (55) $ (39,531) $ 149,055 ===============================================================
See accompanying notes to unaudited consolidated financial statements. - 3 - Capital Trust and Subsidiaries Consolidated Statements of Cash Flows Six months ended June 30, 1998 and 1997 (in thousands)(unaudited)
1998 1997 ------------------- ------------------ Cash flows from operating activities: Net income (loss) $ 7,697 $ (860) Adjustments to reconcile net income (loss) to net cash Provided by (used in) operating activities: Depreciation and amortization 108 25 Restricted Class A Common Shares earned 79 - Net amortization of premiums and accretion of discounts on loans and other investments 477 - Loss on sale of investments and properties - 432 Provision for possible credit losses 1,240 - Changes in assets and liabilities: Deposits and receivables (2,154) (89) Accrued interest receivable (4,702) - Prepaid and other assets (2,940) (403) Deferred revenue 3,620 - Accounts payable and accrued expenses 3,040 834 Other liabilities - (70) ------------------- ------------------ Net cash provided by (used in) operating activities 6,465 (131) ------------------- ------------------ Cash flows from investing activities: Purchase of commercial mortgage-backed securities (36,302) (49,524) Principal collections of commercial mortgage-backed securities 25,471 - Origination and purchase of loans receivable (374,297) - Principal collections of loans receivable 29,372 16 Purchases of equipment and leasehold improvements (240) - Improvements to rental properties - (64) Proceeds from sale of rental properties - 7,306 Principal collections on available-for-sale securities 4,166 1,576 ------------------- ------------------ Net cash used in investing activities (351,830) (40,690) ------------------- ------------------ Cash flows from financing activities: Proceeds from repurchase obligations 41,837 42,451 Repayment of repurchase obligations (18,056) - Proceeds from credit facilities 383,289 - Repayment of credit facilities (109,259) - Proceeds from notes payable 10,170 - Repayment of notes payable (512) (4,296) Dividends paid on Class A Preferred Shares (1,568) - Additional Paid-in Capital - 27 ------------------- ------------------ Net cash provided by financing activities 305,901 38,182 ------------------- ------------------ Net decrease in cash and cash equivalents (39,464) (2,639) Cash and cash equivalents at beginning of period 49,268 4,698 ------------------- ------------------ Cash and cash equivalents at end of period $ 9,804 $ 2,059 =================== ================== Supplemental disclosure of cash flow information Interest paid during the period $ 7,640 $ 123 =================== ================== Taxes paid during the period $ 3,139 $ - =================== ==================
See accompanying notes to unaudited consolidated financial statements. -4- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements June 30, 1998 (unaudited) 1. Presentation of Financial Information The accompanying unaudited consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the financial statements and the related management's discussion and analysis of financial condition and results of operations filed with the 1997 Form 10-K of Capital Trust and Subsidiaries (the "Company"). In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 1998, are not necessarily indicative of results that may be expected for the entire year ending December 31, 1998. At December 31, 1996, the Company owned commercial rental property in Sacramento, California through a 59% limited partnership interest in Totem Square L.P., a Washington limited partnership ("Totem"), and an indirect 1% general partnership interest in Totem through its wholly-owned subsidiary, Cal-REIT Totem Square, Inc. An unrelated party held the remaining 40% interest. This property was sold during the quarter ended June 30, 1997 and the Totem Square L.P. and Totem Square, Inc. subsidiaries were liquidated and dissolved. The unaudited consolidated interim financial statements of the Company include the accounts of the Company, Victor Capital Group, L.P. ("Victor Capital") and its wholly-owned subsidiaries (included in the consolidated statement of operations since their acquisition on July 15, 1997) and the results from the disposition of the Company's rental property held by Totem, which was sold on March 4, 1997. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform in all material respects to generally accepted accounting principles. Certain prior period amounts have been reclassified to conform to current period classifications. 2. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. -5- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 3. Earnings Per Class A Common Share Earnings per Class A Common Share is presented based on the requirements of Statement of Accounting Standards No. 128 ("SFAS No. 128") which is effective for periods ending after December 15, 1997. SFAS No. 128 simplifies the standard for computing earnings per share and makes them comparable with international earnings per share standards. The statement replaces primary earnings per share with basic earnings per share ("Basic EPS") and fully diluted earnings per share with diluted earnings per share ("Diluted EPS"). Basic EPS is computed based on the income applicable to Class A Common Shares (which is net income (loss) reduced by the dividends on the class A 9.5% cumulative convertible preferred shares of beneficial interest, $1.00 par value ("Class A Preferred Shares")) divided by the weighted-average number of Class A Common Shares outstanding during the period. Diluted EPS is based on the net earnings applicable to Class A Common Shares plus dividends on the Class A Preferred Shares, divided by the weighted average number of Class A Common Shares and dilutive potential Class A Common Shares that were outstanding during the period. Dilutive potential Class A Common Shares include the convertible Class A Preferred Shares and dilutive options to purchase Class A Common Shares. At June 30, 1998, the Class A Preferred Shares and dilutive portion of options to purchase Class A Common Shares were considered Class A Common Share equivalents for purposes of calculating Diluted EPS. At June 30, 1997, there was no difference between Basic EPS and Diluted EPS or weighted average Class A Common Shares outstanding, as there were no dilutive securities outstanding. 4. Comprehensive Income In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") which is effective for fiscal years beginning after December 15, 1997. The statement changes the reporting of certain items currently reported in the shareholders' equity section of the balance sheet and establishes standards for reporting of comprehensive income and its components in a full set of general purpose financial statements. The Company has adopted this standard effective January 1, 1998. Total comprehensive income (loss) was $4,700,000 and $(236,000) for the three months ended June 30, 1998 and 1997, respectively, and $7,255,000 and $(703,000) for the six months ended June 30, 1998 and 1997, respectively. The primary component of comprehensive income other than net income was unrealized gain (loss) on available-for-sale securities. -6- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 5. Commercial Mortgage-Backed Securities During the six months ended June 30, 1998, the Company purchased interests in three subordinated commercial mortgage-backed securities issued by a financial asset securitization investment trust for $36.3 million. During the quarter ended June 30, 1998, due to prepayments made on underlying securities that reduced the interest rate/risk profile and maturity of a commercial mortgage-backed security, the Company concluded that it no longer anticipated holding this security to maturity. The security was sold during the quarter ended September 30, 1998 at par. Because of this decision to sell a held-to-maturity security, the Company has transferred all of its investments in commercial mortgage-backed securities, which have a book value of $60,321,000 as of June 30, 1998, from held-to-maturity securities to available-for-sale at amortized cost, which approximated market value. The securities bear interest at floating rates, for which the weighted average interest rate in effect at June 30, 1998 is 9.56%. 6. Loans Receivable At June 30, 1998, the amount and weighted average interest rate the Company's loans receivable by category was as follows (in thousands):
Weighted Average Interest Rate Amount ------------------- ------------------- Mortgage Loans $ 277,653 11.43% Mezzanine Loans 267,539 11.60% Other mortgage loans receivable 2,040 8.41% ------------------- Total loans and other investments 547,232 11.50% Less: Reserve for possible credit losses (1,702) =================== Net loans and other investments $ 545,530 ===================
At June 30, 1998, $414.2 million of the aforementioned loans bear interest at floating rates ranging from LIBOR plus 320 basis points to LIBOR plus 700 basis points before amortization of fees, premiums and discounts. The remaining $133.0 million of loans were originated or purchased with fixed rates ranging from 8% to 12% at June 30, 1998. All of the loans with fixed rates were the subject of interest rate swaps to provide a floating rate. The weighted average interest rate in effect at June 30, 1998, including interest rate swaps and amortization of fees, premiums and discounts, was 11.50%. During the six months ended June 30, 1998, the Company completed sixteen new loan transactions totaling approximately $400.4 million and provided $7.4 million of additional fundings on four existing loans. The Company funded $374.3 million of the foregoing loans receivable and investments through June 30, 1998 and had unfunded commitments on such assets totaling $45.4 million at June 30, 1998. -7- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) At June 30, 1998, the Company had committed to originate one loan for $28.0 million subject to definitive documentation (of which $23.0 million was funded in early July 1998) and had letters of intent outstanding for various other lending transactions, which were subject to satisfaction of certain conditions. 