United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from ______ to ______
Commission File Number: 33-7707
CAPITAL GROWTH MORTGAGE INVESTORS, L.P.
Exact Name of Registrant as Specified in its Charter
Delaware 13-3434580
State or Other Jurisdiction
of Incorporation or Organization I.R.S. Employer Identification No.
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 June 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 3,454,335 1,486,065
Total Assets $3,454,335 $45,175,902
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 42,633 $ 34,777
Due to affiliates 6,418 7,029
Total Liabilities 49,051 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) 4,117,031 46,117,915
Total Partners' Capital 3,405,284 45,134,096
Total Liabilities and Partners' Capital $3,454,335 $45,175,902
Statement of Partners' Capital (Deficit)
For the six months ended June 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 270,598 699,163 969,761
Balance at June 30, 1997 $ 4,117,031 $(711,747) $ 3,405,284
Statements of Operations
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
Income
Recovery of valuation allowance $739,294 $ -- $739,294 $ --
Interest income 167,201 1,413,637 408,997 2,823,660
Less allowance for doubtful accounts -- (1,046,766) -- (2,091,230)
Net interest income 906,495 366,871 1,148,291 732,430
Miscellaneous income 3,750 2,315 10,025 4,905
Total Income 910,245 369,186 1,158,316 737,335
Expenses
Amortization of deferred charges -- 25,962 -- 51,925
General and administrative 75,967 26,117 151,055 49,784
Investment management fee 18,750 18,750 37,500 37,500
Total Expenses 94,717 70,829 188,555 139,209
Net Income 815,528 $ 298,357 $ 969,761 $ 598,126
Net Income Allocated:
To the General Partner $699,163 $ -- $ 699,163 $ --
To the Limited Partners 116,365 298,357 270,598 598,126
$815,528 $ 298,357 $ 969,761 $ 598,126
Per limited partnership unit
(7,047,000 outstanding) $.02 $.04 $.04 $.08
Statements of Cash Flows
For the six months ended June 30, 1997 1996
Cash Flows From Operating Activities
Net income $ 969,761 $ 598,126
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Allowance for (recovery of) doubtful accounts (12,684,012) 2,091,230
Amortization of deferred charges -- 51,925
Amortization of discount on loan -- (2,160)
Increase (decrease) in cash arising from changes in
operating assets and liabilities:
Zero coupon mortgage loan interest receivable 56,373,849 (2,744,221)
Investments in U.S. Treasury securities -- (48,692)
Accounts receivable -- --
Accounts payable and accrued expenses 7,856 (3,385)
Due to affiliates (611) (6,944)
Net cash provided by (used for) operating activities 44,666,843 (64,121)
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 (decrease) in cash and cash equivalents 1,968,270 (66,388)
Cash and cash equivalents, beginning of period 1,486,065 910,771
Cash and cash equivalents, end of period $ 3,454,335 $ 844,383
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 June 30, 1997 and the
results of operations for the three and six months ended June 30,
1997 and 1996, the statements of cash flows for the six months
ended June 30, 1997 and 1996 and the statement of partners'
capital (deficit) for the six months ended June 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 Hotel and the Partnership
received $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
Hotel Partners, L.P., 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 Unit
holders and as a purported derivative action in the name of the
Partnership. The plaintiffs also sought unspecified damages.
The Partnership retained counsel.
To minimize the risk that the litigation might impede the closing
of the sale of the Hotel, the Partnership and Union Square Hotel
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 otherwise
distributable to the 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, as they
may 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.
On June 9, 1997, the parties to the Cal-Kan Litigation executed a
settlement agreement (the "Proposed Settlement") that is now
subject to final Court approval. Under the terms of the Proposed
Settlement, a settlement fund will be established, from
defendants' sources other than the General Partner, in the amount
of $2.4 million (the "Settlement Fund"). Plaintiff's attorneys'
fees, expenses and costs, the aggregate amount of which shall not
exceed $550,000, plus actual and reasonably incurred out-of-
pocket expenses will be paid from the Settlement Fund. The
remainder of the fund will be delivered to the Partnership.
After paying the Plaintiff's attorneys' fees, settling the
Partnership's remaining liabilities and establishing a reserve
for contingencies, the General Partner currently estimates that
approximately $4.4 million ($0.62 per unit) would be available
for distribution if the Proposed Settlement is approved by the
Court.
The Partnership and the General Partner have continued to
vigorously deny that they are subject to any liability with
regard to any of the matters complained of in the Cal-Kan
Litigation. The Partnership and the General Partner have agreed
to settle and compromise the Cal-Kan Litigation on the terms set
forth above, and neither are contributing financially to the
settlement.
The Court has ordered a hearing for September 3, 1997 to consider
final approval of the Proposed Settlement. If the Court approves
the Proposed Settlement an Order and Final Judgment will be
entered into which will provide for: (i) final approval of the
Proposed Settlement; (ii) consummation of the Proposed Settlement
in accordance with the terms of a Stipulation of Settlement; and
(iii) dismissal of the Cal-Kan Litigation. The Order and Final
Judgment will further provide that the Partnership and others
will be released and discharged from any and all claims that
certain parties including Cal-Kan, Union Square, and its Unit
Holders have or could have asserted in the Cal-Kan Litigation.
