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 September 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)
<TABLE>
<S> <C>
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)
</TABLE>
(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[ ]
<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.
<TABLE>
<S> <C>
Class Outstanding at September 30, 1997
- ------------------------------------------------------- ----------------------------------------------------
Class A Common Shares of Beneficial Interest, 9,138,325
$1.00 par value ("Class A Common Shares")
</TABLE>
<PAGE>
CAPITAL TRUST
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1: Financial Statements...................................................................1
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996......................................1
Consolidated Statements of Operations -
Three and Nine Months Ended
September 30, 1997 and 1996...................................................2
Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 1997..........................................3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996.................................4
Notes to Consolidated Financial Statements.............................................5
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................25
Item 3: Quantitative and Qualitative Disclosure about Market Risk.............................31
Part II. Other Information
Item 1: Legal Proceedings.....................................................................32
Item 2: Changes in Securities and Use of Proceeds.............................................32
Item 3: Defaults Upon Senior Securities.......................................................32
Item 4: Submission of Matters to a Vote of Security Holders...................................32
Item 5: Other Information.....................................................................34
Item 6: Exhibits and Reports on Form 8-K......................................................35
</TABLE>
<PAGE>
Capital Trust and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(in thousands)
(audited)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
------------------- -------------------
<S> <C> <C>
Cash and cash equivalents $ 4,063 $ 4,698
Available-for-sale securities 13,030 14,115
Investment and lending transactions, net of $155 and $0 reserve for possible
credit losses at September 30, 1997 and December 31, 1996, respectively 88,358 1,010
Rental properties -- 8,585
Excess of purchase price over net tangible assets acquired, net 337 --
Deposits and other receivables 3,795 1,273
Prepaid and other assets 2,712 355
----------- ----------
Total assets $ 112,295 $ 30,036
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 2,738 $ 326
Notes payable 4,867 5,169
Credit facility 11,715 --
Repurchase obligations 36,881 --
Deferred revenue 725 --
Other liabilities -- 70
----------- ----------
Total liabilities 56,926 5,565
========== ==========
Commitments and contingencies
Shareholders' equity:
Class A Preferred Shares, $1.00 par value, 12,639 shares authorized, 12,268
and 0 shares issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 12,268 --
Class A Common Shares, $1.00 par value; unlimited shares authorized,
9,138 shares issued and outstanding 9,138 9,138
Additional paid-in capital 75,719 55,117
Unrealized gain on available-for-sale securities 459 (22)
Accumulated deficit (42,215) (39,762)
Total shareholders' equity 55,369 24,471
----------- ----------
Total liabilities and shareholders' equity $ 112,295 $ 30,036
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data and share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ------------------------------------
1997 1996 1997 1996
---------------- --------------- --------------- ---------------
(unaudited) (audited) (unaudited)
<S> <C> <C> <C> <C>
Income from investment and lending transactions:
Interest and related income $ 1,787 $ 69 $ 1,863 $ 444
Interest and related expenses 790 -- 790 --
----------------
Net income from investment and lending
transactions 997 69 1,073 444
---------------- --------------- --------------- ---------------
Other revenues:
Advisory and asset management fees 529 -- 529 --
Rental income 8 482 313 1,585
Other interest income 405 220 1,008 393
---------------- --------------- --------------- ---------------
Total other revenues 942 702 1,850 1,978
---------------- --------------- --------------- ---------------
Other expenses:
General and administrative 3,329 313 4,470 1,149
Other interest expense 21 136 144 410
Rental property expenses -- 149 123 475
Depreciation and amortization 27 20 52 45
---------------- --------------- --------------- ---------------
Total other expenses 3,377 618 4,789 2,079
---------------- --------------- --------------- ---------------
Net income (loss) before gain (loss)
on sale of rental properties,
provision for possible credit
losses and income taxes (1,438) 153 (1,866) 343
Gain (loss) on sale of investments and properties -- 517 (432) 1,113
Provision for possible credit losses (155) (1,184) (155) (1,743)
---------------- --------------- --------------- ---------------
Loss before income taxes (1,593) (514) (2,453) (287)
Provision for income taxes -- -- -- --
---------------- --------------- --------------- ---------------
Net loss (1,593) (514) (2,453) (287)
Less: Preferred Share dividend requirement (679) -- (679) --
---------------- --------------- --------------- ---------------
Net loss allocable to Class A Common Shares $ (2,272) $ (514) $ (3,132) $ (287)
================ =============== =============== ===============
Per share information:
Net loss per Class A Common Share
Primary and fully diluted $ (0.25) $ (0.06) $ (0.34) $ (0.03)
================ =============== =============== ===============
Weighted average Class A Common Shares
outstanding
Primary and fully diluted 9,138,325 9,138,325 9,138,325 9,138,325
================ =============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statement of Shareholders' Equity
For the Nine Months Ended September 30, 1997
(in thousands)
(audited)
<TABLE>
<CAPTION>
Preferred Shares Common Shares Additional
--------------------- --------------------- Paid-In Unrealized
Number Amount Number Amount Capital Gain
--------- --------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 9,138 $ 9,138 $ 55,117 $ (22)
Change in unrealized gain on
available-for-sale securities -- -- -- -- -- 481
Issuance of preferred shares 12,268 12,268 -- -- 20,602 --
Net loss -- -- -- -- -- --
--------- --------- --------- --------- ----------- ------------
Balance at September 30, 1997 12,268 $12,268 9,138 $ 9,138 $ 75,719 $ 459
========= ========= ========= ========= =========== ============
Accumulated
Deficit Total
-------------- -----------
Balance at December 31, 1996 $(39,762) $ 24,471
Change in unrealized gain on
available-for-sale securities -- 481
Issuance of preferred shares -- 32,870
Net loss (2,453) (2,453)
-------------- -----------
Balance at September 30, 1997 $(42,215) $ 55,369
============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------
1997 1996
------------------ -------------------
(audited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,453) $ (287)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization 52 45
Unrealized gain on available-for-sale securities 481 --
(Gain) loss on sale of investments and properties 432 (1,113)
Provision for possible credit losses 155 1,743
Changes in assets and liabilities net of effects from subsidiaries
purchased:
Deposits and receivables (804) (5)
Prepaid and other assets (2,846) (61)
Deferred revenue 725 --
Accounts payable and accrued expenses 2,877 48
Other liabilities (64) --
Net cash (used in) provided by operating activities (1,445) 370
------------------ -------------------
Cash flows from investing activities:
Purchases of available-for-sale securities -- (15,849)
Origination and purchase on investment and lending transactions (87,626) --
Principal collections of investment and lending transactions 123 29
Purchases of equipment and leasehold improvements (421) --
Improvements to rental properties -- (123)
Proceeds from sale of investments and rental properties 8,153 13,841
Principal collections on available-for-sale securities 3,483 257
Acquisition of Victor Capital Group, L.P., net of cash acquired (4,066) --
-------------------
Net cash used in investing activities (80,354) (1,845)
------------------ -------------------
Cash flows from financing activities:
Proceeds from repurchase obligations 54,166 --
Termination of repurchase obligations (17,285) --
Proceeds from credit facility 11,715 --
Proceeds from notes payable 4,001 --
Repayment of notes payable (4,303) (55)
Net proceeds from issuance of preferred shares 32,870 --
Net cash provided by (used in) financing activities 81,164 (55)
------------------ -------------------
Net decrease in cash and cash equivalents (635) (1,530)
Cash and cash equivalents at January 1, 1997 4,698 4,778
------------------ -------------------
Cash and cash equivalents at September 30, 1997 $ 4,063 $ 3,248
================== ===================
Supplemental disclosure of cash flow information
Interest paid during the period $ 858 $ 411
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997
1. Organization
Capital Trust (the "Company") is a specialty finance company designed
to take advantage of high-yielding lending and investment opportunities in
commercial real estate and related assets. The Company makes or intends to make
investments in various types of income producing commercial real estate
including senior and junior commercial mortgage loans, preferred equity
investments, direct equity investments and subordinate interests in commercial
mortgage-backed securities ("CMBS"). The Company also provides real estate
investment banking, advisory and asset management services through its
subsidiary, Victor Capital Group, L.P. ("Victor Capital").
The Company, which was formerly known as California Real Estate
Investment Trust, was organized under the laws of the State of California
pursuant to a declaration of trust dated September 15, 1966. On December 31,
1996, 76% of the Company's outstanding common shares of beneficial interest,
$1.00 par value ("Old Common Shares") were held by the Company's former parent
("Former Parent"). On January 3, 1997, the Former Parent sold its entire 76%
ownership interest (consisting of 6,959,593 Old Common Shares) in the Company to
CalREIT Investors Limited Partnership ("CRIL"), an affiliate of Equity Group
Investments, Inc. ("EGI") and Samuel Zell, the Company's current chairman of the
board of trustees, for an aggregate price of approximately $20.2 million. Prior
to the purchase, which was approved by the then-incumbent board of trustees, EGI
and Victor Capital, a then privately held company owned by two of the current
trustees of the Company, presented to the Company's then-incumbent board of
trustees a proposed new business plan in which the Company would cease to be a
real estate investment trust ("REIT") and instead become a specialty finance
company as discussed above. EGI and Victor Capital also proposed that they
provide the Company with a new management team to implement the business plan
and 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 million Victor
Capital's real estate investment banking, advisory and asset management
businesses, including the services of its experienced management team. See Note
2.
On July 15, 1997, the proposed preferred share investment was
consummated and 12,267,658 class A 9.5% cumulative convertible preferred shares
of beneficial interest, $1.00 par value, in the Company ("Class A Preferred
Shares") were sold to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of
Samuel Zell and the principals of Victor Capital for an aggregate purchase price
of $33 million (the "Investment"). Concurrently with the foregoing transaction,
Veqtor purchased from CRIL the 6,959,593 Old Common Shares held by it for an
aggregate purchase price of approximately $21.3 million (which shares were
reclassified on that date as class A common shares of beneficial interest, $1.00
par value, in the Company ("Class A Common Shares") pursuant to the terms of an
amended and restated declaration of trust, dated July 15, 1997, adopted on that
date (the "Amended and Restated Declaration of Trust")). See Note 9.