7. Long-Term Debt Credit Facilities Effective January 1, 1998, pursuant to an amended and restated credit agreement, the Company increased its existing line of credit with a commercial lender to $250 million (the "Credit Facility") and subsequently further amended the credit agreement to increase the facility to $300 million effective June 22, 1998. An additional commitment fee was paid when the Company's borrowings exceeded $250 million. The Credit Facility provides for advances to fund lender-approved loans and investments made by the Company. The amended and restated agreement expires on December 31, 2000. On June 8, 1998, the Company entered into an additional credit agreement with another commercial lender that provides for a $300 million line of credit that expires in November 1999 (the "Second Credit Facility" together with the Credit Facility, the "Credit Facilities"). The Second Credit Facility provides for advances to fund lender-approved loans and investments made by the Company (such loans and investments together with loans and investments approved under the Credit Facility, the "Funded Portfolio Assets"). The Company incurred an initial commitment fee upon the signing of the Second Credit Facility and will pay an additional commitment fee when borrowings exceed $250 million. Future repayments and redrawdowns of amounts previously subject to the drawdown fee will not require the Company to pay any additional fees. The Second Credit Facility provides for margin calls on asset-specific borrowings in the event of asset quality and/or market value deterioration as determined under the Second Credit Facility. The Second Credit Facility contains customary representations and warranties, covenants and conditions and events of default. The Second Credit Facility also contains a covenant obligating the Company to avoid undergoing an ownership change that results in Craig M. Hatkoff, John R. Klopp or Samuel Zell no longer retaining their senior offices and trusteeships with the Company and practical control of the Company's business and operations. The obligations of the Company under the Credit Facilities are secured by pledges of the Funded Portfolio Assets acquired with advances under the Credit Facilities. Borrowings under the Credit Facilities bear interest at specified rates over LIBOR (averaging approximately 8.02% for the borrowings outstanding at June 30, 1998) which rates vary according to the credit quality of the Funded Portfolio Assets and the advance rate. On June 30, 1998, the unused amounts available under the Credit Facilities were $246.1 million. -8- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) Repurchase Obligations In May 1998, the Company entered into a repurchase agreement in connection with the purchase of a subordinated participation in a note. At June 30, 1998, the Company has sold such assets totaling $19.0 million and has a liability to repurchase these assets for $15.2 million. The liability bears interest at specified rates over LIBOR (reflecting a total borrowing rate of 7.16% at June 30, 1998) and matures in May 1999. 8. Income Taxes The Company will elect to file a consolidated federal income tax return for the year ending December 31, 1998. The provision for income taxes for the six months ended June 30, 1998 is comprised of the following (in thousands): Current Federal $ 2,842 State 1,270 Local 1,147 Deferred Federal - State - Local - ============== Provision for income taxes $ 5,259 ============== The Company has federal net operating loss carryforwards ("NOLs") as of June 30, 1998 of approximately $17.7 million. Such NOLs expire through 2012. The Company also has a federal capital loss carryover of approximately $1.6 million that can be used to offset future capital gains. Due to an affiliate's purchase of 6,959,593 Class A Common Shares from the Company's former parent in January 1997 and another prior ownership change, a substantial portion of the NOLs are limited for federal income tax purposes to approximately $1.5 million annually. Any unused portion of such annual limitation can be carried forward to future periods. The Company also has approximately $3.5 million of NOL's from losses in 1997 (after the ownership changes described above) that can be utilized against taxable income in 1998. The reconciliation of income tax computed at the U.S. federal statutory tax rate to the effective income tax rate for the quarter ended June 30, 1998 is as follows (in thousands):
Federal income tax at statutory rate (34%) $ 4,405 34.0% State and local taxes, net of federal tax benefit 1,595 12.3 Tax benefit of utilization of net operating loss carryforward (850) (6.5) Other 109 0.8 ------------------------------ $ 5,259 40.6% ==============================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax reporting purposes. -9- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The components of the net deferred tax assets recorded under SFAS No. 109 as of June 30, 1998 are as follows (in thousands): Net operating loss carryforward $ 8,240 Reserves on other assets and for possible credit losses 3,552 Deferred revenue 616 Reserve for uncollectible accounts 208 ----------------- Deferred tax assets $ 12,616 Valuation allowance (12,616) ---------------- $ - ================= The Company recorded a valuation allowance to fully reserve its net deferred assets. Under SFAS No. 109, this valuation allowance will be adjusted in future years, as appropriate. However, the timing and extent of such future adjustments can not presently be determined. 