As filed with the Securities and Exchange Commission on August 18, 1998
Registration No. 333-52619
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
CAPITAL TRUST, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Maryland 6159, 6162 94-6181186 *
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------------------------
605 Third Avenue, 26th Floor
New York, NY 10016
(212) 655-0220
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
---------------------------------
John R. Klopp
Vice Chairman and Chief Executive Officer
CAPITAL TRUST
605 Third Avenue
26th Floor
New York, New York 10016
(212) 655-0220
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------------
Please send copies of all correspondence to:
Thomas E. Kruger, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
---------------------------------
* I.R.S. Employee Identification Number of Capital Trust, the
predecessor to the registrant prior to the Reorganization described herein.
Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after the effective date of this Registration
Statement and all conditions to the Reorganization described herein have been
waived or satisfied. If the Securities being registered on this Form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box.|_| If the
securities being registered on this Form are being offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. / /
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
CAPITAL TRUST
605 Third Avenue
26th Floor
New York, New York 10016
August __, 1998
Dear Shareholder:
You are cordially invited to the annual meeting (the "Annual Meeting")
of shareholders of Capital Trust (the "Company") to be held on September __,
1998 at 10:00 a.m., New York City time, at [ ].
At the Annual Meeting, Shareholders will be asked to approve the
reorganization (the "Reorganization") of the Company from a California common
law business trust into a Maryland corporation to be known as Capital Trust,
Inc. The Reorganization will modernize the Company's governance procedures by
adopting the corporate form of organization, which will allow the Company's
successor to manage its affairs and transact its business in a more certain and
flexible legal environment.
Upon completion of the Reorganization:
o The Company's successor will be incorporated in the State of
Maryland as a corporation with the name Capital Trust, Inc.
(the "New Company").
o The New Company's capital structure will be substantially
identical to that of the Company.
o Holders of the Company's outstanding class A common shares and
class A preferred shares will have their shares converted on a
share-for-share basis into shares of class A common stock and
class A preferred stock, respectively, of the New Company.
o The Company's current management team will succeed to the
management of the New Company.
The Reorganization is intended to qualify as a tax-free reorganization
for federal income tax purposes, in which case no gain or loss should generally
be recognized by the Company's shareholders on the conversion of their shares
into shares of stock of the New Company.
The Reorganization will be accomplished pursuant to two simultaneous
mergers whereby (a) the Company will be merged with and into a newly formed,
indirect wholly owned Maryland limited partnership subsidiary of the Company
(the "Partnership"), and (b) the Partnership will be merged with and into a
newly formed, wholly owned Maryland corporation subsidiary of the Company. While
the Reorganization will result in an entity that will be governed by a modern,
flexible statute and corporate charter that more clearly delineate the rights of
stockholders, directors and officers, some shareholders may consider that
certain attributes of the New Company may be detrimental to their rights.
Accordingly, shareholders should carefully consider whether the changes are in
their best interest.
The Board of Trustees of the Company has approved the proposed
Reorganization, subject to shareholder approval, and recommends that you vote in
favor of the proposed Reorganization transaction. In arriving at its decision,
the Board considered a number of factors which are described in detail in the
accompanying Proxy Statement/Prospectus, which shareholders are urged to read
carefully.
At the Annual Meeting, the Company's shareholders will also be asked
(i) to approve an amendment to the Company's amended and restated declaration of
trust, necessary to implement the Reorganization, (ii) to elect ten trustees of
the Company (who will, if the Reorganization is approved, serve as directors of
the New Company), (iii) to approve the Company's amended and restated 1997
long-term incentive share plan, (iv) to approve the Company's 1997 amended and
restated non-employee trustee share plan, (v) to approve the Company's 1998
employee share purchase plan, and (vi) to ratify the appointment of Ernst &
Young LLP as independent auditors of the Company (and the New Company as
successor thereto if the Reorganization is approved) for the fiscal year ending
December 31, 1998.
<PAGE>
The proposed transactions are very important to you as a shareholder.
Therefore, whether or not you plan to attend the Annual Meeting, the Company
urges you to give your immediate attention to the proposals. Please review the
enclosed materials, sign and date the enclosed proxy card and return it promptly
in the enclosed postage-paid envelope.
Very truly yours,
/s/ SAMUEL ZELL
SAMUEL ZELL
Chairman of the Board
<PAGE>
CAPITAL TRUST
605 Third Avenue
26th Floor
New York, New York 10016
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on September __, 1998
To the Shareholders of Capital Trust:
Notice is hereby given that the 1998 annual meeting of shareholders of
Capital Trust, a California business trust (the "Company"), will be held at [ ]
on September __, 1998 at 10:00 a.m., New York City time (the "Annual Meeting"),
for the following purposes:
(1) To consider and vote upon a proposal to reorganize the
Company from a California common law business trust into a Maryland
corporation (the "Reorganization"). The Reorganization is governed by
the agreement and plan of merger, dated as of May 15, 1998, among the
Company, Capital Trust, Inc., a Maryland corporation and a wholly owned
subsidiary of the company (the "New Company"), Captrust Limited
Partnership, a Maryland limited partnership and an indirect wholly
owned subsidiary of the Company (the "Partnership"), whereby (i) the
Company will merge with and into the Partnership and (ii) the
Partnership will merge with and into the New Company as set forth and
included in the accompanying proxy statement/prospectus.
(2) To consider and vote upon a proposal to approve an
amendment, necessary to implement the Reorganization, to the Company's
amended and restated declaration of trust, dated as of July 15, 1997,
as set forth and included in the accompanying proxy
statement/prospectus.
(3) To consider and vote upon a proposal to elect ten trustees
of the Company (who will, if the Reorganization is approved, serve as
directors of the New Company) to serve until the next annual meeting of
shareholders or until such trustees' successors are elected and shall
have been duly qualified.
(4) To consider and vote upon a proposal to approve the
Company's amended and restated 1997 long-term incentive share plan,
which increases the number of shares available under and amends certain
other provisions of the original plan, as set forth and included in the
accompanying proxy statement/prospectus.
(5) To consider and vote upon a proposal to approve the
Company's amended and restated 1997 non-employee trustee share plan,
which increases the number of shares available under and amends certain
other provisions of the original plan, as set forth and included in the
accompanying proxy statement/prospectus.
(6) To consider and vote upon a proposal to approve the
Company's 1998 employee share purchase plan, as set forth and included
in the accompanying proxy statement/prospectus.
(7) To consider and vote upon a proposal to ratify the
appointment of Ernst & Young LLP as independent auditors of the Company
(and the New Company as successor thereto if the Reorganization is
approved) for the fiscal year ending December 31, 1998.
(8) To transact such other business as may properly come
before the Annual Meeting or any adjournment thereof.
<PAGE>
The board of trustees of the Company has fixed the close of business on
September __, 1998 as the record date for the Annual Meeting. Only shareholders
of record at the close of business on that date are entitled to notice of, and
to vote at, the Annual Meeting and any adjournment or postponement thereof.
Dissenting shareholders will not have appraisal rights in connection
with the Reorganization.
By Order of the Board of Trustees
Samuel Zell
Chairman of the Board
DATE: August __, 1998
THIS IS AN IMPORTANT MEETING. SHAREHOLDERS ARE URGED TO VOTE BY SIGNING, DATING
AND RETURNING THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE TO WHICH NO POSTAGE
NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
<PAGE>
PROXY STATEMENT/PROSPECTUS
----------------
CAPITAL TRUST
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER __, 1998
----------------
CAPITAL TRUST, INC.
PROSPECTUS
---------------
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to the shareholders
of Capital Trust, a California business trust (the "Company"), in connection
with the solicitation of proxies by the board of trustees of the Company (the
"Board of Trustees") for use at the Company's 1998 annual meeting of
shareholders (the "Annual Meeting"), to be held on September __, 1998 at 10:00
a.m., New York City time, at [ ].
At the Annual Meeting, the shareholders will consider and vote upon a
proposal to reorganize the Company from a California common law business trust
into a Maryland corporation. The Reorganization is governed by the agreement and
plan of merger, dated August __, 1998 (the "Merger Agreement"), among the
Company, Capital Trust, Inc., a Maryland corporation and a wholly owned
subsidiary of the Company (the "New Company"), and Captrust Limited Partnership,
a Maryland limited partnership and an indirect wholly owned subsidiary of the
Company (the "Partnership"), whereby (i) the Company will merge with and into
the Partnership and (ii) the Partnership will merge with and into the New
Company (the "Mergers"). At the effective time of the Mergers, each outstanding
class A common share of beneficial interest, $1.00 par value (the "Class A
Common Shares"), and each outstanding class A 9.5% cumulative convertible
preferred share of beneficial interest, $1.00 par value (the "Class A Preferred
Shares" and together with the Class A Common Shares, the "Company Shares"), of
the Company, will be converted into, respectively, one share of class A common
stock, $.01 par value (the "New Class A Common Stock"), and one share of class A
9.5% cumulative convertible preferred stock, $.01 par value (the "New Class A
Preferred Stock", and together with the New Class A Common Stock, the "New
Company Stock"), of the New Company ("Proposal 1").
The Reorganization of the Company from a California common law business
trust into a Maryland corporation shall be accomplished by the Mergers, pursuant
to which the New Company shall be the surviving entity and the separate legal
existence of the Company shall terminate. This Proxy Statement/Prospectus also
serves as the Prospectus of the New Company filed under the Securities Act of
1933, as amended (the "Securities Act"), for use in connection with the offer
and issuance of shares of New Company Stock into which Company Shares will be
converted upon consummation of the Mergers.
The Company Shares are traded on the New York Stock Exchange, Inc.
("NYSE") under the symbol "CT." On August __, 1998, the closing price for
Company Shares as reported by the NYSE was $______. The principal executive
offices of the Company and the New Company are both located at 605 Third Avenue,
26th Floor, New York, NY 10016, telephone number (212) 655-0220.
(continued on the next page)
--------------------
THIS REORGANIZATION AND THE STOCK OF THE NEW COMPANY HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE FAIRNESS OF THIS TRANSACTION
OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Proxy Statement/Prospectus is August __, 1998. This Proxy
Statement/Prospectus is first being mailed to shareholders of the Company on or
about August __, 1998.
<PAGE>
At the Annual Meeting, the shareholders will also be asked to consider
and vote upon proposals (i) to approve an amendment, necessary to implement the
Reorganization, to the Company's amended and restated declaration of trust,
dated as of July 15, 1997 (the "Declaration Amendment") ("Proposal 2"), (ii) to
elect Jeffrey A. Altman, Thomas E. Dobrowski, Martin L. Edelman, Gary R.
Garrabrant, Craig M. Hatkoff, John R. Klopp, Sheli Z. Rosenberg, Steven Roth,
Lynne B. Sagalyn and Samuel Zell (the "Nominees") as trustees of the Company
(who will, if the Reorganization is approved, serve as directors of the New
Company) ("Proposal 3"), (iii) to approve the Company's amended and restated
1997 long-term incentive share plan (the "Amended and Restated Incentive Plan")
("Proposal 4"), (iv) to approve the Company's 1997 amended and restated
non-employee trustee share plan (the "Amended and Restated Trustee Plan")
("Proposal 5"), (v) to approve the Company's 1998 employee share purchase plan
(the "Share Purchase Plan") ("Proposal 6") (vi) to ratify the appointment of
Ernst & Young LLP as independent auditors of the Company (and the New Company as
successor thereto if the Reorganization is approved) for the year ending
December 31, 1998 ("Proposal 7") and to transact any other business as may
properly come before the Annual Meeting or any adjournment thereof. The above
Proposals are referred collectively herein as the "Proposals."
A conformed copy of the Merger Agreement (including the forms of
amended and restated charter and by-laws of the New Company as exhibits thereto)
is included as Annex A hereto, the form of Declaration Amendment is included as
Annex B hereto, the form of Amended and Restated Incentive Plan is included as
Annex C hereto, the form of Amended and Restated Trustee Plan is included as
Annex D hereto and the form of Share Purchase Plan is included as Annex E
hereto.
Under California law, shareholders are not entitled to any dissenters'
appraisal rights in connection with the Reorganization.
THE BOARD OF TRUSTEES HAS UNANIMOUSLY APPROVED THE REORGANIZATION,
SUBJECT TO SHAREHOLDER APPROVAL, AND BELIEVES THAT THE REORGANIZATION IS IN THE
BEST INTEREST OF THE COMPANY AND ITS SHAREHOLDERS.
The Board of Trustees unanimously recommends a vote in favor of
approval of each of the Proposals that will be considered at the Annual Meeting.
The affirmative vote of the holders of a majority of the outstanding
Company Shares and the affirmative vote of the holders of a majority of the
outstanding Class A Preferred Shares, voting separately as a class, is required
to approve the Reorganization. The affirmative vote of the holders of a majority
of the outstanding Company Shares is required to approve the Declaration
Amendment. The election of the Nominees requires a plurality of the votes cast
at the Annual Meeting. The approval of the Amended and Restated Incentive Plan,
the approval of the Amended and Restated Trustee Plan, the approval of the Share
Purchase Plan and the ratification of the appointment of independent auditors
each requires a majority of votes cast by shareholders at the Annual Meeting.
Veqtor Finance Company, LLC, a limited liability company controlled by officers
and trustees of the Company, that owns 19,227,251 Company Shares (approximately
63% of the outstanding shares) including 12,267,658 Class A Preferred Shares
(100% of the outstanding shares), has advised the Company that it intends to
vote in favor of all of the Proposals. Accordingly, the approval of the
Reorganization, the Declaration Amendment, the Amended and Restated Incentive
Plan, the Amended and Restated Trustee Plan and the Share Purchase Plan and the
election of the Nominees is assured.
All shares represented by properly executed proxies will be voted in
accordance with the specifications on the enclosed proxy card. The enclosed
proxy card is solicited on behalf of the Company's Board of Trustees. You may
revoke or change your proxy at any time prior to its use at the Annual Meeting
by giving the Company written direction to revoke your proxy, giving the Company
a new proxy or by attending the meeting and voting in person.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THE COMPANY WILL PROVIDE
WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL
OF THE DOCUMENTS INCORPORATED BY REFERENCE (OTHER THAN EXHIBITS NOT SPECIFICALLY
INCORPORATED BY REFERENCE INTO THE TEXTS OF SUCH DOCUMENTS). REQUESTS FOR SUCH
DOCUMENTS SHOULD BE DIRECTED TO: SECRETARY, CAPITAL TRUST, 605 THIRD AVENUE, NEW
YORK, NEW YORK 1016 (TELEPHONE: (212) 655-0220).
-ii-
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
AVAILABLE INFORMATION......................................................................-v-
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................-v-
SUMMARY ....................................................................................1
The Company and the New Company.....................................................1
The Annual Meeting..................................................................1
The Proposals.......................................................................2
Recommendation of the Board of Trustees.............................................6
No Appraisal Rights.................................................................6
Approval of Proposals Assured.......................................................6
RISK FACTORS.................................................................................7
Effects of Change of Legal Form of Organization.....................................7
No Appraisal Rights.................................................................7
No Assurance of Tax-Free Reorganization.............................................7
HISTORICAL AND PRO FORMA CAPITALIZATION......................................................8
BUSINESS ....................................................................................9
THE ANNUAL MEETING..........................................................................11
Introduction.......................................................................11
Matters to be Considered at the Annual Meeting.....................................11
Voting Rights and Vote Required....................................................11
Voting of Proxies; Solicitation....................................................12
No Appraisal Rights................................................................13
PROPOSAL 1 -- APPROVAL OF THE REORGANIZATION................................................14
Principal Reasons for the Reorganization...........................................14
Terms of the Reorganization........................................................15
Certain Changes in the Rights of Shareholders Resulting from the Reorganization....16
Description of Authorized Stock of the New Company.................................22
Federal Income Tax Matters.........................................................24
PROPOSAL 2 -- APPROVAL OF THE DECLARATION AMENDMENT.........................................26
PROPOSAL 3 -- ELECTION OF TRUSTEES..........................................................27
Nominees for Election as Trustees..................................................27
Board of Trustees; Committees......................................................29
Compensation of Trustees...........................................................30
Compensation Committee Interlocks and Insider Participation........................30
Executive and Senior Officers......................................................30
Executive Compensation.............................................................31
Employment Agreements..............................................................32
Incentive Share Option Plan........................................................33
Compliance with Section 16(a)......................................................34
-iii-
<PAGE>
Report on Executive Compensation...................................................35
Performance Graph..................................................................37
Security Ownership of Certain Beneficial Owners and Management.....................38
Buy/Sell Agreement.................................................................40
Certain Relationships and Related Transactions.....................................41
PROPOSAL 4 -- APPROVAL OF AMENDED AND RESTATED INCENTIVE PLAN..............................44
PROPOSAL 5-- APPROVAL OF AMENDED AND RESTATED TRUSTEE PLAN.................................50
PROPOSAL 6 -- APPROVAL OF SHARE PURCHASE PLAN...............................................55
PROPOSAL 7 -- RATIFICATION OF INDEPENDENT AUDITORS..........................................58
EXPERTS ...................................................................................59
LEGAL OPINIONS..............................................................................59
REPORTS TO SHAREHOLDERS.....................................................................59
OTHER MATTERS...............................................................................59
SHAREHOLDER PROPOSALS.......................................................................59
</TABLE>
ANNEX A Agreement and Plan of Merger, by and among Capital Trust,
Capital Trust, Inc. and the Captrust Limited Partnership,
dated as of August __, 1998 (including Form of Articles of
Amendment and Restatement of Capital Trust, Inc., related
forms of Articles Supplementary for Class A 9.5% Cumulative
Convertible Preferred Stock of Capital Trust, Inc. and
Articles Supplementary for Class B 9.5% Cumulative Convertible
Non-Voting Preferred Stock of Capital Trust, Inc. and Form of
Amended and Restated Bylaws of Capital Trust, Inc. as exhibits
thereto)
ANNEX B Form of Amendment to Amended and Restated Declaration of
Trust, dated as of July 15, 1997.
ANNEX C Form of Amended and Restated 1997 Long-Term Incentive Share
Plan.
ANNEX D Form of Amended and Restated 1997 Non-Employee Trustee Share
Plan.
ANNEX E Form of 1998 Employee Share Purchase Plan.
ANNEX F Capital Trust Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997.
ANNEX G Capital Trust Quarterly Report on Form 10-Q for fiscal quarter
ended June 30, 1998.
-iv-
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information may be inspected at and, upon payment of the
SEC's customary charges, copies obtained from, the Public Reference Section of
the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Such reports, proxy
statements and other information are also available for inspection and copying
at prescribed rates at the SEC's regional offices in New York, New York (Seven
World Trade Center, Suite 1300, New York, New York 10048), and in Chicago,
Illinois (500 West Madison Street, Suite 1400, Chicago, Illinois 60661). The SEC
maintains a web site (http://www.sec.gov) that also contains reports, proxy
statements and other information concerning the Company. In addition, the Class
A Common Shares are traded on the NYSE under the symbol "CT" and similar
information concerning the Company can be inspected and copied at the offices of
the NYSE, 20 Broad Street, New York, New York 10005.
The New Company has filed with the SEC a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to New
Company Stock to be issued in the Reorganization. This Proxy
Statement/Prospectus constitutes the Prospectus of the New Company filed as part
of the Registration Statement. As permitted by the rules and regulations of the
SEC, this Proxy Statement/Prospectus omits certain information contained in the
Registration Statement. Reference is made to the Registration Statement and the
exhibits listed therein, which can be inspected at the public reference
facilities of the SEC noted above, and copies of which can be obtained from the
SEC at prescribed rates as indicated above.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE MATTERS
DESCRIBED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE NEW COMPANY.
NEITHER THE DELIVERY HEREOF NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS OR A
SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference into this Proxy Statement/Prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1997, as
filed with the Commission on February 26, 1998, as amended by Annual Report on
Form 10-K/A, as filed with the Commission on April 30, 1998, as further amended
by Annual Report on Form 10-K/A, as filed with the Commission on August 17,
1998;
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
as filed with the Commission on May 14, 1998, as further amended by Quarterly
Report on Form 10-Q/A, as filed with the Commission on August 14, 1998;
3. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 as
filed with the Commission on August 14, 1998;
-v-
<PAGE>
4. Current Report on Form 8-K, dated February 9, 1998, as filed with
the Commission on February 23, 1998;
5. Current Report on Form 8-K, dated February 27, 1998, as filed with
the Commission on March 13, 1998;
6. Current Report on Form 8-K/A, dated January 1, 1998, as filed with
the Commission on March 18, 1998;
7. Current Report on Form 8-K, dated March 12, 1998, as filed with the
Commission on March 19, 1998;
8. Current Report on Form 8-K, dated April 21, 1998, as filed with the
Commission on April 23, 1998;
9. Current Report on Form 8-K, dated May 14, 1998, as filed with the
Commission on May 22, 1998;
10. Current Report on Form 8-K, dated June 2, 1998, as filed with the
Commission on June 12, 1998;
11. Current Report on Form 8-K, dated June 16, 1998, as filed with the
Commission on June 24, 1998;
12. Current Report on Form 8-K, dated June 30, 1998, as filed with the
Commission on July 13, 1998; and
13. Current Report on Form 8-K, dated July 28, 1998, as filed with the
Commission on August 6, 1998.
All documents or reports subsequently filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and
prior to the date of the Annual Meeting shall be deemed to be incorporated by
reference into this Proxy Statement/Prospectus and to be a part of this Proxy
Statement/Prospectus from the date of filing of such document. Any statement
contained herein, or in a document all or a portion of which is incorporated or
deemed to be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement/Prospectus.
