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: 33-7707
CAPITAL GROWTH MORTGAGE INVESTORS, L.P.
---------------------------------------
Exact Name of Registrant as Specified in its Charter
Delaware 13-3434580
------------------ -------------------
State or Other Jurisdiction I.R.S. Employer Identification No.
of Incorporation or Organization
3 World Financial Center, 29th Floor,
New York, NY Attn.: Andre Anderson 10285
- ------------------------------------- --------
Address of Principal Executive Offices Zip Code
(212) 526-3237
----------------------
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
--- ---
Balance Sheets At September 30, At December 31,
1997 1996
Assets
Zero coupon second mortgage loan receivable,
net of unamortized discount of $459 in 1996 $ -- $42,184,012
Less valuation allowance -- (12,684,012)
-- 29,500,000
Zero coupon first mortgage loan receivable -- 14,189,837
Cash and cash equivalents 3,392,478 1,486,065
Settlement receivable 1,820,000 --
Total Assets $ 5,212,478 $45,175,902
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 483,450 $ 34,777
Due to affiliates 12,830 7,029
Total Liabilities 496,280 41,806
Partners' Capital (Deficit):
General Partner (711,747) (983,819)
Limited Partners (Depository units: 30,000,000
authorized, 7,047,000 issued and outstanding) 5,427,945 46,117,915
Total Partners' Capital 4,716,198 45,134,096
Total Liabilities and Partners' Capital $ 5,212,478 $45,175,902
Statement of Partners' Capital (Deficit)
For the nine months ended September 30, 1997
Limited General
Partners Partner Total
Balance at December 31, 1996 $ 46,117,915 $(983,819) $ 45,134,096
Cash distributions to partners (42,282,000) (427,091) (42,709,091)
Foreign recoupment withholding 10,518 -- 10,518
Net income 1,581,512 699,163 2,280,675
Balance at September 30, 1997 $ 5,427,945 $(711,747) $ 4,716,198
Statements of Operations Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
Income
Recovery of valuation allowance $1,328,099 $28,453,234 $2,067,393 $26,362,004
Interest income 40,691 1,414,596 449,688 4,238,256
Net interest income 1,368,790 29,867,830 2,517,081 30,600,260
Miscellaneous income 1,270 1,880 11,295 6,785
Total Income 1,370,060 29,869,710 2,528,376 30,607,045
Expenses
Amortization of deferred charges -- 25,963 -- 77,888
General and administrative 40,396 94,302 191,451 144,086
Investment management fee 18,750 18,750 56,250 56,250
Total Expenses 59,146 139,015 247,701 278,224
Net Income $1,310,914 $29,730,695 $2,280,675 $30,328,821
Net Income Allocated:
To the General Partner $ -- $ -- $ 699,163 $ --
To the Limited Partners 1,310,914 29,730,695 1,581,512 30,328,821
$1,310,914 $29,730,695 $2,280,675 $30,328,821
Per limited partnership unit
(7,047,000 outstanding) $0.19 $4.22 $0.22 $4.30
Statements of Cash Flows
For the nine months ended September 30, 1997 1996
Cash Flows From Operating Activities
Net income $ 2,280,675 $30,328,821
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Allowance for (recovery of) doubtful accounts (12,684,012) (26,362,004)
Amortization of deferred charges -- 77,888
Amortization of discount on loan -- (3,240)
Increase (decrease) in cash arising from changes in
operating assets and liabilities:
Zero coupon mortgage loan receivable 56,373,849 (4,127,027)
Investments in U.S. Treasury securities -- 1,073,105
Settlement receivable (1,820,000) --
Accounts payable and accrued expenses 448,673 (5,280)
Due to affiliates 5,801 7,537
Net cash provided by operating activities 44,604,986 989,800
Cash Flows from Financing Activities:
Cash distributions to partners (42,709,091) --
Income tax withholdings to
foreign partners 10,518 (2,267)
Net cash used for financing activities (42,698,573) (2,267)
Net increase in cash and cash equivalents 1,906,413 987,533
Cash and cash equivalents, beginning of period 1,486,065 910,771
Cash and cash equivalents, end of period $ 3,392,478 $ 1,898,304
Notes to the Financial Statements
The unaudited interim financial statements should be read in conjunction with
the Partnership's annual 1996 audited financial statements within Form 10-K.
The unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position as of September 30, 1997 and the results of operations for the three
and nine months ended September 30, 1997 and 1996, the statements of cash flows
for the nine months ended September 30, 1997 and 1996 and the statement of
partners' capital (deficit) for the nine months ended September 30, 1997.
Results of operations for the period are not necessarily indicative of the
results to be expected for the full year.
Reclassification. Certain prior year amounts have been reclassified in order
to conform to the current year's presentation.
The following significant events have occurred subsequent to fiscal year 1996,
and require disclosure in this interim report per Regulation S-X, Rule 10-01,
Paragraph (a)(5):
The Union Square Loan - On February 21, 1997, Union Square Hotel Partners, L.P.
("Union Square") sold the Grand Hyatt San Francisco hotel (the "Hotel") and the
Partnership received gross proceeds of $30,250,000, in accordance with the
Allocation Agreement in full satisfaction of all of the Borrower's obligations
to the Partnership (including unsecured debt obligations and the obligation to
reimburse the Partnership for certain costs).
The Laurel Centre Loan - During the foreclosure period, an unaffiliated
third-party offered to purchase the Partnership's interest in the Laurel Centre
Loan at a price equal to the amount the Partnership would have realized if the
Laurel Centre Loan were paid in full, including interest at the non-default
rate of 10.2% through the date of closing of the purchase, less a $100,000
negotiated discount. On January 24, 1997, the Partnership sold its interest in
the Laurel Centre Loan for total proceeds of $14,184,322.
Partnership Agreement - If upon dissolution of the Partnership, the General
Partner has a negative capital account, it shall contribute capital equal to
the amount of the deficit. In no event, however, shall the required capital
contribution exceed 1.01% of the total capital contributed by the limited
partners less all prior contributions by the General Partner.
Legal Proceedings - On January 24, 1997, certain holders of Units of the
Partnership commenced an action in Delaware Chancery Court against the General
Partner of the Partnership, Union Square, its general partner, and others. The
Partnership was named as a nominal defendant. The litigation sought to
invalidate the Allocation Agreement entered into between Union Square and the
Partnership, under which the Partnership accepted a discounted pay-off of the
Union Square Loan. The litigation did not challenge the closing of the sale of
the Hotel, but merely the allocation of the proceeds from the sale in
accordance with the Allocation Agreement. The litigation was filed as a
purported class action on behalf of all Unitholders and as a purported
derivative action in the name of the Partnership. The plaintiffs also sought
unspecified damages.
To minimize the risk that the litigation might impede the closing of the sale
of the Hotel, the Partnership and Union Square entered into a Non-Distribution
and Security Agreement, dated February 21, 1997, and related documents,
pursuant to which certain net proceeds from the sale of the Hotel, in the
amount of approximately $6,911,149, otherwise distributable to Union Square
were deposited in a restricted bank account (the "Blocked Account") with a
nationally recognized commercial bank. The initial terms of the Blocked
Account generally prohibited the release of any funds therefrom on or prior to
April 21, 1997. In addition, Union Square granted the Partnership a security
interest in the Blocked Account until April 21, 1997, to secure certain of
Union Square's obligations to the Partnership, to be determined by the
litigation. The funds in the Blocked Account were to be released to Union
Square, free from the Partnership's security interest, on April 22, 1997,
unless the Blocked Account was extended by agreement between the Partnership
and Union Square, or by court order. On April 18, 1997, the Blocked Account
was extended to June 24, 1997 pending completion of a trial.