As a result of these transactions, a change of control of the Company
occurred with Veqtor beneficially owning 19,227,251, or approximately 90% of the
outstanding voting shares of the Company.
-5-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Pursuant to the Amended and Restated Declaration of Trust, the Company's name
was changed to "Capital Trust". As a result of the aforementioned events, the
Company, as intended, commenced full implementation of the new business plan and
thereby terminated its status as a REIT.
2. Acquisition of Victor Capital
On July 15, 1997, the Company consummated, for $5.0 million, the
acquisition of the real estate investment banking, advisory and asset management
businesses of Victor Capital and certain affiliated entities including the
following wholly-owned subsidiaries: VCG Montreal Management, Inc., Victor Asset
Management Partners, L.L.C., VP Metropolis Services, L.L.C., and 970 Management,
LLC.
Victor Capital provides services to real estate investors, owners,
developers and financial institutions in connection with mortgage financings,
securitizations, joint ventures, debt and equity investments, mergers and
acquisitions, portfolio evaluations, restructurings and disposition programs.
Victor Capital's wholly-owned subsidiaries provide asset management and advisory
services relating to various mortgage pools and real estate properties. In
addition, VCG Montreal Management, Inc. holds a nominal interest in a Canadian
real estate venture.
The purchase price of $5.0 million is evidenced by non-interest bearing
acquisition notes, payable in ten semi-annual equal installments of $500,000.
The acquisition notes have been discounted to $3.9 million based on an imputed
interest rate of 9.5%. The acquisition has been accounted for under the purchase
method of accounting. The excess of the purchase price of the acquisition in
excess of net tangible assets acquired approximated $342,000.
Had the acquisition occurred on January 1, 1997, pro forma revenues,
net loss (after giving effect to the Preferred Share dividend requirement) and
net loss per common share (primary and fully diluted) would have been:
$6,534,000, $2,451,000 and $0.27, respectively.
3. Summary of Significant Accounting Policies
Principles of Consolidation
At December 31, 1996, the Company owned commercial rental property in
Sacramento, California through a 59% limited partner interest in Totem Square
L.P., a Washington limited partnership ("Totem"), and an indirect 1% general
partner interest in Totem through its wholly-owned subsidiary Cal-REIT Totem
Square, Inc. Totem Square Associates, an unrelated party, held the remaining 40%
interest.
The consolidated financial statements of the Company include the
accounts of the Company and Victor Capital and related wholly-owned subsidiaries
(included in the consolidated statement of operations since their acquisition on
July 15, 1997) and the results from the disposition of its rental property held
by
-6-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Totem, which was sold on March 4, 1997 prior to commencement of the Company's
new business plan. See Note 1. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Interest income for the Company's mortgage loans and investments is
recognized over the life of the investment using the interest method and
recognized on the accrual basis.
Fees received in connection with loan commitments are deferred until
the loan is advanced and are then recognized over the term of the loan as an
adjustment to yield. Fees on commitments that expire unused are recognized at
expiration.
Income recognition is generally suspended for loans at the earlier of
the date at which payments become 90 days past due or when, in the opinion of
management, a full recovery of income and principal becomes doubtful. Income
recognition is resumed when the loan becomes contractually current and
performance is demonstrated to be resumed.
Fees from professional advisory services are generally recognized at
the point at which all Company services have been performed and no significant
contingencies exist with respect to entitlement to payment. Fees from asset
management services are recognized as services are rendered.
Reserve for Possible Credit Losses
The provision for possible credit losses is the charge to income to
increase the reserve for possible credit losses to the level that management
estimates to be adequate considering delinquencies, loss experience and
collateral quality. Other factors considered relate to geographic trends and
product diversification, the size of the portfolio and current economic
conditions. When it is probable that the Company will be unable to collect all
amounts contractually due, the account is considered impaired. Where an
impairment is indicated, a valuation write-down or write-off is measured based
upon the excess of the recorded investment amount over the net fair value of the
collateral, as reduced for selling costs. Any deficiency between the carrying
amount of an asset and the net sales price of repossessed collateral is charged
to the reserve for credit losses.
Cash and Cash Equivalents
The Company classifies highly liquid investments with original
maturities of three months or less from the date of purchase as cash
equivalents. At September 30, 1997, cash equivalents consisted primarily of an
investment in a money market fund that invests in Treasury bills.
-7-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Available-for-Sale Securities
Available-for-sale securities are reported on the consolidated balance
sheet at fair market value with any corresponding change in value reported as an
unrealized gain or loss (if assessed to be temporary), as a component of
shareholders' equity, after giving effect to taxes.
Commercial Mortgage-Backed Securities
The Company has the intent and ability to hold its subordinated
investment in CMBS until maturity. See Note 6. Consequently, this investment is
classified as held to maturity and is carried at amortized cost at September 30,
1997.
Income from CMBS is recognized based on the effective interest method
using the anticipated yield over the expected life of the investments. Changes
in yield resulting from prepayments are recognized over the remaining life of
the investment. The Company recognizes impairment on its CMBS whenever it
determines that the impact of expected future credit losses, as currently
projected, exceeds the impact of the expected future credit losses as originally
projected. Impairment losses are determined by comparing the current fair value
of a CMBS to its existing carrying amount, the difference being recognized as a
loss in the current period in the consolidated statement of income. Reduced
estimates of credit losses are recognized as an adjustment to yield over the
remaining life of the portfolio.
Derivative Financial Instruments
The Company uses interest rate swaps to effectively convert fixed rate
assets to variable rate assets for proper matching with variable rate
liabilities. The differential to be paid or received on these agreements is
recognized as an adjustment to the interest income related to the earning asset.
Each derivative used as a hedge is matched with an asset or liability
with which it has a high correlation. The swap agreements are generally held to
maturity and the Company does not use derivative financial instruments for
trading purposes. Upon early termination of the designated matched asset or
liability, the related derivative is matched to another appropriate item or
marked to fair value.
Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements, net, are stated at original cost
less accumulated depreciation and amortization. Depreciation is computed using
the straight-line method based on the estimated lives of the depreciable assets.
Amortization is computed over the remaining terms of the related leases.
Expenditures for maintenance and repairs are charged directly to
expense at the time incurred. Expenditures determined to represent additions and
betterments are capitalized. Cost of assets sold or retired
-8-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
and the related amounts of accumulated depreciation are eliminated from the
accounts in the year of sale or retirement. Any resulting profit or loss is
reflected in the consolidated statement of operations.
Sales of Real Estate
The Company complies with the provisions of Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate".
Deferred Debt Issuance Costs
The Company capitalizes costs incurred related to the issuance of
long-term debt. These costs are deferred and amortized on a straight-line basis
over the life of the related debt and recognized as a component of interest
expense.
Income Taxes
Prior to commencement of full implementation of the new business plan
on July 15, 1997, the Company had elected to be taxed as a REIT and, as such,
was not taxed on that portion of its taxable income which was distributed to
shareholders, provided that at least 95% of its real estate trust taxable income
was distributed and that the Company met certain other REIT requirements. At
July 15, 1997, the Company did not meet the requirements to continue to be taxed
as a REIT and will therefore not be considered a REIT retroactive to January 1,
1997.
The Company has adopted Financial Accounting Standards Board Statement
No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109, utilizes
the liability method for computing tax expenses. Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying statutory tax rates to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Deferred tax assets are recognized for temporary
differences that will result in deductible amounts in future years and for
carryforwards. A valuation allowance is recognized if it is more likely than not
that some portion of the deferred asset will not be recognized. When evaluating
whether a valuation allowance is appropriate, SFAS No. 109 requires a company to
consider such factors as previous operating results, future earning potential,
tax planning strategies and future reversals of existing temporary differences.
The valuation allowance is increased or decreased in future years based on
changes in these criteria.
Amortization of the Excess of Purchase Price Over Net Tangible Assets
Acquired
The Company recognized the excess of purchase price over net tangible
assets acquired in a business combination accounted for as a purchase
transaction and is amortizing it on a straight-line basis over a period of 15
years. The carrying value of the excess of purchase price over net tangible
assets acquired is analyzed quarterly by the Company based upon the expected
revenue and profitability levels of the acquired enterprise to determine whether
the value and future benefit may indicate a decline in value.
-9-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
If the Company determines that there has been a decline in the value of the
acquired enterprise, the Company writes down the value of the excess of purchase
price over net tangible assets acquired to the revised fair value.
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.
Earnings Per Class A Common Share
Primary earnings per Class A Common Share is computed by dividing net
income (loss), after deduction of preferred share dividends declared or
required, by the weighted average number of Class A Common Shares outstanding
during the period. Fully diluted earnings per Class A Common Share is computed
by dividing net income (loss), after deduction of preferred share dividends
declared or required, by the weighted average number of Class A Common Shares
outstanding and dilutive potential Class A Common Shares (convertible preferred
share and share options) that were outstanding during the period. At September
30, 1997, the preferred shares and share options were not considered Class A
Common Share equivalents for purposes of calculating fully diluted earnings per
share as they were antidilutive. Accordingly, at September 30, 1997, there was
no difference between primary and fully diluted loss per share or weighted
average Class A Common Shares outstanding.
Reclassifications
Certain reclassifications have been made to amounts reported in
previous financial statements to conform to classifications adopted in 1997.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128") 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 loss reduced by the dividends on 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 convertible 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
-10-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
include the convertible preferred shares and dilutive share options. The Company
will adopt this accounting standard effective December 31, 1997, as required.
The adoption of this accounting standard would have no effect on the reported
September 30, 1997 earnings per share amounts.
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") effective for fiscal years beginning
after December 15, 1997, although earlier application is permitted. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No. 130
requires that all components of comprehensive income shall be reported in the
financial statements in the period in which they are recognized. Furthermore, a
total amount for comprehensive income shall be displayed in the financial
statement where the components of other comprehensive income are reported. The
Company was not previously required to present comprehensive income or the
components therewith under generally accepted accounting principles. The Company
intends to adopt the requirements of this pronouncement in its financial
statements for the year ended December 31, 1998.