-vi-
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement/ Prospectus and the Annexes hereto. This summary is
qualified in its entirety by the more detailed information and financial
statements incorporated by reference in this Proxy Statement/Prospectus.
SHAREHOLDERS OF THE COMPANY SHOULD READ CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS AND THE ANNEXES ATTACHED HERETO IN THEIR ENTIRETY.
The Company and the New Company
The Company was organized as a common law business trust under the laws
of the State of California pursuant to a declaration of trust, dated September
15, 1966, to operate as a real estate investment trust ("REIT"). On July 15,
1997, the Company ceased operations as a REIT and commenced full implementation
of its specialty finance business plan. The Company is a specialty finance
company designed to take advantage of high-yielding lending and investment
opportunities in commercial real estate and related assets. The Company also
provides real estate investment banking, advisory and asset management services
through its wholly owned subsidiary, Victor Capital Group, L.P. ("Victor
Capital").
The New Company was organized on April 7, 1998 as a Maryland
corporation and as a wholly owned subsidiary of the Company. The New Company was
organized by the Company to acquire, and succeed to, and to continue the
business of, the Company upon the consummation of the Mergers. The New Company
has had no activities to date other than those incident to the Reorganization.
The principal executive offices of both the Company and the New Company
are located at 605 Third Avenue, 26th Floor, New York, New York 10016.
The Annual Meeting
Meeting Date and Record Date; Proxies. The Annual Meeting will be held
on September __, 1998 at 9:00 a.m., New York time, at
____________________________. The Board of Trustees fixed the close of business
on August __, 1998 as the record date for the Annual Meeting (the "Record
Date").
Only Company shareholders as of the Record Date are entitled to notice
of and to vote at the Meeting. Shareholders of the Company as of the Record Date
may grant proxies by completing, dating, signing and returning the proxy card
accompanying this Proxy Statement/Prospectus. All Company Shares represented by
properly executed proxies, unless proxies have been previously revoked, will be
voted in accordance with the instructions indicated in such proxies. IF NO
INSTRUCTIONS ARE INDICATED, SUCH COMPANY SHARES WILL BE VOTED FOR THE PROPOSALS.
Shareholders that have given a proxy may revoke it any time prior to the Meeting
by giving written notice thereof to the Secretary of the Company, by signing and
returning a proxy card bearing a later date, or by attending the Annual Meeting
and voting in person.
Matters to be Considered. The purposes of the Meeting are to consider
and vote upon the Reorganization, the Declaration Amendment, the election of the
Nominees as trustees, the Amended and Restated Incentive Plan, the Amended and
Restated Trustee Plan, the Share Purchase Plan and the ratification of the
appointment of the Company's independent auditors and any other business as may
properly come before the Meeting or any adjournment or postponement thereof. See
"THE ANNUAL MEETING--Matters to be Considered at the Annual Meeting.
Vote Required. As of the Record Date, there were 18,229,650 Class A
Common Shares and 12,267,658 Class A Preferred Shares outstanding and entitled
to vote at the Annual Meeting, all of which are entitled to be voted on the
Proposals. Holders of Company Shares are entitled to one vote per Company Share
on all matters to be decided on at the Annual Meeting. The approval of the
Reorganization requires the affirmative vote of the holders
<PAGE>
of a majority of the outstanding Company Shares and the affirmative vote of the
holders of a majority of the outstanding Class A Preferred Shares, voting
separately as a class. The approval of the Declaration Amendment requires the
affirmative vote of a majority of the outstanding Company Shares. The election
of each of the Nominees requires a plurality of the votes cast by the holders of
Company Shares at the Annual Meeting. The approval of the Amended and Restated
Incentive Plan, the approval of the Amended and Restated Trustee Plan, the
approval of the Share Purchase Plan and the ratification of the appointment of
the Company's independent auditors each requires a majority of votes cast by
shareholders at the Annual Meeting.
The Proposals
Proposal 1 -- Approval of the Reorganization. At the Annual Meeting,
the shareholders of the Company will be asked to approve the Reorganization,
whereby the Company will be reorganized into a Maryland corporation.
Principal Reasons for the Reorganization. The purpose of the
Reorganization is to reorganize the Company from a California common law
business trust into a Maryland corporation. The Board of Trustees believes that
the well developed Maryland General Corporation Law (the "MGCL"), together with
the New Company's amended and restated charter (the "Charter") and bylaws (the
"Bylaws"), will modernize the Company's governance procedures and provide the
Company with a greater degree of certainty and flexibility in planning and
implementing corporate action than is currently available to the Company as a
California common law business trust. In addition, the New Company will be
subject to certain provisions of the MGCL, which are designed to encourage a
person seeking control of a Maryland corporation to negotiate with its board of
directors. Given the more certain and flexible legal environment under which the
Company's successor will operate as a Maryland corporation, the Board of
Trustees has determined the Reorganization is in the best interest of the
Company and its shareholders.
Terms of the Reorganization. The Reorganization will be effected
through the Mergers, upon consummation of which the New Company will be the
surviving entity in the Mergers, the separate existence of the Company will
terminate and each outstanding Company Share will be converted into one share of
New Class A Common Stock or New Class A Preferred Stock, as the case may be. At
the effective time of the Mergers, the business, assets, liabilities and
obligations of the Company will become the business, assets, liabilities and
obligations of the New Company; however, none of the foregoing nor the
management nor the location of operations of the Company will change as a result
of the Reorganization. Upon consummation of the Mergers, the New Company and its
stockholders will be governed by the MGCL and by the Charter and Bylaws, which
will include a number of provisions which are not currently in the Company's
amended and restated declaration of trust, dated as of July 15, 1997 (the
"Current Declaration of Trust"). These provisions of the Charter and Bylaws of
the New Company, together with certain provisions of the MGCL, may delay, defer
or prevent a change in control of the New Company or other transaction that
might be in the best interest of the stockholders. See "PROPOSAL 1 -- APPROVAL
OF THE REORGANIZATION--Certain Changes in the Rights of Shareholders Resulting
from the Reorganization."
The Reorganization has been unanimously approved by the Board of
Trustees, who believe the Reorganization is in the best interest of the Company
and its shareholders. The Mergers will become effective upon the acceptance for
record of each respective Articles of Merger by the appropriate state agencies,
including, without limitation, the State Department of Assessments and Taxation
of Maryland. The Company anticipates that the Mergers will become effective as
promptly as practicable following shareholder approval of the Reorganization at
the Annual Meeting.
At the effective time of the Mergers, each of the persons who is then a
trustee or executive officer of the Company will become a director or executive
officer, respectively, of the New Company. At the effective time of the Mergers,
it is anticipated that the listing of shares of New Class A Common Stock will
thereafter be listed on the NYSE under the same symbol in accordance with the
applicable rules of the NYSE.
If the Reorganization is approved and the Mergers are consummated, the
Company and the New Company will take such action as may be necessary to provide
that all rights of participants in the Company's share plans (the
2
<PAGE>
"Share Plans") to receive grants of options and share units and to exercise
options and share units granted thereunder in respect of Class A Common Shares
will become substantially identical rights to receive grants of options and
stock units and to exercise options and stock units in respect of shares of New
Class A Common Stock on substantially identical terms and conditions as set
forth in the Share Plans.
The Reorganization is subject to certain conditions, including approval
by the shareholders of the Company.
Certain Changes in the Rights of Shareholders Resulting from the
Reorganization. The rights of shareholders of the Company are currently governed
by the Company's Current Declaration of Trust and current By-laws (the "Current
By-Laws"), California common law and the rules of the NYSE. If the
Reorganization is approved by the shareholders of the Company and the Mergers
are consummated, the New Company will be the surviving entity in the Mergers,
the separate existence of the Company will terminate, each outstanding Company
Share will be converted into one share of New Company Stock and the rights of
stockholders of the New Company will be governed by the Charter and Bylaws,
Maryland law, including the MGCL, and the rules of the NYSE. While a number of
the Company's current governance provisions will be included in the Charter and
Bylaws and, therefore, will not be affected by the Reorganization and the
consummation of the Mergers, certain differences between the Company's Current
Declaration of Trust and Current Bylaws and the Charter and Bylaws will result
in certain material differences between the rights of shareholders of the
Company and the rights of stockholders of the New Company. Accordingly,
shareholders of the Company should carefully consider the changes in their
rights that will result from the approval of the Reorganization and the
consummation of the Mergers. See "PROPOSAL 1 -- APPROVAL OF THE
REORGANIZATION--Certain Changes in the Rights of Shareholders Resulting from the
Reorganization." The following table compares certain of the existing rights of
shareholders of the Company with those of stockholders of the New Company, if
the Reorganization is approved and the Mergers are consummated.
<TABLE>
<CAPTION>
COMPANY NEW COMPANY
<S> <C> <C>
Election of Trustees are elected by the vote of a plurality Directors are elected by a plurality of all
Trustees/Directors of the voting shares present in person or the votes cast at a meeting at which a
represented by proxy. quorum is present, with each share being
entitled to vote for as many individuals as
there are directors to be elected and for
whose election the share is entitled to be
voted.
Removal of A trustee may be removed from office at any Under the MGCL, unless the charter
Trustees/Directors time either (a) with or without cause by the provides otherwise (which the Charter does
vote or written consent of either (i) a majority not), directors may be removed from of
the trustees then in office and a majority of office, with or without cause, by the
the outstanding voting shares or (ii) 662/3% of majority of votes entitled to be cast in the
the outstanding voting shares, or (b) with cause affirmative vote of the holders of at least a
by the vote or written consent of a majority of election of directors.
the trustees then in office.
Distributions Subject to any preferences which may be Dividends and other distributions on the
granted to holders of preferred shares, the stock of the New Company may be
Board of Trustees may cause dividends to be authorized by the Board of Directors out of
declared and paid on outstanding Company assets legally available therefor.
Shares out of funds legally available therefor, Dividends and other distributions may be
at such times, in such amounts and from such paid in cash, property or stock of the New
sources, whether income, surplus, capital or Company.
any combination thereof, as they in their
discretion may determine.
3
<PAGE>
COMPANY NEW COMPANY
Voting by Shareholders' action may be taken without a Under the MGCL, any action required or
Unanimous meeting by written consent if such consent is permitted to be taken at a meeting of
Consent signed by the holders of outstanding voting stockholders may be taken without a
shares having not less than the minimum meeting if (i) a unanimous written consent
number of votes that would be necessary to setting forth the action is signed by each
authorize such action at a meeting at which all stockholder entitled to vote on the matter.
voting shares entitled to vote thereon were Thus, stockholders of the New Company
present and voted. will be effectively prevented from taking
action by written consent.
Amendment of Any amendment to the Current Declaration of Any amendment to the Charter (with
Constitutional Trust must be in writing and, subject to the certain minor exceptions) requires approval
Documents changes required by law or the provisions of of the board of directors and stockholder
any outstanding preferred shares, requires the approval by a majority of the aggregate
affirmative vote or written consent of either (i) votes entitled to be cast thereon. The
a majority of the trustees and a majority of the Board of Directors has the exclusive power
outstanding voting shares or (ii) 662/3% of the to adopt, alter or repeal any provision of
outstanding voting shares. the Bylaws.
Voting on Other Subject to special voting rights of preferred Unless otherwise provided in the Charter,
Matters shares, the approval of matters brought before holders of voting stock may vote on all
the shareholders requires the affirmative vote matters provided for by the MGCL.
of a majority of voting shares present in person Subject to the special voting rights of
or represented by proxy, unless otherwise preferred stock, a majority of the votes cast
required by law or the Current Declaration of at a meeting of stockholders duly called and
Trust. at which a quorum is present shall be
sufficient to approve matter other than
the of directors, unless otherwise
required by the MGCL or the Charter.
Shareholders' The Board of Trustees shall cause a special A special meeting of stockholders may be
Rights to Call meeting to be called upon receipt of the written called by the president, the chief executive
Special Meeting request of the holders of 331/3% of the officer or by the Board of Directors and
outstanding voting shares entitled to vote on must be called by the Secretary upon the
any matter to be voted on at such special written request of the stockholders entitled
meeting. to cast not less than 33% of all the votes
entitled to be cast at the meeting.
4
<PAGE>
COMPANY NEW COMPANY
Exculpation of The Company's Current By-Laws provide that Under the MCGL and the Charter,
Trustees, Officers no trustee, officer, employee or agent of the directors and officers are not liable to New
and Others, Company is liable to the Company or any other Company or its stockholders for money
Fidelity Bond person for any act or omission except for his damages (with two limited exceptions).
own willful misfeasance, bad faith, gross
negligence or reckless disregard of duty or his
failure to act in good faith in the reasonable
belief that his actions are in the Company's
best interests. It further provides that the
above-named individuals when acting in
connection with the Company are deemed to be
acting for the Company and not as individuals,
that they are not liable for actions taken or
omitted for or on behalf of the Company, and
that resort must be to the assets of the
Company for payment or performance.
</TABLE>
See "PROPOSAL 1--APPROVAL OF THE REORGANIZATION--Certain Changes in the Rights
of Shareholders Resulting from the Reorganization."
Material Federal Income Tax Consequences. Battle Fowler LLP has
delivered its opinion to the Company that, on the basis of facts,
representations and assumptions set forth in such opinion, the Reorganization
will be treated for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). Accordingly, (i) no gain or loss will be
recognized by the Company as a result of the Reorganization; and (ii) no gain or
loss will be recognized by any shareholder of the Company who receives New
Company Stock in exchange for Company Shares. See "PROPOSAL 1 -- APPROVAL OF THE
REORGANIZATION--Federal Income Tax Matters."
The Reorganization, the Merger Agreement, the New Company Charter and
Bylaws are described more specifically herein under "PROPOSAL 1 -- APPROVAL OF
THE REORGANIZATION." A conformed copy of the Merger Agreement (including the
Charter and Bylaws) is attached hereto as Annex A.
Proposal 2 -- Approval of the Declaration Amendment. At the Annual
Meeting, the shareholders will be asked to approve the Declaration Amendment in
the form attached hereto as Annex B. The Declaration Amendment would amend the
Company's Current Declaration of Trust to (i) expressly permit the Company to
merge or consolidate with and/or into a domestic or foreign limited partnership
and (ii) set forth procedures pursuant to which such merger or consolidation
would take place.
The Declaration Amendment is described more specifically herein under
"PROPOSAL 2 -- APPROVAL OF DECLARATION AMENDMENT."
MGCL Anti-Takeover Provisions - Although the Reorganization was neither
proposed nor approved by the Board of Trustees as an anti-takeover measure, the
New Company will be subject to certain provisions of the MGCL which could delay,
defer, or prevent a transaction or change in control of the New Company that
might involve a premium price for holders of New Company Stock or, contrary to
the judgment of the New Company's board of directors, otherwise be in their best
interest. In addition, other provisions of the MGCL requiring the consent of all
stockholders for stockholder action by written consent and provisions of the
Bylaws requiring advance notice of stockholder director nominations could
increase the likelihood that incumbent directors would retain their positions in
the face of efforts by stockholders to change the board of directors of the New
Company. See "PROPOSAL 1 -- APPROVAL OF THE REORGANIZATION--Principal Reasons
for the Reorganization;--Certain Changes in the
5
<PAGE>
Rights of Shareholders Resulting from the Reorganization"; "RISK
FACTORS--Effects of Change of Legal Form of Organization.
Proposal 3 -- Election of Trustees. At the Annual Meeting, shareholders
will be asked to elect the Company's Nominees as trustees of the Company to hold
office until the next annual meeting of shareholders and until their successors
have been duly elected and qualified. If the Reorganization is approved and the
Mergers are consummated, the trustees of the Company at the time of the
consummation of the Mergers will become the directors of the New Company serving
for the same terms with the New Company as such persons are then serving with
the Company. The Nominees are discussed more specifically herein under "PROPOSAL
3 -- ELECTION OF TRUSTEES."
Proposal 4 -- Approval of the Amended Incentive Plan. At the Annual
Meeting, the shareholders will be asked to approve the Amended and Restated
Incentive Plan which increases the number of shares that may be issued under and
amends certain other provisions of the original plan. The Amended and Restated
Incentive Plan is described more specifically herein under "PROPOSAL 4 --
APPROVAL OF THE AMENDED AND RESTATED INCENTIVE PLAN."
Proposal 5 -- Approval of the Amended Restated Trustee Plan. At the
Annual Meeting, the shareholders will be asked to approve the Amended and
Restated Trustee Plan which increases the number of shares that may be issued
under and amends certain other provisions of the original plan. The Amended and
Restated Trustee Plan is described more specifically herein under "PROPOSAL 5 --
APPROVAL OF THE AMENDED AND RESTATED TRUSTEE PLAN."
Proposal 6 -- Approval of the Share Purchase Plan. At the Annual
Meeting, the shareholders will be asked to approve the Share Purchase Plan which
allows employees periodically to purchase Class A Common Shares at a discount.
The Share Purchase Plan is described more specifically herein under "PROPOSAL 6
- -- APPROVAL OF THE SHARE PURCHASE PLAN."
Proposal 7--Ratification of Appointment of Independent Auditors. At the
Annual Meeting, the shareholders will be asked to ratify the appointment by the
Board of Trustees of Ernst & Young LLP as the independent auditors of the
Company (and the New Company as successor thereto if the Reorganization is
approved) for the fiscal year ending December 31, 1998. The appointment of Ernst
& Young LLP is discussed more specifically under "PROPOSAL 7 -- RATIFICATION OF
INDEPENDENT AUDITORS."
Recommendation of the Board of Trustees
The Board of Trustees has unanimously determined to recommend a vote in
favor of each of the Proposals. The Board of Trustees has unanimously approved
the Reorganization, subject to shareholder approval, and believes that the
Reorganization is in the best interest of the Company and its shareholders.
No Appraisal Rights
Under California law, the shareholders will not have any appraisal
rights to elect to have the fair value of their shares judicially appraised and
paid to them in cash in connection with or as a result of the Reorganization to
be acted upon at the Annual Meeting.
Approval of Proposals Assured
Veqtor Finance Company, LLC, a limited liability company controlled by
officers and trustees of the Company, that owns 19,227,251 Company Shares
(approximately 63% of the outstanding shares) including 12,267,658 Class A
Preferred Shares (100% of the outstanding shares), has advised the Company that
it intends to vote in favor of all of the Proposals. Accordingly, the approval
of the Reorganization, the Declaration Amendment, the Amended and Restated
Incentive Plan, the Amended and Restated Trustee Plan and the Share Purchase
Plan and the election of the Nominees is assured.
6
<PAGE>
RISK FACTORS
Effects of Change of Legal Form of Organization
The legal form of organization by which the Company conducts its
business, holds its assets and is obligated for its liabilities will be changed
from a common law business trust to a corporation incorporated in the State of
Maryland. Certain differences between the Company's organizational documents and
governing law and the New Company's organizational documents and governing law
will result in certain material differences between the rights of shareholders
of the Company and the rights of stockholders of the New Company. For example,
the Bylaws contain provisions that require advance notice of stockholders
proposals and director nominations that could have the effect of precluding a
contest for the election of directors or stockholder proposals if the proper
procedures are not followed, and of delaying or deferring a third party from
conducting a solicitation of proxies to elect its own slate of directors or to
have its own proposals approved. In addition, unlike the right of shareholders
of the Company, pursuant to provisions of the MGCL, the stockholders of the New
Company may only act by written consent with the consent of all stockholders,
which requirement could have the effect of delaying or hindering efforts of
stockholders to change the board of directors of the New Company. As a Maryland
corporation, the New Company will be subject to the anti-takeover protections of
the certain control share acquisition and business combination provisions of the
MGCL. These provisions, which are designed to encourage a person seeking a
change in control of a Maryland corporation to negotiate with the board of
directors, could delay, defer or prevent a transaction or a change in control of
the New Company that might involve a premium price for holders of New Company
Stock or contrary to the judgment of the New Company's board of directors
otherwise be in their best interest. See "PROPOSAL 1 -- APPROVAL OF THE
REORGANIZATION--Principal Reasons for the Reorganization;" " -- Certain Changes
in the Rights of Shareholders Resulting from the Reorganization".
No Appraisal Rights
Holders of Company Shares do not have any statutory appraisal rights
under California law to elect to have the fair value of their Company Shares
judicially appraised and paid to them in cash in connection with or as a result
of the Reorganization.