The parties to the Cal-Kan Litigation ultimately resolved the litigation
pursuant to a settlement agreement (the "Settlement") that was finally approved
by the Court on September 3, 1997. The Order and Final Judgment provided for:
(i) final approval of the Settlement; (ii) consummation of the Settlement in
accordance with the terms of a Stipulation of Settlement; and (iii) dismissal
of the Cal-Kan Litigation. Under the terms of the Settlement, a settlement
fund was established, from defendants' sources other than the General Partner,
in the amount of $2.4 million (the "Settlement Fund"). The fees and expenses
of Plaintiffs' counsel and certain of Plaintiffs' expenses in the aggregate
amount of $586,187.37 were paid from the Settlement Fund and the remainder was
paid to the Partnership. After paying the Plaintiff's attorneys' fees and
expenses and establishing a reserve for administrative expenses, legal costs
and other contingencies expected to be incurred prior to the liquidation of the
Partnership, the General Partner distributed approximately $4.0 million ($0.57
per Unit) on November 12, 1997. The General Partner currently intends to
dissolve the Partnership and a make a final liquidating distribution prior to
year-end 1997.
The Partnership and the General Partner continue to vigorously deny that they
were subject to any liability with regard to any of the matters complained of
in the Cal-Kan Litigation and have agreed to settle and compromise the Cal-Kan
Litigation on the terms set forth above. Neither are contributing financially
to the settlement.
Part 1, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources
- -------------------------------
The Partnership's primary assets were its zero-coupon mortgage loans. The
Partnership originally held two zero-coupon first mortgage loans and two
zero-coupon second mortgage loans. During 1993, the loan secured by EQK Green
Acres Mall was repaid together with a prepayment premium. In early 1994, the
loan secured by a property located at 417 Fifth Avenue was retired by means of
a transaction which resulted in the receipt of proceeds from the sale of this
property. Below is a summary of the disposition of the Partnership's two other
loans secured by the Laurel Centre Mall and the Grand Hyatt San Francisco
hotel.
Laurel Centre Loan - The Partnership held a 24% interest in a zero- coupon
first mortgage loan (the "Laurel Centre Loan") in the original principal amount
of $5,555,431. The Laurel Centre Loan matured on October 15, 1996, with a
fully accreted value of $57,894,075, of which $13,894,578 was the Partnership's
share. On or about October 9, 1996, after Shopco Laurel was unable to
refinance or sell the Mall on terms that would repay the Laurel Centre Loan,
Shopco Laurel entered into an agreement (the "Agreement") with the Partnership
and the majority interest holder (together, the "Lenders"), pursuant to which
the Lenders, among other things, (a) indicated their intent to commence a
foreclosure action on the Laurel Centre Loan and appoint a receiver, on or
after October 16, 1996, and (b) agreed to release any claims that they may have
to any cash held by Shopco Laurel or its partners prior to October 16, 1996. In
addition, Shopco Laurel and the Lenders agreed that all cash flow from the Mall
generated on or after October 16, 1996, would be paid to the Lenders.
Foreclosure proceedings were commenced by the Lenders on October 16, 1996, and
a receiver for the Mall was appointed. During the foreclosure period, an
unaffiliated third-party offered to purchase the Partnership's interest in the
Laurel Centre Loan at a price equal to the amount the Partnership would have
realized if the Laurel Centre Loan were paid in full, including interest at the
non- default rate of 10.2% through the date of closing of the purchase, less a
$100,000 negotiated discount. The Partnership closed the transaction on
January 24, 1997, for total proceeds of $14,184,322. As a result, the
Partnership paid a cash distribution to the partners on February 18, 1997,
totaling $14,236,364, or $2.00 per Unit.
Union Square Loan - The Partnership held a zero-coupon second mortgage (the
"Hotel Loan") in the original principal amount of $13,325,000 funded to Union
Square Hotel Partners, L.P. ("Union Square," formerly Shearson Union Square
Associates, L.P.), which owned the Grand Hyatt San Francisco hotel (the
"Hotel") located in San Francisco, California. The Hotel Loan was subordinate
to a first mortgage (the "First Mortgage Loan") held by the Bank of Nova Scotia
(the "Bank") in the original principal amount of $70,000,000.
