UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1997
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
incorporation or organization) Identification No.)
885 Third Avenue, Suite 1240, New York, NY 10022
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 593-5400
(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 [ ]
622033.3
<PAGE>
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 June 30, 1997
- -------------------------------------------- ----------------------------
Class A Common Shares of Beneficial Interest, 9,137,335
$1.00 par value ("Class A Common Shares")
EXPLANATORY NOTE
This Form 10-Q Quarterly Report reflects (i) the reclassification on July
15, 1997 of the common shares of beneficial interest, $1.00 par value, of the
Registrant (f/k/a California Real Estate Investment Trust), a California
business trust, as class A common shares of beneficial interest, $1.00 par
value, in the Registrant and (ii) the change in the name of the Registrant on
July 15, 1997 to "Capital Trust."
622033.3
<PAGE>
CAPITAL TRUST
INDEX
PAGE
Part I. Financial Information
Item 1: Financial Statements...................................... 1
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996................... 1
Consolidated Statements of Operations -
For the Six Months Ended
June 30, 1997 and 1996................................ 2
Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1997 and 1996....... 3
Notes to Consolidated Financial Statements................ 4
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations.........11
Part II. Other Information
Item 1: Legal Proceedings.........................................15
Item 2: Changes in Securities.....................................15
Item 3: Defaults Upon Senior Securities...........................15
Item 4: Submission of Matters to a Vote of Security Holders.......15
Item 5: Other Information.........................................16
Item 6: Exhibits and Reports on Form 8-K..........................17
622033.3
<PAGE>
PART I. Financial Information
<TABLE>
<CAPTION>
CAPITAL TRUST
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December
1997 31, 1996
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Investment, Held to Maturity:
Investment in CMBS $49,524,000 $ --
Investments, Held for Sale:
Rental properties -- 8,585,000
Notes receivable net of valuation allowances and deferred
gains of $6,127,000 at June 30, 1997 and December 31, 1996 2,650,000 1,576,000
Marketable securities available-for-sale 12,696,000 14,115,000
Cash 2,059,000 4,698,000
Receivables, net of allowance of $1,250,000 and $1,001,000
at June 30, 1997 and December 31, 1996, respectively 796,000 707,000
Other assets 554,000 355,000
----------- -----------
Total Assets $68,279,000 $30,036,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable, collateralized by deeds of trust on rental
properties $ 873,000 $ 5,169,000
Accounts payable and accrued expenses 1,160,000 326,000
Other liabilities -- 70,000
Repurchase Obligations 42,451,000 --
---------- -----------
Total Liabilities 44,484,000 5,565,000
---------- -----------
Shareholders' Equity:
Class A Common Shares of beneficial interest, par value $1 a share;
unlimited authorization, 9,137,000 shares outstanding at
June 30, 1997 and December 31, 1996 9,137,000 9,137,000
Additional paid-in capital 55,145,000 55,118,000
Unrealized holding income (loss) on marketable 135,000 (22,000)
Accumulated deficit (40,622,000) (39,762,000)
----------- -----------
Total Shareholders' Equity 23,795,000 24,471,000
----------- -----------
Total Liabilities and Shareholders' Equity $68,279,000 $30,036,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
622033.3
1
<PAGE>
<TABLE>
<CAPTION>
CAPITAL TRUST
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rent $ -- $ 534,000 $ 236,000 $1,103,000
Interest 356,000 246,000 679,000 548,000
Other 15,000 -- 69,000 --
--------- --------- ---------- ----------
371,000 780,000 984,000 1,651,000
--------- --------- ---------- ----------
Expenses:
Operating expenses -- 178,000 123,000 326,000
Property management 1,000 29,000 15,000 56,000
Depreciation and amortization 4,000 20,000 25,000 25,000
Interest 24,000 137,000 123,000 274,000
General and administrative 694,000 367,000 1,126,000 780,000
--------- --------- ---------- ----------
723,000 731,000 1,412,000 1,461,000
--------- --------- ---------- ----------
Income (loss) before gain (loss)
on foreclosure or sale of
investments and valuation losses (352,000) 49,000 (428,000) 190,000
Gain (loss) on sale of
investments -- 297,000 (432,000) 596,000
--------- --------- ---------- ----------
Income (loss) before
valuation (losses) (352,000) 346,000 (860,000) 786,000
