-----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, Gv/FJLTRMDCn2Xb20YQJy24bF5lVgV334XXb9TyUYoS8xeQjclQ2TIO0LHCmLtiN 5OmnTksBriNnbXv0G+YGqQ== 0000903112-98-001831.txt : 19981026 0000903112-98-001831.hdr.sgml : 19981026 ACCESSION NUMBER: 0000903112-98-001831 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 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: 98730021 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 March 31, 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 May 13, 1998 - ------------------------------------------- --------------------------- Class A Common Shares of Beneficial Interest 18,229,650 $1.00 par value ("Class A Common Shares") CAPITAL TRUST INDEX
Part I. Financial Information Item 1: Financial Statements 1 Consolidated Balance Sheets - March 31, 1998 (unaudited) and December 31, 1997 (audited) 1 Consolidated Statements of Operations - Three Months Ended March 31, 1998 and 1997 (unaudited) 2 Consolidated Statements of Changes in Shareholders' Equity - Three Months Ended March 31, 1998 and 1997 (unaudited) 3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 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 11 Signatures 16
Capital Trust and Subsidiaries Consolidated Balance Sheets March 31, 1998 and December 31, 1997 (in thousands)
March 31, December 31, 1998 1997 -------------------- -------------------- (unaudited) (audited) Assets Cash and cash equivalents $ 7,075 $ 49,268 Available-for-sale securities 9,604 11,975 Commercial mortgage-backed securities 67,486 49,490 Loans receivable, net of $942 (unaudited) and $462 reserve for possible credit losses at March 31, 1998 and December 31, 1997, respectively 349,588 202,322 Excess of purchase price over net tangible assets acquired, net 326 331 Deposits and other receivables 3,824 284 Accrued interest receivable 3,418 818 Prepaid and other assets 3,858 2,878 -------------------- -------------------- Total assets $ 445,179 $ 317,366 ==================== ==================== Liabilities and Shareholders' Equity Liabilities: Accounts payable and accrued expenses $ 5,098 $ 5,718 Notes payable 4,447 4,953 Credit facility 188,714 79,864 Repurchase obligations 97,945 82,173 Deferred origination fees and other revenue 3,099 1,369 -------------------- -------------------- Total liabilities 299,303 174,077 -------------------- -------------------- 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 March 31, 1998 72 - Additional paid-in capital 158,790 158,137 Unearned compensation (693) - Accumulated other comprehensive income 269 387 Accumulated deficit (42,987) (45,660) -------------------- -------------------- Total shareholders' equity 145,876 143,289 -------------------- -------------------- Total liabilities and shareholders' equity $ 445,179 $ 317,366 ==================== ====================
See accompanying notes to unaudited consolidated financial statements. Capital Trust and Subsidiaries Consolidated Statements of Operations Three Months Ended March 31, 1998 and 1997 (in thousands, except per share data) (unaudited)
1998 1997 ------------------- ------------------ Income from loans and other investments: Interest and related income $ 7,977 $ 36 Less: interest and related expenses 3,081 - ------------------- ------------------ Net income from loans and other investments 4,896 36 ------------------- ------------------ Other revenues: Advisory and investment banking fees 2,860 - Rental income - 290 Other interest income 370 287 Loss on sale of rental properties - (432) ------------------- ------------------ Total other revenues 3,230 145 ------------------- ------------------ Other expenses: General and administrative 3,241 432 Other interest expense 106 99 Rental property expenses - 137 Depreciation and amortization 46 21 Provision for possible credit losses 480 - ------------------- ------------------ Total other expenses 3,873 689 ------------------- ------------------ Net income (loss) before income taxes 4,253 (508) Provision for income taxes 1,580 - ------------------- ------------------ Net income (loss) $ 2,673 $ (508) Less: Class A Preferred Share dividend requirement (784) - ------------------- ------------------ Net income (loss) allocable to Class A Common Shares $ 1,889 $ (508) =================== ================== Per share information: Net income (loss) per Class A Common Share: Basic $ 0.10 $ (0.06) =================== ================== Diluted $ 0.09 $ (0.06) =================== ================== Weighted average Class A Common Shares outstanding: Basic 18,207,900 9,157,150 =================== ================== Diluted 30,736,405 9,157,150 =================== ==================