In early November 1996, Union Square agreed to sell the Hotel to an affiliate
of California Hyatt Corporation ("Hyatt"), the current operator of the Hotel,
for $126,900,000 in cash and the assumption of certain debt owed to an
affiliate of Hyatt. Based upon the negotiated selling price, Union Square
would have sufficient proceeds to pay the First Mortgage Loan balance of
approximately $89.7 million as of December 31, 1996. The remaining proceeds
however, would be insufficient to pay the entire balance of the Hotel Loan. The
general partner of Union Square is an affiliate of the General Partner of the
Partnership. As required by the Partnership Agreement, the General Partner
retained a nationally- recognized investment bank (the "Partnership's
Independent Advisor") to negotiate with Union Square regarding the proposed
sale of the Hotel, and to render an opinion to the effect that such transaction
is fair, from a financial point of view, and at least as favorable to the
Partnership as such transaction would be if entered into with an unaffiliated
entity in similar circumstances. The Partnership's Independent Advisor
negotiated an allocation agreement (the "Agreement") on behalf of the
Partnership, with a similar representative engaged by Union Square. Pursuant
to the terms of the Agreement, the Partnership agreed to accept $30,250,000 in
full satisfaction of all of Union Square's obligations to the Partnership,
which totaled approximately $42,184,471 at December 31, 1996.
On February 21, 1997, Union Square sold the Hotel and the Partnership received
gross proceeds of $30,250,000, in accordance with the Agreement. As a result,
the Partnership paid a cash distribution to the partners on May 1, 1997,
totaling $28,472,727, or $4.00 per Unit. In October 1997, the Partnership
received additional funds in connection with the settlement of the Cal-Kan
Litigation. See Part II, Item 1 for a complete discussion of the Cal-Kan
Litigation.
At September 30, 1997, the Partnership had cash and cash equivalents of
$3,392,478, compared to $1,486,065, at December 31, 1996. The increase in cash
and cash equivalents is mainly due to the retention of a portion of the Union
Square proceeds that were being held as a reserve to pay expenses pending the
resolution of the Cal- Kan Litigation.
Results of Operations
- ---------------------
For the three and nine months ended September 30, 1997, net income totaled
$1,310,914 and $2,280,675 respectively, compared with net income of $29,730,695
and $30,328,821, respectively, for the three and nine months ended September
30, 1996. Net income in the 1996 periods includes the Partnership's initial
recovery of the valuation allowance on the Hotel Loan, in the amount of
$28,453,234 and $26,362,004 for the three and nine months ended September 30,
1996. In the 1997 periods, the Partnership recognized additional recovery of
valuation allowance on the Hotel Loan, in the amount of $1,328,099 and
$2,067,393 for the three and nine months ended September 30, 1997, relating to
income which had been deferred in the prior year pending the resolution of the
Cal-Kan Litigation. Additionally, the 1997 periods reflect lower interest
income as a result of the Partnership's sale of its interest in the Laurel
Centre Loan on January 24, 1997 and the satisfaction of the Hotel Loan on
February 21, 1997.
Total expenses for the three and nine months ended September 30, 1997 were
$59,146 and $247,701, respectively, compared with $139,015 and $278,224,
respectively, for the corresponding periods in 1996. The decrease for the
three-month period in 1997 is largely due to lower general and administrative
expenses. The decrease for the nine- month period in 1997 is due to a decrease
in amortization of deferred charges, partially offset by an increase in general
and administrative expenses. General and administrative expenses for the three
and nine months ended September 30, 1997 were $40,396 and $191,451, compared to
$94,302 and $144,086 for the corresponding periods in 1996. The decrease for
the three-month period in 1997 is mainly due to lower professional fees. During
the nine-month period in 1997, certain expenses incurred by an unaffiliated
third- party service provider in servicing the Partnership, which were
voluntarily absorbed by affiliates of the General Partner in prior periods,
were reimbursed to the General Partner and its affiliates. The increase is also
the result of higher legal fees related to the foreclosure of the Laurel Centre
Loan, and higher printing and postage costs as a result of the special
distribution and mailings related to the Laurel Centre and Union Square
distributions. Amortization of deferred charges was $0 for the three and nine
months ending September 30, 1997, compared to $25,963 and $77,888 for the same
period in 1996, as a result of the assets being fully amortized in the fourth
quarter of 1996.
