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 March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 1-8063
CAPITAL TRUST
(Exact name of registrant as specified in its charter)
California 94-6181186
- ------------------------------------ ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
605 Third Avenue, 26th Floor, New York, NY 10016
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 655-0220
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
<PAGE>
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the close of the latest practical date.
Class Outstanding at March 31, 1998
- -------------------------------------------- --------------------------------
Class A Common Shares of Beneficial Interest, 18,229,650
$1.00 par value ("Class A Common Shares")
<PAGE>
CAPITAL TRUST
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
<S> <C> <C>
Item 1: Financial Statements 1
Consolidated Balance Sheets - March 31, 1998 (unaudited) and
December 31, 1997 (audited) 1
Consolidated Statements of Operations - Three Months Ended
March 31, 1998 and 1997 (unaudited) 2
Consolidated Statement of Shareholders' Equity -
Three Months Ended March 31, 1998 (unaudited) 3
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II. Other Information
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Defaults Upon Senior Securities 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 17
</TABLE>
<PAGE>
Capital Trust and Subsidiaries
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1998 1997
-------------------- -----------------
(unaudited) (audited)
Assets
Cash and cash equivalents $ 7,075 $ 49,268
Available-for-sale securities 9,604 11,975
Loans and other investments, net of $942 and $462 reserve for possible
credit losses at March 31, 1998 and December 31, 1997, respectively 417,074 251,812
Excess of purchase price over net tangible assets acquired, net 326 331
Deposits and other receivables 3,824 284
Accrued interest receivable 3,418 818
Prepaid and other assets 3,858 2,878
==================== =================
Total assets $ 445,179 $ 317,366
==================== =================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 5,098 $ 5,718
Notes payable 4,447 4,953
Credit facility 188,714 79,864
Repurchase obligations 97,945 82,173
Deferred origination fees and other revenue 3,099 1,369
-------------------- -----------------
Total liabilities 299,303 174,077
-------------------- -----------------
Commitments and contingencies
Shareholders' equity:
Class A Preferred Shares, $1.00 par value, 12,639 shares authorized, 12,268 shares
issued and outstanding 12,268 12,268
Class A Common Shares, $1.00 par value; unlimited shares authorized, 18,157 shares
issued and outstanding 18,157 18,157
Restricted Class A Common Shares, $1.00 par value, 72 shares issued and outstanding
at March 31, 1998 72 -
Additional paid-in capital 158,790 158,137
Unearned compensation (693) -
Unrealized gain on available-for-sale securities 269 387
Accumulated deficit (42,987) (45,660)
-------------------- -----------------
Total shareholders' equity 145,876 143,289
-------------------- -----------------
Total liabilities and shareholders' equity $ 445,179 $ 317,366
==================== =================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
------------------- ------------------
<S> <C> <C>
Income from loans and other investments
Interest and related income $ 7,977 $ 36
Less: interest and related expenses 3,081 -
------------------- ------------------
Net income from loans and other investments 4,896 36
------------------- ------------------
Other revenues:
Advisory and investment banking fees 2,860 -
Rental income - 290
Other interest income 370 287
------------------- ------------------
Total other revenues 3,230 577
------------------- ------------------
Other expenses:
General and administrative 3,241 432
Other interest expense 106 99
Rental property expenses - 137
Depreciation and amortization 46 21
------------------- ------------------
Total other expenses 3,393 689
------------------- ------------------
Net income (loss) before loss on sale of rental properties,
provision for possible credit losses and income taxes 4,733 (76)
Loss on sale of rental properties - (432)
Provision for possible credit losses (480) -
------------------- ------------------
Net income (loss) before income taxes 4,253 (508)
Provision for income taxes 1,580 -
------------------- ------------------
Net income (loss) $ 2,673 $ (508)
Less: Class A Preferred Share dividend requirement (784) -
=================== ==================
Net income (loss) allocable to Class A Common Shares $ 1,889 $ (508)
=================== ==================
Per share information:
Net income (loss) per Class A Common Share:
Basic $ 0.10 $ (0.06)
=================== ==================
Diluted $ 0.09 $ (0.06)
=================== ==================
Weighted average Class A Common Shares outstanding:
Basic 18,207,900 9,157,150
=================== ==================
Diluted 30,736,405 9,157,150
=================== ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-2-