No Assurance of Tax-Free Reorganization
Capital Trust has received an opinion of counsel that the
Reorganization will constitute a tax-free "reorganization" for federal income
tax purposes, within the meaning of section 368 of the Code. If there was a
determination that the Reorganization was not a tax-free reorganization, the
Company and its shareholders would experience different tax consequences than
those attendant to a tax-free reorganization. In particular, the Company's
shareholders would be required to recognize gain upon the deemed exchanges of
their Company Shares for shares of New Company Stock to the extent that the fair
market value of any New Company Stock received exceeded the basis of the Company
Shares deemed exchanged therefor. Recognition of loss on such deemed exchanges
might not be allowed until the stockholders dispose of some or all of their New
Company Stock. The Company would be required to recognize gain on its
disposition and distribution of property in connection with the Reorganization
and any loss on such disposition and distribution may be required to be deferred
until the New Company were to sell the assets to an unrelated third party; and,
to the extent the Company's tax attributes were not used to offset any gain, the
New Company would not succeed to them. See "PROPOSAL 1 -- APPROVAL OF THE
REORGANIZATION--Federal Income Tax Matters"
7
<PAGE>
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table sets forth (i) certain combined short-term
obligations and the combined capitalization of the New Company as of June 30,
1998 and (ii) such combined short-term obligations and combined capitalization
giving pro forma effect to the Reorganization. The Reorganization will have no
effect on the reported results of operations. The information set forth in the
table below should be read in conjunction with the Company's Consolidated
Financial Statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
June 30, 1998
Historical Pro Forma
---------- ---------
(thousands)
<S> <C> <C>
Short-Term Debt
Current maturities of long-term notes payable(1)..................... $ 10,845 $ 10,845
--------------------- -------------------
Total short-term debt................................................ $ 10,845 $ 10,845
===================== ===================
Long-Term Debt
Long-term notes payable(2)........................................... $ 3,766 $ 3,766
Credit Facilities.................................................... 353,894 353,894
Repurchase Obligations............................................... 105,954 105,954
--------------------- -------------------
Total long-term debt................................................. 463,614 463,614
--------------------- -------------------
Shareholders' Equity; Pro Forma Stockholders' Equity(3) Class A preferred
shares, $1.00 par value, $.26 cumulative annual dividend,
12,639,405 authorized, 12,267,658 issued and outstanding (liquidation
preference of $33,000,000)...................................... 12,268
Class A common shares, $1.00 par value, unlimited authorized,
18,157,150 issued and outstanding............................... 18,157
Restricted class A common shares, $1.00 par value,
72,000 shares issued and outstanding............................ 72
Pro forma preferred stock, $.01 par value; 100,000,000 shares authorized,
12,267,658 shares of class A 9.5% cumulative convertible preferred stock
authorized, issued and outstanding (liquidation preference of $33,000,000)(4) 123
Pro forma common stock, $.01 par value; 200,000,000 shares authorized
18,157,150 shares of class A common stock authorized, issued and
outstanding(4)..................................................
Pro forma restricted class A common stock, $1.00 par value; 182
72,500 shares issued and outstanding............................, 1
Additional paid-in capital........................................... 158,790 188,909
Unearned compensation................................................ (646) (646)
Accumulated other comprehensive income............................... (55) (55)
Accumulated deficit.................................................. (39,531) (39,531)
--------------------- -------------------
Total Shareholders' Equity........................................... 149,055
---------------------
Pro forma Total Stockholders' Equity................................. 149,055
-------------------
Total Capitalization(5).................................................. $612,669
=====================
Pro Forma Total Capitalization(5)........................................ $612,669
===================
</TABLE>
- -----------------------
(1) Represents the current portion of the five-year, non-interest bearing, $5.0
million promissory notes, payable in ten equal semi-annual installments of
$500,000, issued in connection with the acquisition of Victor Capital (the
"Acquisition Notes"), net of an unamortized discount of $155,000 and
$10,000,000 of other short-term notes payable.
(2) Includes the long-term portion of the Acquisition Notes, net of an
unamortized discount of $580,000.
(3) The New Company is authorized to issue 100,000,000 shares of class A common
stock, $.01 par value, and 100,000,000 shares of class B common stock, $.01
par value, although no shares of class B common stock will be outstanding
upon consummation of the Reorganization. The New Company will create and
authorize the issuance of 12,267,658 shares of two classes of preferred
stock, class A 9.5% cumulative convertible preferred stock and class B 9.5%
cumulative convertible non-voting preferred stock, although no shares of
class B preferred stock will be outstanding upon consummation of the
Reorganization. The class B common stock and the class B preferred stock are
identical to the class A common stock and class A preferred stock,
respectively, except that neither the class B common stock nor class B
preferred stock entitle the holders thereof to voting rights.
(4) Each share of class A preferred stock is convertible at the option of the
holder thereof into one share of class A common stock, or one share of class
B preferred stock, subject to adjustment to avoid dilution.
(5) Total Capitalization and Pro Forma Total Capitalization include long-term
debt and shareholders' or stockholders' equity, as the case may be.
8
<PAGE>
BUSINESS
The New Company will succeed to, and continue, the business of the
Company upon consummation of the Reorganization under the direction of the
Company's current management team, which will succeed to the management of the
New Company.
The Company is a recently recapitalized specialty finance company
designed to take advantage of high-yielding lending and investment opportunities
in commercial real estate and related assets. The Company makes investments in
various types of income-producing commercial real estate and its current
investment program emphasizes senior and junior commercial mortgage loans,
preferred equity investments, direct equity investments and subordinated
interests in commercial mortgage-backed securities("CMBS"). The Company's
current business plan contemplates that a majority of the loans and other assets
held in its portfolio for the long-term will be structured so that the Company's
investment is subordinate to third-party financing but senior to the
owner/operator's equity position. The Company also provides real estate
investment banking, advisory and asset management services through its wholly
owned subsidiary, Victor Capital. The Company anticipates that it will invest in
a diverse array of real estate and finance-related assets and enterprises,
including operating companies, which satisfy its investment criteria.
In executing its business plan, the Company utilizes the extensive real
estate industry contacts and relationships of Equity Group Investments, Inc.
("EGI"). EGI is a privately held real estate and corporate investment firm
controlled by Samuel Zell, who serves as chairman of the Board of Trustees of
the Company. EGI's affiliates include Equity Office Properties Trust and Equity
Residential Properties Trust, the largest U.S. real estate investment trusts
("REITs") operating in the office and multifamily residential sectors,
respectively. The Company also draws upon the extensive client roster of Victor
Capital for potential investment opportunities.
During the past fiscal year, the Company terminated its status as a
REIT following the commencement of full implementation of its current business
plan. This action coincided with the appointment of a new management team
following the acquisition of Victor Capital and a $33 million private placement
of Class A Preferred Shares to Veqtor Finance Company, LLC ("Veqtor"), an
affiliate of certain members of the new management team that currently owns
19,227,251 (or approximately 63%) of the outstanding voting shares of the
Company.
In connection with the implementation and continuation of its current
business plan, the Company has undertaken various long-term financing and
capital raising activities. In September 1997, the Company entered into a credit
arrangement with a commercial lender that provides for a three-year $150 million
line of credit (the "Credit Facility"). In 1998, the Credit Facility was amended
and restated, and thereafter further amended, and now provides for a $300
million line of credit. In addition, in December 1997, the Company completed a
public offering of 9,000,000 Class A Common Shares at $11.00 per share (the
"Offering") from which it received approximately $91.4 million in net proceeds.
In June 1998, the Company entered into a credit arrangement with another
financial intermediary that provides for a $300 million line of credit that
expires in November 1999 (the "Second Credit Facility" and together with the
Credit Facility, the "Credit Facilities"). In July 1998, the Company privately
placed to three investors $150,000,000 aggregate liquidation amount of 8.5% Step
Up Convertible Trust Preferred Securities ("Trust Preferred Securities") that
were issued by its consolidated statutory trust subsidiary, CT Convertible Trust
I (the "Trust"), concurrently with the related issuance and sale to the Trust of
the Company's 8.5% Step Up Convertible Subordinated Debentures in the aggregate
principal amount of $154,650,000 (the "Trust Preferred Private Placement"). The
Company raised approximately $145.2 million in net proceeds from the Trust
Preferred Private Placement. The Company believes that its Credit Facilities and
the proceeds of the Offering and the Trust Preferred Private Placement provide
the Company with the capital necessary to expand and diversify its portfolio of
loans and other investments and enable the Company to compete for and consummate
larger transactions meeting the Company's target risk/return profile in the
ordinary course. The Company continues to explore various alternatives for
enhancing its liquidity so that it will be positioned to obtain the additional
financing and equity capital when required to meet its anticipated long-term
investment needs.
The Company seeks to generate returns from a portfolio of leveraged
investments. The Company seeks to maximize yields through the use of leverage
consistent with maintaining an acceptable level of risk. Consistent with
financial covenants in the Company's Credit Facilities, the Company's current
business plan does not provide for
9
<PAGE>
lending and investing activities which, in the aggregate, would cause the
Company's debt-to-equity ratio to exceed 5 to 1. However, the Company seeks
maximum investment and portfolio management flexibility to enhance its earnings.
As an example, the Company seeks to be positioned to compete for attractive
mezzanine lending opportunities that would require the Company to originate the
senior loan (in addition to its targeted mezzanine loan) which would be
warehoused until sold or securitized as opposed to originating solely the
mezzanine loan to the borrower. For this reason and others, the Company is
seeking the flexibility to adjust its business plan so that it can incur
leverage above a 5 to 1 debt-to-equity ratio that would allow it to obtain, for
example, the financing necessary to fund significant size senior loans.
In this regard, the Company is seeking to eliminate the foregoing
debt-to-equity covenant and other similar covenants that apply to the Company's
business. Any debt financing of loans or investments that would result in a
debt-to-equity ratio in excess of 5 to 1, would require the consent of, among
other credit providers, the Credit Facilities lender and Veqtor's preferred
members for which there can be no assurance.
Further information regarding the Company, including the audited
historical financial statements of the Company and its subsidiaries,
supplementary financial information and management's discussion and analysis of
the Company's financial condition and results of operations, is contained in the
Company's Annual Report on Form 10- K/A for the fiscal year ended December 31,
1997 and Quarterly Report on 10-Q for the six months ended June 30, 1998, which
reports are attached hereto as Annex F and Annex G, respectively.
10
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THE ANNUAL MEETING
Introduction
This Proxy Statement/Prospectus is being furnished to the shareholders
as of the Record Date in connection with the Annual Meeting to be held on
September __, 1998 at 10:00 a.m., New York City time, at [ ], and any
adjournment or postponement thereof.
Matters to be Considered at the Annual Meeting
At the Annual Meeting, shareholders will be asked to consider and vote
upon the following proposals:
o Proposal 1: To consider and vote upon a proposal to
approve the Reorganization, whereby the
Company will be reorganized into a Maryland
corporation.
o Proposal 2: To consider and vote upon a proposal to
approve the Declaration Amendment.
o Proposal 3: To consider and vote upon a proposal to
elect the ten Nominees as trustees.
o Proposal 4: To consider and vote upon a proposal to
approve the Amended and Restated Incentive
Plan.
o Proposal 5: To consider and vote upon a proposal to
approve the Amended and Restated Trustee
Plan.
o Proposal 6: To consider and vote upon a proposal to
approve the Share Purchase Plan.
Proposal 7: To consider and vote upon a
proposal to ratify the appointment of Ernst
& Young LLP as the independent auditors of
the Company for fiscal year 1998.
The Company's shareholders also will consider and vote upon such other
matters as may properly come before the Annual Meeting.
Voting Rights and Vote Required
Only holders of record of Company Shares issued and outstanding as of
the close of business on the Record Date will be entitled to vote at the Annual
Meeting, or any adjournment or postponement thereof. As of the Record Date,
there were 18,229,650 Class A Common Shares issued and outstanding held by
approximately [1,680] holders of record and 12,267,658 Class A Preferred Shares
held by one holder of record.
Holders of record of Company Shares at the close of business on the
Record Date are entitled to one vote per share upon each matter submitted to a
vote of the shareholders of the Company at the Annual Meeting or any adjournment
or postponement thereof. The presence, in person or by proxy, of the holders of
a majority of the outstanding Company Shares entitled to vote at the meeting is
necessary to constitute a quorum to transact business at the Annual Meeting.
Shareholders voting or abstaining from voting on any issue will be counted as
present for purposes of constituting a quorum. If a quorum is not present at the
Annual Meeting, the holders of a majority of the Company Shares present in
person or by proxy and entitled to vote at the Annual Meeting may, by majority
vote, adjourn the Annual Meeting from time to time. Because the Company Shares
owned by Veqtor will be represented at the Annual Meeting, a quorum will be
present, even if no other Company Shares are represented, and approval of all
Proposals is assured without the affirmative vote of any other shareholders.
Pursuant to the Current Declaration of Trust, the affirmative vote of
the holders of a majority of the outstanding Company Shares and the affirmative
vote of the holders of a majority of the outstanding Class A Preferred Shares,
voting separately as a class, is required to approve the Reorganization. The
affirmative vote of
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the holders of a majority of the outstanding Company Shares is required to
approve the Declaration Amendment. The election of each of the Nominees as
trustees requires a plurality of the votes cast at the Annual Meeting. The
approval of the Amended and Restated Incentive Plan, the approval of the Amended
and Restated Trustee Plan, the approval of the Share Purchase Plan and the
ratification of the appointment of independent auditors each requires a majority
of the votes cast by shareholders at the Annual Meeting.
Under the rules of the principal stock exchanges, brokers who hold
Class A Common Shares in street name for customers will not have authority to
vote such Class A Common Shares on the proposals to approve the Reorganization,
the Declaration Amendment, the Amended Incentive Plan, the Amended Trustee Plan
and the Share Purchase Plan unless they have received written instructions from
beneficial owners. Abstentions and broker "non- votes" will be considered in
determining the presence of a quorum at the Annual Meeting, but will not be
counted as votes cast on any matter presented for a vote at the meeting. Because
approval of the Reorganization and the Declaration Amendment each require the
affirmative vote of a specified percentage of the holders of the Company Shares
outstanding on the Record Date, abstentions and broker "non-votes", as the case
may be, will have the same effect as votes against such matters. Since the
election of trustees requires a plurality of the votes cast and the approval of
the Amended Incentive Plan, the approval of the Amended Trustee Plan, the
approval of the Share Purchase Plan and the ratification of the appointment of
Ernst & Young LLP require a majority of the votes cast at the Annual Meeting at
which a quorum is present, abstentions and broker "non-votes" will have no
effect on the result of the vote on such matters.
Veqtor, which owns 19,227,251 Company Shares (approximately 63% of the
outstanding shares) including 12,267,658 Class A Preferred Shares (100% of the
outstanding shares), has advised the Company that it intends to vote in favor of
the Proposals. Accordingly, the approval of the Reorganization, the Declaration
Amendment, the Amended Incentive Plan, the Amended Trustee Plan and the Share
Purchase Plan and the election of the Nominees is assured.
Voting of Proxies; Solicitation
All Company Shares which are entitled to vote and are represented at
the Annual Meeting by properly executed proxies received prior to or at the
Annual Meeting and not revoked will be voted at the Annual Meeting in accordance
with the instructions indicated on such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH PROXIES WILL BE VOTED IN FAVOR OF THE PROPOSALS DESCRIBED
HEREIN. The Board of Trustees knows of no matters to be presented at the Annual
Meeting other than those described in this Proxy Statement/Prospectus. If any
other matters are properly presented at the Annual Meeting for consideration,
including, among other things, consideration of a motion to adjourn the Annual
Meeting to another time and/or place, the persons named in the enclosed form of
proxies and acting thereunder will vote on such matters in their discretion. The
Current Declaration of Trust provides that the Annual Meeting may be adjourned
by an affirmative vote of a majority of the Company Shares entitled to vote and
represented in person or by proxy at the meeting from time to time without
notice to a date not more than forty-five days following the originally noticed
meeting date.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Company, at or before the taking of the vote at the Annual
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Company before the taking of the vote at the Annual Meeting
or (iii) attending the Annual Meeting and voting in person (although attendance
at the Annual Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice of revocation or subsequent proxy should be sent to
the Company c/o American Stock Transfer & Trust Company, 6201 Fifteenth Ave.,
Brooklyn, NY 11219, Attention: Paula Caroppoli, or hand delivered to the Company
at American Stock Transfer & Trust Company, so as to be delivered at or before
the taking of the vote at the Annual Meeting.
All expenses of this solicitation, including the cost of preparing and
mailing of this Proxy Statement/Prospectus, will be borne by the Company. In
addition to solicitation by use of the mails, proxies may be solicited by
trustees, officers and employees of the Company in person or by telephone,
telegram or other means of communication. Such trustees, officers and employees
will not be additionally compensated, but may be
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reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. The Company has retained MacKenzie Partners, Inc., for their
customary fees, plus reimbursement of expenses, to assist in its solicitation of
proxies from brokers, nominees, institutions and individuals. Arrangements will
also be made with brokerage firms and other custodians, nominees and fiduciaries
for the forwarding of proxy solicitation material to certain beneficial owners
of the Company Shares, and the Company will reimburse such brokerage firms,
custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection therewith.
No Appraisal Rights
Under California law, shareholders are not entitled to any dissenters'
appraisal rights in connection with the Reorganization.
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PROPOSAL 1 -- APPROVAL OF THE REORGANIZATION
Principal Reasons for the Reorganization
The Company was organized in 1966 as a California common law business
trust to operate as a REIT. On July 15, 1997, the Company terminated its status
as a REIT following the commencement of full implementation of its current
business plan. The Company now seeks to be reorganized into a corporation
principally to take advantage of the more well developed MGCL, which provides
greater certainty and flexibility in planning and implementing corporate action
than is otherwise available for a common law business trust. Given the more
certain and flexible legal environment under which the Company's successor will
operate as a corporation, the Board of Trustees has unanimously determined the
Reorganization is desirable and in the best interest of the Company and its
shareholders.
Certainty/Flexibility. The MGCL is a modern, well developed general
corporation statute. Maryland also has an extensive body of case law
interpreting its corporation statute. The existence of such a statute and case
law allows a corporation to plan the legal aspects of its future activities with
more certainty and flexibility than do the provisions of the Current Declaration
of Trust and the common law of the State of California currently applicable to
the Company. A modern corporate charter also allows corporations to determine
and change business strategies on an ongoing basis as circumstances warrant,
whereas such flexibility is, at times, unavailable to trusts, which may be
restricted by the more specific provisions of their governing instruments.
Investor Perception. Corporations are far more numerous than business
trusts and are more familiar to the investor community. This familiarity and
favorable perception is considered by the Board of Trustees as likely to enhance
the liquidity and marketability of the Company's securities, providing
potentially greater access for the Company to capital markets.
Protections Afforded by Maryland Law Against Hostile/Unsolicited
Takeovers. The New Company is subject to certain provisions of the MGCL which
are designed to encourage a person seeking control of a Maryland corporation to
negotiate with the board of directors. See "--Certain Changes in the Rights of
Shareholders Resulting from the Reorganization -- Shareholder Approval of
Certain Business Combination Transactions." The Board of Trustees believes that
the reorganization of the Company into a Maryland corporation will allow the New
Company to avail itself of these provisions of the MGCL and will provide the New
Company with a certain amount of flexibility in the face of any future takeover
attempts by encouraging the potential acquiror to negotiate directly with the
New Company's board.
Unsolicited or hostile takeover attempts are frequently structured in
ways that may not be in the best interests of all shareholders. Although a
takeover attempt may be made at a price substantially above the then current
market price for a target company's shares, such offers are sometimes made for
less than all of the outstanding shares of the target company. As a result,
shareholders may be presented with the alternative of either partially
liquidating their investment at a time which may be disadvantageous or retaining
their investment as minority shareholders in an enterprise which is controlled
by persons whose objectives may be different from those of the remaining
minority shareholders. A takeover attempt may also take the form of a two-tiered
offer in which cash is offered for a portion of the target company's outstanding
shares and thereafter securities that are or may be worth less than the cash
portion are offered for the remaining shares. Furthermore, hostile takeover
attempts are sometimes timed and designed to foreclose or minimize the
possibility of more favorable competing bids which frequently may result in
shareholders losing the opportunity to receive and consider alternative and
possibly more attractive proposals. Even a single-tier, all cash tender offer
for all shares may be made by an unsolicited bidder at a price and on terms
below or inferior to what the Board of Directors, as the elected representatives
of all stockholders, would be able to negotiate, especially with more
information than is generally available to any stockholder or to an unsolicited
bidder. On the other hand, transactions negotiated and approved by a target
company's board of directors can be more carefully planned and undertaken in
order to obtain maximum value for the company and all of its shareholders.
The Board of Trustees recognizes that takeover attempts which have not
been negotiated with and approved by a target company's board of directors or
other managerial body do not always have the unfavorable consequences or effects
described above. However, the Board of Trustees believes that the potential
disadvantages of unapproved
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takeover attempts are sufficiently great that the protections afforded by the
MGCL against hostile or unsolicited takeover attempts are in the best interests
of the Company and its shareholders. These provisions of the MGCL could delay,
defer or prevent a transaction or change in control of the New Company that
might involve a premium price for holders of New Company Stock or contrary to
the judgment of the Board of Directors otherwise be in their best interest. In
addition, other provisions of MGCL requiring the consent of all stockholders for
stockholder action by written consent could increase the likelihood that
incumbent directors will retain their positions.
Other Considerations. In addition to the foregoing, the Board of
Trustees also viewed favorably the distribution provisions of the MGCL. Section
2-311(a) of the MGCL permits a Maryland corporation to make a distribution
(including a dividend, redemption or purchase of shares), if authorized by its
board of directors, if, after the distribution (i) the corporation would be able
to pay its debts in the usual course of business and (ii) the corporation's
assets are at least equal to the sum of its liabilities and, unless its charter
permits otherwise, the liquidation preference on stock senior to the stock on
which the distribution is made is satisfied. The Board of Trustees also
considered the states of New York, Delaware and Nevada as possible jurisdictions
for incorporation of the Company's successor. The Board did not believe that New
York's business corporation law was a modern and flexible alternative to the
MGCL. The Board rejected the state of Delaware as the jurisdiction for
incorporation because provisions of the state's business corporation law would
have necessitated a change in name. The Board believes that the Company has
established a public identity among participants in the commercial real estate
industry that is associated with its current name. The MGCL accommodates the
goal of allowing the New Company to continue to enjoy the goodwill and name
recognition associated with the "Capital Trust" name. The Board determined that
Nevada was not a convenient jurisdiction for incorporation due to its geographic
location.