In June 1997, the FASB issued Statement No.131, "Disclosure about
segments of an Enterprise and Related Information" ("SFAS No. 131") effective
for financial statements issued for periods beginning after December 15, 1997.
SFAS No. 131 requires disclosures about segments of an enterprise and related
information regarding the different types of business activities in which an
enterprise engages and the different economic environments in which it operates.
The Company intends to adopt the requirements of this pronouncement in its
financial statements for the year ended December 31, 1998. The adoption of SFAS
No. 131 is not expected to have a material impact on the Company's financial
statement disclosures.
4. Interest Rate Risk Management
Effective September 12, 1997, the Company entered into an interest rate
swap agreement for a notional amount of $15 million with a financial institution
counterparty whereby the Company swapped a fixed rate instrument for a floating
rate instrument based on the London Interbank Offered Rate ("LIBOR"). Amounts
arising from the differential are recognized as an adjustment to interest income
related to the earning asset. See Note 6. The agreement terminates on April 12,
2006.
The Company is exposed to credit loss in the event of non-performance
by the counterparty to the agreement, although it does not anticipate such
non-performance.
-11-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Available-for-Sale Securities
At September 30, 1997, the Company's available-for-sale securities
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized
----------------
Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Federal National Mortgage Association, adjustable rate interest
currently at 7.923%, due April 1, 2024............................. $ 2,359 $ -- $ (2) $ 2,357
Federal Home Loan Mortgage Association, adjustable rate interest
currently at 7.944%, due June 1, 2024.............................. 812 1 -- 813
Federal National Mortgage Association, adjustable rate interest
currently at 7.360%, due May 1, 2025............................... 532 -- (2) 530
Federal National Mortgage Association, adjustable rate interest
currently at 7.094%, due May 1, 2026............................... 2,205 -- (19) 2,186
Federal National Mortgage Association, adjustable rate interest
currently at 7.146%, due June 1, 2026.............................. 4,865 64 -- 4,929
SL Green Realty Corp. Common Stock, 85,600 shares..................... 1,798 417 -- 2,215
-------- ------- ---------- --------
$12,571 $ 482 $ (23) $13,030
======= ====== ========== =======
</TABLE>
The maturity dates of debt securities are not necessarily indicative of
expected maturities as principal is often prepaid on such instruments.
The 85,600 shares of SL Green Realty Corp. Common Stock were received
as partial payment for advisory services rendered by Victor Capital to SL Green
Realty Corp. These shares are restricted from sale by the Company for a period
of one year from the date of issuance, August 20, 1997.
The cost of securities sold is determined using the specific
identification method.
-12-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Investment and Lending Transactions
At September 30, 1997, the Company's investment and lending
transactions consisted of the following (in thousands):
(1) CMBS subordinated interest....................... $49,491
(2) Participation in mezzanine loan.................. 15,617
(3) Second mortgage transition financing............. 11,532
(4) Mortgage note acquisition bridge financing....... 9,800
(5) Other mortgage loans receivable.................. 2,073
-----------
88,513
Less: Reserve for possible credit losses............. (155)
-----------
Total investment and lending transactions............ $88,358
===========
At September 30, 1997, $86.4 million of the aforementioned investment
and lending transactions bear interest at floating rates ranging from LIBOR plus
410 basis points to LIBOR plus 600 basis points. The remaining $2.1 million of
investment and lending transactions were financed at fixed rates ranging from 8%
to 9.5% at September 30, 1997. The average earning rate in effect at September
30, 1997 was 10.8%.
(1) On June 30, 1997 the Company completed an investment in a junior,
subordinated class of CMBS. The CMBS investment consists of securities with a
face value of $49.6 million purchased at a discount for $49.2 million plus
accrued fees. The investment is collateralized by twenty short-term commercial
notes receivable with original maturities ranging from two to three years. 75%
of the purchase price was financed (approximately $36.9 million) pursuant to a
reverse repurchase agreement and is collateralized by the Company's investment
in the CMBS.
In addition, the Company was named "special servicer" for the entire
loan portfolio of $413 million in which capacity the Company will earn fee
income for management of the collection process should any of the loans become
non-performing. At September 30, 1997, no fees relating to the special servicing
arrangement were earned.
(2) On September 19, 1997, the Company completed a fixed rate
investment in the form of a $15.0 million portion of a ten year $80.0 million
mezzanine loan secured by a pledge of the ownership interest in the entities
that own an office building in New York City. Additionally, the investment is
secured by a full payment guarantee by the principal owner of the property
owning entities, in the event of certain circumstances, including bankruptcy.
The investment was purchased at a premium for approximately $15.6 million. In
the event that excess cash flow available, as defined, is insufficient to pay
the loan's interest currently, up to 2% can be accrued and added to principal.
Scheduled maturity of the note is April 2007, with prepayment prohibited for the
first five years but permitted during the following four years with yield
maintenance. The loan is fully prepayable with no premium or penalty in the
tenth year. The purchase price was financed 75% (approximately $11.7 million)
pursuant to a reverse repurchase agreement. Effective September 12, 1997, in
order to hedge its interest rate risk under the transaction, the Company entered
into
-13-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
an interest rate swap agreement. See Note 4. Effective September 30, 1997, the
reverse repurchase agreement was terminated and refinanced with an $11.7 million
borrowing under the Company's Credit Facility (as hereinafter defined). See Note
8.
(3) On August 4, 1997, the Company originated, and funded in part, a
$35.0 million commitment for a subordinated mortgage loan for improvements to a
mixed-use property in Chicago, Illinois. The loan is subordinate to senior
indebtedness and is secured by the mixed-use property and two mortgage notes
aggregating $9.6 million on nearby development sites. The loan has a two-year
initial term with a one-year extension option available to the borrower, subject
to certain conditions, and is payable upon the sale of the property unless the
Company approves the assumption of the debt by an institutional investor. On
August 4, 1997, the Company funded $19.0 million against the aforementioned
commitment and, subsequently, on August 19, 1997, the Company entered into a
participation agreement with a third party (the "Participant") pursuant to which
the Company assigned a 42.9% interest in the loan. In connection with the
participation agreement the Participant paid to the Company approximately $8.2
million or 42.9% of the $19.0 million previously funded by the Company. During
September 1997, the Company and the Participant funded additional amounts
aggregating $1.2 million, of which $506,000 was funded by the Participant.
Through September 30, 1997, the Company's portion of the funding provided under
the mortgage loan aggregated $11.5 million.
As of September 30, 1997, the Company's remaining share of the
commitment amounts to $8.5 million.
(4) On August 13, 1997, the Company originated and funded a
LIBOR-based $9.8 million short-term loan. The proceeds of the loan were used
primarily for the acquisition of a first mortgage note that is secured by an
office/warehouse facility located in Philadelphia, Pennsylvania and for general
corporate purposes. The loan is secured by a pledge of the first mortgage note,
a pledge of a $4.4 million mortgage note secured by an industrial/warehouse
facility in Queens, New York and a $2.3 million pool of secured home loans to
owners of cooperative apartments located in Brooklyn, New York. The loan is
further secured by a pledge of various other loans owned by the borrower.
The loan has a term of one year which may be extended by the borrower
for an additional year.
-14-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(5) The mortgage loans receivable are collateralized by real estate
properties in California and Arizona. These mortgage loans receivable mature at
varying dates between February 11, 1999 and March 31, 2012.
At September 30, 1997, the Company has letters of intent outstanding
for various other lending transactions, the terms of which have not been
finalized.
-15-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Notes Payable
At September 30, 1997, the Company has notes payable aggregating $4.9
million.
In connection with the acquisition of Victor Capital and related
entities, $5.0 million of non-interest bearing notes ("Acquisition Notes") were
issued to the sellers, payable in ten semi-annual payments of $500,000. The
Acquisition Notes have been discounted to $3.9 million based on an imputed
interest rate of 9.5%. At September 30, 1997, the net present value of the
Acquisition Notes amounted to approximately $4.0 million.
The Company is also indebted under a note payable due to a life
insurance company. The note bears interest at 9.50% per annum with principal and
interest payable monthly until August 7, 2017 when the entire unpaid principal
balance and any unpaid interest is due. The life insurance company has the right
to call the entire note due and payable upon ninety days prior written notice.
At September 30, 1997, the balance of the note payable amounted to approximately
$866,000.
8. Long-Term Debt
Credit Facility
Effective September 30, 1997, the Company entered into a credit
agreement with a commercial lender that provides for a three-year $150 million
line of credit (the "Credit Facility"). The Credit Facility provides for
advances to fund lender-approved loans and investments made by the Company
("Funded
-16-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Portfolio Assets"). Prior to the execution of the Credit Facility, the
commercial lender provided financing to the Company of approximately $11.7
million pursuant to a reverse repurchase agreement. The agreement bore interest
at LIBOR plus 2.25% and upon execution of the Credit Facility, the agreement was
terminated and the $11.7 million was refinanced with an advance under the Credit
Facility.
The obligations of the Company under the Credit Facility are to be
secured by pledges of the Funded Portfolio Assets acquired with advances under
the Credit Facility. Borrowings under the Credit Facility will bear interest at
specified rates over LIBOR, (averaging approximately 7.9% for the borrowing
outstanding at September 30, 1997), which rate may fluctuate based upon the
credit quality of the Funded Portfolio Assets. Upon the signing of the credit
agreement, a commitment fee was due and when the total borrowing under the
agreement exceeds $75 million an additional fee will be due. In addition, each
advance requires payment of a drawdown fee. Future repayments and redrawdowns of
amounts previously subject to the drawdown fee will not require the Company to
pay any additional fees. The Credit Facility provides for margin calls on
asset-specific borrowings in the event of asset quality and/or market value
deterioration as determined under the credit agreement. The Credit Facility
contains customary representations and warranties, covenants and conditions and
events of default. The 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.