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statement of Shareholders' Equity
For the Three Months Ended March 31, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Class A Class A Restricted Class A
Preferred Shares Common Shares Common Shares Additional
------------------------- -------------------- ---------------------- Paid-In Unearned
Number Amount Number Amount Number Amount Capital Compensation
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 12,268 $ 12,268 18,157 $18,157 - $ - $ 158,137 $ -
Change in
unrealized - - - - - - - -
gain on
available-for-sale
securities
Issuance of
restricted - - - - 72 72 653 (725)
Class A
Common Shares
Restricted
Class A - - - - - - - 32
Common Shares
earned
Net income - - - - - - - -
===========================================================================================================
Balance at 12,268 $ 12,268 18,157 $18,157 72 $ 72 $ 158,790 $ (693)
March 31, 1998
===========================================================================================================
Unrealized Accumulated
Gain Deficit Total
--------------------------------------------
<S> <C> <C> <C>
Balance at
December 31, 1997 $ 387 $ (45,660) $ 143,289
Change in
unrealized (118) - (118)
gain on
available-for-sale
securities
Issuance of
restricted - - -
Class A
Common Shares
Restricted
Class A - - 32
Common Shares
earned
Net income - 2,673 2,673
============================================
Balance at $ 269 $ (42,987) $ 145,876
March 31, 1998
============================================
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
-3-
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,673 $ (508)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 46 21
Change in unrealized gain on available-for-sale securities (118) -
Restricted Class A Common Shares earned 32 -
Loss on sale of investments and properties - 432
Provision for possible credit losses 480 -
Changes in assets and liabilities net of effects from subsidiaries purchased:
Deposits and receivables (3,540) 20
Accrued interest receivable (2,600) -
Prepaid and other assets (895) (53)
Deferred revenue 1,730 -
Accounts payable and accrued expenses (620) (213)
Other liabilities - (70)
------------------- ------------------
Net cash used in operating activities (2,812) (371)
------------------- ------------------
Cash flows from investing activities:
Origination and purchase of loans and other investments (177,112) -
Principal collections of loans and other investments 11,370 8
Purchases of equipment and leasehold improvements (126) -
Improvements to rental properties - (64)
Proceeds from sale of rental properties - 7,306
Principal collections on available-for-sale securities 2,371 1,015
------------------- ------------------
Net cash provided by (used in) investing activities (163,497) 8,265
------------------- ------------------
Cash flows from financing activities:
Proceeds from repurchase obligations 26,612 -
Repayment of repurchase obligations (10,840) -
Proceeds from credit facility 148,714 -
Repayment of credit facility (39,864) -
Repayment of notes payable (506) (4,289)
Additional Paid-in Capital - 27
------------------- ------------------
Net cash provided by (used in) financing activities 124,116 (4,262)
------------------- ------------------
Net increase (decrease) in cash and cash equivalents (42,193) 3,632
Cash and cash equivalents at beginning of period 49,268 4,698
=================== ==================
Cash and cash equivalents at end of period $ 7,075 $ 8,330
=================== ==================
Supplemental disclosure of cash flow information
Interest paid during the period $ 2,260 $ 99
=================== ==================
Taxes paid during the period $ 143 $ -
=================== ==================
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
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<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
1. Presentation of Financial Information
The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited consolidated interim financial
statements should be read in conjunction with the financial statements and the
related management's discussion and analysis of financial condition and results
of operations filed with the 1997 Form 10-K of Capital Trust and Subsidiaries
(the "Company"). In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the three months ended March 31,
1998, are not necessarily indicative of results that may be expected for the
entire year ending December 31, 1998.
At December 31, 1996, the Company owned commercial rental property in
Sacramento, California through a 59% limited partnership interest in Totem
Square L.P., a Washington limited partnership ("Totem"), and an indirect 1%
general partnership interest in Totem through its wholly-owned subsidiary
Cal-REIT Totem Square, Inc. An unrelated party held the remaining 40% interest.
This property was sold during the quarter ended March 31, 1997 and the Totem
Square L.P. and Totem Square, Inc. subsidiaries were liquidated and dissolved.