Terms of the Reorganization
The Merger Agreement is set forth in its entirety as Annex A to this
Proxy Statement/Prospectus. The information set forth below is only a summary of
its principal provisions and is qualified in its entirety by reference to Annex
A.
The Reorganization will be effected pursuant to the Mergers whereby (a)
the Company will be merged with and into the Partnership and (b) the Partnership
will be merged with and into the New Company. The New Company will be the
surviving entity in the Mergers, the separate existence of the Company will
terminate, each outstanding Company Share will be converted into one share of
New Company Stock and the shares of New Company Stock held by the Company will
be canceled and retired and will cease to exist. At the effective time of the
Mergers, all properties, assets, liabilities and obligations of the Company will
become properties, assets, liabilities and obligations of the New Company. For
federal income tax and financial reporting purposes, the New Company will be
considered to be the same entity as the Company.
The Mergers will become effective upon the filing and acceptance for
record of each of the Articles of Merger by the appropriate state agencies,
including, without limitation, the State Department of Assessments and Taxation
of the State of Maryland. The Company anticipates that the Mergers will become
effective as promptly as practicable following shareholder approval of the
Reorganization at the Meeting.
Upon consummation of the Mergers, the New Company and its stockholders
will be governed by the Charter and Bylaws, which will include a number of
provisions which are not currently in the Current Declaration of Trust. See
"--Certain Changes in the Rights of Shareholders Resulting from the
Reorganization." These provisions of the Charter and Bylaws of the New Company,
together with certain provisions of the MGCL, may have certain anti-takeover
effects. A copy of the proposed Charter and Bylaws of the New Company are set
forth in their entirety as exhibits to the Merger Agreement attached hereto as
Annex A.
At the effective time of the Mergers, each of the persons then serving
as trustees and officers of the Company will be directors and officers,
respectively, of the New Company. For information concerning the trustees and
officers of the Company, see "PROPOSAL 3 -- Election of Trustees."
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If the Reorganization is approved and the Mergers are consummated, the
Company and the New Company will take such action as may be necessary to provide
that all rights of participants in the Company's 1997 Long-Term Incentive Share
Plan and the 1997 Non-Employee Trustee Share Plan (the "Share Plans") to receive
grants of options and share units and to exercise options and share units
granted thereunder in respect of Company Shares will become substantially
identical rights to receive grants of options and stock units to exercise
options and stock units in respect of New Company Stock on substantially
identical terms and conditions as shares set forth in the Share Plans.
At the effective time of the Mergers, it is anticipated that the
listing of the Class A Common Shares on the NYSE will be terminated and the
shares of New Class A Common Stock will thereafter continue to be listed on the
NYSE in accordance with the applicable rules of the NYSE.
At the effective time of the Mergers, each certificate representing
Company Shares will be deemed for all purposes to represent the same number of
shares of New Company Stock. The registered owner of any such certificates
shall, until such certificates have been surrendered for transfer, have and be
entitled to exercise any voting or other rights with respect to and to receive
any dividends and other distributions upon the shares of New Company Stock. The
New Company's stockholders are not requested or obligated to surrender in
exchange for certificates representing shares of New Company Stock their Company
Share certificates.
The expenses associated with the Reorganization of the Company into the
New Company pursuant to the Mergers will be borne by the Company.
Certain Changes in the Rights of Shareholders Resulting from the Reorganization
The rights of shareholders of the Company are currently governed by the
Company's Current Declaration of Trust, Current By-Laws, Certificate of
Designation, California common law and the rules of the NYSE. If the
Reorganization is approved by the shareholders of the Company and the Mergers
are consummated, the New Company will be the surviving entity in the Mergers,
the separate existence of the Company will terminate, each outstanding Company
Share will be converted into one share of New Company Stock and the rights of
New Company stockholders will be governed by the MGCL and by the Charter and
Bylaws and the rules of the NYSE. While a number of the Company's current
corporate governance provisions will be included in the Charter and Bylaws and,
therefore, will not be affected by the approval of the Reorganization and the
consummation of the Mergers, certain differences between the Company's Current
Declaration of Trust and Current By-Laws and the Charter and Bylaws will result
in certain material differences between the rights of shareholders of the
Company and the rights of stockholders of the New Company. Accordingly,
shareholders of the Company should carefully consider the changes in their
rights that will result from the approval of the Reorganization and the
consummation of the Mergers.
Set forth below is a summary of the principal material differences in
this respect. This summary does not, however, purport to be complete and is
qualified in its entirety by reference to the Current Declaration of Trust and
Current By-Laws of the Company, copies of which are exhibits to the Registration
Statement of which this Proxy Statement/Prospectus forms a part, and to the
Charter and the Bylaws of the New Company, copies of which are included as
exhibits to the Merger Agreement attached hereto as Annex A.
General/Authorized Shares. The Company was organized as a common law
business trust under the laws of the State of California pursuant to a
declaration of trust dated September 15, 1966. The Company's declaration of
trust was last amended and restated in the form of the Current Declaration of
Trust on July 15, 1997. The New Company was organized on April 7, 1998 by the
Company to acquire and succeed to, and to continue the business of, the Company
upon the consummation of the Mergers and has had no activities to date other
than those incident to the Reorganization.
Under the Current Declaration of Trust, the authorized capital shares
of the Company consist of an unlimited number of common shares of beneficial
interest in the Company and preferred shares of beneficial interest in the
Company issuable in classes or series, comprised of (i) Class A Common Shares,
(ii) class B common shares of beneficial interest, $1.00 par value ("Class B
Common Shares" and together with the Class A Common Shares, the "Common
Shares"), (iii) Class A Preferred Shares and (iv) class B preferred shares of
beneficial interest, par value
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$1.00 per share (the "Class B Preferred Shares" and together with the Class A
Preferred Shares, the "Preferred Shares"). As of August __, 1998, there were
12,267,658 Class A Preferred Shares issued and outstanding, no Class B Preferred
Shares issued and outstanding, 18,213,816 Class A Common Shares issued and
outstanding and no Class B Common Shares issued and outstanding. The certificate
of designation, preferences and rights of the Class A Preferred Shares and the
Class B Preferred Shares ("Certificate of Designation") fixes the number of
authorized Class A Preferred Shares and the Class B Preferred Shares at
12,649,405 each. The Current Declaration of Trust permits the Board of Trustees
to authorize and issue additional shares of beneficial interest in the Company
and to establish additional classes or series of preferred shares and common
shares of beneficial interest from time to time, including additional Class A
Preferred Shares, Class B Preferred Shares, Class A Common Shares and Class B
Common Shares.
Under its Charter, the New Company has authority to issue up to
300,000,000 shares of stock, consisting of (a) 100,000,000 shares of class A
common stock, $.01 par value per share ("Class A Common Stock"), (b) 100,000,000
shares of class B common stock, $.01 par value per share ("Class B Common Stock"
and together with the Class A Common Stock, the "Common Stock"), and (c)
100,000,000 shares of preferred stock, $.01 par value per share ("Preferred
Stock").
Except as described below, all shares of Common Stock will have equal
dividend, distribution, liquidation and other rights. Holders of Common Stock
have no sinking fund or redemption rights, or preemptive rights to subscribe for
any securities of the New Company.
Upon consummation of the Reorganization, the New Company will create
and authorize the issuance of, pursuant to articles supplementary with respect
thereto (the "Articles Supplementary"), 12,267,658 shares of two classes of
Preferred Stock, Class A 9.5% cumulative convertible preferred stock, $.01 par
value per share ("Class A Preferred Stock") and class B 9.5% cumulative
convertible non-voting preferred stock, $.01 par value per share ("Class B
Preferred Stock," together with the Class A Preferred Stock, the "Authorized
Preferred Stock"). Except as described below, all shares of Authorized Preferred
Stock will have equal dividend, distribution, liquidation and other rights.
Holders of Authorized Preferred Stock have no sinking fund or redemption rights,
or preemptive rights to subscribe for any securities of the New Company.
The Board of Directors of the New Company generally will have the power
to issue shares of authorized stock without stockholder approval. Other than the
1,000 shares of New Company common stock owned by the Company which will be
canceled in the Mergers, there are currently no shares of any class of stock of
the New Company issued or outstanding. The Charter authorizes the Board of
Directors to classify any unissued shares of the stock of the New Company and to
reclassify any previously classified but unissued shares of such stock from time
to time, in one or more classes or series of preferred stock or stock issued
from time to time, as authorized by the Board of Directors. Prior to the
issuance of shares of each class or series, the Board of Directors is required
by the MGCL and the Charter to set for each series the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption, as permitted by Maryland law. Such rights, powers, restrictions and
limitations could include the right to receive dividends and payments on
liquidation prior to any such payments being made to the holders of the shares
of New Company Stock. The Board of Directors could authorize the issuance of
shares of preferred stock with terms and conditions that could have the effect
of delaying, deferring or preventing a transaction or a change of control of the
New Company that might involve a premium price for holders of shares of New
Company Stock over the then market price of such shares or otherwise be in the
best interests of such stockholders.
The number of shares of stock of the New Company authorized in the
charter is significantly greater than the number of shares that will be issued
upon the Mergers in order to anticipate current and future needs for
acquisitions, financings, employee benefit plans, stock dividends and splits and
for other corporate purposes. In the event of an unsolicited tender offer or
takeover proposal, the significant number of authorized but unissued shares
could give the Board of Directors of the New Company the ability to issue shares
in one or more transactions which might impede or deter such offer or proposal.
Similarly, additional shares of Preferred Stock could also be issued in a manner
or with such terms, provisions and rights including, but not limited to,
extraordinary voting, dividend, redemption or conversion rights which could make
more difficult, and therefore less likely, a change of control of
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the New Company or other transaction that may, contrary to the judgment of the
Board of Directors, be in best interest of the New Company or its stockholders.
The transfer agent and registrar for the Common Stock will be American
Stock Transfer & Trust Company, the Company's current transfer agent.
Meetings of Shareholders. The Current Declaration of Trust and Current
By-Laws provide for an annual meeting of shareholders to be held each year
during the fifth or sixth calendar month of the Company's fiscal year and at New
York, New York or at such other location as the Board of Trustees shall select.
Special meetings of shareholders shall be called (i) at any time and place
determined by the Board of Trustees and (ii) upon the written request of the
holders of 331/3% of the outstanding Company Shares entitled to vote on any
matter to be voted on at such special meeting, provided such request specify the
purpose or purposes for which such meeting shall be called.
The Bylaws of the New Company provide for annual meetings of
stockholders to be held at such time on such day as shall be set by the Board of
Directors. Special meetings of stockholders may be called by the chief executive
officer, the president or the Board of Directors and must be called by the
secretary upon the written request of the stockholders entitled to cast not less
than 33% of all the votes entitled to be cast at the meeting. Under the MGCL,
unless requested by the stockholders entitled to cast a majority of all the
votes entitled to be cast at such meeting, a special meeting need not be called
to consider any matter which is substantially the same as a matter voted on at
any special meeting of the stockholders held during the preceding twelve months.
Advance Notice of Stockholder Proposals and Director Nominations.
Neither the Current Declaration of Trust nor the Current By-Laws of the Company
contains any provisions allowing or detailing the process for a shareholder to
propose business to be considered at an annual meeting or for the nomination of
trustees.
The Bylaws, in contrast, contain detailed provisions concerning
stockholder nominations and stockholder business. Pursuant to the Bylaws, in
order to have a stockholder proposal or director nomination considered at an
annual meeting of stockholders, stockholders are generally required to deliver
certain information concerning themselves and their stockholder proposal or
director nomination not less than 60 days nor more than 90 days prior to the
anniversary date of the immediately preceding annual meeting (the "Anniversary
Date"); provided, however, that in the event that the date of the annual meeting
is advanced by more than 30 days or delayed by more than 60 days from the
Anniversary Date or if the New Company has not previously held an annual
meeting, notice by the stockholder to be timely must be delivered not earlier
than the close of business on the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made. Failure to comply with such timing
and informational requirements will result in such proposal or director
nomination not being considered at the annual meeting. The purpose of requiring
stockholders to give the New Company advance notice of nominations and other
business, and certain information relating thereto, is to ensure that the New
Company and its stockholders have sufficient time and information to consider
any matters that are proposed to be voted on at an annual meeting, thus
promoting orderly and informed stockholder voting. Such Bylaw provisions could
have the effect of precluding a contest for the election of directors or
stockholder proposals if the proper procedures are not followed, and of delaying
or deferring a third party from conducting a solicitation of proxies to elect
its own slate of directors or to have its own proposals approved.
Action by Consent of Stockholders. The Current Declaration of Trust
provides that any action which may be taken at any meeting of shareholders may
be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding Company Shares having at least the minimum
number that would be necessary to authorize or take such action at a meeting at
which all such shares entitled to vote thereon were present and voted. However,
the MGCL provides that any action required or permitted to be taken by
stockholders of the New Company may be effected by a consent in writing only if
signed by the holders of all of the outstanding stock of the New Company
entitled to vote on the matter. The requirement for unanimous action could have
the effect of delaying or hindering efforts of stockholders to change the Board
of Directors of the New Company.
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Board of Trustees of the Company Compared to Board of Directors of the
New Company. The Current Declaration of Trust provides that the number of
trustees shall generally be established by the Board of Trustees provided that
there shall be no less than three and no more than twenty-one trustees. Pursuant
to the Current Declaration of Trust, a trustee may be removed for cause by the
vote or written consent of a majority of trustees then in office (except the one
so to be removed) and, with or without cause, by the affirmative vote or written
consent of either (i) a majority of the trustees then in office and a majority
of the outstanding Company Shares or (ii) 662/3% of the outstanding Company
Shares. Vacancies in the office of a trustee may be filled by a written
appointment signed by a majority of the trustees then in office. Trustees are
elected for one-year terms.
The Charter provides that the number of directors of the New Company
initially shall be ten, which number may thereafter be increased or decreased
from time to time by the directors pursuant to the Bylaws; provided, however,
that the total number of directors shall not be fewer than three, unless there
are less than three stockholders, nor greater than fifteen. The directors of the
New Company will serve one-year terms. The MGCL provides that any director may
be removed from office, with or without cause, by the affirmative vote of a
majority of all the votes entitled to be cast for the election of directors. The
MGCL also provides that any vacancy occurring on the Board of Directors may be
filled by the affirmative vote of a majority of the remaining directors, except
that a vacancy resulting from an increase in the number of directors must be
filled by a majority of the entire Board of Directors. The stockholders may fill
any vacancy on the Board of Directors resulting from the removal of a director.
Amendment of Organic Documents of the Company and the New Company. Any
amendment to the Current Declaration of Trust requires the affirmative vote or
written consent of either (i) a majority of the trustees then in office and a
majority of the outstanding Company Shares or (ii) the affirmative vote of the
holders of not less than two-thirds of the Company Shares then outstanding.
The approval of the Board of Directors and the affirmative vote of the
holders of shares entitled to cast not less than a majority of the aggregate
votes entitled to be cast thereon (considered for this purpose as a single
class) are required to amend the Charter.
The Current By-Laws of the Company may be amended by the affirmative
vote of a majority of the Board of Trustees at any regular meeting thereof.
The Bylaws of the New Company may be amended only by the Board of
Directors.
Consolidation, Merger or Sale of Assets. The Current Declaration of
Trust provides for the merger, consolidation, reorganization, liquidation or
dissolution and sale, exchange or other disposition of the assets of the Company
upon the affirmative vote or written consent of a majority of the outstanding
Company Shares entitled to vote thereon.
The MGCL generally provides that a consolidation, merger, share
exchange or transfer of all or substantially all of the New Company's assets not
in the ordinary course of business must first be approved by the board of
directors and thereafter by the stockholders by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter, except that the
charter may provide for a greater or lesser percentage of votes, but not less
than a majority of all the votes entitled to be cast on the matter. The Charter
contains a provision that reduces the vote required for approval of any
consolidation, merger, share exchange or transfer of all or substantially all of
the assets to an affirmative vote of a majority of all the votes entitled to be
cast on any such matter at a meeting of the stockholders.
Dissolution/Termination. The Company's Current Declaration of Trust
provides that the Company may be terminated or dissolved only upon the
affirmative vote or written consent of either (i) a majority of the trustees
then in office and a majority of the outstanding Company Shares or (ii) 66 2/3%
of the outstanding Company Shares.
The MGCL generally permits the dissolution of a corporation if approved
(i) first by the affirmative vote of a majority of the entire Board of Directors
declaring such dissolution to be advisable and directing that the proposed
dissolution be submitted for consideration at an annual or special meeting of
stockholders and (ii) after
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<PAGE>
proper notice as to the purpose of the meeting, by the stockholders of the New
Company by the affirmative vote of two-thirds of all the votes entitled to be
cast on the matter. As permitted by the MGCL, the Charter provides that a
dissolution must be approved by a majority of all votes entitled to be cast on
the matter.
Limitations on Dissenters' Appraisal Rights. Generally, so long as the
shares of New Company Stock are listed on a national stock exchange, holders of
such shares who dissent from certain corporate transactions have no right under
the MGCL to an appraisal and payment of the fair value of their shares, except
to the limited extent set forth below.
Certain Business Combinations. Under the MGCL, certain business
combinations, including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities, between a Maryland corporation and an interested stockholder who
beneficially owns 10% or more of the voting power of such corporation's shares
or an affiliate of the corporation who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of the
voting power of the then outstanding voting stock of the corporation or an
affiliate thereof are prohibited for five years after the most recent date on
which the interested stockholder becomes an interested stockholder. Thereafter,
any such business combination must be recommended by the board of directors of
the corporation and approved by the affirmative vote of at least (i) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation and (ii) two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of the corporation other than shares held by the
interested stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the corporation's
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the interested stockholder for its shares. These provisions of Maryland law
do not apply, however, to business combinations that are approved or exempted by
the board of directors of the corporation prior to the time that the interested
stockholder becomes an interested stockholder. The New Company is subject to
these provisions of the MGCL except that the board of directors of the New
Company has adopted a resolution that would exempt Veqtor from the application
of such provisions.
Control Share Acquisitions. The MGCL provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror, by officers or by directors who are employees of the corporation.
"Control shares" are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror, or in respect of which
the acquiror is able to exercise or direct the exercise of voting power except
solely by virtue of a revocable proxy, would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third; (ii) one-third or more but
less than a majority; or (iii) a majority of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses and delivery of an "acquiring person statement"), may compel the
corporation's board of directors to call a special meeting of stockholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the corporation may itself present the question
at any shareholders meeting.
Unless the charter or bylaws provide otherwise, if voting rights are
not approved at the meeting or if the acquiring person does not deliver an
acquiring person statement within ten days following a control share acquisition
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. Moreover, unless the
charter or bylaws provide otherwise, if voting rights for control shares are
approved at a stockholders' meeting and the acquiror becomes entitled to
exercise or direct the exercise of a majority or more of all voting power, all
other
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<PAGE>
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or to acquisitions approved or exempted by the charter or
bylaws of the corporation. Stockholders of the New Company are subject to the
terms of the control share acquisition statute; except that the Bylaws contain a
provision that exempts Veqtor and any affiliates thereof and certain permitted
transferees of Veqtor from the application of the statute.
Limitation of Liability and Indemnification of Trustees and Directors.
Directors of a corporation are generally not responsible for its debts and
obligations. The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by Maryland law.
The Company's Current Declaration of Trust contains a provision
authorizing the Company to indemnify and hold harmless trustees and officers, or
directors and officers, respectively, involved in an action, suit or proceeding.
The Charter of the New Company authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to, (a) any present or
former director or officer or (b) any individual who, while a director of the
New Company and at the request of the New Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason of his or her status as a present or former director or
officer of the New Company. The Bylaws of the New Company obligate it, to the
maximum extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of the New Company and at the request of the New Company, serves or has
served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Charter and Bylaws also permit the New Company to indemnify and advance
expenses to any person who served a predecessor of the New Company in any of the
capacities described above and to any employee or agent of the New Company or a
predecessor of the New Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking
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<PAGE>
by him or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met.
Inspection Rights. The Current Declaration of Trust provides that
shareholders of record are entitled to inspect the books of account of the
Company and the share register at any reasonable time upon written demand for a
purpose reasonably related to his or her interests as a shareholder.
Under the MGCL, the New Company's stockholders have the right to
inspect and copy during usual business hours the Bylaws, minutes of the
proceedings of stockholders, annual statements of affairs and voting trust
agreements on file at the New Company's principal offices. In addition, any
stockholder may request in writing a statement of all stock and securities
issued by the New Company during a specified period of not more than twelve
months before the date of such request. The MGCL also provides additional
inspection rights for stockholders who individually or together are and for at
least six months have been stockholders of record of at least 5% of the
outstanding stock of any class of the New Company. These rights include (i) the
right upon written request to inspect and copy during usual business hours the
New Company's books of account and its stock ledger; (ii) the right to require
the New Company to produce a statement of affairs verified under oath by an
officer that sets forth in reasonable detail the New Company's assets and
liabilities of a reasonably current date; and (iii) if the New Company does not
maintain the original or duplicate stock ledger at its principal office, the
right to obtain from the New Company a list of stockholders setting forth the
name and address of each stockholder and the number of shares of each class that
the stockholder holds, verified under oath by an officer of the New Company or
its transfer agent or registrar.
Trustees' and Directors' Duties. The Current By-Laws of the Company
provide that no trustee shall be liable to the Company for any act or omission
except for wilful misfeasance, bad faith, gross negligence or reckless disregard
of duty or for the failure to act in good faith in the reasonable belief that
his or her actions are in the best interests of the Company. Under the MGCL, a
director of a Maryland corporation must perform his duties in good faith, in a
manner that he reasonably believes to be in the best interests of the
corporation and with the care of an ordinarily prudent person in a like position
under similar circumstances. Directors of the New Company who act in such a
manner generally will not be liable to the New Company for monetary damages
arising from their activities.