The General Partner estimates that the effective date of the
Proposed Settlement, if approved, will occur no later than
October 1997. While it is the General Partner's desire to
dissolve the Partnership and a make a final liquidating
distribution prior to year-end 1997, the General Partner does not
intend to make any distribution prior to a final resolution of
the Cal-Kan Litigation.
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 417 Fifth
Avenue was retired by means of a transaction which resulted in the
receipt of proceeds upon sale of the property. Below is a summary
of the disposition of the Partnership's two other loans secured by
Laurel Centre Mall and the Grand Hyatt San Francisco.
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, the current operator of
the Hotel ("Hyatt"), 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 $30,250,000, in accordance with the Allocation 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.
As of February 21, 1997, the Partnership had sold or received
payment on all of its original zero-coupon mortgage loan
investments. Subject to the pending litigation discussed in Part 2
Item 1 of this Form 10-Q, the General Partner will seek to
liquidate the Partnership and make a final cash distribution to the
limited partners prior to year-end 1997.
At June 30, 1997, the Partnership had cash and cash equivalents of
$3,454,335, 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 are being
held as a reserve to pay liquidating expenses, and due to an
increase in net cash provided by operating activities.
Results of Operations
The Partnership had deferred income recognition on the recovery of
principal on the Hotel Loan to cover potential legal fees due to
the lawsuit filed in January 1997. At June 30, 1997 the
Partnership revised its estimate as a result of the proposed
settlement and recorded additional recovery of the valuation
allowance in the amount of $739,294. Since the lawsuit has been
tentatively settled, there is no longer a need for such a reserve.
For the three and six months ended June 30, 1997, net income totaled
$815,528 and $969,761 respectively, compared with net income of
$298,357 and $598,126, respectively, for the three and six months
ended June 30, 1996. The increase is due to the additional
recovery of valuation allowance on the Hotel Loan, partially offset
by the Partnership's sale of its interest in the Laurel Center Loan
on January 24, 1997.
Total expenses for the three and six months ended June 30, 1997 were
$94,717 and $188,555, respectively, compared with $70,829 and
$139,209 respectively, for the corresponding periods in 1996. The
increase is due to higher general and administrative expenses and
was partially offset by a decrease in amortization of deferred
charges. General and administrative expenses for the three and six
months ended June 30, 1997 were $75,967 and $151,055, compared to
$26,117 and $49,784 for the corresponding periods in 1996. During
the 1997 period, 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 reimbursable 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 six months ending June 30, 1997, compared to $25,962 and
$51,925 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 holders of Units 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 Allocation Agreement entered into
between Union Square Hotel 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 Unit
holders and as a purported derivative action in the name of the
Partnership. The plaintiffs sought unspecified damages. The
Partnership retained counsel.
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 otherwise
distributable to the Hotel Borrower, 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, as they may 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.
On June 9, 1997, the parties to the Cal-Kan Litigation executed a
settlement agreement (the "Proposed Settlement") that is now
subject to final Court approval. Under the terms of the Proposed
Settlement, a settlement fund will be established, from
defendants' sources other than the Partnership and General
Partner, in the amount of $2.4 million (the "Settlement Fund").
Plaintiff's attorneys' fees, expenses and costs, the aggregate
amount of which shall not exceed $550,000, plus actual and
reasonably incurred out-of-pocket expenses will be paid from the
Settlement Fund. The remainder of the fund will be delivered to
the Partnership. After paying the Plaintiff's attorneys' fees,
settling the Partnership's remaining liabilities and establishing
a reserve for contingencies, the General Partner currently
estimates that approximately $4.4 million ($0.62 per unit) would
be available for distribution if the Proposed Settlement is
approved by the Court.
The Partnership and the General Partner have continued to
vigorously deny that they are subject to any liability with
regard to any of the matters complained of in the Cal-Kan
Litigation. The Partnership and the General Partner have agreed
to settle and compromise the Cal-Kan Litigation on the terms set
forth above, and neither are contributing financially to the
settlement.
The Court has ordered a hearing for September 3, 1997 to consider
final approval of the Settlement. If the Court approves finally
approves the Proposed Settlement an Order and Final Judgment will
be entered which will provide for: (i) final approval of the
Proposed Settlement; (ii) consummation of the Proposed Settlement
in accordance with the terms of a Stipulation of Settlement; and
(iii) dismissal of the Cal-Kan Litigation. The Order and Final
Judgment will further provide that the Partnership and others
will be released and discharged from any and all claims that
certain parties including Cal-Kan, Union Square, and its Unit
Holders have or could have asserted in the Cal-Kan Litigation.
The General Partner estimates that the effective date of the
Proposed Settlement, if approved, will occur no later than
October 1997. While it is the General Partner's desire to
dissolve the Partnership and a make a final liquidating
distribution prior to year-end 1997, the General Partner does not
project that a distribution will occur prior to a final
resolution of the Cal-Kan Litigation.
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 June 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: August 14, 1997 BY: /s/ Moshe Braver
Director and President
Date: August 14, 1997 BY: /s/ Daniel M. Palmier
Vice President and Chief Financial Officer
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<PERIOD-END> Jun-30-1997
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