9. Employee Benefit Plans 1998 Long-Term Incentive Share Plan On May 23, 1997, the Board of Trustees adopted the 1997 Long-Term Incentive Plan (the "Incentive Share Plan"), which became effective upon shareholder approval on July 15, 1997 at the 1997 annual meeting of shareholders (the "1997 Annual Meeting"). The Incentive Share Plan permits the grant of nonqualified share option ("NQSO"), incentive share option ("ISO"), restricted share, share appreciation right ("SAR"), performance unit, performance share and share unit awards. The Company has reserved an aggregate of 2,000,000 Class A Common Shares for issuance pursuant to awards under the Incentive Share Plan and the Company Non-Employee Trustee Share Plan. The maximum number of shares that may be subject of awards to any employee during the term of the Incentive Share Plan may not exceed 500,000 shares and the maximum amount payable in cash to any employee with respect to any performance period pursuant to any performance unit or performance share award is $1.0 million. During the quarter ended June 30, 1998, the Company issued an aggregate of 82,000 options to acquire Class A Common Shares with an exercise price of between $10.00 and $11.38 per share (which were issued at or above the Class A Common Share price on the date of the grant). -10- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table summarizes the activity under the Incentive Share Plan for the six months ended June 30, 1998:
Options Exercise Price Outstanding per Share -------------------------- -------------------------- Outstanding at January 1, 1998 607,000 $6.00 Granted 1,007,250 $10.00 - $11.38 Exercised - Canceled 57,500 $6.00 - $10.00 -------------------------- -------------------------- Outstanding at June 30, 1998 1,556,750 $6.00 - $11.38 ========================== ==========================
10. Subsequent Event On July 28, 1998, the Company privately placed 150,000 8.25% Step Up Convertible Trust Preferred Securities (liquidation amount $1,000 per security) with an aggregate liquidation amount of $150 million (the "Convertible Trust Preferred Securities"). The Convertible Trust Preferred Securities were issued by the Company's consolidated statutory trust subsidiary, CT Convertible Trust I (the "Trust"). The Convertible Trust Preferred Securities represent an undivided beneficial interest in the assets of the Trust which consist solely of the Company's Convertible Debentures. This private placement transaction was completed concurrently with the related issuance and sale to the Trust of the Company's 8.25% Step Up Convertible Junior Subordinated Debentures in the aggregate principal amount of $154,650,000 (the "Convertible Debentures"). Distributions on the Convertible Trust Preferred Securities are payable quarterly in arrears on each calendar quarter-end and correspond to the payments of interest made on the Convertible Debentures, the sole assets of the Trust. Distributions are payable only to the extent payments are made in respect to the Convertible Debentures. The Company received $145.2 million in net proceeds, after original issue discount and transaction expenses, pursuant to the above transactions, reflecting an original issue discount of 3% from the liquidation amount of the Convertible Trust Preferred Securities. The proceeds were initially used to pay down the Company's Credit Facilities. The Convertible Trust Preferred Securities will be convertible into class A common shares of beneficial interest, $1.00 par value, of the Company, pursuant to the direction of the holder of the Convertible Trust Preferred Securities to the conversion agent to exchange such Convertible Trust Preferred Securities for a portion of the Convertible Debentures held by the Trust on the basis of one security per $1,000 principal amount of Convertible Debentures, and immediately convert such amount of Convertible Debentures into Class A Common Shares at an initial rate of 85.47 Class A Common Shares per $1,000 principal amount of the Convertible Debentures (which is equivalent to a conversion price of $11.70 per Class A Common Share). The Convertible Debentures have a 20-year maturity and are non-callable for five years. Upon repayment of the Convertible Debentures at maturity or upon redemption, the proceeds of such repayment or payment shall be simultaneously paid and applied to redeem, among other things, the Convertible Trust Preferred Securities. If the securities have not been redeemed by September 30, 2004, the distribution rate will step up by 0.75% per annum. The 3% ($4.5 million) discount on the issuance will be amortized over the life of the Convertible Trust Preferred Securities. -11- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) For financial reporting purposes, the Trust will be treated as a subsidiary of the Company and, accordingly, the accounts of the Trust will be included in the consolidated financial statements of the Company. Intercompany transactions between the Trust and the Company, including the Junior Subordinated Debentures, will be eliminated in the consolidated financial statements of the Company. The Convertible Trust Preferred Securities will be presented as a separate caption between liabilities and shareholders' equity in the consolidated balance sheet of the Company as "Company-obligated, madatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the Company". Distributions on the Convertible Trust Preferred Securities will be recorded as a separate caption immediately following non-interest expense in the consolidated statement of operations of the Company. -12- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. Historical results set