On September 30, 1997, the unused Credit Facility amounted to $138.3
million.
Repurchase Obligation
The Company entered into a reverse repurchase agreement with the
counter party of the CMBS transaction described in Note 6. At September 30,
1997, the balance of $36.9 million bears interest at a specified rate over LIBOR
(6.75% at September 30, 1997), and has a one year term with quarterly extensions
available every 90 days.
9. Shareholders' Equity
Authorized Capital
Pursuant to the Company's Amended and Restated Declaration of Trust,
all of the Company's previously issued common shares of beneficial interest, par
value $1.00, were reclassified as Class A Common Shares on July 15, 1997. The
total number of authorized capital shares of the Company is unlimited and
currently consists of (i) Class A Preferred Shares, (ii) class B 9.5% cumulative
convertible non-voting preferred shares of beneficial interest, $1.00 par value,
in the Company ("Class B Preferred Shares"), (iii) Class A Common Shares, and
(iv) class B common shares of beneficial interest, $1.00 par value, in the
Company ("Class B Common Shares"). As of September 30, 1997, there were
12,267,658 Class A Preferred Shares issued and outstanding, no Class B Preferred
Shares issued and outstanding,
-17-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9,138,325 Class A Common Shares issued and outstanding and no Class B Common
Shares issued and outstanding. The Board of Trustees is authorized, with certain
exceptions, to provide for the issuance of additional preferred shares of
beneficial interest in one or more classes or series.
Common Shares
Except as described herein or as required by law, all Class A Common
Shares and Class B Common Shares are identical and entitled to the same
dividend, liquidation and other rights. The Class A Common Shares are voting
shares entitled to vote on all matters presented to a vote of shareholders,
except as provided by law or subject to the voting rights of any outstanding
preferred shares. The Class B Common Shares do not have voting rights and are
not counted in determining the presence of a quorum for the transaction of
business at any meeting of the shareholders. Holders of record of Class A Common
Shares and Class B Common Shares on the record date fixed by the Company's Board
of Trustees are entitled to receive such dividends as may be declared by the
Board of Trustees subject to the rights of the holders of any series of
preferred shares.
Each Class A Common Share is convertible at the option of the holder
thereof into one Class B Common Share and, subject to certain conditions, each
Class B Common Share is convertible at the option of the holder thereof into
Class A Common Share.
The Company is restricted from declaring or paying any dividends on its
Class A Common Shares or Class B Common Shares unless all accrued and unpaid
dividends with respect to the Preferred Shares have been paid in full.
Preferred Shares
In connection with the adoption of the Amended and Restated Designation
of Trust, the Company created two classes of preferred shares, the Class A
Preferred Shares and the Class B Preferred Shares (collectively, the "Preferred
Shares"). Each class of Preferred Shares consists of 12,639,405 authorized
shares, as specified in the certificate of designation, preferences and rights
thereof adopted on July 15, 1997 (the "Certificate of Designation"). On July 15,
1997, Veqtor purchased from the Company 12,267,658 Class A Preferred Shares for
an aggregate purchase price of approximately $33 million.
Except as described herein or as required by law, both classes of
Preferred Shares are identical and entitled to the same dividend, liquidation
and other rights as provided in the Certificate of Designation and the Restated
Declaration. The Class A Preferred Shares are entitled to vote together with the
holders of the Class A Common Shares as a single class on all matters submitted
to a vote of shareholders. Each Class A Preferred Share entitles the holder
thereof to a number of votes per share equal to the number of Class A Common
Shares into which such Class A Preferred Share is then convertible. Except as
described herein, the Class B Preferred Shares do not have voting rights and are
not counted in determining the presence of a quorum for the transaction of
business at a shareholders' meeting. The affirmative vote of the shareholders of
a majority of the outstanding Preferred Shares, voting together as a separate
single class, except in
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<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
certain circumstances, have the right to approve any merger, consolidation or
transfer of all or substantially all of the assets of the Company. Holders of
the Preferred Shares are entitled to receive, when and as declared by the Board
of Trustees, cash dividends per share at the rate of 9.5% per annum on a per
share price of $2.69. Such dividends shall accrue (whether or not declared) and,
to the extent not paid for any dividend period, will be cumulative. Dividends on
the Preferred Shares are payable, when and as declared, semi-annually, in
arrears, on December 26 and June 25 of each year commencing December 26, 1997.
Each Class A Preferred Share is convertible at the option of the holder
thereof into an equal number of Class B Preferred Shares, or into a number of
Class A Common Shares equal to the ratio of (x) $2.69 plus an amount equal to
all dividends per share accrued and unpaid thereon as of the date of such
conversion to (y) the Conversion Price in effect as of the date of such
conversion. Each Class B Preferred Share is convertible at the option of the
holder thereof, subject to certain conditions, into an equal number of Class A
Preferred Shares or into a number of Class B Common Shares equal to the ratio of
(x) $2.69 plus an amount equal to all dividends per share accrued and unpaid
thereon as of the date of such conversion to (y) the Conversion Price in effect
as of the date of such conversion. The Conversion Price as of September 30, 1997
is $2.69.
10. Income Taxes
The Company and its subsidiaries will elect to file a consolidated
federal income tax return for the year ending December 31, 1997. Due to the net
loss and its net operating loss carryforwards available, there was no provision
for either federal or state income taxes for the three and nine months ended
September 30, 1997.
The Company has federal net operating loss carryforwards ("NOLs") as of
September 30, 1997 of approximately $16.4 million. Such NOLs expire through
2011. The Company also had a federal capital loss carryover of approximately
$1.6 million that can be used to offset future capital gains. Due to CRIL's
purchase of 6,959,593 Class A Common Shares from the Company's Former Parent in
January 1997 and another prior ownership change, 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 recorded a valuation allowance to fully reserve its net
deferred assets. Under SFAS 109, this valuation allowance will be adjusted in
future years, as appropriate. However, the timing and extent of such future
adjustments cannot presently be determined.
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<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Employee Benefit Plans
1997 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
-20-
<PAGE>
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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. Through September 30, 1997, the Company had outstanding ISOs
and NQSOs (the "Grants") pursuant to the Incentive Share Plan to purchase an
aggregate of 607,000 Class A Common Shares with an exercise price of $6.00 per
share (the closing Class A Common Share price on the date of the grant). None of
the options are exercisable at September 30, 1997 and they have a remaining
contractual life of 93/4 years.
The ISOs shall be exercisable no more than ten years after their date
of grant and five years after the grant in the case of a 10% shareholder and
vest over a period of three years with one-third vesting at each anniversary
date. Payment of an option may be made with cash, with previously owned Class A
Common Shares, by foregoing compensation in accordance with performance
compensation committee or compensation committee rules or by a combination of
these.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by
the FASB in October 1995. SFAS No. 123 encourages the adoption of a new
fair-value based accounting method for employee stock-based compensation plans.
SFAS No. 123 also permits companies to continue accounting for stock-based
compensation plans as prescribed by APB Opinion No. 25. However, companies
electing to continue accounting for stock-based compensation plans under the APB
Opinion No. 25, must make pro forma disclosures as if the company adopted the
cost recognition requirements under SFAS No. 123. The Company has continued to
account for stock-based compensation under the APB Opinion No. 25. Accordingly,
no compensation cost has been recognized for the Incentive Share Plan or the
Trustee Share Plan in the accompanying consolidated statement of operations as
the exercise price of the Grant equaled the market price of the underlying stock
on the date of the Grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option- pricing model with the following weighted
average assumptions used for grants in 1997, respectively: (1) dividend yield of
zero; (2) expected volatility of 40%; (3) risk-free interest rate of 6.15% and
(4) an expected life of five years. The weighted average fair value of each
share option granted during the nine months ended September 30, 1997 was $2.67.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee share options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee share options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Pro forma net
loss, after giving effect to the Class A Preferred Share dividend requirement,
and primary and fully diluted
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<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
loss per share, after giving effect to the fair value of the grants would be
$3.3 million and $0.36, respectively, for the nine months ended September 30,
1997 and $2.5 million and $0.27, respectively, for the three months ended
September 30, 1997.
The pro forma information presented above is not representative of the
effect share options will have on pro forma net income or earnings per share for
future years.
1997 Non-Employee Trustee Share Plan
On May 23, 1997, the Board of Trustees adopted the 1997 Non-Employee
Trustee Share Plan (the "Trustee Share Plan"), which became effective upon
shareholder approval on July 15, 1997 at the 1997 Annual Meeting. The Trustee
Share Plan permits the grant of NQSO, restricted shares, SAR, performance unit,
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 Trustee Share
Plan and the Incentive Share Plan. Through September 30, 1997, the Company
issued to each of two trustees pursuant to the Trustee Share Plan NQSOs to
purchase 25,000 Class A Common Shares with an exercise price of $6.00 per share
(the closing Class A Common Share price on the date of grant).
The purchase price per Class A Common Share covered by a NQSO granted
under the Trustee Share Plan shall be determined by the Board of Trustees.
Payment of a NQSO may be made with cash, with previously owned Class A Common
Shares, by foregoing compensation in accordance with Board rules or by a
combination of these. SARs may be granted under the plan in lieu of NQSOS, in
addition to NQSOS, independent of NQSOs or as a combination of the foregoing. A
holder of a SAR is entitled upon exercise to receive Class A Common Shares, or
cash or a combination of both, as the Board of Trustees may determine, equal in
value on the date of exercise to the amount by which the fair market value of
one Class A Common Share on the date of exercise exceeds the exercise price
fixed by the Board on the date of grant (which price shall not be less than 100%
of the market price of a Class A Common Share on the date of grant) multiplied
by the number of shares in respect of which the SARs are exercised.