Description of Authorized Stock of the New Company
The authorized stock of the New Company will be substantially identical
to the capital shares of the Company in all material respects. The following is
a summary description of the authorized and outstanding stock of the New Company
following the Reorganization.
Common Stock
Distributions. Directors of the New Company may authorize dividends
payable in cash, property or stock as long as, after payment of the dividend,
(a) the New Company is able to pay its debts as they become due in the usual
course of business and (b) the New Company's total assets are at least equal to
the sum of its total liabilities plus, unless the charter permits otherwise
(which the New Company Charter does), the amount necessary, if the New Company
were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of stockholders whose preferential rights
on dissolution are superior to those receiving the dividend. After provisions
with respect to preferential dividends on any then outstanding classes of
Preferred Stock, if any, fixed by the Board of Directors pursuant to the Charter
have been satisfied, and after satisfaction of any other requirements including
with respect to redemption rights and preferences, of any such classes of
Preferred Stock, including with respect to redemption rights and preferences,
then and thereafter the holders of Common Stock will be entitled to receive, pro
rata in relation to the number of shares of Common Stock held by them, such
dividends or other distributions as may be authorized from time to time, by the
Board of Directors out of assets legally available therefor.
Liquidation Rights. In the event of the liquidation of the New Company
and the distribution of its assets, after the payment in full or the setting
apart for payment to all creditors of the New Company of the amounts to which
they shall be entitled and subject to such preferential amounts to which the
holders of outstanding Preferred
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Stock, if any, shall be entitled, the remaining assets of the Company available
for payment and distribution to holders of shares of Class A Common Stock and
Class B Common Stock shall, subject to any participating or similar rights of
Preferred Stock at the time outstanding, be distributed ratably, in accordance
with the number of shares of Class A Common Stock and Class B Common Stock held
by each such holder, among the holders of outstanding shares of Class A Common
Stock and Class B Common Stock.
Voting Rights. Each holder of Class A Common Stock is entitled to one
vote per share on all matters to be voted upon by the New Company's
stockholders. The Class B Common Stock does not have voting rights and is not
counted in determining the presence of a quorum for the transaction of business
at any meeting of the stockholders.
Conversion Rights. Each share of Class A Common Stock is convertible at
the option of the holder thereof at any time and from time to time into one
fully paid and nonassessable share of Class B Common Stock and, subject to
delivery of the certification described below, each share of Class B Common
Stock is convertible at the option of the holder thereof at any time and from
time to time into one fully paid and nonassessable share of Class A Common
Stock. If shares of Class B Common Stock are to be converted into shares of
Class A Common Stock, the holder of the shares of Class B Common Stock must
certify to the New Company that the stockholder either (a) will not, together
with any other person (other than the New Company) who previously held voting
shares of the New Company now held by the stockholder, upon the issuance of such
shares of Class A Common Stock, own more than 4.9% of any class of voting stock
of the New Company or (b) is not limited by the Bank Holding Company Act of
1956, as amended, to holding no more than 4.9% of any class or series of voting
stock of the New Company.
Preferred Stock
Distributions. Holders of shares of Authorized Preferred Stock are
entitled to receive, when, as and if authorized by the Board of Directors, out
of funds legally available therefor, cash dividends per share at the rate of
9.5% per annum on a per share price of $2.69. Such dividends shall accrue
(whether or not authorized) and, to the extent not paid for any dividend period,
will be cumulative. The semi-annual dividend periods commence on and include the
sixteenth day of December and June of each year and end on the fifteenth day of
the following June and December, respectively, provided however, that subject to
the consummation of the Merger, the first dividend period shall be deemed to
commence on June 16, 1998 and end on and include December 15, 1998. Dividends on
the Authorized Preferred Stock are payable, when, as and if, authorized,
semi-annually, in arrears, on December 26 and June 25 of each year commencing
December 26, 1998. No dividends may be authorized or paid in cash or property on
any Authorized Preferred Stock unless simultaneously the same dividend is
authorized or paid on both classes of Authorized Preferred Stock, except that if
dividends are authorized that are payable in shares of Common Stock or
Authorized Preferred Stock, such dividends shall be payable at the same rate on
the Authorized Preferred Stock and shall be payable only in Class A Common Stock
and Class A Preferred Stock to holders of Class A Preferred Stock and in Class B
Common Stock and Class B Preferred Stock to holders of Class B Preferred Stock.
Unless all dividends and other amounts then accrued with respect to the
Authorized Preferred Stock are paid in full, the New Company may not declare or
pay or set apart for payment any dividends or make any other distributions on,
or make any payment on account of the purchase, redemption, exchange or other
retirement of, any other shares of stock of the New Company (other than payment
in or in exchange for Junior Stock (as defined below)).
Liquidation Preference. In the event of the liquidation of the New
Company and the distribution of its assets, the holders of the shares of
Authorized Preferred Stock are entitled to receive out of assets of the Company
available for distribution to stockholders, an amount per share equal to $2.69
plus the amount of all dividends per share accrued and unpaid thereon through
the date of final distribution to stockholders, whether or not declared, before
any payment shall be made or any assets distributed to the holders of any other
class or series of shares of the New Company.
Voting Rights. Holders of Class A Preferred Stock are entitled to vote
together with the holders of Class A Common Stock as a single class on all
matters submitted to a vote of shareholders. Each share of Class A Preferred
Stock entitles the holder thereof to a number of votes per share equal to the
number of shares of Class A Common Stock into which such Class A Preferred Stock
is then convertible. Except as described below, the Class
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B Preferred Stock do not have voting rights and are not counted in determining
the presence of a quorum for the transaction of business at a stockholders'
meeting.
The holders of a majority of the outstanding shares of both classes of
Authorized Preferred Stock, voting together as a single class, but voting
together as a separate class from the Common Stock, have, with certain limited
exceptions, the right to approve any merger, consolidation or transfer of all or
substantially all of the assets of the Company.
In addition, the affirmative vote of the holders of a majority of the
outstanding shares of both classes of Authorized Preferred Stock, voting
together as a single class, but voting together as a separate class from the
Common Stock, is required in order to: amend, alter or repeal any provision of
the Articles Supplementary; authorize, create or issue any class or series of
stock of the New Company (other than Junior Stock); and incur any indebtedness
if the New Company's debt-to-equity ratio would exceed 5 to 1. "Junior Stock" is
defined as shares of Common Stock and any other class or series of shares of
stock of the New Company now or hereafter authorized, issued or outstanding
which is subject to the following restrictions and limitations: (i) no dividend
or distribution can be declared or paid on the shares of such class or series
unless all accrued dividends and other amounts then due with respect to the
Authorized Preferred Stock shall have been paid in full; (ii) in the event of
any liquidation, dissolution or winding up of the Company, either voluntary or
involuntary, the holders of Authorized Preferred Stock shall be entitled to
receive out of assets of the Company available for distribution to stockholders,
the liquidation preference with respect to the Authorized Preferred Stock and
any accrued and unpaid dividends thereon before any payment shall be made or any
assets distributed to the holders of such other class or series of shares of the
New Company; and (iii) shares of such class or series are not required to be
redeemed under any circumstances, either at the option of the New Company or of
any holder thereof, unless all of the outstanding Authorized Preferred Stock
have theretofore been redeemed or converted.
Conversion Right. Shares of Class A Preferred Stock are convertible at
the option of the holder thereof at any time and from time to time in whole or
in part into an equal number of shares of Class B Preferred Stock, or into a
number of shares of Class A Common Stock equal to the ratio of (x) $2.69 plus an
amount equal to all dividends per share accrued and unpaid thereon as of the
date of such conversion to (y) the Conversion Price (as defined below) in effect
as of the date of such conversion. Shares of Class B Preferred Stock are
convertible at the option of the holder thereof at any time and from time to
time in whole or in part into an equal number of shares of Class A Preferred
Stock or into a number of shares of Class B Common Stock equal to the ratio of
(x) $2.69 plus an amount equal to all dividends per share accrued and unpaid
thereon as of the date of such conversion to (y) the Conversion Price in effect
as of the date of such conversion. If shares of Class B Preferred Stock are to
be converted into shares of Class A Preferred Stock, the holder of the shares of
Class B Preferred Stock must certify to the New Company that the stockholder
either (a) will not, together with any other person (other than the New Company)
who previously held voting shares of the New Company now held by the
stockholder, upon the issuance of such shares of Class A Preferred Stock, own
more than 4.9% of any class of voting stock of the New Company or (b) is not
limited by the Bank Holding Company Act of 1956, as amended, to holding no more
than 4.9% of any class or series of voting stock of the New Company. The
"Conversion Price" will be equal to $2.69, but the Conversion Price will be
adjusted to provide the holders of the Class A Preferred Stock with customary
anti-dilution protection, including protection for the issuance of additional
shares at a price less than $2.69 per share.
Federal Income Tax Matters
Federal Income Tax Consequences of the Reorganization. The Board of
Trustees intends the Reorganization to qualify as a "reorganization" within the
meaning of the Code, with the result that no gain or loss will be recognized by
the Company, the New Company or the shareholders of the Company. The basis of
each shareholder's shares of New Company Stock received in exchange for Company
Shares, and the holding period for such shares of New Company Stock, will be the
same as such shareholder's basis in, and holding period for (assuming that the
shareholder holds the Company Shares as capital assets), the shareholder's
Company Shares. The basis and holding period for the properties of the Company
acquired by the New Company upon the consummation of the Mergers will be the
same in the hands of the New Company as they were in the hands of the Company.
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Battle Fowler LLP, counsel to the Company and to the New Company, has
rendered an opinion to the Company and to the New Company to the effect that the
Mergers will qualify as a "reorganization" within the meaning of the Code. Such
opinion, which is based on certain factual assumptions and representations
regarding the Mergers, concludes that neither the shareholders of the Company or
the Company itself will recognize any gain or loss as a result of the
Reorganization; the shareholders' basis in the New Company Stock will be the
same as their basis in their Company Shares; and for those shareholders who hold
Company Shares as capital assets, their holding period for the shares of New
Company Stock received in the Reorganization will include their holding period
for their Company Shares. The opinion also concludes that the New Company's
basis and holding period for the assets of the Company acquired upon
consummation of the Reorganization will be the same as the basis and holding
period of such assets in the hands of the Company. In the event that any of such
assumptions or representations upon which the opinion is based are incorrect,
the treatment of the Mergers as a "reorganization" under the Code may be
adversely affected.
State Taxes. Each shareholder is encouraged to check with his or her
own tax advisor to determine whether the tax consequences of the Mergers to such
shareholder are the same under applicable income tax laws of the state in which
such shareholder resides as the tax consequences to such shareholder under the
Code.
Shareholders are urged to consult their own tax advisors with respect
generally to the tax consequences arising under Federal law and the laws of any
state, municipality or other taxing jurisdiction, including tax consequences
resulting from such shareholder's own tax characteristics and situation.
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<PAGE>
PROPOSAL 2 -- APPROVAL OF THE DECLARATION AMENDMENT
CERTAIN ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. THIS SUMMARY
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE COMPLETE TEXT OF THE DECLARATION AMENDMENT ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS ANNEX B. SHAREHOLDERS ARE URGED TO READ THE ANNEXES TO
THIS PROXY STATEMENT/PROSPECTUS IN THEIR ENTIRETY.
The Board of Trustees has determined that the Declaration Amendment is
necessary in order to permit the Company to implement the Reorganization. The
Declaration Amendment would amend the Company's Current Declaration of Trust to
(i) expressly permit the Company to merge or consolidate with and/or into a
domestic or foreign limited partnership and (ii) set forth the procedures
pursuant to which such merger or consolidation would take place. The proposed
Declaration Amendment is intended to allow the Company to comply with the
provisions of Section 23006 of the California Corporations Code, which expressly
permits REITs to merge with limited partnerships or REITs provided the merger is
specifically permitted by the declaration of trust and the procedure is detailed
in the declarations. While the Company terminated REIT operations in connection
with its recapitalization and change in control in July 1997, it is
grandfathered as a REIT for purposes of, among other things, Section 23006.
Article X of the Current Declaration of Trust sets forth the approval
requirement for the merger or consolidation of the Company with or into another
entity (i.e., the affirmative vote or written consent of holders of a majority
of the outstanding Company Shares entitled to vote). However, the provisions of
Article X of the Current Declaration of Trust do not expressly authorize the
merger or consolidation of the Company with or into a foreign or domestic
limited partnership and do not set forth the procedures by which such a merger
or consolidation would take place, as required by Section 23006 of the
California Corporations Code. The Declaration Amendment (i) explicitly permits
the Company to merge or consolidate with and/or into a domestic or foreign
limited partnership and (ii) sets forth the procedures pursuant to which such
merger would take place. Upon approval of the Declaration Amendment by
shareholders, the Company will be able to implement the Reorganization.
The Declaration Amendment will be filed with the office of the
Assessor-Recorder of the County of San Francisco, California, when approved by
the shareholders.
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PROPOSAL 3 -- ELECTION OF TRUSTEES
All of the Company's trustees will be elected at the Annual Meeting to
serve as trustees until the next succeeding annual meeting of shareholders (or
stockholders of the New Company if the Reorganization is approved) and until
their successors are elected and shall have qualified. The Nominees are all
currently members of the Board of Trustees. All Nominees, if elected, are
expected to serve until the next succeeding annual meeting of shareholders.
The Board of Trustees has been informed that all of the nominees are
willing to serve as trustees but, if any of them should decline or be unable to
act as a trustee, the individuals named in the proxies will vote for the
election of such other person or persons as they, in their discretion, may
choose. The Board of Trustees has no reason to believe that any such nominees
will be unable or unwilling to serve.
The election to the Board of Trustees of each of the eight nominees
identified in this Proxy Statement will require the affirmative vote of the
holders of a plurality of the Company Shares present in person or represented by
proxy at the Annual Meeting and entitled to vote. The Board of Trustees
unanimously recommends that shareholders vote FOR the election to the Board of
Trustees of each of the ten nominees identified below.
Nominees for Election as Trustees
The name, age as of August 1, 1998, and existing office(s) and/or
trustee positions with the Company of each of the nominees for election as a
trustee are as follows:
<TABLE>
<CAPTION>
Name Age Office or Position Held
---- --- -----------------------
<S> <C>
Samuel Zell........................... 56 Chairman of the Board
Jeffrey A. Altman..................... 31 Trustee
Thomas E. Dobrowski................... 54 Trustee
Martin L. Edelman..................... 56 Trustee
Gary R. Garrabrant.................... 41 Trustee
Craig M. Hatkoff...................... 44 Trustee, Vice Chairman and Chairman of the Executive Committee
John R. Klopp......................... 44 Trustee, Vice Chairman and Chief Executive Officer
Sheli Z. Rosenberg.................... 56 Trustee
Steven Roth........................... 57 Trustee
Lynne B. Sagalyn...................... 50 Trustee
</TABLE>
The name, principal occupation for the last five years, selected
biographical information and the period of service as a trustee of the Company
of each of the nominees for trustees are set forth below.
Samuel Zell has been Chairman of the Board of Trustees since July 15,
1997. Mr. Zell is chairman of the board of directors of Equity Group
Investments, Inc. ("EGI"), American Classic Voyages Co., an owner and operator
of cruise lines ("American Classic"), Anixter International Inc., a provider of
integrated network and cabling systems ("Anixter"), Manufactured Home
Communities, Inc., a REIT specializing in the ownership and management of
manufactured home communities ("MHC"), and Jacor Communications, Inc. an owner
of radio stations ("Jacor"). He is chairman of the board of trustees of Equity
Residential Properties Trust ("ERPT"), a REIT specializing in the ownership and
management of multi-family housing, and of Equity Office Properties Trust
("EOPT"), a REIT specializing in the ownership and management of office
buildings. Mr. Zell is also a director of Fred Meyer, Inc., an
27
<PAGE>
owner and operator of supermarkets and discount stores, Chart House Enterprises,
Inc., an owner and operator of restaurants, and Ramco Energy PLC, an independent
oil company based in the United Kingdom.
Jeffrey A. Altman has been a trustee of the Company since November 4,
1997. Since November 1996, Mr. Altman has been a senior vice president of
Franklin Mutual Advisers, Inc., formerly Heine Securities Corporation, a
registered investment adviser ("FMA"), and a vice president of Franklin Mutual
Series Fund Inc., a mutual fund with assets in excess of $25 billion, advised by
FMA. From August 1988 to October 1996, Mr. Altman was an analyst with FMA. Mr.
Altman is also the chairman of the board of trustees of Value Property Trust, a
self- administered REIT engaged in the business of managing its portfolio of
real estate investments, and a director of Resurgence Properties Inc., a company
engaged in diversified real estate activities.
Thomas E. Dobrowski has been a trustee since August 13, 1998. Mr.
Dobrowski has been the managing director of real estate and alternative
investments of General Motors Investment Management Corporation ("GMIMCO"), an
investment advisor to several pension funds of General Motors Corporation ("GM")
and its subsidiaries and to several other clients also controlled by GM [for
more than the past five years]. Since March 1993, Mr. Dobrowski has been a
director of MHC. Since April 1994, Mr. Dobrowski has been a director of Red Roof
Inns, Inc., an owner and operator of hotels. Since May 1997, Mr. Dobrowski has
been a director of Taubman Centers Inc., an equity REIT focused on regional
shopping centers. Mr. Dobrowski is a trustee of EOPT.
Martin L. Edelman has been a trustee of the Company since February 4,
1997. Mr. Edelman has been a director of Chartwell Leisure Inc., a publicly
traded owner and operator of hotel properties ("Chartwell"), since November 1994
and has been president of Chartwell since January 1996. He has also been a
director of Cendant Corporation and a member of that corporation's executive
committee since November 1993. Mr. Edelman has been of counsel to Battle Fowler
LLP, a New York City law firm that provides services to the Company, since
January 1994 and was a partner with that firm from 1972 through 1993. Mr.
Edelman also serves as a director of Avis Rent a Car, Inc. and G. Soros Realty,
Inc.
Gary R. Garrabrant has been a trustee of the Company since January 2,
1997. Mr. Garrabrant was the vice chairman of the Company from February 1997
until July 15, 1997. Mr. Garrabrant is executive vice president of EGI and
managing partner of EGI Capital Markets, L.L.C. He joined EGI as senior vice
president in January 1996. Previously, Mr. Garrabrant was director of Sentinel
Securities Corporation and co-founded Genesis Realty Capital Management in 1994,
both of which were based in New York and specialized in real estate securities
investment management. From 1989 to 1994, he was associated with The Bankers
Trust Company. Mr. Garrabrant is a director of Meritage Hospitality Group Inc.
Craig M. Hatkoff has been a trustee and a vice chairman of the Company
since July 15, 1997. Mr. Hatkoff is a founder and has been a managing partner of
Victor Capital since 1989. Mr. Hatkoff was a managing director and co-head of
Chemical Realty Corporation, the real estate investment banking arm of Chemical
Banking Corporation, from 1982 until 1989. From 1978 to 1982, Mr. Hatkoff was
the head of new product development in Chemical Bank's Real Estate Division,
where he previously served as a loan officer.
John R. Klopp has been a trustee of the Company since January 2, 1997,
the chief executive officer of the Company since February 1997 and a vice
chairman of the Company since July 15, 1997. Mr. Klopp is a founder and has been
a managing partner of Victor Capital since 1989. Mr. Klopp was a managing
director and co-head of Chemical Realty Corporation from 1982 until 1989. From
1978 to 1982, Mr. Klopp held various positions with Chemical Bank's Real Estate
Division, where he was responsible for originating, underwriting and monitoring
portfolios of construction and permanent loans. He is a director of Metropolis
Realty Trust, Inc., a Manhattan office REIT.
Steven Roth has been a trustee since August 13, 1998. Mr. Roth has been
chairman of the board of trustees and chief executive officer of Vornado Realty
Trust ("Vornado") since May 1989 and chairman of the executive committee of the
board of Vornado since April 1980. Since 1968, he has been a general partner of
Interstate Properties and, more recently, he has been managing general partner.
On March 2, 1995, he became chief executive officer of Alexander's, Inc. Mr.
Roth is also a director of Alexander's, Inc.
28
<PAGE>
Sheli Z. Rosenberg has been a trustee of the Company since July 15,
1997. Since 1994, Ms. Rosenberg has been the chief executive officer and
president of EGI and Ms. Rosenberg has been a director of EGI for more than the
past five years. She was a principal of the law firm Rosenberg & Liebentritt
P.C. from 1980 until September 1997. Ms. Rosenberg is a director of Jacor; MHC;
Anixter; CVS Corporation, a drugstore chain; and Illinois Power Co., a supplier
of electricity and natural gas in Illinois, and its holding company, Illinova
Corporation. She is also a trustee of ERPT and of EOPT. Ms. Rosenberg was a vice
president of First Capital Benefit Administrators, Inc., which filed a petition
under the federal bankruptcy laws on January 3, 1995, which resulted in its
liquidation on November 15, 1995.
Lynne B. Sagalyn has been a trustee of the Company since July 15, 1997.
Dr. Sagalyn has been a professor and the coordinator of the M.B.A. Real Estate
Program at the Columbia University Graduate School of Business since 1992. From
1991 to 1992, she was a visiting professor at Columbia. From 1987 to 1991, she
was an associate professor of Planning and Real Estate Development at the
Massachusetts Institute of Technology. She is also on the faculty of the Weimer
School for Advanced Studies in Real Estate and Land Economics. Dr. Sagalyn is a
director of United Dominion Realty Trust (NYSE) and The Retail Initiative and on
an advisory board for Initiatives for a Competitive Inner City.