Valuation (losses) -- (559,000) -- (559,000)
--------- --------- ---------- ----------
Net (loss) income $(352,000) $(213,000) $ (860,000) $ 227,000
========= ========= ========== ==========
Net (loss) income per share of
beneficial interest $ (0.04) $ (0.02) $ (0.09) $ 0.02
========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
622033.3
2
<PAGE>
<TABLE>
<CAPTION>
CAPITAL TRUST
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (860,000) $ 227,000
Adjustments to reconcile net (loss) income to net cash
used in) provided by operating activities:
Depreciation and amortization 25,000 25,000
Loss (gain) on foreclosure or sale of investments 432,000 (596,000)
Valuation losses -- 559,000
Changes in assets and liabilities:
(Increase) in receivables, net (89,000) (4,000)
(Increase) Decrease in other assets (403,000) 12,000
(Decrease) increase in accounts payable
and accrued expenses 834,000 12,000
(Decrease) increase in other liabilities (70,000) 130,000
----------- -----------
Total adjustments to net income 729,000 138,000
----------- -----------
Net cash (used in) provided by operating activities (131,000) 365,000
----------- -----------
Cash flows from investing activities:
Proceeds from sale of investments 7,306,000 11,142,000
Purchase of CMBS (49,524,000) --
Purchase of marketable securities -- (11,993,000)
Improvements to rental properties (64,000) (118,000)
Principal collections on notes receivable 16,000 22,000
Principal collection on marketable securities 1,576,000 --
----------- -----------
Net cash used in investing activities (40,690,000) (947,000)
----------- -----------
Cash flows from financing activities:
Principal payments on long-term notes payable (4,296,000) (38,000)
Proceeds from repurchase obligation 42,451,000 --
Additional paid-in capital 27,000 --
----------- -----------
Net cash provided by (used in) financing activities 38,182,000 (38,000)
----------- -----------
Net decrease in cash (2,639,000) (620,000)
Cash, beginning of period 4,698,000 4,778,000
----------- -----------
Cash, end of period $ 2,059,000 $ 4,158,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
622033.3
3
<PAGE>
CAPITAL TRUST
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation:
--------------------------------------
Organization
------------
Capital Trust (f/k/a California Real Estate Investment Trust) (the
"Company") was organized under the laws of the State of California pursuant
to a Declaration of Trust dated September 15, 1966. On July 15, 1997, a
change of control of the Company occurred. This change of control followed
the purchase on January 3, 1997 by CalREIT Investors Limited Partnership
("CRIL"), an affiliate of Equity Group Investments, Inc. ("EGI") and Samuel
Zell, of the 6,959,593 Class A Common Shares (representing approximately
76% of the outstanding Class A Common Shares) then owned by the Company's
former parent. Prior to the purchase which was approved by the then
incumbent board of trustees, EGI and Victor Capital Group, L.P. ("VCG")
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 opportunities in commercial real
estate. EGI and VCG 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 million in a new class of preferred shares to
be issued by the Company. In connection with the foregoing, the Company
subsequently agreed that, concurrently with the consummation of the
proposed preferred equity investment, it would acquire for $5.0 million
VCG's real estate investment banking, advisory and asset management
businesses, including the services of its experienced management team.
On July 15, 1997, the proposed preferred share investment was consummated;
12,267,658 class A 9.5% cumulative convertible preferred shares, $1.00 par
value, of beneficial interest in the Company ("Class A Preferred Shares")
were sold to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of Samuel
Zell and the principals of VCG for an aggregate purchase price of
$33,000,000 (the "Preferred Share Investment"). Concurrently with the
foregoing transaction, Veqtor purchased from CRIL the 6,959,593 Class A
Common Shares held by it for an aggregate purchase price of approximately
$21.3 million. As a result of these transactions, Veqtor beneficially owns
19,227,251 or approximately 90% of the outstanding voting shares of the
Company.
In addition, on July 15, 1997, the Company consummated the acquisition of
the real estate services businesses of VCG. A new management team was
appointed by the Company from among the rank's of VCG's professional team
and elsewhere. Thereafter, the Company immediately commenced full
implementation of the new business plan under the direction of its newly
elected board of trustees and its new management team.