Restricted shares may be granted under the Trustee Share Plan with
performance goals and periods of restriction as the Board of Trustees may
designate. The performance goals may be based on the attainment of certain
objective and/or subjective measures. The Trustee Share Plan also authorizes the
grant of share units at any time and from time to time on such terms as shall be
determined by the Board of Trustees. Share units shall be payable in Class A
Common Shares upon the occurrence of certain trigger events. The terms and
conditions of the trigger events may vary by share unit award, by the
participant, or both.
12. Supplemental Schedule of Non-Cash and Financing Activities
The following is a summary of the significant non-cash investing and
financing activities during the three and nine months ended September 30, 1997:
Stock received as partial compensation for advisory services $1,798
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<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
In connection with the sale of properties and notes receivable, the
Company entered into various non-cash transactions as follows during the nine
months ended September 30, 1997:
Sales price less selling costs $ 8,396
Amount due from buyer.......... (1,090)
--------
Net cash received.............. $ 7,306
========
13. Transactions with Related Parties
The Company entered into a consulting agreement, dated as of July 15,
1997, with a Trustee of the Company. The consulting agreement has a term of one
year and provides for a consulting fee of $150,000. Pursuant to the agreement,
the Trustee provides consulting services for the Company including strategic
planning, identifying and negotiating mergers, acquisitions, joint ventures and
strategic alliances, and advising as to capital structure matters. During the
nine months ended September 30, 1997 the Company has incurred an expense of
$37,000 in connection with this agreement.
The Company pays EGI, an affiliate under common control of the Chairman
of the Board of Trustees, for certain corporate services. These services include
consulting on legal matters, tax matters, risk management, investor relations
and investment banking. During the nine months ended September 30, 1997, the
Company has incurred $22,000 of expenses in connection with these services.
Prior to January 7, 1997, the Company had an oral agreement with the
Company's former parent whereby certain general administrative costs were
allocated to the Company based upon a formula agreed to by the parties. At
September 30, 1997, the Company had no amounts due to the Company's former
parent pursuant to the cost allocation arrangement.
During the nine months ended September 30, 1997, the Company, through
two of its acquired subsidiaries, earned asset management fees pursuant to
agreements with entities in which two of the executive officers and trustees of
the Company have an equity interest and serve as officers, members or as a
general partner thereof. During the nine months ended September 30, 1997, the
Company earned $233,000 from such agreements, which has been included in the
consolidated statement of operations.
14. Commitments and Contingencies
Litigation
In the normal course of business, the Company is subject to various
legal proceeding and claims, the resolution of which, in management's opinion,
will not have a material adverse effect on the consolidated financial position
or the results of operations of the company.
Employment Agreements
At September 30, 1997, the Company has employment agreements with three
of its executives.
The employment agreements with two of the executives provide for
five-year terms of employment commencing as of July 15, 1997. Such agreements
contain extension options which extend such agreements automatically unless
terminated by notice, as defined, by either party. The employment agreements
provide for base annual salaries of $500,000, which will be increased each
calendar year to reflect increases in the cost of living and will otherwise be
subject to increase in the discretion of the Board of Trustees. Such executives
are also entitled to annual incentive cash bonuses to be determined by the Board
of Trustees based on individual performance and the profitability of the Company
and are participants in the Incentive Share Plan and other employee benefit
plans of the Company.
The employment agreement with another executive provides for a two year
employment term. Such agreement contains extension options which extend the
agreement automatically unless terminated by notice by either party. The
employment agreement provides for base annual salary of $300,000, annual
bonuses, as specified, at the end of 1997 and 1998, and participation in the
Incentive Share Plan and other employee benefit plans of the Company. Such
executive is also entitled to an annual incentive cash bonus to be determined by
the Board of Trustees based on individual performance and the profitability of
the Company.
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<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Subsequent Events
On October 31, 1997 the Company entered into an agreement to provide a
secured second mortgage loan of $10 million, which is secured by a 64%
tenancy-in-common interest in an office building located in New York City; the
loan is further secured by a pledge by the members of the borrower of 100% of
membership interests in the borrower. The loan is for five years and bears
interest at a fixed rate. The Company earns certain financing fees in connection
therewith and such fees will be recognized over the life of the loan as an
adjustment to yield. The Company financed the aforementioned investment in part
by entering into a repurchase agreement which is collateralized by certain of
the Company's debt securities.
On October 6, 1997, the Company filed a Registration Statement on Form
S-1 with the Securities and Exchange Commission pursuant to which the Company
intends to register 9.2 million Class A Common Shares, including 1.2 million
shares that may be sold under an over-allotment option available to the
underwriters, exercisable for 30 days after the shares are registered. On
November 13, 1997, the Company amended its Registration Statement. Included with
amendment No. 1 to the Company's Registration Statement were audited financial
statements as of and for the nine months ended September 30, 1997.
-24-
<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").
Overview
Prior to July 1997, the Company operated as a REIT, originating,
acquiring, operating or holding income-producing real property and
mortgage-related investments. Since the Company's 1997 annual meeting (the "1997
Annual Meeting"), the Company has pursued a new strategic direction with a focus
on becoming a specialty finance company designed primarily to take advantage of
high-yielding mezzanine investments and other real estate asset and finance
opportunities in commercial real estate. As contemplated by its new business
plan, the Company no longer qualifies for treatment as a REIT for federal income
tax purposes. Consequently, the information set forth below with regard to
historical results of operations for the three and nine months ended September
30, 1996 does not reflect any operating results from the Company's specialty
finance activities or real estate investment banking services nor the Company's
current investment portfolio. The results for the three and nine months ended
September 30, 1997 reflect partial implementation of the Company's new business
plan and reflect only the activity since June 30, 1997 from the Company's
specialty finance activities and reflect only the activity since July 15, 1997
from the Company's real estate investment banking services as discussed below.
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 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 CRIL'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 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
parent's interest in the Company
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<PAGE>
of which the Board was aware and the fact that the average price of the
Company's shares of beneficial interest, par value $1.00 ("Old 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 Victor
Capital's real estate investment banking, advisory and asset management
businesses, including the services of its experienced management team.
At the 1997 Annual Meeting 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% Preferred Shares, $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 an amended and restated declaration of trust of the
Company (the "Restated Declaration"), 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 pursuant to the terms of the preferred
share purchase agreement, dated as of June 16, 1997, by and between the Company
and Veqtor (the "Investment Agreement"). Concurrently with the foregoing
transaction, Veqtor purchased the 6,959,593 Class A Common Shares held by CRIL
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. Veqtor funded the 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 Veqtor Notes issued to the Institutional
Investors. The Veqtor Notes may in the future be converted for preferred
interests in Veqtor that may in turn be redeemed for an aggregate of 9,899,710
voting shares of the Company.
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 the new business plan
under the direction of its newly elected Board of Trustees and new management
team.
Overview of Financial Condition Following Implementation of the New Business
Plan
During the period June 30, 1997 through September 30, 1997, in
connection with the Company's implementation of its new business plan as a
specialty finance company, the Company originated four investment and loan
transactions. These transactions aggregated approximately $110 million, and the
Company's portion, which is net of participations and unfunded commitments,
aggregated approximately $86.4 million at September 30, 1997. These investments
and loans have yields ranging from 400 to 600 basis points over LIBOR and are
consistent with the Company's targeted risk/reward parameters. In addition, the
Company entered into the $150 million Credit Facility to finance, in part,
investments made pursuant to the new business plan. As of September 30, 1997,
all of the Company's new investment and loan assets and corresponding
liabilities were based upon floating rates over LIBOR. During the three months
ended September 30, 1997, significant advisory income, collected during the
period, as a result of
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the Company's acquisition of Victor Capital, was applied as a reduction in the
excess of the acquisition purchase price over net tangible assets acquired as
opposed to being reflected as a revenue item. In addition, the Company incurred
significant general and administrative expenses primarily related to the
commencement of operations as a specialty finance company. The Company expects
to consummate the Offering (as hereinafter defined) during the fourth quarter of
1997. The net proceeds from the Offering after repayment of outstanding Credit
Facility borrowings will be used to fund investments and loans made by the
Company and for working capital for ongoing operations and potential business
acquisitions. The Company's initial investments pursuant to the new business
plan are described below.
On June 30, 1997, the Company completed its first investment pursuant
to its new business plan, an approximately $49.5 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 which loans are secured,
directly or indirectly, by properties located throughout the United States. This
investment was structured to provided an effective yield of a specified number
of basis points over LIBOR based on specified base case modeling assumptions.
On August 4, 1997, the Company originated, and funded in part, a $35
million short-term LIBOR- based commitment for a subordinated mortgage loan for
improvements to a mixed-use property (the Chicago Apparel Center) in Chicago,
Illinois. The mortgage loan is secured by the property, is subordinate to senior
indebtedness and is further secured by two mortgage notes (with an aggregate
principal amount of $9.6 million) on development sites located nearby. The loan
has a two-year initial term with a one-year extension option available to the
borrower, subject to certain conditions, and is payable upon the sale of the
property unless the Company approves the assumption of the debt by an
institutional investor. On August 4, 1997, the Company funded $19.0 million
against the aforementioned commitment and, subsequently, on August 19, 1997, the
Company entered into a participation agreement with a third party (the
"Participant") pursuant to which the Company assigned a 42.9% interest in the
loan. In connection with the participation agreement, the Participant paid to
the Company approximately $8.2 million or 42.9% of the $19.0 million previously
funded by the Company. During September 1997, the Company and the Participant
funded additional amounts aggregating $1.2 million, of which $506,000 was funded
by the Participant. Through September 30, 1997, the Company's portion of the
funding provided under the mortgage loan aggregated $11.5 million.
On August 13, 1997, the Company originated and funded a LIBOR-based
$9.8 million mortgage loan. This loan is primarily secured by an $11.8 million
mortgage note on an approximately 281,000 square foot office/warehouse facility
located in Philadelphia, Pennsylvania. This loan is also secured by a pledge of
a $4.4 million mortgage note secured by an industrial/warehouse facility in
Queens, New York and a $2.3 million pool of secured home loans to owners of
cooperative apartments located in Brooklyn, New York. The mortgage loan is
further secured by a pledge of various other loans owned by the borrower. The
loan has a term of one year which may be extended by the borrower for an
additional year.