The unaudited consolidated interim financial statements of the Company include
the accounts of the Company, Victor Capital Group, L.P. ("Victor Capital") and
its wholly-owned subsidiaries (included in the consolidated statement of
operations since their acquisition on July 15, 1997) and the results from the
disposition of the Company's rental property held by Totem, which was sold on
March 4, 1997. All significant intercompany balances and transactions have been
eliminated in consolidation. The accounting and reporting policies of the
Company conform in all material respects to generally accepted accounting
principles. Certain prior period amounts have been reclassified to conform to
current period classifications.
2. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
-5-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
3. Earnings Per Class A Common Share
Earnings per Class A Common Share is presented based on the requirements of
Statement of Accounting Standards No. 128 ("SFAS No. 128") which is effective
for periods ending after December 15, 1997. SFAS No. 128 simplifies the standard
for computing earnings per share and makes them comparable with international
earnings per share standards. The statement replaces primary earnings per share
with basic earnings per share ("Basic EPS") and fully diluted earnings per share
with Diluted Earnings per Share ("Diluted EPS"). Basic EPS is computed based on
the income applicable to Class A Common Shares (which is net income (loss)
reduced by the dividends on Class A Preferred Shares) divided by the
weighted-average number of Class A Common Shares outstanding during the period.
Diluted EPS is based on the net earnings applicable to Class A Common Shares
plus dividends on the class A 9.5% cumulative convertible preferred shares of
beneficial interest, $1.00 par value ("Class A Preferred Shares"), divided by
the weighted average number of Class A Common Shares and dilutive potential
Class A Common Shares that were outstanding during the period. Dilutive
potential Class A Common Shares include the convertible Class A Preferred Shares
and dilutive Class A Common Share options. At March 31, 1998, the Class A
Preferred Shares and dilutive portion of the Class A Common Share options were
considered Class A Common Share equivalents for purposes of calculating Diluted
EPS. At March 31, 1997, there was no difference between Basic EPS and Diluted
EPS or weighted average Class A Common Shares outstanding, as there were no
dilutive securities outstanding.
4. Loans and Other Investments
At March 31, 1998, the Company's loans and other investments consisted of the
following (in thousands):
Mortgage Loans $ 201,367
Mezzanine Loans 147,111
Subordinated Interests 67,486
Other mortgage loans receivable 2,052
-------------------
418,016
Less: Reserve for possible credit losses (942)
-------------------
Total loans and other investments $ 417,074
===================
At March 31, 1998, $307.1 million of the aforementioned loans and other
investments bear interest at floating rates ranging from LIBOR plus 370 basis
points to LIBOR plus 660 basis points before amortization of fees, premiums and
discounts. The remaining $110.9 million of loans and other investments were
originated or purchased with fixed rates ranging from 8.5% to 12% at March 31,
1998. All of the loans and other investments financed at fixed rates were
swapped to yield a floating rate. The average earning rate in effect at March
31, 1998, before giving effect to interest rate swaps but including amortization
of fees, premiums and discounts, was 11.02%.
During the quarter ended March 31, 1998, the Company completed nine new loan and
investment transactions totaling approximately $188.1 million and provided $5.4
million of
-6-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
additional fundings on two existing loans. The Company funded $177.1 million of
the foregoing loans and investments through March 31, 1998.
At March 31, 1998, the Company has letters of intent outstanding for various
other lending transactions, the terms of which have not been finalized. The
Company also has unfunded commitments on existing loans totaling $37.9 million
at March 31, 1998.
5. Long-Term Debt
Credit Facility
Effective January 1, 1998, pursuant to an amended and restated credit agreement,
the Company increased its line of credit with a commercial lender to $250
million (the "Credit Facility"). The Credit Facility provides for advances to
fund lender-approved loans and investments made by the Company ("Funded
Portfolio Assets"). The amended and restated agreement expires on December 31,
2000.
The obligations of the Company under the Credit Facility are secured by pledges
of the Funded Portfolio Assets acquired with advances under the Credit Facility.
Borrowings under the Credit Facility bear interest at specified rates over LIBOR
(averaging approximately 7.82% for the borrowings outstanding at March 31, 1998)
which rates may fluctuate based upon the credit quality of the Funded Portfolio
Assets and the advance rate. The Company incurred an initial commitment fee upon
the signing of the Credit Facility and paid additional commitment fees when the
total borrowing under the Credit Facility exceeded $75 million and exceeded $150
million.
On March 31, 1998, the unused amount available under the Credit Facility was
$61.3 million.