622033.3
4
<PAGE>
CAPITAL TRUST
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation, continued:
--------------------------------------
As of March 31, 1997, the Company had sold its two remaining commercial
rental properties, Fulton Square Shopping Center and Totem Square in
Sacramento, California and in Kirkland, Washington, respectively. At the
end of the second quarter, the Company owned a mortgage note portfolio of
four notes encompassing approximately $8,777,000 in loans with an aggregate
book value of approximately $2,650,000. These loans bear interest at an
overall effective rate of approximately 8%; approximately $2.1 million
(book value) of these loans pay interest on a monthly basis and bear
interest at an overall effective rate of approximately 8.7%. They are
collateralized by mortgages on real property. Three of the investments in
the four loans were originated by the Company in connection with the
disposition of Company properties prior to 1996. The remaining note, in the
face amount of approximately $1,090,000, was made in conjunction with the
sale of Fulton Square Shopping Center in February 1997.
Additionally, as of June 30, 1997 the Company had approximately $12,696,000
invested in liquid mortgage-backed securities.
Basis of Presentation
---------------------
The accompanying financial statements are unaudited; however, they have
been prepared in accordance with generally accepted accounting principles
for interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting solely of normal recurring matters)
necessary for a fair presentation of the financial statements for these
interim periods have been included. The results for the interim period
ended June 30, 1997, are not necessarily indicative of the results to be
obtained for the full fiscal year. These financial statements should be
read in conjunction with the December 31, 1996, audited financial
statements and notes thereto, included in the Company's Annual Report on
Form 10-K. The accompanying unaudited consolidated financial statements of
Capital Trust include the accounts of the Company and its wholly owned
subsidiaries.
622033.3
5
<PAGE>
CAPITAL TRUST
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation, continued:
--------------------------------------
Stock-Based Compensation
------------------------
As of June 30, 1997 and December 31, 1996 there were no share options
outstanding nor share option plans in place. The Company's board of
trustees adopted, subject to shareholder approval which was obtained on
July 15, 1997, two share option plans pursuant to which options to purchase
an aggregate of two million Class A Common Shares may be issued to
employees and trustees of the Company.
2. Investment in CMBS and Related Repurchase Obligations:
-----------------------------------------------------
On June 30, 1997, the Company completed an approximately $49.3 million
investment in a junior, subordinated class of commercial mortgage-backed
securities ("CMBS"). The CMBS investment, which is secured by 20 short-term
commercial mortgage loans with original maturities ranging from two to
three years, was structured to provided an effective yield of a specified
number of basis points over LIBOR based on specified base case modeling
assumptions. The purchase price was financed in part pursuant to a reverse
repurchase agreement. Pursuant to the reverse repurchase agreement, the
Company posted 25% of the purchase price (approximately $12.3 million) from
available cash sources as maintenance margin and received an extension of
credit from the counter party for the remaining 75% balance (approximately
$36.9 million). In connection with the foregoing, the Company entered into
a separate repurchase agreement in the approximate amount of $5.6 million
secured by certain of its FNMA securities.
3. Investments in Notes Receivable:
-------------------------------
As of June 30, 1997 and December 31, 1996, the Company had long-term notes
receivable, collateralized by deeds of trust (before valuation allowances
and deferred gains) of $8,777,000 and $7,703,000, respectively. The notes
are collateralized by real estate properties in California and Arizona. In
conjunction with the Company's plan to monetize assets, its mortgage note
investments are classified for accounting purposes as "held for sale." The
notes bear interest at rates ranging from 7.63% to 9.5% as of June 30,
1997. For the quarter ended June 30, 1997 the overall effective rate was
approximately 8%; approximately $2.1 million (book value) of these loans
pay interest on a monthly basis and bear interest at an overall effective
rate of approximately 8.7%.