See accompanying notes to unaudited consolidated financial statements. -2- Capital Trust and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the Three Months Ended March 31, 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 ------------------ --------------------------------------------------- Three months ended March 31, 1997 - -------------------------------- Balance at December 31, 1996 $ - $ - $ 9,157 $ - $ 55,098 Net loss (508) - - - - Change in unrealized gain (loss) on available-for-sale 41 - - - - securities Other - - - - 27 ------------------ --------------------------------------------------- Balance at March 31, 1997 $ (467) $ - $ 9,157 $ - $ 55,125 ================== =================================================== Three months ended March 31, 1998 - --------------------------------- Balance at December 31, 1997 $ - $ 12,268 $18,157 $ - $ 158,137 Net income 2,673 - - - - Change in unrealized gain (loss) on available-for-sale securities (118) - - - - Issuance of restricted Class A Common Shares - - - 72 653 Restricted Class A Common Shares earned - - - - - ------------------ --------------------------------------------------- Balance at March 31, 1998 $ 2,555 $ 12,268 $18,157 $ 72 $ 158,790 ================== ===================================================
Accumulated Other Unearned Comprehensive Accumulated Compensation Income Deficit Total -------------------------------------------------------------- Three months ended March 31, 1997 - -------------------------------- Balance at December 31, 1996 $ - $ (22) $ (39,762) $ 24,471 Net loss - - (508) (508) Change in unrealized gain (loss) on available-for-sale - 41 - 41 securities Other - - - 27 -------------------------------------------------------------- Balance at March 31, 1997 $ - $ 19 $ (40,270) $ 24,031 ============================================================== Three months ended March 31, 1998 - --------------------------------- Balance at December 31, 1997 $ - $ 387 $ (45,660) $ 143,289 Net income - - 2,673 2,673 Change in unrealized gain (loss) on available-for-sale securities - (118) - (118) Issuance of restricted Class A Common Shares (725) - - - Restricted Class A Common Shares earned 32 - - 32 -------------------------------------------------------------- Balance at March 31, 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 Three months ended March 31, 1998 and 1997 (in thousands) (unaudited)
1998 1997 ------------------- ------------------ Cash flows from operating activities: Net income (loss) $ 2,673 $ (508) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 46 21 Restricted Class A Common Shares earned 32 - Loss on sale of investments and properties - 432 Provision for possible credit losses 480 - Changes in assets and liabilities: Deposits and receivables (3,540) 20 Accrued interest receivable (2,600) - Prepaid and other assets (895) (53) Deferred revenue 1,730 - Accounts payable and accrued expenses (620) (213) Other liabilities - (70) ------------------- ------------------ Net cash used in operating activities (2,694) (371) ------------------- ------------------ Cash flows from investing activities: Purchase of commercial mortgage-backed securities (28,959) - Principal collections of commercial mortgage-backed securities 10,963 - Origination and purchase of loans receivable (148,153) - Principal collections of loans receivable 407 8 Purchases of equipment and leasehold improvements (126) - Improvements to rental properties - (64) Proceeds from sale of rental properties - 7,306 Principal collections on available-for-sale securities 2,253 1,015 ------------------- ------------------ Net cash provided by (used in) investing activities (163,615) 8,265 ------------------- ------------------ Cash flows from financing activities: Proceeds from repurchase obligations 26,612 - Repayment of repurchase obligations (10,840) - Proceeds from credit facility 148,714 - Repayment of credit facility (39,864) - Repayment of notes payable (506) (4,289) Additional Paid-in Capital - 27 ------------------- ------------------ Net cash provided by (used in) financing activities 124,116 (4,262) ------------------- ------------------ Net increase (decrease) in cash and cash equivalents (42,193) 3,632 Cash and cash equivalents at beginning of period 49,268 4,698 ------------------- ------------------ Cash and cash equivalents at end of period $ 7,075 $ 8,330 =================== ================== Supplemental disclosure of cash flow information Interest paid during the period $ 2,260 $ 99 =================== ================== Taxes paid during the period $ 143 $ - =================== ==================
See accompanying notes to unaudited consolidated financial statements. -4- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements March 31, 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 months ended March 31, 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 March 31, 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 March 31, 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 March 31, 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 $2,555,000 and $(467,000) for the three months ended March 31, 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 quarter ended March 31, 1998, the Company purchased three subordinated commercial mortgage-backed securities issued by a financial asset securitization investment trust for $29.0 million. The Company's commercial mortgage-backed securities totaled $67,486,000 at March 31, 1998, all of which earned interest at floating rates (weighted average interest rate is 9.68% at March 31, 1998). 6. Loans receivable At March 31, 1998, the amount and weighted average interest rate the Company's loans receivable by category was as follows (in thousands):