Repurchase Obligations
During the quarter ended March 31, 1998, the Company has entered into three new
repurchase agreements.
In February 1998, the Company entered into a repurchase agreement in connection
with the purchase of a subordinated participation in a note. At March 31, 1998,
the Company has sold such assets totaling $10.0 million and has a liability to
repurchase these assets for $7.5 million. The liability bears interest at
specified rates over LIBOR (7.09% at March 31, 1998) and matures in February
1999.
In March 1998, the Company entered into a repurchase agreement in connection
with the purchase of a subordinated participation in a first mortgage loan. At
March 31, 1998, the Company has sold such assets totaling $14.2 million and has
a liability to repurchase these assets for $10.6 million. The liability bears
interest at specified rates over LIBOR (7.64% at March 31, 1998) and matures in
March 1999.
-7-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
The Company has also entered into a repurchase agreement in conjunction with the
purchase of a class of subordinated commercial mortgage-backed securities issued
by a financial asset securitization investment trust. At March 31, 1998, the
Company has sold such securities with a book value totaling $10.0 million and
has a liability to repurchase these assets for $8.5 million. The liability bears
interest at 6.66%, and matures in March 1999.
6. Income Taxes
The Company will elect to file a consolidated federal income tax return for the
year ending December 31, 1998. The provision for income taxes for the quarter
ended March 31, 1998 is comprised of the following (in thousands):
Current
Federal $ 787
State 417
Local 376
Deferred
Federal -
State -
Local -
------------
Provision for income taxes $ 1,580
============
The Company has federal net operating loss carryforwards ("NOLs") as of March
31, 1998 of approximately $19.0 million. Such NOLs expire through 2012. The
Company also has a federal capital loss carryover of approximately $1.6 million
that can be used to offset future capital gains. Due to an affiliate's purchase
of 6,959,593 Class A Common Shares from the Company's former parent in January
1997 and another prior ownership change, a substantial portion of the NOLs are
limited for federal income tax purposes to approximately $1.5 million annually.
Any unused portion of such annual limitation can be carried forward to future
periods.
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to the effective income tax rate for the quarter ended March 31, 1998 is as
follows (in thousands):
<TABLE>
<S> <C> <C>
Federal income tax at statutory rate (34%) $ 1,446 34.0%
State and local taxes, net of federal tax benefit 523 12.3
Tax benefit of utilization of net operating loss carryforward (425) (10.0)
Other 36 0.9
------------------------------
$ 1,580 37.2%
==============================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax reporting purposes.
-8-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
The components of the net deferred tax assets recorded under SFAS No. 109 as of
March 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Net operating loss carryforward $ 8,665
Reserves on other assets and for possible credit losses 3,552
Deferred revenue 616
Reserve for uncollectible accounts 208
-----------------
Deferred tax assets $ 13,041
Valuation allowance (13,041)
-----------------
$ -
=================
</TABLE>
The Company recorded a valuation allowance to fully reserve its net deferred
assets. Under SFAS No. 109, this valuation allowance will be adjusted in future
years, as appropriate. However, the timing and extent of such future adjustments
can not presently be determined.
7. Employee Benefit Plans
1998 Long-Term Incentive Share Plan
On May 23, 1997, the Board of Trustees adopted the 1997 Long-Term Incentive Plan
(the "Incentive Share Plan"), which became effective upon shareholder approval
on July 15, 1997 at the 1997 annual meeting of shareholders (the "1997 Annual
Meeting"). The Incentive Share Plan permits the grant of nonqualified share
option ("NQSO"), incentive share option ("ISO"), restricted share, share
appreciation right ("SAR"), performance unit, performance share and share unit
awards. The Company has reserved an aggregate of 2,000,000 Class A Common Shares
for issuance pursuant to awards under the Incentive Share Plan and the Trustee
Share Plan (as defined below). The maximum number of shares that may be subject
of awards to any employee during the term of the plan may not exceed 500,000
shares and the maximum amount payable in cash to any employee with respect to
any performance period pursuant to any performance unit or performance share
award is $1.0 million.