On September 19, 1997, the Company completed a fixed rate investment in
the form of a $15.0 million portion of a ten-year $80.0 million mezzanine loan
secured by the pledge of the ownership interest in the entities that own the
approximately 1.75 million square foot office building located at 277 Park
Avenue in New York City. The investment is further secured by a full payment
guarantee by the principal owner of the entities that own the property, in the
event of certain circumstances, including bankruptcy. Seventy-five percent of
the purchase price (approximately $11.7 million) was financed pursuant to a
reverse repurchase agreement. Effective September 12, 1997, in order to hedge
its interest rate risk under the
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transaction, the Company entered into an interest rate swap agreement. Effective
September 30, 1997, the reverse repurchase agreement was terminated and replaced
with an $11.7 million borrowing under the Credit Facility.
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 sale of Sacramento
property closed on February 14, 1997 and the sale of the Kirkland property
closed on March 3, 1997.
The Company completed the investment and lending transactions above
with cash on hand and funding pursuant to reverse repurchase agreements,
including an agreement with the commercial lender on the Credit Facility made in
advance of the execution thereof.
Comparison of the Nine Months Ended September 30, 1997 (Audited) and Three
Months Ended September 30, 1997 (Unaudited) to the Nine Months and Three Months
Ended September 30, 1996 (Unaudited)
Net loss allocable to Class A Common Shares of $3,132,000 was reported
by the Company during the nine months ended September 30, 1997, an increase of
$2,845,000 from the loss reported for the nine months ended September 30, 1996.
Net loss allocable to Class A Common Shares of $2,272,000 was reported by the
Company for the three months ended September 30, 1997, an increase of
$1,758,000, from the net loss allocable to Class A Common Shares of $514,000 for
the three months ended September 30, 1996. These increases resulted primarily
from costs incurred with the implementation of the new business plan,
significant general and administrative expenses associated with the acquisition
of Victor Capital and the retention of the Company's new management team and the
Preferred Share dividend requirement. The increase in net loss further resulted
from losses from the sale of rental properties in 1997 as compared to gains from
such sales in 1996. Such increased losses were partially offset by a decrease in
the provision for possible credit losses during 1997.
Net income from investment and lending transactions increased $629,000
to $1,073,000 for the nine months ended September 30, 1997. Net income from
investment and lending transactions increased $928,000 to $997,000 for the three
months ended September 30, 1997. These increases are primarily attributable to
the revenue earned from the Company's significant new investments and loan
originations offset by the interest paid on reverse repurchase agreements.
Other revenues decreased $128,000 to $1,850,000 for the nine months
ended September 30, 1997. This decrease was primarily caused by a $1,272,000
decrease in rental income as the Company sold the remaining rental properties
during the first quarter of 1997. This decrease in rental income was
substantially offset by an increase in other interest income of $615,000, which
income was derived from the higher level of invested cash on hand and
investments and the addition of advisory and asset management fees generated by
Victor Capital. During the three months ended September 30, 1997, other revenues
increased $240,000 to $942,000 over the same period in 1996. As in the decrease
for the nine months ended September 30, 1997, there was a $474,000 decrease in
rental income as the Company sold the remaining rental properties during the
first quarter of 1997, an increase in other interest income of $185,000
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from the higher level of invested cash on hand and investments, and a $529,000
addition of advisory and asset management fees generated by Victor Capital.
Other expenses increased by $2,710,000 for the nine months ended
September 30, 1997 to $4,789,000 and from $618,000 for the three months ended
September 30, 1996 to $3,377,000 for the three months ended September 30, 1997.
These increases were primarily due to the additional general and administrative
expenses associated with the acquisition of Victor Capital and the full
implementation of the Company's new business plan. The majority of the increase
in general and administrative expenses was attributable to salaries and other
expenses related to the additional employees from Victor Capital and other
related administrative expenses resulting from the acquisition of Victor
Capital.
During the first quarter of 1997, the Company sold its Sacramento,
California shopping center. The net loss recognized from the sale of such
property was approximately $34,000. The Company also sold its Kirkland,
Washington retail property. The net loss recognized from the sale of such
property was approximately $398,000, of which the majority was transfer taxes
and the elimination of unamortized tenant improvements and leasing commissions.
The provision for possible credit losses decreased to $155,000 for the
three and nine months ended September 30, 1997 as the rental properties that
necessitated the provision for possible credit losses in 1996 had been sold in
1997.
Liquidity and Capital Resources
At September 30, 1997, the Company had $4,063,000 in cash. Liquidity
in the remainder of 1997 will be provided primarily by cash on hand, cash
generated from operations, interest payments received on its investments, loans
and securities, additional borrowings under the Credit Facility and the net
proceeds from a public offering of Class A Common Shares expected to be
completed in the fourth quarter (the "Offering"). On October 6, 1997, the
Company filed a Registration Statement on Form S-1 with respect to the offer and
sale of 9.2 million shares of Class A Common Shares (including 1.2 million
shares subject to the underwriter's over-allotment option) in the proposed
Offering. The Company believes these sources of capital will adequately meet
future cash requirements. Consistent with its new business plan, the Company
expects that during the remainder of 1997 it will use a significant amount of
its available capital resources to originate and fund investment and lending
transactions. In connection with such investment and loan transactions, the
Company intends to employ significant leverage, up to a 5:1 debt-to-equity
ratio, to enhance its return on equity.
The Company experienced a net decrease in cash of $635,000 for the
nine months ended September 30, 1997, compared to a net decrease in cash of
$1,530,000 for the nine months ended September 30, 1996, a difference of
$895,000. For the nine months ended September 30, 1997, cash used in operating
activities was $1,445,000, a difference of $1,815,000 from cash provided by
operations of $370,000 during the same period in 1996. Cash used in investing
activities during this same period increased by $78,509,000 to $80,354,000, up
from $1,845,000, primarily as a result of the investment and lending
transactions completed since June 30, 1997. Cash provided by financing
activities increased $81,219,000 due primarily from the proceeds of repurchase
obligations, borrowings under the Credit Facility and the net proceeds from the
issuance of Class A Preferred Shares.
The Company has two outstanding notes payable totaling $4,867,000 and
outstanding borrowings of $11,715,000 under the line of Credit Facility in
addition to the outstanding repurchase obligation of $36,881,000.
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<PAGE>
The Company has entered into the $150 million Credit Facility with
German American Capital Corporation ("GACC"). The Credit Facility has a term of
three years, including extensions, provided that the Company is in compliance
with the covenants and terms of the Credit Facility, there have been no material
adverse changes in the Company's financial position, and the Company is not
otherwise in material default of the terms of the Credit Facility. The Credit
Facility provides for advances to fund lender- approved investments ("Funded
Portfolio Assets") made by the Company pursuant to its business plan. Prior to
the execution of the Credit Facility, GACC advanced approximately $11.7 million
to the Company pursuant to a reverse repurchase agreement. Upon the execution of
the Credit Facility, the approximately $11.7 million was refinanced with an
advance under the Credit Facility and the repurchase agreement was terminated.
As of November 11, 1997, outstanding borrowings under the Credit Facility,
including accrued interest, totaled approximately $35 million.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information contained in Notes 3, 4 and 6 to the Consolidated
Financial Statements of the Company as of December 31, 1996 and as of the nine
months ended September 30, 1997 included in Item I of Part I of this report with
respect to an interest rate swap agreement for the notional amount of $15
million is incorporated herein by reference. The Company had not entered into
any interest rate swaps at or during the year ended December 31, 1996.
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PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
None.
ITEM 2: Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) On July 15, 1997, pursuant to the terms of the preferred
share agreement, dated as of June 16, 1997, by and between the Registrant and
Veqtor Finance Company, LLC ("Veqtor"), the Registrant issued 12,267,658 class A
9.5% cumulative convertible preferred shares of beneficial interest, $1.00 par
value, in the Company ("Class A Preferred Shares"). The issuance of the Class A
Preferred Shares was not subject to the registration requirements of Section 5
of the Securities Act of 1933, as amended, because the transaction was exempt
from registration under Section 4(2) thereof for transactions by an issuer not
involving a public offering. Each Class A Preferred Share is convertible at the
option of the holder thereof at any time and from time to time in whole or in
part into a number of class A common shares of beneficial interest, $1.00 par
value, in the Registrant ("Class A Common Shares") equal to the ratio of (x)
$2.69 plus an amount equal to all dividends per share accrued and unpaid thereon
as of the date of such conversion to (y) the Conversion Price in effect as of
the date of such conversion. The initial "Conversion Price" was set at $2.69,
but will be adjusted to provide the holders of Class A Preferred Shares with
customary anti-dilution protection, including protection for the issuance of
additional shares at a price less than $2.69 per share. At the initial
Conversion Price (which is in effect on the date hereof), the holders of Class A
Preferred Shares have the right to convert their shares into Class A Common
Shares at the rate of one Class A Common Share for each Class A Preferred Share.
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 considered proposals to:
1. approve the issuance of the Registrant's class A 9.5% cumulative
convertible preferred shares, $1.00 par value, of beneficial interest
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 and Veqtor Finance Company, LLC and in the
certificate of designation, preferences and
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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);
5. approve a long-term incentive share plan ("Proposal 5"); and
6. approve a non-employee trustee share plan ("Proposal 6").
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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.
Votes in Votes Abstentions Broker
Proposal Favor Opposed (Withheld) Non-Votes
- -------- -------- ------- ---------- ---------
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 --
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
ITEM 5: Other Information
None
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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).
10.5 Employment Agreement, dated as of July 15, 1997,
by and between the Registrant and John Klopp
(filed as Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 filed on
October 6, 1997 and is incorporated herein by
reference).
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10.6 Employment Agreement, dated as of July 15, 1997,
by and between the Registrant and Craig M.
Hatkoff (filed as Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1
filed on October 6, 1997 and is incorporated
herein by reference).