622033.3
6
<PAGE>
CAPITAL TRUST
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
4. Investments in Marketable Securities:
------------------------------------
At June 30, 1997, the Company's "available-for-sale" securities consisted
of the following:
<TABLE>
<CAPTION>
(In thousands)
Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Federal National Mortgage
Association, adjustable rate interest
currently at 7.931%, due April 1, 2024 $ 2,535 $ 13 $ -- $ 2,548
Federal Home Loan Mortgage
Corporation, adjustable rate interest
currently at 7.666%, due June 1, 2024 870 4 -- 874
Federal National Mortgage
Association, adjustable rate interest
currently at 7.359%, due April 1, 2025 582 4 -- 586
Federal National Mortgage
Association, adjustable rate interest
currently at 6.82%, due May 1, 2026 2,936 13 -- 2,949
Federal National Mortgage
Association, adjustable rate interest
currently at 6.869%, due June 1, 2026 5,638 101 -- 5,739
------- ----- ----- -------
$12,561 $ 135 $ -- $12,696
======= ===== ===== =======
</TABLE>
The maturity dates above are not necessarily indicative of expected
maturities as principal is often prepaid on such instruments.
5. Note Payables
-------------
The Company has one note payable to John Alden Life Insurance Company
("John Alden") with an interest rate of 9.50% per annum. Principal and
interest are payable monthly until August 7, 2017 when the entire unpaid
principal balance and any unpaid interest are due. John Alden has the right
to call the entire note due and payable upon ninety days prior written
notice.
622033.3
7
<PAGE>
CAPITAL TRUST
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
6. Income Taxes:
------------
The Company has here-to-fore elected to be taxed as a real estate
investment trust and as such, is not taxed on that portion of its taxable
income which is distributed to shareholders, provided that at least 95% of
its real estate trust taxable income is distributed and that the Company
meets certain other REIT requirements. Immediately following the Preferred
Share Investment, the Company will no longer be operated as a REIT and will
therefore be subject to federal income taxes.
The Company had federal and California net operating loss carryforwards
("NOLs") as of December 31, 1996 of approximately $17,631,000 and
$5,194,000, respectively. The Company also has a federal and California
capital loss carryover of approximately $1,567,000 that can be used to
offset future capital gain. Due to CRIL's purchase of the 6,959,593 Class A
Common Shares from the Company's former parent in January 1997 and the
prior year ownership change related to the former parent's bankruptcy, NOLs
are limited for both federal and California to approximately $1,500,000
annually. Any unused portion of such annual limitation can be carried
forward to future periods.
7. Related-Party Transactions:
--------------------------
Pursuant to an oral agreement with the Company's former parent, costs for
certain general administrative services, including executive services,
accounting services, treasury services, financial reporting and internal
bookkeeping services, shareholder relations, and directors and officers
insurance were shared with the former parent. The shared costs were
allocated to the Company and the former parent based upon their respective
asset values (real property and notes receivable), subject to annual
negotiation. At June 30, 1997 and December 31, 1996, the Company had
$9,000, and $31,000, respectively due to the Company's former parent
pursuant to the cost allocation arrangement. The cost allocation
arrangement between the Company and the former parent was terminated on
January 7, 1997.
622033.3
8
<PAGE>
CAPITAL TRUST
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
8. Statement of Cash Flows Supplemental Information:
------------------------------------------------
In connection with the sale and foreclosure of properties, notes
receivable, and property, plant and equipment the Company entered into
various non-cash transactions as follows:
(In thousands)
For the Six Months Ended
June 30, June 30,
1997 1966
Sales price less selling costs $8,396 $11,199
Liabilities applied to sales price -- (57)
Amount due from buyer (1,090) --
------ -------
Net cash received $7,306 $11,142
------ -------
Cash paid for interest during the three month periods ended June 30, 1997
and 1996, was $24,000 and $137,000, respectively. Cash paid for interest
during the six month periods ended June 30, 1997, and June 30, 1996, was
$123,000 and $274,000, respectively.
9. Per Share Data:
--------------
Per share data is for the three month and six month periods ended June 30,
1997, and June 30, 1996, based on the weighted average number of shares of
beneficial interest outstanding during each period. The weighted average
number of shares used in the computation was 9,137,000.