During the quarter ended March 31, 1998, the Company issued options to acquire
an aggregate of 930,250 Class A Common Shares with an exercise price of $10.00
per share (the closing Class A Common Share price on the date of the grant) and
72,500 shares of restricted shares which will begin to vest in January 2001 and
fully vest in January 2003. In addition, as of March 31, 1998, the Company had
outstanding ISOs and NQSOs (the "Grants") pursuant to the Incentive Share Plan
to purchase an aggregate of 604,500 Class A Common Shares with an exercise price
of $6.00 per share.
-9-
<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 ("Old Common
Shares"), as class A common shares of beneficial interest, $1.00 par value (the
"Class A Common Shares").
Recent Developments
On January 3, 1997, Capital Trust Investors Limited Partnership
("CTILP"), an affiliate of Equity Group Investments, Inc. ("EGI") and Samuel
Zell, purchased from the Company's former parent, 6,959,593 Class A Common
Shares (representing approximately 76% of the then-outstanding Class A Common
Shares) for an aggregate purchase price of $20,222,011. Prior to the purchase,
which was approved by the then-incumbent Board of Trustees, EGI and Victor
Capital Group, L.P. ("Victor Capital") presented to the Company's then-incumbent
Board of Trustees a proposed new business plan in which the Company would cease
to be a REIT and instead become a specialty finance company designed primarily
to take advantage of high-yielding mezzanine investment and other real estate
asset opportunities in commercial real estate. EGI and Victor Capital also
proposed that they provide the Company with a new management team to implement
the business plan and that they invest through an affiliate a minimum of $30.0
million in a new class of preferred shares to be issued by the Company.
The Board of Trustees approved CTILP's purchase of the former parent's
Class A Common Shares, the new business plan and the issuance of a minimum of
$30.0 million of a new class of preferred shares of the Company at $2.69 per
share, such shares to be convertible into Class A Common Shares of the Company
on a one-for-one basis. The Company subsequently agreed that, concurrently with
the consummation of the proposed preferred equity investment, it would acquire
for $5.0 million Victor Capital's real estate investment banking, advisory and
asset management businesses, including the services of its experienced
management team.
At the Company's 1997 annual meeting of shareholders ("1997 Annual
Meeting"), the Company's shareholders approved the investment, pursuant to which
the Company would issue and sell up to approximately $34.0 million of class A
9.5% cumulative convertible preferred shares of beneficial interest, $1.00 par
value ("Class A Preferred Shares"), to Veqtor Finance Company, LLC ("Veqtor"),
an affiliate of Samuel Zell and the principals of Victor Capital (the
"Investment"). The Company's shareholders also approved the amended and restated
declaration of trust, which, among other things, reclassified the Company's Old
Common Shares as Class A Common Shares and changed the Company's name to
"Capital Trust."
Immediately following the 1997 Annual Meeting, the Investment was
consummated; 12,267,658 Class A Preferred Shares were sold to Veqtor for an
aggregate purchase price of $33,000,000. Concurrently with the foregoing
transaction, Veqtor purchased the 6,959,593 Class A Common Shares held by CTILP
for an aggregate purchase price of approximately $21.3 million. As a result of
these transactions, currently, Veqtor beneficially owns 19,227,251 (or
approximately 63%) of the outstanding voting shares of the Company. Veqtor
funded the
<PAGE>
approximately $54.3 million aggregate purchase price for the Class A Common
Shares and Class A Preferred Shares with $5.0 million of capital contributions
from its members and $50.0 million of borrowings under the 12% convertible
redeemable notes (the "Veqtor Notes") issued to institutional investors. The
Veqtor Notes may in the future be converted into preferred interests in Veqtor
that may in turn be redeemed for an aggregate of 9,899,710 voting shares of the
Company held by Veqtor.
In addition, immediately following the 1997 Annual Meeting, the
acquisition of the real estate services businesses of Victor Capital was
consummated and a new management team was appointed by the Company from among
the ranks of Victor Capital's professional team and elsewhere. The Company
thereafter immediately commenced full implementation of its current business
plan under the direction of its newly elected board of trustees and new
management team.
After the 1997 Annual Meeting, the Company completed two significant
financing and capital raising transactions. As of September 30, 1997, the
Company obtained a $150 million credit facility ("Credit Facility") from a
commercial lender, which was subsequently increased to $250 million as of
January 1, 1998. On December 16, 1997, the Company completed a public offering
of 9,000,000 Class A Common Shares resulting in net proceeds to the Company of
approximately $91.4 million. This significant source of borrowed funds and
infusion of cash allowed the Company to commence full scale operations as a
specialty finance company pursuant to its current business plan.