Board of Trustees; Committees
The Board of Trustees is currently comprised of Messrs. Zell, Altman,
Dobrowski, Edelman, Garrabrant, Hatkoff, Klopp and Roth, Ms. Rosenberg and Dr.
Sagalyn. The Board of Trustees has four standing committees: an executive
committee, an audit committee, a compensation committee and a performance
compensation committee.
Executive Committee: The executive committee is currently comprised of
Messrs. Hatkoff, Garrabrant and Klopp and Ms. Rosenberg, with Mr. Hatkoff
serving as chairman of the executive committee. The executive committee is
authorized to exercise all the powers and authority of the Board of Trustees in
the management of the business and affairs of the Company except those powers
reserved, by law or resolution, to the Board of Trustees.
Audit Committee: The audit committee is currently comprised of Mr.
Altman and Dr. Sagalyn, with Dr. Sagalyn serving as chairman of the audit
committee. The audit committee makes recommendations to the Board of Trustees
regarding the selection of the Company's independent auditors, reviews the plan,
scope and results of the audit, reviews with the independent auditors and
management the Company's policies and procedures with respect to internal
accounting and financial controls, changes in accounting policy and the scope of
the non-audit services which may be performed by the independent auditors.
Compensation Committee: The compensation committee is currently
comprised of Ms. Rosenberg and Dr. Sagalyn and Messrs. Altman, Edelman and
Klopp, with Ms. Rosenberg serving as chairman of the compensation committee. The
compensation committee establishes the compensation and benefit arrangements for
the officers and the key employees of the Company and the general policies
relating to compensation and benefit arrangements of other employees of the
Company, except to the extent that power is vested in the performance
compensation committee. The compensation committee also administers the share
plans and compensation programs of the Company.
Performance Compensation Committee: The performance compensation
committee is currently comprised of Ms. Rosenberg, Dr. Sagalyn and Mr. Altman,
with Ms. Rosenberg serving as chairman of the performance compensation
committee. The performance compensation committee establishes awards under and
administers the Company's share plans and compensation programs insofar as they
relate to executive officers of the Company.
During 1997, the Board of Trustees held 10 meetings. The executive
committee did not meet during 1997. The audit committee held one meeting in
1997. During 1997, the compensation committee held one meeting. The performance
compensation committee held one meeting in 1997. During 1997, each trustee
attended at least 75 percent of the number of meetings of the Board (while they
were members) and 100 percent of the total number of meetings of committees on
which he or she served, except for Messrs. Zell and Klopp who attended
two-thirds of the meetings of the Board (while they were members).
29
<PAGE>
Compensation of Trustees
The Company does not pay its non-employee trustees any cash fees for
their services as such, but rather compensates non-employee trustees with an
annual award of share units under the Company's 1997 non-employee trustee share
plan with a value equal to $30,000. The number of share units awarded to each
trustee, which are convertible into an equal number of Class A Common Shares
according to individual schedules set by each trustee, is determined quarterly
in arrears by dividing one-quarter of the annual retainer amount ($7,500) by the
average closing price of the Class A Common Shares for the quarter. The share
units vest when issued. There is no separate compensation for service on
committees of the Board of Trustees. All trustees are also reimbursed for travel
expenses incurred in attending Board and committee meetings.
The Company is a party to a consulting agreement, dated as of July 15,
1997, with Gary R. Garrabrant, a trustee of the Company. The consulting
agreement has a term of one year and, as amended, provides for a consulting fee
of $180,000. Pursuant to the agreement, Mr. Garrabrant provides consulting
services for the Company, including, strategic planning, identifying and
negotiating mergers, acquisitions, joint ventures and strategic alliances, and
advising as to capital structure matters. Mr. Garrabrant is also entitled to
participate in the Company's Incentive Share Plan, on such basis as may be
determined by the compensation committee of the board of trustees (the
"Compensation Committee"). In 1998, Mr. Garrabrant was awarded 35,000 options to
purchase Class A Common Shares in recognition of his ongoing contributions to
the Company. The Compensation Committee also awarded a one-time discretionary
bonus of $150,000 to Mr. Garrabrant for services rendered during 1997 in
connection with the Company's public offering of 9,000,000 Class A Common Shares
(the "Offering").
The Company is a party to a consulting agreement, dated as of January
1, 1998, with Martin L. Edelman, a trustee of the Company. The consulting
agreement has a term of one year, is terminable by either party upon thirty (30)
days prior notice and provides for a consulting fee of $8,000 per month. Unless
otherwise terminated, the agreement shall automatically be extended for an
additional one year term. Pursuant to the agreement, Mr. Edelman provides
consulting services for the Company including client development and advisory
services in connection with lending and investment banking activities and asset
and business acquisition transactions. Pursuant to the agreement, the Company
agreed to grant 50,000 options to purchase Class A Common Shares. Mr. Edelman is
also entitled to participate in the Company's Incentive Share Plan.
In 1998, the Compensation Committee awarded Samuel Zell 120,000 options
to purchase Class A Common Shares in recognition of his ongoing contributions to
the Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee was comprised during 1997 of Ms. Rosenberg,
Dr. Sagalyn and Messrs. Altman, Edelman and Klopp. Other than Mr. Klopp, none of
the committee's members was an officer or employee of the Company during 1997.
No committee member had any interlocking relationships requiring disclosure
under applicable rules and regulations.
Mr. Zell and Ms. Rosenberg serve as members of the board of directors
of numerous non-public companies owned or controlled in whole or in part by Mr.
Zell or his affiliates which do not have compensation committees, and in many
cases, the executive officers of those companies include Mr. Zell and Ms.
Rosenberg.
For a description of certain relationships and transactions with
members of the board of trustees or their affiliates, see "--Certain
Relationships and Related Transactions."
Executive and Senior Officers
The following sets forth the positions with the Company and selected
biographical information for the executive and senior officers of the Company
who are not trustees.
30
<PAGE>
Carol J. Eglow has been a managing director of the Company since July
15, 1997. Prior to that time, Ms. Eglow served as a principal of Victor Capital
and had been employed in various positions at such firm since June 1989. She was
previously employed in various positions at Chemical Realty Corporation and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Jeremy FitzGerald has been a managing director of the Company since
July 15, 1997. Prior to that time, Ms. FitzGerald served as a principal of
Victor Capital and had been employed in various positions at such firm since May
1990. She was previously employed in various positions at PaineWebber
Incorporated.
Donald J. Meyer has been a managing director and Chief Investment
Officer of the Company since July 15, 1997. From 1979 through July 1997, Mr.
Meyer held various positions at The First National Bank of Chicago ("First
Chicago"). From 1989 until 1990, Mr. Meyer served as Senior Credit Officer for
real estate at First Chicago. From 1990 to 1993, Mr. Meyer, at different times,
was the head of the Real Estate Enhancement Division and the Asset Disposition
Department. Mr. Meyer was the Senior Credit Officer for Product Risk Management
at First Chicago from 1993 until 1995. From 1995 until 1997, Mr. Meyer was Head
of Structural Investments and managed First Chicago's investments in
non-investment grade tranches of commercial mortgage-backed securities. In 1991,
Mr. Meyer became a Senior Vice President at First Chicago.
Edward L. Shugrue III has been the chief financial officer of the
Company since September 30, 1997 and a managing director and assistant secretary
of the Company since July 15, 1997. Prior to that time, Mr. Shugrue served as a
principal of Victor Capital since January 1997. He previously served as director
of real estate for and a vice president of River Bank America from April 1994
until June 1996 after serving as a vice president of the bank since January
1992. He was previously employed in various positions at Bear, Stearns & Co.
Inc.
Executive Compensation
The following table sets forth for the years indicated the annual
compensation of the chief executive officer and the other executive officers of
the Company who earned annual salary and bonus in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
- --------------------------------------------------------------------------------------------------------------------------------
Securities
Underlying Other
<S> <C> <C> <C> <C> <C>
Name and Principal Position Year Salary($)(1) Bonus($) Options(#) Compensation
John R. Klopp
Vice Chairman and Chief
Executive Officer 1997 $935,964(2) $500,000 75,000 $ 992(4)
Craig M. Hatkoff
Vice Chairman and Chairman
of the Executive Committee 1997 935,964(2) 500,000 75,000 992(4)
Donald J. Meyer
Managing Director and Chief
Investment Officer 1997 139,773(3) 150,000 75,000 35,125(5)
Edward L. Shugrue III 1997 275,067(1) 200,000 50,000 --
Managing Director and Chief
Financial Officer
</TABLE>
(1) The Company paid total compensation of $140,000, $180,000 and $72,000
to Frank M. Morrow, the Company's former chief executive officer, for
the years ended 1997, 1996 and 1995, respectively.
31
<PAGE>
(2) Includes $235,417 of base salary paid by the Company for the pro rata
portion of each of Messrs. Klopp and Hatkoff's $500,000 annual base
salary, payment of which commenced after the acquisition of Victor
Capital by the Company. Also includes an allocation equal to half of
the $475,021 of total management fees ($237,511) paid by Victor Capital
to Valentine Wildove & Company, Inc., a company owned equally by
Messrs. Klopp and Hatkoff, and $463,036 of capital distributions made
by Victor Capital to each of Messrs. Klopp and Hatkoff. The foregoing
management fees and capital distributions were paid or made prior to
the acquisition of Victor Capital by the Company in July 1997.
(3) Represents pro rata portion of $300,000 annual base salary paid for
portion of year employed.
(4) Represents term life insurance premiums paid by the Company.
(5) Represents relocation expenses paid by the Company.
Employment Agreements
The Company is a party to employment agreements with John R. Klopp and
Craig M. Hatkoff. The employment agreements provide for five-year terms of
employment commencing as of July 15, 1997. On the fifth anniversary of the
commencement of the employment agreements, and on each succeeding anniversary,
the terms of the employment agreements shall be automatically extended for one
additional year unless, not later than three months prior to such anniversary
date, either party shall have notified the other that it will not extend the
term of the agreement. The employment agreements provide for base annual
salaries of $500,000, which will be increased each calendar year to reflect
increases in the cost of living and will otherwise be subject to increase in the
discretion of the Board of Trustees. Mr. Klopp and Mr. Hatkoff are also entitled
to annual incentive cash bonuses to be determined by the Board of Trustees based
on individual performance and the profitability of the Company. Mr. Klopp and
Mr. Hatkoff are also participants in the Company's 1997 long-term incentive
share plan (the "Incentive Share Plan") and other employee benefit plans of the
Company.
If the employment of Mr. Klopp or Mr. Hatkoff is terminated without
cause, with good reason or following a change of control, as those terms are
defined in the employment agreements, the affected employee would be entitled to
(i) a severance payment equal to the greater of the amount payable to such
employee over the remainder of the term of the employment agreement or an amount
equal to the aggregate base salary and cash incentive bonus paid to the employee
during the previous year; (ii) continued welfare benefits for two years; and
(iii) automatic vesting of all unvested share options such that all of the
employee's share options would become immediately exercisable. Each vested
option will remain exercisable for a period of one year following the employee's
termination. The employment agreements provide for a non-competition period of
one year if Mr. Klopp or Mr. Hatkoff terminates his employment voluntarily or is
terminated for cause.
The Company is a party to an employment agreement with Donald J. Meyer
which provides for a term of employment for two years. The employment agreement
provides for a base annual salary of $300,000, minimum annual bonuses of
$150,000 at the end of 1997 and 1998, and for participation in the Incentive
Share Plan.
32
<PAGE>
Incentive Share Option Plan
The following table sets forth share options issued in 1997 to the
executive officers named in the Summary Compensation Table. The table also sets
forth the hypothetical gains that would exist for the share options at the end
of their ten-year terms, assuming compound rates of appreciation of 5% and 10%.
The actual future value of the options will depend on the market value of the
Company's Class A Common Shares.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term(2)
(a) (b) (c) (d) (e) (f) (g)
Number of
Securities % of Total
Underlying Option/SARs
Options/ Granted to
SARs Employees Exercise or Expira
Granted in Fiscal Base Price tion
Name (#)(1) Year ($/sh) Date 5% ($) 10% ($)
- ------------- ------------- --------------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
John R. Klopp 75,000 13.9665% $ 6.00 7/16/07 $283,002.58 $717,184.11
Craig M. Hatkoff 75,000 13.9665 6.00 7/16/07 283,002.58 717,184.11
Donald J. Meyer 75,000 13.9665 6.00 7/16/07 283,002.58 717,184.11
Edward L. Shugrue III 50,000 9.3110 6.00 7/16/07 188,668.39 478,122.73
</TABLE>
- -----------------
(1) Represents shares underlying share options; none of the executive
officers were granted SARs. One-third of the options become exercisable
in equal increments on the first, second and third anniversaries of the
date of grant.
(2) The amounts of potential realizable value, which are based on assumed
appreciation rates of 5% and 10% prescribed by Securities and Exchange
Commission ("SEC") rules, are not intended to forecast possible future
appreciation, if any, of the Company's share price. The amounts of
potential value with respect to the options do not account for
expiration of the options upon termination of employment or the
phased-in exercise schedule. Future compensation resulting from the
options is based solely on the actual performance of the Company's
share price in the trading market.
33
<PAGE>
The following chart shows the 1997 year-end value of the share options
held by the named executive officers. None of the named executive officers
exercised share options during 1997.
Year End 1997 Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options/SARs at Year Money Options/SARs at
End # Year End (1)
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
John R. Klopp 0 75,000 $0.00 $393,750.00
Craig M. Hatkoff 0 75,000 $0.00 $393,750.00
Donald J. Meyer 0 75,000 $0.00 $393,750.00
Edward L. Shugrue III 0 50,000 $0.00 $262,500.00
</TABLE>
(1) Amounts shown represent the market value of the underlying Class A
Common Shares at year end calculated using the December 31, 1997, the
NYSE closing price per share of Class A Common Shares of $11.25 minus
the exercise price of the share option. The actual value, if any, an
executive may realize is dependent upon the amount by which the market
price of Class A Common Shares exceeds the exercise price when the
share options are exercised. The actual value realized may be greater
or less than the value shown in the table.
Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires the Company's officers and
trustees, and persons who own more than ten percent of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the SEC and the NYSE. Officers, trustees and greater than ten
percent shareholders are required by regulation of the SEC to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of Forms 3, 4 and 5 and amendments thereto
available to the Company and written representations from certain of the
trustees, officers and 10% shareholders that no form is required to be filed,
the Company believes that no trustee, officer or beneficial owner of more than
10% of its Class A Common Shares failed to file on a timely basis reports
required pursuant to Section 16(a) of the Exchange Act with respect to 1997
except John McMahan, a former trustee of the Company, who filed a Form 4 report
for January 1997 on or about March 12, 1997 (30 days after the due date). The
late Form 4 report related to four transactions. Mr. McMahan paid the profit
from the transactions to the Company on February 9, 1997.
34
<PAGE>
Report on Executive Compensation*
Introduction
Following the Company's recapitalization and change in control on July
15, 1997, a new management team was appointed and the Company thereafter
commenced full implementation of its current specialty finance business plan. At
that time, the Board of Trustees formed the Compensation Committee, which
establishes and administers the compensation and benefit arrangements for
officers and key employees (except to the extent vested in the Performance
Compensation Committee formed at that time). The Performance Compensation
Committee was formed from the members of the Compensation Committee to establish
and administer the Company's compensation programs as they relate, in certain
circumstances, to executive officers of the Company. The Compensation Committee
may make recommendations to the Performance Compensation Committee, but the
Performance Compensation Committee is empowered to accept or reject, or increase
or decrease, any award or component of compensation recommended by the
Compensation Committee.
Compensation for 1997
The Company's 1997 executive compensation consisted of three elements:
an annual base salary, annual bonus compensation and long-term incentive
compensation.
Messrs. Klopp and Hatkoff received the pro rated portion of their
$500,000 annual salaries called for by their employment agreements which were
approved by the Company's former trustees prior to the change in control. The
other executive officers also received the pro rated portions of their salaries
that were set by the incumbent Board of Trustees in July 1997. The Compensation
Committee believes that the salaries of the Company's executive officers are
commensurate with prevailing compensation practices in the financial services
industry. The various salary levels among the executive officers depend
primarily upon individual levels of responsibility.
The Compensation Committee's goals with annual bonus and long-term
incentive compensation is to focus executive behavior on the fulfillment of
annual and long-term business objectives, and to create a sense of ownership in
the Company that causes executive decisions to be aligned with the best
interests of the Company's shareholders. To that end, share options were granted
to the Company's executive officers in July 1997 to immediately incentivise
their performance following the commencement of the full implementation of the
Company's current business plan. Messrs. Klopp and Hatkoff each received an
initial award of 75,000 share options. The size of the initial option awards
depended upon an evaluation of the executive officer's ability to influence the
Company's long-term performance. Following a year-end review of executive
officer performance and contribution to the implementation of the Company's
business plan and the further capitalization of the Company through the
successful completion of a $91.4 million Offering and the negotiation of the
$150 million Credit Facility, the compensation committees granted discretionary
bonuses and awards of restricted shares and share options. Messrs. Klopp and
Hatkoff were each awarded a discretionary bonus of $500,000 and an award of
100,000 share options. Other executive officers received discretionary bonuses
and awards of restricted shares and additional share options.
In determining the discretionary compensation, the Compensation
Committee credited the individual contributions made toward the successful
initial implementation of the Company's business plan as well as toward the
Company's obtaining the additional capitalization from the Offering and Credit
Facility. The Compensation Committee viewed the foregoing as critical events for
building future shareholder value over the long-term and determined that,
- --------
* The material in this report is not "solicitation material," is not deemed
filed with the Commission, and is not incorporated by reference in any filing
of the Company under the Securities Act of 1933 (the "Securities Act") or the
Exchange Act, whether made before or after the date hereof and irrespective
of any general incorporation language in any filing.
35
<PAGE>
as such, they provided an appropriate framework against which the committee
could evaluate the individual executiveofficers' contributions in formulating
the discretionary awards. In connection with its evaluation, the committee
considered the executive officer's level of job responsibility and relative
influence on the Company's ability to obtain its goals.
The Compensation Committee is reviewing the Company's compensation
program with a view toward establishing specific bonus and long-term incentive
plans that incorporate performance oriented quantitative and qualitative
criteria and provide for the measurement and weighting thereof. The results of
the review will be reflected in the annual incentive and long-term incentive
compensation decisions for the fiscal year ending 1998.
Section 162(m) of the Code limits the deductibility in the Company's
tax return of compensation over $1 million to any of the executive officers of
the Company unless, in general, the compensation is paid pursuant to a plan
which is performance-related, non-discretionary and has been approved by the
Company's stockholders. The Performance Compensation Committee's policy with
respect to Section 162(m) is to make every reasonable effort to ensure that
compensation is deductible to the extent permitted while simultaneously
providing Company executives with appropriate rewards for their performance. The
Company did not pay any compensation during 1997 that would be non-deductible
pursuant to Section 162(m). However, in the future, if, in the judgment of the
Performance Compensation Committee, the advantages of a compensation program
which does not satisfy the conditions of Section 162(m) outweigh the costs to
the Company of the failure to satisfy such conditions, the Company may adopt
such a program as in the case of the restricted shares awarded to certain
executive officers.
Compensation Committee
Jeffrey A. Altman
Martin L. Edelman
John R. Klopp
Sheli Z. Rosenberg
Lynne B. Sagalyn
36
<PAGE>
Performance Graph
Set forth below is a line graph comparing the yearly percentage change
in the cumulative total shareholder return on Class A Common Shares against (i)
the cumulative total return of companies listed on the New York Stock Exchange,
(ii) the cumulative total return of the companies contained in the National
Association of Real Estate Investment Trusts ("NAREIT") Hybrid REIT Share Index
and (iii) the cumulative total return of the peer group selected by the Company
(Amresco Inc., Contifinancial Corp., Criimi Mae Group Inc., LNR Property Corp.,
Ocwen Financial Corp.). Prior to July 1997, the Company operated as a REIT and
therefore previously compared its shareholder returns with the returns on the
foregoing NAREIT index. As a result of the commencement of its current specialty
finance business plan and the consequent cessation of operations as a REIT, the
Company has determined that a comparison of shareholder returns to the returns
of its selected peer group companies provides a more appropriate basis of
comparison. The Company selected its peer group based on the nature of the real
estate related financial services provided by and the kind of lending and
investing activities engaged in by the peer group companies. The five-year
period compared commences January 1, 1993 and ends December 31, 1997. This graph
assumes that $100 was invested on January 1, 1993 in Capital Trust and each of
the two indices and the peer group index, and that all cash distributions were
reinvested. The Class A Common Share price performance shown on the graph is not
necessarily indicative of future price performance.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Capital Trust $100.00 $109.72 $88.33 $81.54 $149.48 $611.52
NYSE Market Index $100.00 $113.54 $111.33 $144.36 $173.90 $228.78
NAREIT Hybrid $100.00 $121.18 $126.03 $155.01 $200.51 $222.07
Peer Group Index $100.00 $127.38 $126.17 $195.75 $290.05 $361.31
</TABLE>
37
<PAGE>
The foregoing price performance comparisons shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act, or under the
Exchange Act, except to the extent that the Company specifically incorporates
this graph by reference, and shall not otherwise be deemed filed under such
acts.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of August __, 1998, unless otherwise
indicated, certain information with respect to the beneficial ownership of Class
A Common Shares and Class A Preferred Shares, and the voting power possessed
thereby (based on 18,213,816 Class A Common Shares and 12,267,658 Class A
Preferred Shares outstanding on that date), by (i) each person known to the
Company to be the beneficial owner of more than 5% of each of the outstanding
Class A Common Shares and the Class A Preferred Shares, (ii) each trustee and
named executive officer of the Company who is a beneficial owner of any Class A
Common Shares or Class A Preferred Shares and (iii) all trustees and executive
officers of the Company as a group. Such information (other than with respect to
trustees and officers of the Company) is based on a review of statements filed
with the Commission pursuant to Sections 13(d), 13(f) and 13(g) of the Exchange
Act with respect to the Company's Class A Common Shares.