622033.3
9
<PAGE>
CAPITAL TRUST
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
10. Gain (Loss) on Foreclosure or Sale of Investments:
-------------------------------------------------
Components of the gain (loss) on foreclosure or sale of investments for the
three and six months ended June 30, 1997, and June 30, 1996, were as
follows:
<TABLE>
<CAPTION>
(In thousands)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sale of Bekins property -- $(164) -- (164)
Sale of pavilions at Mesa Note -- 430 -- 430
Sale of Spacesaver Mini-Storage Note -- 30 -- 30
Sale of Van -- 1 -- 1
Sale of Redfield property -- -- -- 299
Recognition of deferred gains -- -- -- --
Sale of Fulton Square -- -- (34) --
Sale of Totem Square -- -- (398) --
---- ---- ----- ----
-- $297 $(432) $596
==== ==== ===== ====
</TABLE>
622033.3
10
<PAGE>
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, as class A
common shares of beneficial interest, $1.00 par value (the "Class A Common
Shares").
Recent Developments
- -------------------
On January 3, 1997, CalREIT Investors Limited Partnership ("CRIL"), 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 outstanding Class A Common Shares) then owned by the
former parent 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. ("VCG") 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 opportunities in
commercial real estate. EGI and VCG 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 million in a new class of preferred shares
to be issued by the Company.
The board of trustees approved CRIL's purchase of the former parent's Class
A Common Shares, the new business plan and the issuance of a minimum of $30
million of convertible preferred shares of the Company at $2.69 per share, the
preferred shares to be convertible into common shares of the Company on a
one-for-one basis. The board of trustees considered a number of factors in
approving the foregoing, including the attractiveness of the proposed new
business plan, the significant real estate investment and financing experience
of the proposed new management team and the significant amount of equity capital
the Company would obtain from the proposed preferred share investment. The Board
also considered the terms of previous alternative offers to purchase the former
parents's interest in the Company of which the Board was aware and the fact that
the average price of the Company's Class A Common Shares during the 60 trading
days preceding the board of trustees' meeting at which the proposed preferred
equity investment was approved was $2.38 per share. The Company subsequently
agreed that, concurrently with the consummation of the proposed preferred equity
investment, it would acquire for $5.0 million VCG'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 held on July 15, 1997,
the Company's shareholders approved a proposal to issue and sell up to
approximately $34 million of class A 9.5% cumulative convertible preferred
shares, $1.00 par value, of beneficial interest in the Company ("Class A
Preferred Shares") to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of
Samuel Zell and the principals of VCG (the "Preferred Share Investment"). The
Company's shareholders also approved an amended and restated declaration of
trust of the Company, that, among other things, reclassified the Company's
outstanding common shares as Class A Common Shares and changed the Company's
name to Capital Trust.
622033.3
11
<PAGE>
Immediately following the Company's annual meeting of shareholders, the
Preferred Share 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 from CRIL the 6,959,593 Class A
Common Shares held by it for an aggregate purchase price of approximately $21.3
million. As a result of these transactions, Veqtor beneficially owns 19,227,251
or approximately 90% of the outstanding voting shares of the Company.
In addition immediately following the shareholder meeting, the acquisition
of the real estate services businesses of VCG was consummated and a new
management team was appointed by the Company from among the rank's of VCG's
professional team and elsewhere. The Company thereafter immediately commenced
full implementation of the new business plan under the direction of its newly
elected board of trustees and new management team.
In connection with the foregoing, the Company announced on July 15, 1997
the completion of its first investment pursuant to the new business plan. On
June 30, 1997, the Registrant completed an approximately $49.3 million
investment in a junior, subordinated class of commercial mortgage-backed
securities ("CMBS"). The CMBS investment, which is secured by 20 short-term
commercial mortgage loans with original maturities ranging from two to three
years, was structured to provided an effective yield of a specified number of
basis points over LIBOR based on specified base case modeling assumptions. The
purchase price was financed in part pursuant to a reverse repurchase agreement.
Pursuant to the reverse repurchase agreement, the Company posted 25% of the
purchase price (approximately $12.3 million) from available cash sources as
maintenance margin and received an extension of credit from the counter party
for the remaining 75% balance (approximately $36.9 million).
Dispositions of Properties and Mortgage Notes
- ---------------------------------------------
As of January 1, 1997, the Company's investment portfolio included two
commercial properties, as well as three mortgage notes secured by real property,
all "held for sale." The Company's real estate portfolio, carried at a book
value of $8,585,000 as of January 1, 1997, included Fulton Square Shopping
Center in Sacramento, California and a 60% interest in Totem Square, a mixed-use
retail property in Kirkland, Washington. During the first quarter, these two
commercial properties were sold. The sale of Fulton Square closed on February
14, 1997 and the sale of Totem Square closed on March 3, 1997. The proceeds from
these sales were invested in mortgage loans and liquid mortgage-backed
securities which satisfy REIT-asset qualification requirements. As of the end of
the second quarter, the Company had $12,696,000 invested in such securities.