-11-
<PAGE>
Overview of Financial Condition
During the first quarter of 1998, the Company completed nine new loan
and investment transactions totaling approximately $188.1 million and provided
$5.4 million of additional fundings on two existing loans. The Company funded
$177.1 million of the foregoing loans and investments through March 31, 1998
which enabled the Company to grow its assets from $317.4 million to $445.2
million. The significant infusion of cash from the public offering of Class A
Common Shares in December 1997 allowed the Company to commence full scale
operations as a specialty finance company. The equity capital provided by the
public offering, used in combination with additional borrowings under the Credit
Facility and repurchase financing, allowed the Company to make the investments
described below.
Since December 31, 1997, the Company has identified, negotiated and
committed to fund or acquire nine loan and investment transactions. This
includes five Mortgage Loan transactions totaling $84.2 million (of which $12.4
million remains unfunded at March 31, 1998), three Mezzanine Loan transactions
totaling $74.9 million (of which $4.0 million remains unfunded at March 31,
1998), and one transaction for three subordinated commercial mortgage-backed
securities issued by a financial asset securitization investment trust for $29.0
million. The Company also funded $5.4 million of commitments to two existing
loans. The Company believes that these investments will provide investment
yields within the Company's target range of 400 to 600 basis points above LIBOR.
The Company maximizes its return on equity by utilizing its existing cash on
hand and then employing leverage on its investments (employing a cash
optimization model). The Company may make investments with yields that fall
outside of the investment range set forth above, but that correspond with the
level of risk perceived by the Company to be inherent in such investments. At
March 31, 1998, the Company had outstanding loans and investments totaling in
excess of $418 million and had additional commitments for fundings of
approximately $37.9 million pursuant to certain of the loans originated in such
transactions.
When possible, in connection with the acquisition of investments, the
Company obtains seller financing in the form of repurchase agreements. Three of
the transactions completed during the quarter ended March 31, 1998 described
above were financed in this manner representing total repurchase financings of
$26.6 million. These financings are generally completed at discounted terms as
compared to those available under the Credit Facility. The remaining
transactions were funded primarily with cash on hand from the proceeds of the
Company's public offering and through borrowings under the Credit Facility. The
Credit Facility was increased from $150 million to $250 million effective
January 1, 1998. At March 31, 1998, the Company had $188.7 million of
outstanding borrowings under the Credit Facility.
As of March 31, 1998, the Company's new investment and loan assets have
been hedged so that the assets and the corresponding liabilities were matched at
floating rates over LIBOR.
As of January 1, 1997, the Company's real estate portfolio, which
included two commercial properties, was carried at a book value of $8,585,000.
The portfolio included a shopping center in Sacramento, California and a 60%
interest in a mixed-use retail property in Kirkland, Washington. During the
first quarter, these two commercial properties were sold. The proceeds from
these sales were invested in mortgage loans and in liquid mortgage-backed
securities.
-12-
<PAGE>
Comparison of the Three Months Ended March 31. 1998 to the
Three Months Ended March 31. 1997
The Company reported net income allocable to Class A Common Shares of
$1,889,000 for the three months ended March 31, 1998, an increase of $2,397,000
from loss of $508,000 reported for the three months ended March 31, 1997. These
changes were primarily the result of the revenues generated from loans and other
investments and significant advisory and investment banking fees.
Net income from loans and other investments increased $4,860,000 to
$4,896,000 for the three months ended March 31, 1998 over the $36,000 for the
three months ended March 31, 1997. This increase is primarily attributable to
the revenue earned by the Company from new investments and loans that increased
by more than $400 million from March 31, 1997 to March 31, 1998. This increase
was partially offset by the interest paid on repurchase agreements and the
Credit Facility during the quarter ended March 31, 1998 which did not exist
during the quarter ended March 31, 1997.
During the three months ended March 31, 1998, other revenues increased
$2,653,000 to $3,230,000 over the same period in 1997. The increase for the
three months ended March 31, 1998 was primarily due to the addition of
$2,860,000 of advisory and investment banking fees generated by Victor Capital
and its related subsidiaries and an increase in other interest income of
$83,000, from a higher level of invested cash on hand and investments, which was
partially offset by a $290,000 decrease in rental income as the Company sold its
remaining rental properties during the first quarter of 1997.