forth are not necessarily indicative of the future financial position and results of operations of the Company. The following discussion reflects the reclassification on July 15, 1997 of the Company's common shares of beneficial interest, $1.00 par value ("Old Common Shares"), as class A common shares of beneficial interest, $1.00 par value (the "Class A Common Shares"). Recent Developments - ------------------- On January 3, 1997, Capital Trust Investors Limited Partnership ("CTILP"), an affiliate of Equity Group Investments, Inc. ("EGI") and Samuel Zell, purchased from the Company's former parent, 6,959,593 Class A Common Shares (representing approximately 76% of the then-outstanding Class A Common Shares) for an aggregate purchase price of $20,222,011. Prior to the purchase, which was approved by the then-incumbent Board of Trustees, EGI and Victor Capital Group, L.P. ("Victor Capital") presented to the Company's then-incumbent Board of Trustees a proposed new business plan in which the Company would cease to be a REIT and instead become a specialty finance company designed primarily to take advantage of high-yielding mezzanine investment and other real estate asset opportunities in commercial real estate. EGI and Victor Capital also proposed that they provide the Company with a new management team to implement the business plan and that they invest through an affiliate a minimum of $30.0 million in a new class of preferred shares to be issued by the Company. The Board of Trustees approved CTILP's purchase of the former parent's Class A Common Shares, the new business plan and the issuance of a minimum of $30.0 million of a new class of preferred shares of the Company at $2.69 per share, such shares to be convertible into Class A Common Shares of the Company on a one-for-one basis. The Company subsequently agreed that, concurrently with the consummation of the proposed preferred equity investment, it would acquire for $5.0 million Victor Capital's real estate investment banking, advisory and asset management businesses, including the services of its experienced management team. At the Company's 1997 annual meeting of shareholders ("1997 Annual Meeting"), the Company's shareholders approved the investment, pursuant to which the Company would issue and sell up to approximately $34.0 million of class A 9.5% cumulative convertible preferred shares of beneficial interest, $1.00 par value ("Class A Preferred Shares"), to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of Samuel Zell and the principals of Victor Capital (the "Investment"). The Company's shareholders also approved the amended and restated declaration of trust, which, among other things, reclassified the Company's Old Common Shares as Class A Common Shares and changed the Company's name to "Capital Trust." Immediately following the 1997 Annual Meeting, the Investment was consummated; 12,267,658 Class A Preferred Shares were sold to Veqtor for an aggregate purchase price of $33,000,000. Concurrently with the foregoing transaction, Veqtor purchased the 6,959,593 Class A Common Shares held by CTILP for an aggregate purchase price of approximately $21.3 million. As a result of these transactions, currently, Veqtor beneficially owns 19,227,251 (or approximately 63%) of the outstanding voting shares of the Company. Veqtor funded the -13- approximately $54.3 million aggregate purchase price for the Class A Common Shares and Class A Preferred Shares with $5.0 million of capital contributions from its members and $50.0 million of borrowings under the 12% convertible redeemable notes (the "Veqtor Notes") issued to institutional investors. In June 1998, the Veqtor Notes were converted into preferred units of Veqtor by agreement between the common members of Veqtor and the institutional investors. Pursuant to an amended and restated limited liability company agreement of Veqtor, the Veqtor notes were converted into preferred units of Veqtor (the "Veqtor Preferred Units") and the institutional investors were admitted as preferred members of Veqtor. Veqtor may in the future redeem the Veqtor Preferred Units for an aggregate of 9,899,710 shares (assuming redemption on the earliest possible date, July 16, 1999). The common members of Veqtor and Veqtor agreed with the Company in December 1997 that Veqtor should redeem the preferred units then authorized by the original limited liability company agreement of Veqtor in effect at such time at the earliest date upon which Veqtor has the right to effectuate such redemption. Veqtor has confirmed to the Company that the foregoing agreement obligates Veqtor to redeem the Veqtor Preferred Units according to the timetable specified therein. In addition, immediately following the 1997 Annual Meeting, the acquisition of the real estate services businesses of Victor Capital was consummated and a new management team was appointed by the Company from among the ranks of Victor Capital's professional team and elsewhere. The Company thereafter immediately commenced full implementation of its current business plan under the direction of its newly elected board of trustees and new management team. After the 1997 Annual Meeting, the Company completed two significant financing and capital raising transactions. As of September 30, 1997, the Company obtained a $150 million line of credit ("Credit Facility") from a commercial