The Company's mortgage note portfolio, carried at an aggregate book value
of $2,650,000 as of June 30, 1997, consists of four loans which bear interest at
an overall effective rate of approximately 8% and are collateralized by
mortgages on real property; approximately $2.1 million of these loans pay
interest on a monthly basis and bear interest at an overall effective rate of
approximately 8.7%.
622033.3
12
<PAGE>
Management of the Company's Investments
- ---------------------------------------
All strategic and investment decisions during the period were made by the
board of trustees. The Company was self-administered and had no employees. In
1996, operating and administration services were provided by the employees of
the Company's former parent (for which the former parent received a
reimbursement of costs) and by independent contractors. As of January 7, 1997,
the arrangement with the former parent was mutually terminated. Day-to-day
operations and administration of the Company are currently being provided by its
new management team which was appointed following the 1997 annual meeting of
shareholders. See "-- Recent Developments."
Comparison of the Six Months and Three Months Ended June 30, 1997 to the Six
- -----------------------------------------------------------------------------
Months and Three Months Ended June 30, 1996
- -------------------------------------------
Net loss of $860,000 was reported by the Company the six months ended June
30, 1997, a decrease of $1,087,000, from the six months ended June 30, 1996. Net
loss of $352,000 was reported by the Company for the three months ended June 30,
1997, a decrease of $139,000, or 65% from the net loss of $213,000 for the three
months ended June 30, 1996. These changes were primarily the result of losses on
the sale of investments and expenses associated with the annual meeting of
shareholders and the attendant proxy materials, respectively.
Total Revenues decreased $667,000, or 40%, to $984,000 for the six months
ended June 30, 1997. Total revenues decreased $409,000, or 52%, to $371,000 for
the three months ended June 30, 1997. This was down from $1,651,000 and $780,000
for the six and three months ended June 30, 1996, respectively. These decreases
are primarily attributable to decreases in rental revenues due primarily to the
sale of properties offset by an increase in interest revenues.
Rental revenues decreased $867,000, or 79%, to $236,000 for the six months
ended June 30, 1997. Rental revenues decreased $534,000, or 100%, to $0 for
three months ended June 30, 1997. This was down from $1,103,000 and $534,000 for
the six and three months ended June 30, 1996, respectively. These decreases were
primarily the result of the sale of the Company's remaining properties.
Interest revenues increased $131,000, or 24%, to $679,000 for the six
months ended June 30, 1997. Interest revenues increased $110,000, or 45%, to
$356,000 for the three months ended June 30, 1997. This was up from $548,000 and
$246,000 for the six and three months ended June 30, 1996, respectively. These
increases were primarily due to the increase in interest received from
marketable securities and an increase in interest earned on cash accounts.
Total Expenses decreased $49,000, or 3 %, to $1,412,000 for the six months
ended June 30, 1997. Total expenses decreased $8,000, or 1%, to $723,000 for the
three months ended June 30, 1997. This was down from $1,461,000 and $731,000 for
the six and three months ended June 30, 1996, respectively. These decreases were
attributable to decreases in operating expenses as well as decreases in interest
expense offset by increases in general and administrative expenses, primarily
associated with the annual meeting of shareholders.
Interest expense decreased $151,000, or 55%, to $123,000 for the six months
ended June 30, 1997. Interest expense decreased $113,000, or 82%, to $24,000 for
the three months ended June 30, 1997. This was down from $274,000 and $137,000
for the six and three months ended June 30, 1996,
622033.3
13
<PAGE>
respectively. These decreases primarily resulted from the cessation of interest
expense on the sale of Totem Square.
General and administrative expenses increased $346,000, or 44%, to
$1,126,000 for the six months ended June 30, 1997. The same expenses increased
$327,000, or 89%, to $694,000, for the three months ended June 30, 1997. This
was up from $780,000 and $367,000 for the six and three months ended June 30,
1996, respectively. These increases were due to the net effect of increases and
decreases in various expense categories. The largest increases were generated by
additional trustee fees and consulting fees related to expansion transaction
activities, the packaging and disposition of the Company's mortgage notes,
and expenses relating to the annual meeting of shareholders.