Other expenses increased from $689,000 for the three months ended March
31, 1997 to $3,393,000 for three months ended March 31, 1998. The increase was
primarily due to the additional general and administrative expenses necessary
for the commencement of full-scale operations as a specialty finance company
pursuant to the Company's business plan, the largest component of which is
employee salaries and related costs. As of March 31, 1998, the Company has 41
full time employees as compared to none at March 31, 1997.
The provision for possible credit losses was $480,000 for the three
months ended March 31, 1998 as the Company provided reserves on its loan and
investment portfolio pursuant to its new business plan. The Company had no
provision for possible credit loss in the quarter ended March 31, 1997.
During the first quarter of 1997, the Company sold a shopping center in
Sacramento, California. The net loss recognized from the sale of the shopping
center was approximately $34,000. The Company also sold a retail property
located in Kirkland, Washington. The net loss recognized from the sale of the
retail property was approximately $398,000, the majority of which was
attributable to transfer taxes and the elimination of unamortized tenant
improvements and leasing commissions.
In 1997, the Company did not incur any income tax expense or benefit
associated with the loss it incurred due to the uncertainty of realization of
net operating loss carryforwards. In the first quarter of 1998, the Company
accrued $1,580,000 of income tax expense for federal,
-13-
<PAGE>
state and local income taxes. For federal purposes, the Company utilized one
quarter of the expected net operating loss carryforward to be utilized in 1998
in calculating the accrual.
The preferred share dividend and dividend requirement arose in 1997 as
a result of the Company issuing $33 million of Class A Preferred Shares on July
15, 1997. Dividends accrue on these shares at a rate of 9.5% per annum on a per
share price of $2.69.
Liquidity and Capital Resources
At March 31, 1998, the Company had $7,075,000 in cash. The primary
sources of liquidity for the Company for the remainder of 1998, which the
Company believes will adequately meet future operating liquidity and capital
resource requirements, will be cash on hand, cash generated from operations,
interest payments received on its investments, loans and securities, and
additional borrowings under the Company's Credit Facility. The Company's loan
origination activities have outpaced its original plan and as a result, the
Company is exploring securing additional debt and equity financing. The primary
demands on the Company's capital resources will be the fundings required for the
origination of loans and other investments as the Company continues with its
specialty finance operations and the growth of its portfolio of loans and other
investments.
The Company experienced a net decrease in cash of $42,193,000 for the
three months ended March 31, 1998, compared to a net increase in cash of
$3,632,000 for the three months ended March 31, 1997. This use of cash was
primarily due to the utilization of the proceeds of the Class A Common Share
offering in the fourth quarter of 1997 in making loans and other investments
during the first quarter of 1998 offset by additional borrowings. For the three
months ended March 31, 1998, cash used in operating activities was $2,812,000,
an increase of $2,441,000 from $371,000 during the same period in 1997. Cash
used in investing activities during this same period increased by $171,762,000
to $163,497,000, from cash provided by investing activities of $8,265,000 during
the quarter ended March 31, 1997, primarily the result of the loans and other
investments completed since December 31, 1997. The increase in cash provided by
financing activities, which increased $128,378,000 to $124,116,000 from a use of
$4,262,000, was due primarily to the proceeds of repurchase obligations and net
borrowings under the Credit Facility.
The Company has two outstanding notes payable totaling $4,447,000,
outstanding borrowings on the Credit Facility of $188,714,000 and outstanding
repurchase obligations of $97,945,000.
-14-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
10.1 Amended and Restated Credit Agreement, dated as of January 1,
1998, between the Company and German American Capital
Corporation (filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on March 18, 1998 and incorporated
herein by reference)
11.1 Statements regarding computation of earnings (loss) per share
27.1 Financial Data Schedules
(b) Reports on Form 8-K
During the fiscal quarter ended March 31, 1998, the Company filed eight
Current Reports on Form 8-K:
(1) Current Report on Form 8-K, dated December 23, 1997, as filed
with the Commission on January 7, 1998, reporting under Item 2
"Acquisition or
-15-
<PAGE>
Disposition of Assets" the acquisition of a mortgage loan
obligation, the acquisition of a mezzanine loan, the
acquisition of two mortgage loan participation interests and
the acquisition of a preferred equity investment and including
under Item 7 "Financial Statements and Exhibits" certain
financial statements relating to the events reported under
Item 2.