lender, which was subsequently increased to $250 million as of January 1, 1998 and $300 million as of June 22, 1998. On December 16, 1997, the Company completed a public offering of 9,000,000 Class A Common Shares resulting in net proceeds to the Company of approximately $91.4 million. This significant source of borrowed funds and infusion of cash allowed the Company to commence full scale operations as a specialty finance company pursuant to its current business plan. On July 28, 1998, the Company privately placed 150,000 8.25% Step Up Convertible Trust Preferred Securities (liquidation amount $1,000 per security) with an aggregate liquidation amount of $150 million (the "Convertible Trust Preferred Securities"). The Convertible Trust Preferred Securities were issued by the Company's consolidated statutory trust subsidiary, CT Convertible Trust I (the "Trust"). This private placement transaction was completed concurrently with the related issuance and sale to the Trust of the Company's 8.25% Step Up Convertible Junior Subordinated Debentures in the aggregate principal amount of $154,650,000 (the "Convertible Debentures"). Distributions on the Convertible Trust Preferred Securities are payable quarterly in arrears on each calendar quarter-end and correspond to the payments of interest made on the Convertible Debentures, the sole assets of the Trust. Distributions are payable only to the extent payments are made in respect to the Convertible Debentures. The Company received $145.2 million in net proceeds, after original issue discount and transaction expenses, pursuant to the above transactions, reflecting an original issue discount of 3% from the liquidation amount of the Convertible Trust Preferred Securities. The proceeds were initially used to pay down the Company's Credit Facilities. The Convertible Trust Preferred -14- Securities are convertible at any time by the holders thereof into the Company's listed Class A Common Shares at a conversion price of $11.70. The Convertible Debentures have a 20-year maturity and are non-callable for five years. Upon repayment of the Convertible Debentures at maturity or upon redemption, the proceeds of such repayment or payment shall be simultaneously paid and applied to redeem, among other things, the Convertible Trust Preferred Securities. If the securities have not been redeemed by September 30, 2004, the distribution rate will step up by 0.75% per annum. The 3% ($4.5 million) discount on the issuance will be amortized over the life of the Convertible Trust Preferred Securities or 20 years. Overview of Financial Condition - ------------------------------- During the six months ended June 30, 1998, the Company completed eighteen new loan and investment in commercial mortgage-backed securities transactions totaling approximately $436.7 million and provided $7.4 million of additional fundings on four existing loans. The Company funded $410.6 million of the foregoing loans and investments through June 30, 1998, which enabled the Company to grow its assets from $317.4 million to $637.3 million. The significant infusion of cash from the public offering of Class A Common Shares in December 1997 allowed the Company to expand its specialty finance company operations. The equity capital provided by the public offering, used in combination with additional borrowings under the Credit Facilities (as defined below) and repurchase financing, allowed the Company to make the investments described below. Since December 31, 1997, the Company has identified, negotiated and committed to fund or acquire eighteen loan and commercial mortgage-backed securities transactions. These include eight Mortgage Loan transactions totaling $153.5 million (of which $16.1 million remains unfunded at June 30, 1998), eight Mezzanine Loan transactions totaling $246.9 million (of which $17.4 million remains unfunded at June 30, 1998), and two acquisitions of three classes of subordinated interests issued by a financial asset securitization investment trust totaling $36.3 million. The Company also funded $7.4 million of commitments under four existing loans. The Company believes that these investments will provide investment yields within the Company's target range of 400 to 600 basis points above LIBOR. The Company maximizes its return on equity by utilizing its existing cash on hand and then employing leverage on its investments (employing a cash optimization model). The Company may make investments with yields that fall outside of the investment range set forth above, but that correspond with the level of risk perceived by the Company to be inherent in such investments. At June 30, 1998, the Company had outstanding loans and investment in commercial mortgage-backed securities totaling in excess of $581 million, additional commitments for fundings on outstanding loans of approximately $45.4 million and a $28.0 million commitment to originate a new mortgage loan (of which $23.0 million was funded in early July 1998). When possible, in connection with the acquisition of investments, the Company obtains seller financing in the form of repurchase agreements. Four of the transactions completed during the six months ended June 30, 1998 described above were financed in this manner representing total original repurchase financings of $41.8 million. These financings are generally completed at discounted terms as