Weighted Average Amount Interest Rate ------------------- ------------------- Mortgage Loans $ 201,367 11.20% Mezzanine Loans 147,111 11.79% Other mortgage loans receivable 2,052 8.41% ------------------- Total loans and other investments 350,530 11.43% Less: Reserve for possible credit losses (942) ------------------- Net loans and other investments $ 49,588 ===================
At March 31, 1998, $239.6 million of the aforementioned loans bear interest at floating rates ranging from LIBOR plus 370 basis points to LIBOR plus 660 basis points before amortization of fees, premiums and discounts. The remaining $110.9 million of loans were originated or purchased with fixed rates ranging from 8.5% to 12% at March 31, 1998. All of the loans financed at fixed rates were swapped to yield a floating rate. The weighted average interest rate in effect at March 31, 1998, including interest rate swaps and amortization of fees, premiums and discounts, was 11.43%. During the quarter ended March 31, 1998, the Company completed eight new loan transactions totaling approximately $159.1 million and provided $5.4 million of additional fundings on two existing loans. The Company funded $148.1 million of the foregoing loans receivable through March 31, 1998 and had unfunded commitments on such assets totaling $37.9 million at March 31, 1998. At March 31, 1998, the Company has letters of intent outstanding for various other lending transactions, which were subject to satisfaction of certain conditions. -7- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 7. Long-Term Debt Credit Facility Effective January 1, 1998, pursuant to an amended and restated credit agreement, the Company increased its line of credit with a commercial lender to $250 million (the "Credit Facility"). The Credit Facility provides for advances to fund lender-approved loans and investments made by the Company ("Funded Portfolio Assets"). The amended and restated agreement expires on December 31, 2000. The obligations of the Company under the Credit Facility are secured by pledges of the Funded Portfolio Assets acquired with advances under the Credit Facility. Borrowings under the Credit Facility bear interest at specified rates over LIBOR (averaging approximately 7.82% for the borrowings outstanding at March 31, 1998) which rates may fluctuate based upon the credit quality of the Funded Portfolio Assets and the advance rate. The Company incurred an initial commitment fee upon the signing of the Credit Facility and paid additional commitment fees when the total borrowing under the Credit Facility exceeded $75 million and exceeded $150 million. On March 31, 1998, the unused amount available under the Credit Facility was $61.3 million. Repurchase Obligations During the quarter ended March 31, 1998, the Company has entered into three new repurchase agreements. In February 1998, the Company entered into a repurchase agreement in connection with the purchase of a subordinated participation in a note. At March 31, 1998, the Company has sold such assets totaling $10.0 million and has a liability to repurchase these assets for $7.5 million. The liability bears interest at specified rates over LIBOR (7.09% at March 31, 1998) and matures in February 1999. In March 1998, the Company entered into a repurchase agreement in connection with the purchase of a subordinated participation in a first mortgage loan. At March 31, 1998, the Company has sold such assets totaling $14.2 million and has a liability to repurchase these assets for $10.6 million. The liability bears interest at specified rates over LIBOR (7.64% at March 31, 1998) and matures in March 1999. The Company has also entered into a repurchase agreement in conjunction with the purchase of a class of subordinated commercial mortgage-backed securities issued by a financial asset securitization investment trust. At March 31, 1998, the Company has sold such securities with a book value totaling $10.0 million and has a liability to repurchase these assets for $8.5 million. The liability bears interest at 6.66%, and matures in March 1999. -8- Capital Trust and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 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 quarter ended March 31, 1998 is comprised of the following (in thousands): Current Federal $ 787 State 417 Local 376 Deferred Federal - State - Local - -------------- Provision for income taxes $ 1,580 ============== The Company has federal net operating loss carryforwards ("NOLs") as of March 31, 1998 of approximately $19.0 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 NOLs 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 March 31, 1998 is as follows (in thousands):