(2) Current Report on Form 8-K/A, dated December 23, 1997, as
filed with the Commission on March 6, 1998, amending a
previous reporting under Item 2 "Acquisition or Disposition of
Assets" the purchase of a mortgage loan and including under
Item 7 "Financial Statements and Exhibits" certain financial
statements relating to the event reported under Item 2.
(3) Current Report on Form 8-K/A, dated December 29, 1997, as
filed with the Commission on March 13, 1998, amending a
previous reporting under Item 2 "Acquisition or Disposition of
Assets" the purchase of a mezzanine loan and including under
Item 7 "Financial Statements and Exhibits" certain financial
statements relating to the event reported under Item 2.
(4) Current Report on Form 8-K/A, dated December 31, 1997, as
filed with the Commission on March 13, 1998, amending a
previous reporting under Item 2 "Acquisition or Disposition of
Assets" the purchase of a preferred equity investment and
including under Item 7 "Financial Statements and Exhibits"
certain financial statements relating to the event reported
under Item 2.
(5) Current Report on Form 8-K, dated February 9, 1998, as filed
with the Commission on February 23, 1998, reporting under Item
2 "Acquisition or Disposition of Assets" the purchase of a
subordinate participation in a first mortgage loan.
(6) Current Report on Form 8-K, dated February 23, 1998, as filed
with the Commission on March 13, 1998, reporting under Item 2
"Acquisition or Disposition of Assets" the origination and
funding of a mezzanine loan.
(7) Current Report on Form 8-K, dated January 1, 1998, as filed
with the Commission on March 18, 1998, reporting under Item 5
"Other Events" an increase in the Company's line of credit and
including under Item 7 "Financial Statements and Exhibits" the
Amended and Restated Credit Agreement and press release
relating to the event reported under Item 2.
(8) Current Report on Form 8-K, dated March 12, 1998, as filed
with the Commission on March 19, 1998, reporting under Item 2
"Acquisition or Disposition of Assets" the purchase of
subordinated commercial mortgage-backed securities issued by a
financial asset securitization investment trust.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL TRUST
May 14. 1998 /s/ John R. Klopp
Date John R. Klopp
Chief Executive Officer
/s/ Edward L Shugrue III
Edward L. Shugrue III
Managing Director and
Chief Financial Officer
-17-
<PAGE>
Exhibit 11.1
Capital Trust and Subsidiaries
Form 10-Q
Statement Regarding Computation of Earnings (Loss) per Share
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
----------------------------------------------- ----------------------------------------------
Per Share Per Share
Net Income Shares Per Share Net Loss Shares Amount
----------------- -------------- ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net Income per Class A
Common Share $ 1,889,000 18,207,900 $ 0.10 $ (508,000) 9,157,150 $ (0.06)
============ ===========
Effect of Dilutive
Securities
Options outstanding for
the purchase of Class
A Common Stock - 260,847 - -
Convertible Class A
Preferred Stock 784,000 12,267,658 - -
----------------- ---------------- -------------- ---------------
Diluted EPS:
Net Income per Class A
Common Share and
Assumed Conversions $ 2,673,000 30,736,405 $ 0.09 $ (508,000) 9,157,150 $ (0.06)
================= ================ ============ ============== =============== ==========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>THIS SCHEDULE CONTAINS SUMMARY FINANCIAL EXTRACTED FROM THE FINANCIAL
STATEMENTS OF CAPITAL TRUST FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,075
<SECURITIES> 77,090
<RECEIVABLES> 350,530
<ALLOWANCES> 942
<INVENTORY> 0
<CURRENT-ASSETS> 10,984
<PP&E> 577
<DEPRECIATION> 135
<TOTAL-ASSETS> 445,179
<CURRENT-LIABILITIES> 5,098
<BONDS> 294,205
12,268
0
<COMMON> 18,229
<OTHER-SE> 115,379
<TOTAL-LIABILITY-AND-EQUITY> 445,179
<SALES> 0
<TOTAL-REVENUES> 11,207
<CGS> 0
<TOTAL-COSTS> 6,474
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 480
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,253
<INCOME-TAX> 1,580
<INCOME-CONTINUING> 2,673
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,673
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>