Valuation Losses. Valuation losses decreased to zero for the six months
ended June 30, 1997.
Dispositions. During the first quarter of 1997, the Company sold Fulton
Square Shopping Center, a retail property located in Sacramento, California. The
net loss recognized from the sale of Fulton Square was approximately $34,000.
The Company also sold Totem Square, a retail property located in Kirkland,
Washington. The net loss recognized from the sale of Totem Square was
approximately $398,000 of which the majority was transfer taxes and the
elimination of unamortized tenant improvements and leasing commissions.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1997, the Company had $2,059,000 in cash. Capital Trust's
$8,777,000 mortgage note portfolio is carried at a net book value of $2,650,000
due primarily to cumulative write downs in valuation. Its investment in
marketable securities, available for sale, had a net book value at June 30,
1997, of $12,696,000. The primary sources of liquidity for the Company in the
remainder of 1997, which management believes will adequately meet future
liquidity and capital resource requirements, will be the $33 million of proceeds
from the Preferred Share Investment, cash on hand, cash generated from
operations, and interest payments on its notes and securities. The primary
demands on the Company's capital resources will be the implementation of the
Company's new business plan.
The Company experienced a net decrease in cash of $2,639,000 for the six
months ended June 30, 1997, compared to a net decrease in cash of $620,000 for
the six months ended June 30, 1996, a difference of $2,019,000. For the six
months ended June 30, 1997, cash used in operating activities was $131,000, down
$496,000 from cash provided by operations of $365,000 during the same period in
1996. Cash used in investing activities during this same period increased by
$39,743,000 to $40,690,000, up from $(947,000), primarily the result of
investing in Commercial Mortgage Backed Securities ("CMBS"). Cash provided by
financing activities increased $38,220,000 due primarily from the proceeds of
repurchase obligations.
The Company has one outstanding debt obligation of $873,000 in addition to
two outstanding repurchase obligations
622033.3
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
The Registrant held its annual meeting of shareholders on July 15, 1997. The
Registrant's shareholders consider proposals to:
1. approve the issuance of the Registrant's class A 9.5% cumulative
convertible preferred shares, $1.00 par value, of beneficial interests
in the Registrant, upon the terms and conditions set forth in the
preferred share purchase agreement, dated as of June 16, 1997, by and
between the Registrant, Veqtor Finance Company, LLC and in the
certificate of designation, preferences and rights of the class A 9.5%
cumulative convertible preferred shares and the class B 9.5%
cumulative convertible non-voting preferred shares of the Registrant
("Proposal 1");
2. (a) approve an amendment to the existing declaration of trust of the
Registrant (the "Existing Declaration") which reclassifies the common
shares of beneficial interest, $1.00 par value, of the Registrant as
"class A common shares" and creates another class of common shares,
"class B non-voting common shares" ("Proposal 2(a)"); (b) approve an
amendment to the Existing Declaration which revises certain
restrictions upon transactions between the Registrant and certain
large shareholders and other affiliates ("Proposal 2(b)"); (c) approve
an amendment to the Existing Declaration which eliminates certain
provisions intended to assure the Registrant's continued treatment as
a "real estate investment trust" for federal tax purposes ("Proposal
2(c)"); and (d) approve other amendments to the Existing Declaration
("Proposal 2(d)"), each of the foregoing amendments to be contained in
an amended and restated declaration of trust of the Registrant;
3. elect Martin L. Edelman, Gary R. Garrabrant, Craig M. Hatkoff, John R.
Klopp, Sheli Z. Rosenberg, Lynne B. Sagalyn and Samuel Zell as
trustees to serve until the Registrant's next annual meeting of
shareholders or until such trustees' successors are elected and shall
have qualified ("Proposal 3");
4. ratify the appointment of Ernst & Young LLP as the independent
auditors of the Registrant for fiscal year 1997 ("Proposal 4);
622033.3
15
<PAGE>
5. approve a long-term incentive share plan ("Proposal 5"); and
6. approve a non-employee trustee share plan ("Proposal 6").