Federal income tax at statutory rate (34%) $ 1,446 34.0% State and local taxes, net of federal tax benefit 523 12.3 Tax benefit of utilization of net operating loss carryforward (425) (10.0) Other 36 0.9 ------------------------------ $ 1,580 37.2% ==============================
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 March 31, 1998 are as follows (in thousands): Net operating loss carryforward $ 8,665 Reserves on other assets and for possible credit losses 3,552 Deferred revenue 616 Reserve for uncollectible accounts 208 ----------------- Deferred tax assets $ 13,041 Valuation allowance (13,041) ----------------- $ - ================= 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 Trustee Share Plan (as defined below). The maximum number of shares that may be subject of awards to any employee during the term of the plan may not exceed 500,000 shares and the maximum amount payable in cash to any employee with respect to any performance period pursuant to any performance unit or performance share award is $1.0 million. During the quarter ended March 31, 1998, the Company issued an aggregate of 925,250 options to acquire Class A Common Shares with an exercise price of $10.00 per share (the closing Class A Common Share price on the date of the grant) and 72,500 shares of restricted shares which will begin to vest in January 2001 and fully vest in January 2003. In addition, as of March 31, 1998, the Company had outstanding ISOs and NQSOs (the "Grants") pursuant to the Incentive Share Plan to purchase an aggregate of 604,500 Class A Common Shares with an exercise price of $6.00 per share. -10- 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 -11- 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. The Veqtor Notes may in the future be converted into preferred interests in Veqtor that may in turn be redeemed for an aggregate of 9,899,710 voting shares of the Company held by Veqtor. 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. 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. Overview of Financial Condition - ------------------------------- During the first quarter of 1998, the Company completed nine new loan and investment in commercial mortgage-backed securities transactions totaling approximately $188.1 million and provided $5.4 million of additional fundings on two existing loans. The Company funded $177.1 million of the foregoing loans and investments through March 31, 1998 which enabled the Company to grow its assets from $317.4 million to $445.2 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 Facility 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 nine loan and investment in commercial mortgage-backed securities transactions. This includes five Mortgage Loan transactions totaling $84.2 million (of which $12.4 million remains unfunded at March 31, 1998), three Mezzanine Loan transactions totaling $74.9 million (of which $4.0 million remains unfunded at March 31, 1998), and one transaction for three subordinated commercial mortgage-backed securities issued by a financial asset securitization investment trust for $29.0 million. The Company also funded $5.4 million of commitments to two 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. -12- At March 31, 1998, the Company had outstanding loans and investments in commercial mortgage-backed securities totaling in excess of $418 million and had additional commitments for fundings of approximately $37.9 million pursuant to certain of the loans originated in such transactions. When possible, in connection with the acquisition of investments, the Company obtains seller financing in the form of repurchase agreements. Three of the transactions completed during the quarter ended March 31, 1998 described above were financed in this manner representing total repurchase financings of $26.6 million. These financings are generally completed at discounted terms as compared to those available under the Credit Facility. The remaining transactions were funded primarily with cash on hand from the proceeds of the Company's public offering and through borrowings under the Credit Facility. The Credit Facility was increased from $150 million to $250 million effective January 1, 1998. At March 31, 1998, the Company had $188.7 million of outstanding borrowings under the Credit Facility. As of March 31, 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 $49.9 million with financial institution counterparties whereby the Company swapped fixed rate instruments, which averages approximately 6.14%, for floating rate instruments based on the London Interbank Offered Rate ("LIBOR"). The agreements mature at varying times from December 1998 to April 2006. 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. -13- Comparison of the Three Months Ended March 31. 