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, 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 March 31, 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 31,869,354 1,486,065
Total Assets $31,869,354 $45,175,902
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 49,411 $ 34,777
Reserve for liabilities 739,294 --
Distribution payable 28,472,727 --
Due to affiliates 6,250 7,029
Total Liabilities 29,267,682 41,806
Partners' Capital (Deficit):
General Partner (1,410,910) (983,819)
Limited Partners (7,047,000 units outstanding) 4,012,582 46,117,915
Total Partners' Capital 2,601,672 45,134,096
Total Liabilities and Partners' Capital $31,869,354 $45,175,902
Statement of Partners' Capital (Deficit)
For the three months ended March 31, 1997
General Limited
Partner Partners Total
Balance at December 31, 1996 $ (983,819) $46,117,915 $45,134,096
Cash distributions to partners (427,091) (42,282,000) (42,709,091)
Foreign recoupment withholding -- 22,434 22,434
Net income -- 154,233 154,233
Balance at March 31, 1997 $(1,410,910) $ 4,012,582 $ 2,601,672
Statements of Operations
For the three months ended March 31, 1997 1996
Income
Interest income $241,796 $1,410,023
Less allowance for doubtful accounts -- (1,044,464)
Net investment income 241,796 365,559
Miscellaneous income 6,275 2,590
Total Income 248,071 368,149
Expenses
Amortization of deferred charges -- 25,963
General and administrative 75,088 23,667
Investment management fee 18,750 18,750
Total Expenses 93,838 68,380
Net Income $154,233 $ 299,769
Net Income Allocated:
To the General Partner $ -- $ --
To the Limited Partners 154,233 299,769
$154,233 $ 299,769
Per limited partnership unit
(7,047,000 outstanding) $.02 $.04
Statements of Cash Flows
For the three months ended March 31, 1997 1996
Cash Flows From Operating Activities
Net income $ 154,233 $ 299,769
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Allowance for (recovery of) doubtful accounts (12,684,012) 1,044,464
Amortization of deferred charges -- 25,963
Amortization of discount on loan -- (1,080)
Increase (decrease) in cash arising from changes in
operating assets and liabilities:
Zero coupon mortgage loan interest receivable 56,373,849 (1,364,144)
Investments in U.S. Treasury securities -- (23,806)
Reserve for liabilities 739,294 --
Accounts payable and accrued expenses 14,634 (5,733)
Due to affiliates (779) (6,544)
Net cash provided by (used for) operating activities 44,597,219 (31,111)
Cash Flows From Financing Activities
Cash distributions to partners (14,236,364) --
Income tax withholdings to foreign partners 22,434 --
Net cash used for financing activities (14,213,930) --
Net increase (decrease) in cash and cash equivalents 30,383,289 (31,111)
Cash and cash equivalents, beginning of period 1,486,065 910,771
Cash and cash equivalents, end of period $31,869,354 $ 879,660
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 normal and
reoccurring adjustments which are, in the opinion of management,
necessary to present a fair statement of financial position as of
March 31, 1997 and the results of operations and cash flows for
the three months ended March 31, 1997 and 1996 and the statement
of partners' capital (deficit) for the three months ended March
31, 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 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% to 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.
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 amount of $5,555,431. The mortgage note 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% to 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 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 Partnership's loan was subordinate to
a first mortgage 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 ("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 March 31, 1997, the Partnership had cash and cash equivalents
of $31,869,354, compared to $1,486,065, at December 31, 1996.
The increase in cash and cash equivalents is mainly due to the
receipt of the Union Square proceeds that had not yet been
distributed at March 31, 1997.
The Partnership has created a reserve for liabilities in the
amount of $739,294 at March 31, 1997, to cover potential legal
fees due to the lawsuit filed in January 1997. In addition the
Partnership retained approximately $1 million of the proceeds
received from the Union Square Loan as a reserve to pay
liquidating expenses.
Results of Operations
For the three months ended March 31, 1997, net income totaled
$154,233, compared with $299,769 for the three months ended March
31, 1996. The decrease is due to lower interest income as a
result of the Partnership's sale of its interest in the Laurel
Centre Loan.
Total expenses for the three months ended March 31, 1997 were
$93,838, compared with $68,380 for the corresponding period 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 months ended March 31, 1997 were $75,088, compared to
$23,667 for the same period 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 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 distribution. Amortization
of deferred charges was $0 for the three months ending March 31,
1997, compared to $25,963 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
Items 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 of the Partnership, Union Square Hotel
Partners, L.P., its general partner, and others. The Partnership
was named as a nominal defendant. The litigation seeks to
invalidate the Partnership's acceptance of a discounted pay-off
of the Union Square loan pursuant to the Allocation Agreement
entered into between Union Square Hotel Partners, L.P. and the
Partnership. The litigation does 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 seek unspecified damages.
The Partnership has retained counsel and is seeking an expedited
resolution of this litigation.
To minimize the risk that the litigation might impede the closing
of the sale of the Hotel, the Partnership and Union Square Hotel
Partners, L.P.(the "Hotel Borrower") 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 prohibit 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. A preliminary injunction hearing was originally scheduled
for April 21, 1997 to determine whether Union Square should be
prohibited from making distributions to its unitholders pending
resolution of the litigation. However, the parties to the
lawsuit agreed to forego the preliminary injunction hearing based
on the setting of a trial date allowing for completion of a trial
on the merits before June 30, 1997, and based on the Union
Square's agreement not to make distributions to unitholders
before that date. The trial date is currently set for June 9 and
10, 1997. The Partnership and its General Partner are continuing
their efforts to resolve the 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 -
A current report on Form 8-K was filed on February
5, 1997, disclosing information about the
Partnership's sale of its interest in the Laurel
Centre loan.
A current report on Form 8-K was filed on February
26, 1997, disclosing information about the sale of
the Union Square Hotel.
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: May 15, 1997 BY: /s/ Kenneth L. Zakin
Director and President
Date: May 15, 1997 BY: /s/ Daniel M. Palmier
Vice President and Chief Financial Officer
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