10.7 Employment Agreement, dated as of July 15, 1997,
by and between the Registrant and Donald J.
Meyer.
10.8 Consulting Agreement, dated as of July 15, 1997,
by and between the Registrant and Gary R.
Garrabrant (filed as Exhibit 10.7 to the
Registrant's Registration Statement on Form S-1
filed on October 6, 1997 and is incorporated
herein by reference).
10.9 Sublease, dated as of July 29, 1997, between New
York Job Development Authority and Victor Capital
Group, L.P. (filed as Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1
filed on October 6, 1997 and is incorporated
herein by reference).
10.10 Credit Agreement, dated as of September 30, 1997,
between the Registrant and German American
Capital Corporation ("GACC") and Global Note,
dated as of September 30, 1997, made in favor of
GACC by the Registrant (filed as Exhibit 10.9 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 filed on November 13, 1997
and is incorporated herein by reference).
27.1 Financial Data Schedule.
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<PAGE>
(b) Reports on Form 8-K
During the fiscal quarter ended September 30, 1997, the
Registrant filed the following Current Reports on Form 8-K:
(1) Current Report on Form 8-K, dated June 30, 1997, as filed with
the Commission on July 15, 1997, reporting under Item 2
"Acquisition or Disposition of Assets" the completion of an
investment in a junior, subordinated class of commercial
mortgage- backed securities and under Item 5 "Other Events"
the issuance of press releases reporting the outcome of the
Registrant's 1997 annual meeting of shareholders and including
under Item 7 "Financial Statements and Exhibits" certain
exhibits relating to the events reported under Item 2 and Item
5.
(2) Current Report on Form 8-K, dated July 15, 1997, as filed with
the Commission on July 30, 1997, reporting under Item 1
"Changes in Control" the change in control following the
acquisition by Veqtor Finance Company, LLC of 6,959,593
reclassified class A common shares of beneficial interest,
$1.00 par value, in the Registrant and 12,267,658 class A 9.5%
cumulative convertible preferred shares of beneficial
interest, $1.00 par value, in the Registrant, under Item 2
"Acquisition or Disposition of Assets" the acquisition of all
partnership interests and membership interests in Victor
Capital Group, L.P. and including under Item 7 "Financial
Statements and Exhibits" certain exhibits relating to the
matters reported under Item 1 and Item 2.
(3) Current Report on Form 8-K, dated August 4, 1997, as filed
with the Commission on August 19, 1997, reporting under Item 2
"Acquisition on Disposition of Assets" the origination and
funding of a short-term mortgage loan.
(4) Current Report on Form 8-K, dated August 13, 1997, as filed
with the Commission on August 28, 1997, reporting under Item 2
"Acquisition or Disposition of Assets" the origination and
funding of a short-term loan secured by a mortgage note.
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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
Date: November 14, 1997 /s/ John R. Klopp
----------------- -----------------
John R. Klopp
Chief Executive Officer
(principal executive officer)
/s/ Edward L Shugrue III
Edward L. Shugrue III
Managing Director and
Chief Financial Officer
(principal financial officer)
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
July 15, 1997, by and between Capital Trust, a business trust organized under
the laws of the State of California and established under a Declaration of Trust
dated September 15, 1966, as amended from time to time (such trust and any
successors thereto being hereinafter referred to as "Capital Trust"), and Donald
Meyer ("Executive").
RECITALS
WHEREAS, Capital Trust desires to employ Executive as Managing Director
and Chief Investment Officer of Capital Trust; and
WHEREAS, Executive desires to be employed by Capital Trust at the
salary and benefits provided for herein; and
WHEREAS, Executive acknowledges and understands that during the course
of his employment, Executive will develop certain strategic business
relationships and become familiar with certain confidential information of
Capital Trust which are exceptionally valuable to Capital Trust and vital to the
success of Capital Trust's business; and
WHEREAS, Capital Trust and Executive desire to protect such business
relationships and such confidential information from use to the detriment of
Capital Trust or disclosure to third parties.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties hereto acknowledge
and agree as follows:
TERMS
PART ONE
NATURE AND TERM OF EMPLOYMENT
1.01 Employment. Capital Trust hereby agrees to employ Executive, and
Executive hereby accepts such employment, as Managing Director and Chief
Investment Officer of Capital Trust.
1.02 Term of Employment. The term of Executive's employment hereunder
shall be for a period of two years beginning on the date of this Agreement (the
"Original Term").
1.03 Term Extension. Immediately as of the expiration of the Original
Term and each Renewal Period, this Agreement will automatically renew and extend
for successive one year periods (the "Renewal Periods"), unless Capital Trust or
Executive shall have delivered to the other written notice of non-renewal at
least one hundred twenty (120) days prior to the expiration of the Original Term
or the applicable Renewal Period, in which case the Original Term or the
applicable Renewal Period shall expire effective as of the last day of the
Original Term or the applicable Renewal Period, as the case may be. The period
during which Executive shall be employed by Capital Trust hereunder shall be
referred to herein as the "Employment Period."
1.04 At Will Employment. Notwithstanding anything to the contrary
contained in this Agreement, Executive's employment by Capital trust shall be
"at will", and both the Original Term and the Renewal Periods are subject to
termination at any time for any or no reason by either Capital Trust or
Executive upon written notice to the other party.
1.05 Duties. The duties of Executive shall be as determined by the
Board of Trustees of Capital Trust (the "Board") consistent with Executive's
title and position with the Company, and Executive shall report to, and shall be
subject to the direction and control of, the Vice Chairman of the Board and/or
Chief Executive Officer of Capital Trust and/or such other officers of Capital
Trust as the Board shall determine. Executive agrees to devote his full business
time, attention and energies to the diligent performance of his duties hereunder
and will not, during the Employment Period, engage in, accept employment from or
provide services to any other person, firm, corporation, governmental agency or
other entity.
PART TWO
COMPENSATION AND BENEFITS
2.01 Salary. During the Employment Period, Executive shall receive a
base salary at the rate of $300,000 per annum (the "Base Salary"), payable in
regular installments in accordance with Capital Trust's general payroll
practices for salaried employees. During the Employment Period, the Base Salary
may be increased as of each anniversary of the date of this Agreement in the
Board's sole discretion.
2.02 Bonus. In addition to his Base Salary, Executive may receive
during the Employment Period, as determined annually at the discretion of the
Board, an annual incentive cash bonus based upon Executive's performance and the
profitability of Capital Trust during such period. Notwithstanding anything to
the contrary in this Section 2.02, Executive shall be entitled to receive a
minimum annual bonus of $150,000 in cash (the "Minimum Annual Bonus"), payable
on or about January 1, 1998, and January 1, 1999; provided further, however,
that it is agreed that (i) subject to Part Three of this Agreement, Executive
shall not have earned and shall not be entitled to receive any portion of the
Minimum Annual Bonus if for any or no reason he is not employed by Capital Trust
on such dates, and (ii) such minimum bonuses shall not apply to any periods
subsequent to January 1, 1999.
2.03 Benefits. During the Term of this Agreement, Capital Trust agrees
to provide to Executive such benefits as are provided to other employees of
Capital Trust from time to time, including but not limited to, any health,
disability, life, deferred compensation, profit-sharing, pension, vacation,
reimbursement of reasonable out-of-pocket business expenses or other employee
benefit policies, programs or plans (other than with respect to severance) which
Capital Trust provides to its employees, all at levels determined by the Board
and commensurate with Executive's position.
2.04 Share Plan. Executive shall participate in Capital Trust's 1997
Long-Term Incentive Share Plan, and any successor plan thereto ("Share Plan") at
a level determined by the Board and commensurate with his position.
2
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2.05 Withholding. Any amounts payable to Executive hereunder shall be
paid to Executive subject to all applicable taxes required to be withheld by the
Company pursuant to federal, state or local law. Executive or his beneficiary,
if applicable, shall be solely responsible for all taxes imposed on Executive or
his beneficiary by reason of his receipt of any amount of compensation or
benefits payable to Executive hereunder.
PART THREE
SEVERANCE PAYMENTS
3.01 General. Either Capital Trust or Executive may terminate
Executive's employment during the Employment Period for any or no reason by
delivery to the other party of a written notice (the "Termination Notice")
indicating the date Executive's employment is terminated (the "Termination
Date").
3.02 Involuntary Termination without Cause.
(a) If Capital Trust terminates Executive's employment prior to the
expiration of the Original Term for any reason other than Cause, or if Employee
terminates his employment prior to the expiration of the Original Term for Good
Reason:
(i) Capital Trust shall pay to Executive Executive's Base Salary
accrued up to the Termination Date; and
(ii) upon execution and delivery by Executive of the form of Release
attached hereto as Exhibit A, and the expiration of the seven day revocation
period provided in said Release without revocation of said Release by Executive,
Capital Trust shall pay to Executive, a severance payment equal to (A) the Base
Salary payable to Executive over the remainder of the Original Term had
Executive not been so terminated (the "Base Severance") and (B) the Minimum
Annual Bonus in respect of the first and second year of the Original Term if and
to the extent not previously paid to Executive (the "Bonus Severance"). The Base
Severance shall be payable over a period of time equal to the remainder of the
Original Term had Executive not been so terminated beginning on the Termination
Date and in regular installments in accordance with Capital Trust's general
payroll practices for salaried employees. The portion, if any, of the Bonus
Severance payable in respect of the first year of the Original Term shall be
payable no later than January 10, 1998. The portion, if any, of the Bonus
Severance payable in respect of the second year of the Original Term shall be
payable no later than January 10, 1999. As used in this Agreement, "Good Reason"
shall mean a willful and material breach of this Agreement by Capital Trust;
(b) Notwithstanding anything to the contrary in the Share Plan or in
any option agreement thereunder, if Capital Trust terminates Executive's
employment at any time during the Employment Period, including, without
limitation, during any Renewal Period, or refuses to renew this Agreement after
the expiration of the Original Term or any Renewal Term, in each case for any
reason other than Cause, or if Employee terminates his employment at any time
during the Employment Period, including, without limitation, during any Renewal
Period, or refuses to renew this Agreement after the expiration of the Original
Term or any Renewal Term, in each case for Good Reason: (A) all of the initial
75,000 options granted to Executive under the Share Plan
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<PAGE>
which are not vested at the time of termination will automatically vest and
become immediately exercisable for the total number of shares purchasable
thereunder; and (B) such options will expire on the earlier of (aa) the
expiration date of such options under the Share Plan and (bb) one year from the
Termination Date.