1998 to the - ---------------------------------------------------------- Three Months Ended March 31. 1997 --------------------------------- The Company reported net income allocable to Class A Common Shares of $1,889,000 for the three months ended March 31, 1998, an increase of $2,397,000 from loss of $508,000 reported for the three months ended March 31, 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 $4,860,000 to $4,896,000 for the three months ended March 31, 1998 over the $36,000 for the three months ended March 31, 1997. This increase is primarily attributable to the revenue earned by the Company from new investments and loans that increased by more than $400 million from March 31, 1997 to March 31, 1998. This increase was partially offset by the interest paid on repurchase agreements and the Credit Facility during the quarter ended March 31, 1998 which did not exist during the quarter ended March 31, 1997. During the three months ended March 31, 1998, other revenues increased $2,653,000 to $3,230,000 over the same period in 1997. The increase for the three months ended March 31, 1998 was primarily due to the addition of $2,860,000 of advisory and investment banking fees generated by Victor Capital and its related subsidiaries and an increase in other interest income of $83,000, from a higher level of invested cash on hand and investments, which was partially offset by a $290,000 decrease in rental income as the Company sold its remaining rental properties during the first quarter of 1997. Other expenses increased from $689,000 for the three months ended March 31, 1997 to $3,393,000 for three months ended March 31, 1998. The increase was primarily due to the additional general and administrative expenses necessary for the commencement of full-scale operations as a specialty finance company pursuant to the Company's business plan, the largest component of which is employee salaries and related costs. As of March 31, 1998, the Company has 41 full time employees as compared to none at March 31, 1997. The provision for possible credit losses was $480,000 for the three months ended March 31, 1998 as the company provided reserves on its loan and investment portfolio pursuant to its new business plan. The Company had no provision for possible credit loss in the quarter ended March 31, 1997. During the first quarter of 1997, the Company sold a shopping center in Sacramento, California. The net loss recognized from the sale of the shopping center was approximately $34,000. The Company also sold a retail property located in Kirkland, Washington. The net loss recognized from the sale of the retail property was approximately $398,000, the majority of which was attributable to transfer taxes and the elimination of unamortized tenant improvements and leasing commissions. 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 first quarter of 1998, the Company accrued $1,580,000 of income tax expense for federal, -14- state and local income taxes. For federal purposes, the Company utilized one quarter of the expected net operating loss carryforward to be utilized in 1998 in calculating the accrual. The preferred share dividend and dividend requirement arose in 1997 as a result of the Company issuing $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. Liquidity and Capital Resources - ------------------------------- At March 31, 1998, the Company had $7,075,000 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, and additional borrowings under the Company's Credit Facility. The Company's loan origination activities have outpaced its original plan and as a result, the Company is exploring securing additional debt and equity financing. The primary demands on the Company's capital resources will be the fundings required for the origination 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 $42,193,000 for the three months ended March 31, 1998, compared to a net increase in cash of $3,632,000 for the three months ended March 31, 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 quarter of 1998 offset by additional borrowings. For the three months ended March 31, 1998, cash used in operating activities was $2,812,000, an increase of $2,441,000 from $371,000 during the same period in 1997. Cash used in investing activities during this same period increased by $171,762,000 to $163,497,000, from cash provided by investing activities of $8,265,000 during the quarter ended March 31, 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 $128,378,000 to $124,116,000 from a use of $4,262,000, was due primarily to the proceeds of repurchase obligations and net borrowings under the Credit Facility. The Company has two outstanding notes payable totaling $4,447,000, outstanding borrowings on the Credit Facility of $188,714,000 and outstanding repurchase obligations of $97,945,000. 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 20, 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-----