compared to those available under the Credit Facilities. Effective January 1, 1998, pursuant to an amended and restated credit agreement, the Company increased its line of credit under the Credit Facility to $250 million and subsequently -15- increased the facility to $300 million effective June 22, 1998. An additional commitment fee was paid when the Company's borrowings exceeded $250 million. The Credit Facility provides for advances to fund lender-approved loans and investments made by the Company. The Credit Facility expires on December 31, 2000. On June 8, 1998, the Company entered into an additional credit agreement with another commercial lender that provides for a $300 million line of credit that expires in November 1999 (the "Second Credit Facility" together with the Credit Facility, the "Credit Facilities"). The Second Credit Facility provides for advances to fund lender-approved loans and investments made by the Company (such loans and investments together with loans and investments approved under the Credit Facility, "Funded Portfolio Assets"). The Company incurred an initial commitment fee upon the signing of the Second Credit Facility and an additional commitment fee will be due when borrowings exceed $250 million. Future repayments and redrawdowns of amounts previously subject to the drawdown fee will not require the Company to pay any additional fees. The Second Credit Facility provides for margin calls on asset-specific borrowings in the event of asset quality and/or market value deterioration as determined under the Second Credit Facility. The Second Credit Facility contains customary representations and warranties, covenants and conditions and events of default. The Second Credit Facility also contains a covenant obligating the Company to avoid undergoing an ownership change that results in Craig M. Hatkoff, John R. Klopp or Samuel Zell no longer retaining their senior offices and trusteeships with the Company and practical control of the Company's business and operations. At June 30, 1998, the Company had $353.9 million of outstanding borrowings under the Credit Facilities. As of June 30, 1998, certain of the Company's loans and other investments have been hedged so that the assets and the corresponding liabilities were matched at floating rates over LIBOR. The Company has entered into interest rate swap agreements for notional amounts totaling approximately $87.4 million with financial institution counterparties whereby the Company swapped fixed rate instruments, which averages approximately 6.04%, for floating rate instruments based on the London Interbank Offered Rate ("LIBOR"). The agreements mature at varying times from December 1998 to July 2008. As of January 1, 1997, the Company's real estate portfolio, which included two commercial properties, was carried at a book value of $8,585,000. The portfolio included a shopping center in Sacramento, California and a 60% interest in a mixed-use retail property in Kirkland, Washington. During the first quarter, these two commercial properties were sold. The proceeds from these sales were invested in mortgage loans and in liquid mortgage-backed securities. -16- Comparison of the Six and Three Months Ended June 30, 1998 to the - ----------------------------------------------------------------- Six and Three Months Ended June 30, 1997 ---------------------------------------- The Company reported net income allocable to Class A Common Shares of $6,129,000 for the six months ended June 30, 1998, an increase of $6,989,000 from the net loss allocable to Class A Common Shares of $860,000 for the six months ended June 30, 1997. The Company reported net income allocable to Class A Common Shares of $4,240,000 for the three months ended June 30, 1998, an increase of $4,592,000, from the net loss allocable to Class A Common Shares of $352,000 for the three months ended June 30, 1997. These changes were primarily the result of the revenues generated from loans and other investments and significant advisory and investment banking fees. Net income from loans and other investments increased $12,370,000 to $12,446,000 for the six months ended June 30, 1998 over the $76,000 for the six months ended June 30, 1997. Net income from loans and other investments increased $7,510,000 to $7,550,000 for the three months ended June 30, 1998 over the $40,000 for the three months ended June 30, 1997. This increase is primarily attributable to the revenue earned by the Company from new loans and investments originated or acquired by the Company that increased by more than $550 million from June 30, 1997 to June 30, 1998. The increase in net income was partially offset by the interest paid on repurchase agreements and the Credit Facilities during the six months and quarter ended June 30, 1998. No interest expense for these types of borrowings was incurred during the six months or quarter ended June 30, 1997. During the six months ended June 30, 1998, other revenues increased $8,854,000 to $9,330,000 over the same period in 1997. The increase during the three months ended June 30, 1998 over the same period in 1997 was $5,769,000 to $6,100,000. The increase for the six months ended June 30, 1998 was primarily due to the addition of $8,650,000 of advisory and investment banking fees generated by Victor Capital and its related subsidiaries, which was partially offset by a $305,000 decrease in rental income as the Company sold its remaining rental properties during the first quarter of 1997. The sales of the rental properties in the first quarter of 1997 resulted in the Company recognizing a loss of $432,000. The Company sold a shopping center in Sacramento, California and recognized a net loss of approximately $34,000. The Company also sold a retail property located in Kirkland, Washington, resulting in a net loss of approximately $398,000, the majority of which was attributable to transfer taxes and the elimination of unamortized tenant improvements and leasing commissions. The increase for the three months ended June 30, 1998 was primarily due to the addition of $5,790,000 of advisory and investment banking fees generated by Victor Capital and its related subsidiaries. Other expenses increased from $1,412,000 for the six months ended June 30, 1997 to $8,820,000 for six months ended June 30, 1998 and from $723,000 for the three months ended June 30, 1997 to $4,947,000 for the three months ended June 30, 1998. The increase was primarily due to the additional general and administrative expenses necessary for the commencement and continuation of full-scale operations as a specialty finance company, the largest component of such expenses is employee salaries and related costs, and the increase in the provision for possible credit losses. As of June 30, 1998, the Company had 42 full time employees as compared to none at June 30, 1997. The provision for possible credit losses was $1,240,000 for the six months ended June 30, 1998 and was $760,000 for the three months ended June 30, 1998 as the Company provided reserves on its loan and investment portfolio pursuant to -17- its reserve policy. The Company had no provision for possible credit loss in the quarter or six months ended June 30, 1997. In 1997, the Company did not incur any income tax expense or benefit associated with the loss it incurred due to the uncertainty of realization of net operating loss carryforwards. In the six and three months ended June 30, 1998, the Company accrued $5,259 and 3,679, respectively, of income tax expense for federal, state and local income taxes. For federal purposes, the Company utilized one half of the expected net operating loss carryforward to be utilized in 1998 in calculating the accrual for the six months ended June 30, 1998 and one quarter of the expected net operating loss carryforward to be utilized in 1998 in calculating the accrual for the three months ended June 30, 1998. The preferred share dividend and dividend requirement arose in 1997 as a result of the Company's issuance of $33 million of Class A Preferred Shares on July 15, 1997. Dividends accrue on these shares at a rate of 9.5% per annum on a per share price of $2.69 for the 12,267,658 shares outstanding. Liquidity and Capital Resources - ------------------------------- At June 30, 1998, the Company had $9,804,000 in cash. The primary sources of liquidity for the Company for the remainder of 1998, which the Company believes will adequately meet future operating liquidity and capital resource requirements, will be cash on hand, cash generated from operations, interest payments received on its investments, loans and securities, additional borrowings under the Company's Credit Facilities and the $145.2 million in net proceeds, after original issue discount and transaction expenses, from the issuance of the Convertible Trust Preferred Securities. The primary demands on the Company's capital resources will be the funding required for the origination or acquisition of loans and other investments as the Company continues with its specialty finance operations and the growth of its portfolio of loans and other investments. The Company experienced a net decrease in cash of $39,464,000 for the six months ended June 30, 1998, compared to $2,639,000 for the six months ended June 30, 1997. This use of cash was primarily due to the utilization of the proceeds of the Class A Common Share offering in the fourth quarter of 1997 in making loans and other investments during the first six months of 1998 offset by additional borrowings. Cash provided by operating activities during the six months ended June 30, 1998 increased by $6,596,000 to $6,465,000, from cash used in operating activities of $131,000 during the same period of 1997. For the six months ended June 30, 1998, cash used in investing activities was $351,830,000, an increase of $311,140,000 from $40,690,000 during the same period in 1997 primarily the result of the loans and other investments completed since December 31, 1997. The increase in cash provided by financing activities, which increased $267,719,000 to $305,901,000 from $38,182,000, was due primarily to the proceeds of repurchase obligations and net borrowings under the Credit Facilities. At June 30, 1998, the Company has three outstanding notes payable totaling $14,611,000, outstanding borrowings on the Credit Facilities of $353,894,000 and outstanding repurchase obligations of $105,954,000. -18- SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITAL TRUST October 23, 1998 /s/ John R. Klopp - ---------------- ----------------- Date John R. Klopp Chief Executive Officer /s/ Edward L. Shugrue III ------------------------ Edward L. Shugrue III Managing Director and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----