Part II Other Information
Item 1 Legal Proceedings
On January 24, 1997, certain Unitholders of the Partnership commenced an action
in Delaware Chancery Court against the General Partner, Union Square, its
general partner, and others. The Partnership was named as a nominal defendant.
The litigation sought to invalidate the Agreement entered into between Union
Square and the Partnership, under which the Partnership accepted a discounted
pay-off of the Hotel Loan. The litigation did not challenge the closing of the
sale of the Hotel, but merely the allocation of the proceeds from the sale in
accordance with the Agreement. The litigation was filed as a purported class
action on behalf of all Unitholders and as a purported derivative action in the
name of the Partnership. The plaintiffs sought unspecified damages.
To minimize the risk that the litigation might impede the closing of the sale
of the Hotel, the Partnership and Union Square entered into a Non-Distribution
and Security Agreement, dated February 21, 1997, and related documents,
pursuant to which certain net sales proceeds from the sale of the Hotel would
otherwise be distributable to Union Square, in the amount of approximately
$6,911,149, were deposited in a restricted bank account (the "Blocked Account")
with a nationally recognized commercial bank. The initial terms of the Blocked
Account generally prohibited the release of any funds therefrom on or prior to
April 21, 1997. In addition, Union Square granted the Partnership a security
interest in the Blocked Account until April 21, 1997, to secure certain of
Union Square's obligations to the Partnership, to be determined by the
litigation. The funds in the Blocked Account were to be released to Union
Square, free from the Partnership's security interest, on April 22, 1997,
unless the Blocked Account was extended by agreement between the Partnership
and Union Square, or by Court order. On April 18, 1997, the Blocked Account
was extended to June 24, 1997 pending completion of a trial.
The parties to the Cal-Kan Litigation ultimately resolved the litigation
pursuant to a settlement agreement (the "Settlement") that was finally approved
by the Court on September 3, 1997. The Order and Final Judgment provided for:
(i) final approval of the Settlement; (ii) consummation of the Settlement in
accordance with the terms of a Stipulation of Settlement; and (iii) dismissal
of the Cal-Kan Litigation. Under the terms of the Settlement, a settlement
fund was established, from defendants' sources other than the General Partner,
in the amount of $2,400,000 (the "Settlement Fund"). Fees and expenses of
Plaintiffs' counsel and certain of Plaintiffs' expenses in the aggregate amount
of $586,187 were paid from the Settlement Fund and the remainder was paid to
the Partnership. After paying the Plaintiff's attorneys' fees and expenses and
establishing a reserve for administrative expenses, legal costs and other
contingencies expected to be incurred prior to the liquidation of the
Partnership, the General Partner distributed approximately $4,000,000 ($0.57
per Unit) on November 12, 1997. The General Partner currently intends to
dissolve the Partnership and a make a final liquidating distribution prior to
year-end 1997.
The Partnership and the General Partner continue to vigorously deny that they
were subject to any liability with regard to any of the complaints in the
Cal-Kan Litigation and have agreed to settle and compromise the Cal-Kan
Litigation on the terms set forth above. Neither are contributing financially
to the settlement.
Items 2-5 Not applicable.
Item 6 Exhibits and reports on Form 8-K.
(a) Exhibits -
(27) Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K
were filed during the quarter ended September 30, 1997.
SIGNATURES
Pursuant to the requirements 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 GROWTH MORTGAGE INVESTORS, L.P.
BY: CG REALTY FUNDING INC.
General Partner
Date: November 18, 1997 BY: /s/Moshe Braver
Moshe Braver
Director and President
Date: November 18, 1997 BY: /s/Kenneth Boyle
Kenneth Boyle
Director, Vice President and Chief
Financial Officer
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<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Sep-30-1997
<CASH> 3,392,478
<SECURITIES> 0
<RECEIVABLES> 1,820,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,392,478
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,212,478
<CURRENT-LIABILITIES> 496,280
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 4,716,198
<TOTAL-LIABILITY-AND-EQUITY> 5,212,478
<SALES> 0
<TOTAL-REVENUES> 2,528,376
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 247,701
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,280,675
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,280,675
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,280,675
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