The following table sets forth the number of votes in favor, the number of
votes opposed the number of abstentions (or votes withheld in the case of the
election of trustees) and broker non-votes with respect to each of the foregoing
proposals.
<TABLE>
<CAPTION>
Proposal Votes in Favor Votes Opposed Abstentions Broker Non-
(Withheld) Votes
<S> <C> <C> <C> <C>
Proposal 1 7,637,601 77,231 35,750 784,029
Proposal 2(a) 7,635,887 64,091 50,604 784,029
Proposal 2(b) 7,635,044 68,278 40,260 784,029
Proposal 2(c) 7,593,678 118,262 38,642 784,029
Proposal 2(d) 7,584,600 115,087 50,895 784,029
Proposal 3
Martin L. Edelman 8,474,895 -- 59,716 --
Gary R. Garrabrant 8,485,499 -- 49,112 --
Craig M. Hatkoff 8,485,499 -- 49,112 --
John R. Klopp 8,485,499 -- 49,112 --
Sheli Z. Rosenberg 8,485,499 -- 49,112 --
Lynne B. Sagalyn 8,485,499 -- 49,112 --
Samuel Zell 8,485,499 -- 49,112 --
49,112 --
Proposal 4 8,460,551 38,549 35,511 --
Proposal 5 7,591,933 113,232 45,417 784,029
Proposal 6 7,581,740 120,627 48,215 784,029
</TABLE>
ITEM 5: Other Information
None
622033.3
16
<PAGE>
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
2.1 Interest Purchase Agreement, dated as of June 16, 1997, by and between
John R. Klopp, Craig M. Hatkoff, and Valentine Wildove & Company, Inc.
and the Registrant (filed as Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed on July 30, 1997 and is incorporated herein
by reference).
3.1 Amended and Restated Declaration of Trust, dated July 15, 1997 (filed
as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on
July 15, 1997 and is incorporated herein by reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3.2 to the Registrant's
Current Report on Form 8-K filed on July 15, 1997 and is incorporated
herein by reference).
4.1 Certificate of Designation, Preferences and Rights of the Class A 9.5%
Cumulative Convertible Preferred Shares and the Class B 9.5%
Cumulative Convertible Non-Voting Preferred Shares (filed as Exhibit
4.1 to the Registrant's Current Report on Form 8-K filed on July 15,
1997 and is incorporated herein by reference).
10.1 Preferred Share Purchase Agreement, dated as of June 16, 1997, by and
between the Registrant and Veqtor Finance Company, LLC (filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on
July 30, 1997 and is incorporated herein by reference).
10.2 Non-Negotiable Notes of the Registrant payable to John R. Klopp, Craig
M. Hatkoff and Valentine Wildove & Company, Inc. (filed as Exhibit
10.2 to the Registrant's Current Report on Form 8-K filed on July 30,
1997 and is incorporated herein by reference).
10.3 1997 Long-Term Incentive Share Plan, as amended.(filed as Exhibit 10.1
to the Registrant's Current Report on Form 8-K filed on July 15, 1997
and is incorporated herein by reference).
10.4 1997 Non-Employee Trustee Share Plan, as amended (filed as Exhibit
10.2 to the Registrant's Current Report on Form 8-K filed on July 15,
1997 and is incorporated herein by reference).
622033.3
17
<PAGE>
(b) Reports on Form 8-K
During the fiscal quarter ended March 31, 1997, the Company filed two
Current Reports on Form 8-K:
(i) The Registrant filed on April 16, 1997 a Current Report on
Form 8-K, dated April 10, 1997, reporting under Item 4 a
change in independent accountants and under Item 5 the
filing of its preliminary proxy statement for its 1997
annual meeting of shareholders.
(ii) The Registrant filed on June 12, 1997 a Current Report on
Form 8-K, dated February 14, 1997, reporting under Item 2
the disposition of certain commercial properties and under
Item 7 pro forma financial information with respect thereto.
622033.3
18
<PAGE>
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
August 14, 1997 /s/ John R. Klopp
- --------------- ------------------
Date John R. Klopp
Chief Executive Officer
/s/ Edward L. Shugrue III
-------------------------
Edward L. Shugrue III
Managing Director and Acting
Chief Financial Officer
(principal financial officer)
622033.3
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