(c) Except as set forth in this Section 3.02, Executive shall not be
entitled to receive any other severance, benefits or compensation of any kind
whatsoever.
3.03 Voluntary Termination. If Executive terminates his employment
voluntarily without Good Reason, Executive shall be entitled to receive only his
Base Salary accrued through the Termination Date as set forth in the Termination
Notice, and Executive shall not be entitled to receive any Base Severance, Bonus
Severance or other severance benefits or compensation of any kind whatsoever.
Except as set forth in this Section 3.03, Executive shall not be entitled to
receive any other severance, benefits or compensation of any kind whatsoever.
3.04 Involuntary Termination for Cause. If Capital Trust terminates
Executive's employment prior to the expiration of the Original Term for Cause,
Executive shall be entitled to receive only his Base Salary accrued through the
Termination Date as set forth in the Termination Notice, and Executive shall not
be entitled to receive any Base Severance, Bonus Severance or other severance
benefits or compensation of any kind whatsoever. As used in this Section 3.04,
"Cause" shall mean: (a) fraud, embezzlement or conviction of a felony; (b)
misappropriation of any money, proprietary information or other assets or
properties of Capital Trust or any affiliate of Capital other than (i) an
isolated, insubstantial and unintentional misappropriation which is promptly
remedied by Executive after receipt of notice thereof by Capital Trust, or (ii)
any good faith dispute regarding reimbursement of expenses or other similar good
faith dispute; (c) willful and material breach by Executive of the terms of this
Agreement; and (d) any other verifiable misconduct of Executive materially and
adversely affecting the reputation of Capital Trust. Except as set forth in this
Section 3.04, Executive shall not be entitled to receive any other severance,
benefits or compensation of any kind whatsoever.
3.05 Sole Remedy. The rights and remedies provided for in this Part
Three in connection with the termination of Executive's employment, voluntarily
or involuntarily, for any or no reason, shall be the only remedy, legal or
equitable, available to Executive in connection with such termination (but not
for claims or causes of action not directly related to such termination, even if
arising at the time of termination), and such rights and remedies shall
constitute liquidated damages.
PART FOUR
CONFIDENTIAL INFORMATION AND NON-SOLICITATION
4.01 Definition of Confidential Information. For the purposes of this
Agreement, the term "Confidential Information" shall mean all information and
all documents and other tangible items which record information which is
non-public, confidential or proprietary in nature with respect to Capital Trust
or its customers, clients or investors and shall include, but shall not be
limited to: (a) all information, which at the time or times concerned is
protectible as a trade secret under applicable law; (b) business and investment
plans and strategies; (c) marketing plans and strategies; and (d) proprietary
software and business records. Capital Trust and Executive acknowledge and agree
that the Confidential Information is extremely valuable to Capital Trust
4
<PAGE>
and the information referred to in subparagraphs (b) through (d) inclusive
of this Section 4.01 is especially sensitive and valuable.
4.02 Non-Disclosure of Confidential Information. Executive will not
during, or for a period of two (2) years after termination of Executive's
employment for any or no reason, in any form or manner, directly or indirectly,
divulge, disclose or communicate to any person, entity, firm, corporation or any
other third party, or utilize for the Employee's personal benefit of for the
benefit of any person, entity, firm or corporation (other than Capital Trust),
any Confidential Information.
4.03 Delivery Upon Termination. Upon termination of Executive's
employment with Capital Trust for any or no reason, Executive will promptly
deliver to Capital Trust all correspondence, manuals, letters, notes, notebooks,
reports, programs, plans, proposals, financial documents, or any other documents
or media concerning Capital Trust and/or which contains Confidential
Information.
4.04 Restriction Against Employing Capital Trust Employees. Executive
will not, for a period of (1) one year after termination of Executive's
employment with Capital Trust for any or no reason, directly or indirectly,
whether individually, as a director, stockholder, partner, member, owner,
employee or agent of any business, or in any other capacity, solicit for
employment or engagement, any person who is employed or otherwise engaged by
Capital Trust on, or within 180 days prior to, such termination of Executive.
4.05 Continuing Obligation. The obligations, duties and liabilities of
Executive pursuant to Part Four of this Agreement are continuing, absolute and
unconditional and shall remain in full force and effect as provided therein
despite any termination of Executive's employment with Capital Trust for any or
no reason, including, but not limited to, the expiration of the Employment
Period.
4.06 Executive Acknowledgment/Injunctive Relief. Executive acknowledges
and agrees that the covenants set forth in Part Four hereof are reasonable and
necessary for the protection of Capital Trust's business interests, that such
covenants will not result in undue economic hardship to Executive, that
irreparable injury will result to Capital Trust if Executive breaches any of the
terms of said covenants, and that in the event of Executive's actual or
threatened breach of any such covenants, Capital Trust will have no adequate
remedy at law. Executive accordingly agrees that in the event of any actual or
threatened breach by him of any of said covenants, Capital Trust shall be
entitled to immediate injunctive and other equitable relief, without bond and
without the necessity of showing, any actual monetary damages. If, in any action
by Capital Trust against Executive to enforce the provisions of this Part Four,
there shall be a final judicial finding that Executive has committed a material
breach of this Part Four, Executive shall reimburse Capital Trust for its
reasonable costs and expenses in such action (including court costs and
reasonable attorney's fees). If, in any action by Capital Trust against
Executive to enforce the provisions of this Part Four, there shall be a final
judicial finding that Executive has not committed a material breach of this Part
Four, Capital Trust shall reimburse Executive for his reasonable costs and
expenses in defending such action (including court costs and reasonable
attorney's fees). If in any such action there is no judicial finding on the
issue of a material breach by Executive of this Part Four, neither party shall
be obligated to reimburse the other for costs and expenses relating to the
action. Nothing herein shall be construed as prohibiting Capital Trust from
pursuing any other remedies available to it for such breach or threatened
breach, including the recovery of any damages which it is able to prove.
5
<PAGE>
PART FIVE
MISCELLANEOUS
5.01 Assignment. Executive and Capital Trust acknowledge and agree that
the covenants, terms and provisions contained in this Agreement constitute a
personal employment contract and the rights of the parties thereunder cannot be
transferred, sold, assigned, pledged or hypothecated, excepting that the rights
and obligations of Capital Trust under this Agreement may be assigned or
transferred by operation of law pursuant to a merger, consolidation, share
exchange, sale of substantially all of Capital Trust's assets, or other
reorganization described in Section 368 of the Code, or through liquidation,
dissolution or otherwise, whether or not Capital Trust is the continuing entity,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of Capital Trust and, in the event of any such
transaction, such assignee or transferee assumes the liabilities, obligations
and duties of Capital Trust, if any, as contained in this Agreement, either
contractually or as a matter of law.
5.02 Capacity. Executive hereby represents and warrants that, in
entering into this Agreement, he is not in violation of any contract or
agreement, whether written or oral, with any other person, firm, partnership,
corporation, or other entity to which he is a party or by which he is bound and
will not violate or interfere with the rights of any other person, firm,
partnership, corporation or other entity. In the event that such a violation or
interference does occur, or is alleged to occur, notwithstanding the
representation and warranty made hereunder, Executive shall indemnify Capital
Trust from and against any and all manner of expenses and liabilities incurred
by Capital Trust or any affiliated company of Capital Trust in connection with
such violation or interference or alleged violation or interference.
5.03 Severability. If any phrase, clause or provision of this Agreement
is declared invalid or unenforceable by a court of competent jurisdiction, such
phrase, clause or provision shall be deemed severed from this Agreement, but
will not affect any other provisions of this Agreement, which shall otherwise
remain in full force and effect. If any restriction or limitation in this
Agreement is deemed to be unreasonable, onerous and unduly restrictive by a
court of competent jurisdiction, it shall not be stricken in its entirety and
held totally void and unenforceable, but shall remain effective to the maximum
extent permissible within reasonable bounds.
5.04 Notices. Any notice, request or other communication required to be
given pursuant to the provisions hereof shall be in writing and shall be deemed
to have been given when delivered in person or five (5) days after being
deposited in the United States mail, certified or registered, postage pre-paid,
return receipt requested and addressed to the party at its or his last known
addresses. The address of any party may be changed by notice in writing to the
other parties duly served in accordance herewith.
5.05 Waiver. The waiver by Capital Trust or Executive of any breach of
any term or condition of this Agreement shall not be deemed to constitute the
waiver of any other breach of the same or any other term or condition hereof.
6
<PAGE>
5.06 Governing Law. This Agreement and the enforcement thereof shall be
governed and controlled in all respects by the laws of the State of New York
(applicable to agreements to be performed wholly within such state).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first hereinabove written.
CAPITAL TRUST
By:/s/ John Klopp
--------------------------------------
John Klopp, Vice Chairman of the Board
and Chief Executive Officer
EXECUTIVE:
/s/ Donald Meyer
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL EXTRACTED FROM THE FINANCIAL STATEMENTS
OF CAPITAL TRUST FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4063
<SECURITIES> 62,521
<RECEIVABLES> 39,022
<ALLOWANCES> 155
<INVENTORY> 0
<CURRENT-ASSETS> 6,511
<PP&E> 384
<DEPRECIATION> 51
<TOTAL-ASSETS> 112,295
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<BONDS> 54,188
12,268
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<COMMON> 9,138
<OTHER-SE> 33,963
<TOTAL-LIABILITY-AND-EQUITY> 112,295
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<CGS> 0
<TOTAL-COSTS> 5,579
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<INCOME-PRETAX> (2453)
<INCOME-TAX> 0
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