<TABLE>
<CAPTION>
Class A Common Shares Class A Preferred Shares
-------------------------------- ---------------------------------
Amount and Nature of Amount and Nature of
Beneficial Ownership(1) Beneficial Ownership(1)
-------------------------------- ---------------------------------
Five Percent Shareholders, Percent Percent of
Trustees and Executive Officers Number of Class Number Class Voting Power
- ------------------------------------ --------------------- -------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Veqtor Finance Company, LLC (2)(3) 6,959,593(3) 38.2% 12,267,658(3) 100% 63.1%
FMR Corp. (4) 2,357,982 12.9 -- -- 7.7
EOP Operating Limited Partnership(5) 4,273,500(5) 19.0 -- -- 12.3
General Motors Investment 4,273,500(5) 19.0 -- -- 12.3
Management Corporation(5)
Vornado Realty, L.P.(5) 4,273,500(5) 19.0 -- -- 12.3
Jeffrey A. Altman 30,000 * -- -- *
Thomas E. Dobrowski -- -- -- -- --
Martin L. Edelman 11,116(7) * -- -- *
Gary R. Garrabrant (6) 2,782(7) * -- -- *
Craig M. Hatkoff (3)(6) 7,002,593(8)(9) 38.4 12,267,658(8) 100 63.2
John R. Klopp (3)(6) 6,984,593(8)(9) 38.3 12,267,658(8) 100 63.2
Sheli Z. Rosenberg (6) 2,782(7) * -- -- *
Steven Roth -- -- -- -- --
Lynne B. Sagalyn 11,116(7) * -- -- *
Samuel Zell (3)(6) 6,962,375(8) 38.2 12,267,658(8) 100 63.1
Donald J. Meyer 30,000(10) * -- -- *
Edward L. Shugrue III 38,667(10) * -- -- *
All executive officers and trustees as a 7,126,838 38.9% 12,267,658(8) 100% 63.4
group (12 persons) (3)(6)
</TABLE>
* Represents less than 1%.
38
<PAGE>
- -------------------
(1) The number of shares owned are those beneficially owned, as determined
under the rules of the Commission, and such information is not
necessarily indicative of beneficial ownership for any other purpose.
Under such rules, beneficial ownership includes any shares as to which
a person has sole or shared voting power or investment power and any
shares which the person has the right to acquire within 60 days through
the exercise of any option, warrant or right, through conversion of any
security or pursuant to the automatic termination of a power of
attorney or revocation of a trust, discretionary account or similar
arrangement.
(2) Capital Trust Investors Limited Partnership ("CTILP") and V2 Holdings,
LLC ("V2") are the sole managing and common members of Veqtor Finance
Company, LLC, a Delaware limited liability company ("Veqtor"). The
general partner of CTILP is SZ Investments LLC, the managing member of
which is Zell General Partnership, Inc. ("Zell GP"). The sole
stockholder of Zell GP is the Samuel Zell Revocable Trust (the "Zell
Trust"). Mr. Samuel Zell serves as the trustee of the Zell Trust.
Messrs. John R. Klopp and Craig M. Hatkoff are the sole members of V2.
The address of Veqtor is c/o Capital Trust, 605 Third Avenue, 26th
Floor, New York, New York 10016.
(3) John R. Klopp, Craig M. Hatkoff and Samuel Zell collectively indirectly
control the affairs of Veqtor. Each of Messrs. Hatkoff, Klopp and Zell
disclaim beneficial ownership of the Common Shares and Preferred Shares
owned by Veqtor. In 1997, Veqtor issued $50.0 million of 12%
convertible redeemable notes ("Veqtor Notes") to four institutional
lenders to fund the purchase of its Company Shares. In 1998, the Veqtor
Notes were converted into preferred units of Veqtor ("Veqtor Preferred
Units") by agreement among Veqtor's common members and the
institutional lenders. The foregoing persons entered into an amended
and restated limited liability agreement of Veqtor (the "Restated LLC
Agreement") which provided for, among other things, the conversion of
the Veqtor Notes into Veqtor Preferred Units and the admission of the
institutional lenders as preferred members of Veqtor. The Restated LLC
Agreement provides that the Veqtor Preferred Units may be redeemed by
the Company or the holders thereof for a portion of the Company Shares
at any time after July 15, 1999. Pursuant to the Restated LLC
Agreement, if all Veqtor Preferred Units were redeemed by the holders
thereof for Company Shares on July 16, 1999 (the earliest possible date
of redemption), Veqtor's preferred members would receive in exchange
for their units an aggregate of 9,648,946 of the Company Shares owned
by Veqtor; if all Veqtor Preferred Units were redeemed by the Company
at any time on or after July 16, 1999 prior to July 15, 2000, Veqtor's
preferred members would receive in exchange for their units an
aggregate of 9,899,710 of the Company Shares owned by Veqtor (assuming
redemption on the earliest possible date of redemption, July 16, 1999).
In addition, in connection with the Offering, CTILP, V2 and Veqtor
entered into an agreement with the Company that, in the case of any
redemption of all of the preferred units then authorized by the
original limited liability company agreement of Veqtor in effect at
such time (the "Original LLC Agreement") for the portion of Veqtor's
Company Shares specified in the original LLC Agreement, Veqtor shall
convert the remaining Class A Preferred Shares owned by it into Class A
Common Shares. CTILP, V2 and Veqtor also agreed that Veqtor shall
redeem the then authorized preferred units on the earliest date upon
which Veqtor has the right to effect such redemption. Veqtor has
confirmed to the Company that the foregoing agreements obligate Veqtor
to convert its Class A Preferred Shares and redeem the Veqtor Preferred
Units, as the case may be, according to the timetables specified
therein.
(4) Beneficial ownership information as of December 31, 1997 is based on
the Schedule 13G jointly filed by FMR Corp. ("FMR"), Edward C. Johnson
3rd, Abigail P. Johnson, Fidelity Management and Research Company (the
"FMR Advisor") and Fidelity Growth & Income Fund (the "FGI Fund")
reporting ownership of shares by the FGI Fund and other funds advised
by the FMR Advisor. FMR and the FMR Advisor are located at 82
Devonshire Street, Boston, Massachusetts, 02109.
(5) Represents shares which may be obtained upon conversion of $50,000,000
in liquidation amount of 8.5% Step Up Convertible Trust Preferred
Securities issued by the Company's consolidated statutory trust
subsidiary, CT Convertible Trust I, to each of EOP Operating Limited
Partnership ("EOP"), Mellon Bank N.A., as trustee for General Motors
Hourly-Rate Employes Pension Trust and General Motors Salaried Employes
Pension Trust (collectively the "GM Trusts"), and Vornado Realty, L.P.
("VNO"). General Motors Investment Management Corporation ("GMIMCO") is
the investment advisor to the GM Trusts and in that capacity has the
power to direct Mellon Bank, N.A. as to the voting and disposition of
the shares beneficially owned by GM Trusts. The address of EOP is Two
North Riverside Plaza, Chicago, Illinois 60606. The address of VNO is
c/o Vornado Realty Trust, Park 80 West, Plaza II, Saddle Brook, New
Jersey 07663. The address of GMIMCO is 767 Fifth Avenue, New York, New
York 10153.
(6) Messrs. Zell, Klopp, Hatkoff and Garrabrant and Ms. Rosenberg hold
indirect economic ownership interests in Veqtor equal to approximately
34.2%, 25%, 25%, 4.5% and 4.5%, respectively.
(7) Includes 2,782 shares which may be obtained upon conversion of vested
share units and, in the case of Mr. Edelman and Dr. Sagalyn, 8,333
shares issuable upon the exercise of vested share options.
(8) Includes the 6,959,593 Class A Common Shares and the 12,267,658 Class A
Preferred Shares owned by Veqtor. The inclusion of such shares in the
table shall not be construed as an admission that any of Messrs.
Hatkoff, Klopp and Zell are beneficial owners of such shares within the
meaning of Section 13(d) of the Exchange Act. Also includes, in the
case of Mr. Zell, 2,782 shares which may be obtained upon conversion of
vested share units.
(9) Includes 25,000 shares issuable upon the exercise of vested share
options held by each of Messrs. Hatkoff and Klopp.
(10) Includes 20,000 and 5,000 shares for Mr. Shugrue and Mr. Meyer,
respectively, that are the subject of restricted share awards for which
the recipients retain voting rights. Includes 16,666 and 25,000 shares
issuable upon the exercise of vested share options held by Mr. Shugrue
and Mr. Meyer, respectively.
39
<PAGE>
Buy/Sell Agreement
Veqtor, CTILP, V2 and Messrs. Klopp and Hatkoff are parties to an
agreement, dated July 15, 1997, that contains buy/sell provisions pursuant to
which (i) one member of Veqtor may purchase from or sell to the other member its
interests in Veqtor or (ii) one member of V2 or CTILP may purchase the other V2
member's interest in V2 (the "Buy/Sell Agreement"). Pursuant to the agreement,
from and after July 15, 2000, either CTILP or V2 as the initiating party (the
"Initiating Party") may initiate the buy/sell process by notifying (the
"Buy/Sell Notice") the other party (the "Responding Party") of its desire either
to sell for cash all of its Veqtor Common Units (as defined in the Buy/Sell
Agreement) to the Responding Party or to purchase for cash all of the Veqtor
Common Units owned by the Responding Party, in each case, at the per unit price
specified by the Initiating Party (the "Specified Price"). Upon receipt of the
Buy/Sell Notice, the Responding Party must within 150 days elect either to sell
its Veqtor Common Units to the Initiating Party or purchase the Initiating
Party's Veqtor Common Units at the Specified Price. If the Responding Party
fails to respond to the Buy/Sell Notice, it shall be deemed to have elected to
sell its Veqtor Common Units at the Specified Price.
The Buy/Sell Agreement provides that upon the termination of employment
(including through death or disability) with the Company of either John R. Klopp
or Craig M. Hatkoff (the "Departing Person") other than by voluntary termination
(the "Termination Event"), whomever of Messrs. Klopp or Hatkoff has not been the
subject of the Termination Event (the "Remaining Person") shall have the right
to purchase all of the interests in V2 then held by the Departing Person for
cash at their fair market value as defined in the Buy/Sell Agreement ("Fair
Market Value"). If the Remaining Person does not purchase the Departing Person's
interest in V2, the Buy/Sell Agreement provides that CTILP shall have the right
to purchase for cash from V2 50% of the Veqtor Common Units then held by V2 at
their fair market value, upon which purchase V2 shall distribute to the
Departing Person (or his estate or representative) an amount equal to the net
proceeds of such sale reduced by 50% of V2's aggregate liabilities in full
redemption of the interest in V2 then held by the Departing Person (or his
estate or representative). If CTILP does not elect to purchase the Veqtor Common
Units held by V2 pursuant to the foregoing, (i) Veqtor must distribute to V2 50%
of its assets that V2 would be entitled to receive upon a liquidation of Veqtor
(whereupon V2's economic interest in Veqtor shall be correspondingly reduced)
and (ii) V2 must distribute to the Departing Person 50% of such assets reduced
by 50% of V2's aggregate liabilities in full redemption of the Departing
Person's interest in V2.
Pursuant to the Buy/Sell Agreement, upon the voluntary termination of
employment with the Company of either of Messrs. Klopp or Hatkoff (the
"Voluntarily Departing Person"), CTILP shall have the right to purchase from V2
50% of the Veqtor Common Units then held by V2 for cash at their fair market
value, upon such purchase V2 shall distribute to the Voluntarily Departing
Person an amount equal to the net proceeds of such sale reduced by 50% of V2's
aggregate liabilities in full redemption of the interest in V2 then held by the
Voluntarily Departing Person. If CTILP does not purchase the Veqtor Common Units
pursuant to the foregoing, the agreement provides that whomever of Messrs. Klopp
or Hatkoff is not the Voluntarily Departing Person (the "Voluntarily Remaining
Member") shall have the right to purchase all of the interest in V2 then held by
the Voluntarily Departing Person for cash at its Fair Market Value. If the
Voluntarily Remaining Member does not purchase from the Voluntarily Departing
Person all of the interest in V2 then held by the Voluntarily Departing Person
for cash at its Fair Market Value pursuant to the foregoing, (i) Veqtor must
distribute to V2 50% of its assets that V2 would be entitled to receive in a
liquidation of Veqtor (whereupon V2's economic interest in Veqtor shall be
correspondingly reduced) and (ii) V2 must distribute to the Voluntarily
Departing Person 50% of such assets reduced by 50% of V2's aggregate liabilities
in full redemption of the Voluntarily Departing Person's interest in V2.
Pursuant to the Buy/Sell Agreement, upon the termination of employment
with the Company of both Messrs. Klopp and Hatkoff, within any 30-day period,
for any or no reason, whether voluntary or involuntary, including, without
limitation, by reason of death or disability, CTILP shall have the right to
purchase from V2 all of the Veqtor Common Units then held by V2 for cash at
their Fair Market Value. If CTILP does not purchase the Veqtor Common Units
pursuant to the foregoing, Veqtor shall distribute to V2 100% of its assets that
V2 would be entitled to receive upon a liquidation of Veqtor in full redemption
of 100% of the Veqtor Common Units then held by V2.
Pursuant to the Buy/Sell Agreement, upon the termination of employment
with the Company of either of Messrs. Klopp or Hatkoff for any or no reason,
whether voluntary or involuntary, including, without limitation, by
40
<PAGE>
reason of his death or disability, following by more than 30 days the prior
termination of employment with the Company of the other individual for any or no
reason, whether voluntary or involuntary, including, without limitation, by
reason of his death or disability, CTILP shall have the right to purchase from
V2 all of the Veqtor Common Units then held by V2 for cash at their Fair Market
Value. If CTILP does not purchase the Veqtor Common Units pursuant to the
foregoing, Veqtor shall distribute to V2 100% of its assets that V2 would be
entitled to receive upon a liquidation of Veqtor in full redemption of 100% of
the Veqtor Common Units then held by V2.
The Buy/Sell Agreement prohibits the transfer of Veqtor Common Units
and interests in V2 except to permitted transferees as defined in the agreement
or pursuant to right of first refusal provision contained in the agreement. The
Buy/Sell Agreement contains provisions governing the management of Veqtor.
Pursuant to such provisions, in the event that V2 and CTILP do not hold the same
number of Veqtor Common Units, then, notwithstanding anything to the contrary in
the operating agreement governing Veqtor (the "Veqtor Operating Agreement"), all
matters to be determined by V2 and CTILP as the managing members of Veqtor shall
be determined as between V2 and CTILP by an affirmative vote of a majority of
the Veqtor Common Units then held by V2 and CTILP, and V2 and CTILP shall be
bound to act on such matter as managing members in the manner determined by such
vote. The agreement provides that no permitted transferee or other third party
transferee shall be entitled to be appointed, or otherwise act as, a managing
member of Veqtor.
The Buy/Sell Agreement provides that notwithstanding anything to the
contrary in the Veqtor Operating Agreement, as long as V2 and CTILP hold the
same number of Veqtor Common Units, each shall be entitled to direct the
nomination of an equal number of trustees/directors of the Company, and if
Veqtor shall be entitled to nominate an odd number of trustees/directors, V2 and
CTILP shall jointly select one of the trustee/director nominees. If V2 and CTILP
do not hold the same number of Veqtor Common Units, then, notwithstanding
anything to the contrary in the Veqtor Operating Agreement, V2 and CTILP each
shall be entitled to direct the nomination of a number of trustees/directors
equal to their relative percentage holdings of Veqtor Common Units multiplied by
the total number of trustees/directors which Veqtor is then entitled to nominate
(rounded to the nearest whole number).
Certain Relationships and Related Transactions
Interest Purchase Agreement
In connection with the acquisition of Victor Capital, the Company
entered into an interest purchase agreement, dated as of June 16, 1997, with
John R. Klopp, Craig M. Hatkoff and Valentine Wildove & Company, Inc., pursuant
to which the Company acquired partnership interests in Victor Capital and
certain of its affiliated entities for a purchase price of $5 million. The
purchase price under the interest purchase agreement is payable by the delivery
by the Company to the sellers of the non-interest bearing acquisition notes (the
"Acquisition Notes"). The Acquisition Notes provide for ten semi-annual
principal amortization payments in equal installments. Mr. Klopp and Mr.
Hatkoff, each of whom is a trustee of the Company, each received an Acquisition
Note in the principal amount of $2,162,500. Valentine Wildove & Company, Inc.,
in which Messrs. Klopp and Hatkoff are each 50% owners, received $675,000 in
principal amount of the Acquisition Notes.
The interest purchase agreement provides that the sellers will
indemnify the Company from all damages as a result of any breach of any
representation, warranty, covenant or agreement of the sellers contained in the
interest purchase agreement. The Company's right to indemnification and the
seller's obligation to provide indemnification with respect to any breach of a
representation or warranty continue until July 15, 1999.
Investment Agreement
Pursuant to the terms of the preferred share purchase agreement, dated
as of June 16, 1997, by and between the Company and Veqtor (the "Investment
Agreement"), on July 15, 1997, the Company sold 12,267,658 Class A Preferred
Shares to Veqtor for an aggregate purchase price of $33.0 million. The
Investment Agreement contains certain restrictive covenants binding on the
Company. The Investment Agreement provides that the Company will not amend the
Current Declaration of Trust unless (i) the Company has given Veqtor no less
than 15 days prior notice of such change and (ii) the Board of Trustees has
reasonably determined that the amendment does not contravene or violate the
41
<PAGE>
provisions of the Investment Agreement or the terms of the Class A Preferred
Shares. The Company has agreed that, so long as any Class A Preferred Shares or
Class B Preferred Shares remain outstanding, without the affirmative vote of the
holders of more than 50% of the Class A Preferred Shares and Class B Preferred
Shares then outstanding, voting as a single class, the Company will not incur
any indebtedness if the Company's debt-to-equity ratio would exceed 5 to 1.
The Company has also agreed in the Investment Agreement only to issue
shares that are Junior Shares and only to issue Class B Preferred Shares upon
the conversion of any Class A Preferred Shares. "Junior Shares" are defined as
common shares and any other class or series of shares of the Company now or
hereafter authorized, issued or outstanding that are subject, under the terms of
the Current Declaration of Trust, to the following restrictions and limitations:
(i) no dividend or distribution can be declared or paid on the shares of such
class or series unless all accrued dividends and other amounts then due with
respect to the Class A Preferred Shares and Class B Preferred Shares shall have
been paid in full; (ii) in the event of any liquidation, dissolution or winding
up of the Company, either voluntary or involuntary, the holders of Class A
Preferred Shares and Class B Preferred Shares shall be entitled to receive out
of the assets of the Company available for distribution to shareholders, the
liquidation preference with respect to the Class A Preferred Shares and Class B
Preferred Shares and any accrued and unpaid dividends thereon before any payment
shall be made or any assets distributed to the holders of such other class or
series of shares of the Company; and (iii) shares of such class or series are
not required to be redeemed under any circumstances, either at the option of the
Company or of any holder thereof, unless all of the outstanding Class A
Preferred Shares and Class B Preferred Shares have theretofore been redeemed or
converted.
The Investment Agreement provides for certain registration rights with
respect to securities of the Company held by Veqtor at the time of the
Investment, to the extent such securities (whether or not converted into other
securities of the Company) continue to be held by Veqtor or the Institutional
Investors (as such term is defined in the Investment Agreement) (or their
respective transferors). The holders of such registrable securities will have
the right to request that the Company prepare and file up to three registration
statements under the Securities Act covering all or any portion of such
registrable securities. In addition, if the Company proposes to file a
registration statement at any time, the Company has agreed to use its best
efforts, upon Veqtor's and the other holders' request, to cause any shares held
by Veqtor and the other holders to be included in such registration. In
connection with any securities registration, Veqtor and the other holders,
respectively, have agreed to pay all underwriting discounts and selling
commissions on the shares registered on behalf of Veqtor and the other holders.
All other costs of registration are to be paid by the Company.
Sharing Agreement
Pursuant to an oral agreement with The Peregrine Real Estate Trust (the
"Former Parent"), costs for certain general administrative services, including
executive services (including the services of Mr. Morrow), accounting services,
treasury services, financial reporting and internal bookkeeping services,
shareholder relations, and directors' and officers' insurance were shared with
the Former Parent. The shared costs were allocated to the Company and the Former
Parent based upon their respective asset values (real property and notes
receivable), subject to annual negotiation. Pursuant to this agreement,
approximately $435,000 and $258,000 was charged to operations in 1995 and 1996,
respectively. As of December 31, 1996, the Company owed the Former Parent
approximately $31,000 pursuant to the cost sharing agreement. The agreement was
terminated on January 7, 1997 and all amounts owed thereunder were paid.
Reimbursement Agreement
Pursuant to an expense reimbursement arrangement with EGI, the Company
has agreed to reimburse EGI the costs for certain general administrative
services to the Company, including, among others, certain legal, tax,
shareholder relations and insurance acquisition services, which are provided by
employees of EGI. As of December 31, 1997, the Company had charged to operations
approximately $82,000.
42
<PAGE>
Relationships with Martin L. Edelman
Martin L. Edelman, a trustee of the Company, is of counsel to Battle
Fowler LLP, a New York City law firm that is representing the Company with
respect to various matters, including, without limitation, the Reorganization
contemplated hereby, and has represented the Company and certain affiliates
thereof, including Victor Capital, in the past with respect to various legal
matters. The Company expects to continue to engage Battle Fowler LLP after the
completion of the Reorganization.
Relationship with Rosenberg & Liebentritt, P.C.
During 1997, the Company retained the services of Rosenberg &
Liebentritt, P.C., a law firm which performs legal services exclusively for
entities in which Samuel Zell, chairman of the board of trustees of the Company,
has an interest.
Asset Management Agreements
VP Metropolis Services, LLC, a wholly owned subsidiary of the Company
("VPM"), is a party to an asset management agreement (the "VPM Asset Management
Agreement") with MVB Metropolis Properties, L.P. ("MVB") pursuant to which VPM
has agreed to manage, service and administer certain real estate assets owned by
MVB and its affiliates, initially including a New York City property consisting
of 46 condominium units and a pool of 18 mortgages secured by properties located
throughout the Unites States. John R. Klopp and Craig M. Hatkoff, both trustees
of the Company, are each 25.05% owners of VP-LP, LLC, which owns a 1.0% interest
in MVB. In addition, Mr. Klopp is a vice president of MVB Metropolis Corp., the
general partner and a 1.0% owner of MVB. Pursuant to the VPM Asset Management
Agreement, fees of $247,219, $149,069 and $149,090 were paid to VPM and
recognized as income by the Company during 1995, 1996 and 1997, respectively.
Victor Asset Management Partners, LLC, a wholly owned subsidiary of the
Company ("VAMP"), is a party to an asset management agreement (the "VAMP Asset
Management Agreement I") with S.H. Mortgage Acquisition, LLC ("S.H. Mortgage
Acquisition") pursuant to which VAMP has agreed to manage, service and
administer certain real estate assets owned by S.H. Mortgage Acquisition and its
affiliates, initially including 21 loans secured by various properties and other
assets located in New Jersey. Messrs. Klopp and Hatkoff are managing members of
VP-NJ, LLC, which owns a 1.0% interest in and is the managing member of S.H.
Mortgage Acquisition. Pursuant to the VAMP Asset Management Agreement I, fees of
$126,406, $401,912 and $313,977 were paid to VAMP and recognized as income by
the Company during 1995, 1996 and 1997, respectively.
VAMP is also a party to an asset management agreement (the "VAMP Asset
Management Agreement II") with RE Acquisition, LLC ("RE Acquisition") pursuant
to which VAMP has agreed to manage, service and administer certain real estate
assets owned by RE Acquisition, initially including a pool of five mortgages and
other rights relating to real properties located in New York and New Jersey.
Messrs. Klopp and Hatkoff are managing members of VPC Partners, LLC, which owns
a 0.7772% interest in RE Acquisition. In addition, Mr. Klopp is a manager of RE
Acquisition. Pursuant to the VAMP Asset Management Agreement II, fees of
$380,566 were paid to VAMP and recognized as income by the Company during 1997.
Trust Preferred Private Placement and Co-Investment Agreement
On July 28, 1998, the Company privately placed $50,000,000 aggregate
liquidation amount of the Trust Preferred Securities to each of EOP Operating
Limited Partnership ("EOP"), Vornado Realty, L.P. ("VNO") and Mellon Bank N.A.,
as trustee for General Motors Hourly-Rate Employees Pension Trust and General
Motors Salaried Employees Pension Trust. Samuel Zell, chairman of the board of
trustees of the Company, is the chairman of the board of trustees of Equity
Office Properties Trust, the managing general partner of EOP. In connection with
the foregoing transaction, the Company entered into a Co-Investment Agreement,
dated as of July 28, 1998, with EOP, VNO and General Motors Investment
Management Corporation ("GMIMCO"), as agent for and for the benefit of pension
plans of General Motors Corporation and its affiliates, pursuant to which the
Company, subject to certain terms and conditions, is obligated to extend to the
other parties to such agreement the opportunity to co-invest in any loan or
other investment for which the Company in its sole and absolute discretion seeks
to obtain co-investors. Subsequently, on August 13, 1998, Steven Roth, chairman
of the board of directors of Vornado Realty Trust, the managing general partner
of VNO, and Thomas E. Dobrowski, a managing director of GMIMCO, were appointed
trustees of the Company.
43
<PAGE>
PROPOSAL 4 -- APPROVAL OF AMENDED AND RESTATED INCENTIVE PLAN
CERTAIN ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. THIS SUMMARY
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE COMPLETE TEXT OF THE AMENDED INCENTIVE PLAN ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS ANNEX C. SHAREHOLDERS ARE URGED TO READ THE ANNEXES TO
THIS PROXY STATEMENT/PROSPECTUS IN THEIR ENTIRETY. ALL CAPITALIZED TERMS WHICH
ARE NOT DEFINED HEREIN ARE DEFINED IN THE AMENDED AND RESTATED INCENTIVE PLAN.
The Company instituted the 1997 Long-Term Incentive Share Plan in July
1997 (the "Original Incentive Plan"). The Amended and Restated Share Plan would
amend such Original Incentive Plan to increase the number of Class A Common
Shares authorized for issuance under the plan. The increase in the authorized
shares will allow the Board of Trustees' committees administering the plan to
grant awards to the Company's officers, consultants and employees in excess of
the current share limit. The Company wishes to preserve the ability to make such
awards so that it can attract and retain officers, consultants and employees
with the incentives provided by Awards provided under the plan.
The Amended and Restated Incentive Plan contains an amendment that
includes a so-called "evergreen" limitation on the number of Class A Common
Shares that can be granted in respect of Awards made under the Amended and
Restated Incentive Plan (i.e., the Amended and Restated Incentive Plan expresses
the maximum number of shares which may be granted in respect of Awards in terms
of a percentage of outstanding shares (on a fully diluted basis with respect to
Class A Common Share underlying any outstanding Class B Common Shares or
Preferred Shares). The Board of Trustees adopted this amendment to ensure that
the Company can continue to grant Awards to officers, consultants and employees
at levels determined appropriate by the committees administering the plan. This
type of limitation will replenish the Class A Common Shares available under the
Amended and Restated Incentive Plan, without the need for further amendment, in
the event there is an increase in the number of Class A Common Shares the
Company has outstanding. The limit contained in the Original Incentive Plan was
shared with the Company's 1997 Non-Employee Trustee Share Plan (the "Original
Trustee Plan") so that the maximum number of shares that may be made subject to
Awards under the Original Incentive Plan is reduced by the maximum number of
shares made the subject of Awards under the Original Trustee Plan. Consistent
with the foregoing, Amended and Restated Incentive Plan provides for a pool of
shares that may be made the subject of Awards under both the Amended and
Restated Incentive Plan and the Amended and Restated Trustee Plan equal to ten
percent (10%) of the outstanding Class A Common Shares (on a fully diluted basis
with respect to certain convertible securities), calculated generally with
respect to the number of Class A Common Shares outstanding (on a fully diluted
basis with respect to certain convertible securities) as of the last day of the
prior calendar year. Due to a technical tax law requirement, the Amended and
Restated Incentive Plan specifies that no more than 2,500,000 shares may be
issued pursuant to ISOs granted under the Amended and Restated Incentive Plan.
Although the Board of Trustees has no intention to grant that number of ISOs, it
selected that approximate number of shares currently available under the Amended
and Restated Incentive Plan as a means of setting an outside limitation.
In addition, the Amended and Restated Incentive Plan contains
amendments which permit the granting of Awards that do not quality as
"performance-based compensation" and changes the per individual limit on Awards
from an aggregate limit of 500,000 shares to an annual limit of 500,000 shares.
These changes are designed to increase the Committee's flexibility in designing
competitive awards, for example, by using grants of restricted shares that vest
over time or larger option grants with longer vesting schedules. The amendments
also permit the Committee to allow retirees to exercise options for up to
one-year following retirement and, with respect to performance-based Awards,
measure performance through the date of the awardee's death, disability or
retirement and permit the use of asset growth as an objective measurement of
performance. The Board believes all of these changes will give the Committee a
greater ability to attract and retain highly qualified executives and employees.
The Amended and Restated Incentive Plan has been designed to comply
with Section 162(m) of the Code, which generally denies a tax deduction for
annual compensation exceeding $1,000,000 paid to the chief executive officer and
the four other most highly compensated officers of a public company ("Covered
Employees"). Certain types of compensation, including "performance-based
compensation," are generally excluded from this deduction limit. It is expected
that the Committee will aim to make Awards that will constitute
"performance-based compensation" under
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Section 162(m) of the Code. However, the amendments contained in the Amended and
Restated Incentive Plan permit the granting of Awards that do not so qualify.
If, in the judgment of the Committee, the benefits of granting Awards that do
not satisfy the criteria for "performance-based compensation" outweigh the costs
to the Company in granting such Awards, the Committee may determine to make such
Awards. Share Unit Awards will count toward the annual $1,000,000 deduction
limit. In an effort to ensure that Awards under the plan can qualify as
"performance-based compensation," the Amended and Restated Incentive Plan is
being submitted to shareholders for approval at the Annual Meeting. By approving
the Amended and Restated Incentive Plan, shareholders will be approving, among
other things, the performance measures, eligibility requirements and limits on
Awards contained therein.
Set forth herein is a description of the terms of Amended and Restated
Incentive Plan. The Amended and Restated Incentive Plan is effective upon
shareholder approval. The Amended and Restated Incentive 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.
Purpose. The purpose of the Amended Incentive Plan is to promote the
success of the Company and its Subsidiaries by providing incentives to Eligible
Individuals that link their compensation to the long-term financial success of
the Company and its Subsidiaries and to growth in shareholder value. The plan is
designed to provide flexibility to the Company and its Subsidiaries in their
ability to motivate, attract and retain the services of Eligible Individuals
upon whose judgment, interest and special effort the successful conduct of their
operations is largely dependent.
Administration. The Amended and Restated Incentive Plan will be
administered by the Board or by a committee (the "Committee") of the Board of
Trustees. The Committee will be composed solely of not less than two Trustees,
who, to the extent required for compliance with Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act"), qualify as "Non-Employee Directors"
for purposes of Rule 16b-3. Alternatively, Awards under the Amended and Restated
Incentive Plan may be made in reliance on another exemption from Section 16(b)
of the Exchange Act. To the extent required by Section 162(m) of the Code,
members of the Committee will also qualify as "outside directors" for purposes
of Section 162(m). Among other things, the Board or the Committee will have the
authority to select Eligible Individuals to whom Awards may be granted, to
determine the type of Awards as well as the number of Common Shares to be
covered by each Award, and to determine the terms and conditions of any such
Awards. The Board or the Committee will also have the authority to construe and
interpret the plan, establish, amend or waive rules and regulations for its
administration, accelerate the exercisability of any Award, and amend the terms
and conditions of any outstanding Option, SAR or other Award. However, the Board
or the Committee shall have no authority to adjust upward any amounts payable to
a Covered Employee with respect to a particular Award.
Eligibility. Eligible Individuals under the plan will be employees of
and consultants or service providers to the Company or any Subsidiary, including
officers and non-employee Trustees of the Company or any Subsidiary who, in the
opinion of the Board or the Committee, contribute significantly to the growth
and profitability of the Company and its Subsidiaries.
Number of Shares. With respect to calendar year 1998, the maximum
number of shares that may be made the subject of Awards under the Amended and
Restated Incentive Plan is equal to (i) ten percent (10%) of the number of
Common Shares that were outstanding on a fully diluted basis with respect to the
Common Shares underlying any outstanding Convertible Securities as of December
31, 1997 (subject to rounding), minus (ii) the number of shares remaining
subject to or issued in respect of Awards which were granted prior to December
31, 1997, which maximum number shall be reduced by the number of shares
remaining subject to or issued in respect of Awards which were granted prior to
December 31, 1997 under the Company's Amended and Restated Trustee Plan and the
number of shares made the subject of Awards under the Company's Amended and
Restated Trustee Plan during the 1998 calendar year. Thereafter, for any given
calendar year, the maximum number of shares that may be made subject to Awards
under the Amended and Restated Plan shall be equal to (i) ten percent (10%) of
the number of Shares that were outstanding on a fully diluted basis with respect
to the Common Shares underlying any Convertible Securities as of the end of the
immediately preceding calendar year (subject to rounding), minus (ii) the number
of shares remaining subject to or issued in respect of Awards which were granted
under the Plan through the last day of the immediately preceding calendar year
(the "Year End Date"), which maximum number shall be reduced by the number of
shares remaining subject to or issued in respect of Awards which were granted
prior to the Year End Date under the Company's Amended
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and Restated Trustee Plan and the number of shares made the subject of Awards
under the Company's 1997 Non- Employee Trustee Share Plan during such calendar
year. The maximum amount payable in cash to any Eligible Individual with respect
to any Performance Period pursuant to any Performance Unit or Performance Share
Award is $1,000,000. Upon the grant of an Award, except for the grant of a
Performance Unit Award denominated in dollars, the maximum number of shares
shall be reduced by the number of shares in respect to which the Award is
granted or denominated. For a Performance Unit Award denominated in dollars, the
number of shares shall be reduced by an amount equal to the dollar amount of the
Award, divided by the Fair Market Value of a share on the date the Award is
granted. Notwithstanding the foregoing, no Eligible Individual shall be granted
Awards in respect of more than 500,000 shares in any calendar year and no more
than 2,500,000 shares in the aggregate shall be subject to outstanding ISOs or
issued with respect of the exercise of ISOs.
Subject to the foregoing limits, the shares available under the Amended
and Restated Incentive Plan can be divided among the various types of Awards and
among the Participants as the Board or the Committee sees fit. The shares are to
be made available from authorized but unissued Company Common Shares or shares
reacquired by the Company in the open market. The maximum number of shares
subject to Awards under the Amended and Restated Incentive Plan and the limit on
the number of Awards to Eligible Individuals, will adjust with any share
dividend or split, recapitalization, reclassification, merger, consolidation,
combination or exchange of shares, or similar change affecting the Company's
Common Shares.
Description of Awards. Share Options. The Amended and Restated
Incentive Plan permits the award of ISOs and NQSOs. Each Option granted under
the plan must be evidenced by an Option Agreement specifying terms, including
the type, the number of shares covered, the exercise price, when it is
exercisable, any restrictions on transferability of the Option or the shares
obtained upon exercise and duration of the Option. The purchase price per share
of Common Shares covered by an Option shall be determined by the Board or the
Committee but may not be less than the Fair Market Value of the underlying
Common Shares on the date of grant. ISOs may only be granted to employees of the
Company or its Subsidiaries. All ISOs must be granted at Fair Market Value or at
110% of Fair Market Value in the case of grants to 10% shareholders. No ISOs
shall be exercisable more than ten years after their date of grant and five
years after grant in the case of a 10% shareholder. Payment of an Option may be
made with cash, with previously owned Common Shares, by foregoing compensation
in accordance with Committee rules or by a combination of these.
Share Appreciation Rights. The Amended and Restated Incentive Plan
authorizes the Board or the Committee to grant SARs in lieu of Options, in
addition to Options, independent of Options or as a combination of the
foregoing. A holder of a SAR is entitled upon exercise to receive Common Shares,
or cash or a combination of both, as the Board or the Committee may determine,
equal in value on the date of exercise to the amount by which the Fair Market
Value of one Common Share on the date of exercise exceeds the exercise price
fixed by the Board or the Committee on the date of grant (which price shall not
be less than 100% if the market price of a Common Share on the date of grant)
multiplied by the number of shares in respect of which the SARs are exercised.
If granted in lieu of an Option, the SAR is exercisable at the same time as the
related Option and, when exercised, the related Option must be surrendered and
ceases to be exercisable. If granted in addition to an Option, the exercise of
the related Option causes the SAR also to be exercised. If granted independently
of an Option, the SAR will be exercisable at such time as the Board or the
Committee determines and its exercise will be unrelated to any Option. The term
of any SAR will not exceed ten years.
Restricted Shares. The Amended and Restated Incentive Plan authorizes
the Board or the Committee to grant Restricted Shares to individuals with such
Periods of Restriction as the Board or the Committee may designate. In the case
of Covered Employees, the Board or the Committee may also condition the vesting
or lapse of such Periods of Restriction upon the attainment of one or more
Performance Goals established by the Board or the Committee within the time
period prescribed by Section 162(m) of the Code. These Performance Goals must be
based on the attainment, by the Company or its Subsidiaries, of certain
objective and/or subjective performance measures, which may include one or more
of the following: total shareholder return, return on equity, return on capital,
earnings per share, cash flow per share, market share, share price, revenues,
costs, net income, cash flow and retained earnings. Such Performance Goals may
also be based upon the attainment of specified levels of performance of the
Company or one or more Subsidiaries relative to the performance of other
corporations. With respect to Covered Employees, all Performance
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Goals shall be objective performance goals satisfying the requirements for
"performance-based compensation" within the meaning of Section 162(m)(4)(C) of
the Code.
Each grant of Restricted Shares will be evidenced by a Restricted Share
Agreement that shall specify the Period of Restriction, the number of Restricted
Shares granted and such other provisions determined by the Committee. During the
Period of Restriction, Participants holding Restricted Shares may exercise full
voting rights with respect to those shares and are entitled to all dividends and
other distributions paid on the Common Shares.
Performance Units, Performance Shares and Share Units. The Amended and
Restated Incentive Plan authorizes the Board or the Committee to grant
Performance Units and Performance Shares which may be earned if specified
long-term corporate goals are achieved over a period of time selected by the
Board or the Committee (a "Performance Period"). Prior to the grant of
Performance Units or Performance Shares, the Board or the Committee must
establish the Performance Goals (from among the performance measures described
above relating to Restricted Shares) that must be satisfied before a payout of
such Awards is made. At the conclusion of a particular Performance Period, the
Board or the Committee will determine the extent to which the Performance Goals
have been met. It will then determine the applicable percentage (which may
exceed 100%) to be applied to, and will apply such percentage to, the value of
the Performance Units or Performance Shares awarded to determine the payout to
be received by the Participant; provided that no payout to a Covered Employee
will be made thereunder except upon written certification by the Board or the
Committee that the applicable Performance Goal(s) have been satisfied to a
particular extent. As a result, depending upon the Company's performance in
relation to the Performance Goals, a Participant may earn less or more than the
number of Performance Shares or Performance Units initially awarded. In
addition, to the extent that the value of a Performance Unit or Performance
Share is related to the Common Shares, the value of any payout will be dependent
upon the changing value of the shares. Payments may be made in cash, Common
Shares or a combination, as determined by the Board or the Committee. With
respect to Covered Employees, all Performance Goals will be objective
performance goals satisfying the requirements for "performance-based
compensation" within the meaning of Section 162(m)(4)(C) of the Code.
The Amended and Restated Incentive Plan also authorizes the grant of
Share Units at any time and from time to time on such terms as shall be
determined by the Board or the Committee. A Share Unit is a derivative interest
in a Common Share based on a share equivalent. Share Units shall be payable in
Common Shares upon the occurrence of certain trigger events set forth on the
Participant's Election Form in his or her complete discretion ("Trigger
Events"). The terms and conditions of the Trigger Events may vary by Share Unit
award, by Participant, or both. Each Share Units awarded is credited to a Share
Unit Account as a Common Share equivalent to reflect the Company's liability to
that Participant. Additional share equivalents may be added to the Share Unit
Account equal to the amount of Common Shares that could be purchased with
dividends equal to that paid on one Common Share, multiplied by the number of
share equivalents then existing in the Share Unit Account and based on the Fair
Market Value of the Common Shares on the date a dividend is paid. A Participant
is entitled to receive the Common Shares in his or her Share Unit Account upon
the occurrence of the applicable Trigger Event. Share Unit Awards will not
constitute "performance-based compensation" within the meaning of Section
162(m)(4)(C) of the Code and, as such, will count toward the annual $1,000,000
deduction limit.
Change in Control. Upon a Change in Control of the Company, all
share-based Awards, such as ISOs, NQSOs, SARs, Restricted Shares and Share Units
shall vest 100%, and all performance-based Awards, such as Performance Units and
Performance Shares, shall immediately be paid out in cash, based upon the
extent, as determined by the Board or the Committee, to which the Performance
Goals have been met through the effective date of the Change in Control or based
upon the assumed achievement of such goals, whichever is higher.
Limits on Transferability and Exercisability. No Award granted under
the Amended and Restated Incentive Plan may be sold, transferred, assigned,
pledged or hypothecated, other than by will or by the laws of descent and
distribution. Generally, all rights to any Award shall be exercisable only by
the Participant during his lifetime.
All outstanding Awards granted under the plan will be forfeited
immediately if a Participant is terminated for cause. Upon termination due to
death or disability, all outstanding and vested Options and SARs may be
exercised
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within one year but in no event after the expiration date. In the case of
retirement or termination for any other reason, all outstanding and vested
Options and SARs may be exercised within three months but in no event after the
expiration date.
In the event that a Participant terminates employment or service for
any reason during the Period of Restriction, then any Restricted Shares subject
to restrictions as of the date of termination shall automatically be forfeited
subject to the discretion of the Board or the Committee to waive the forfeiture
and impose new restrictions to such Restricted Shares in the event a
Participant's service is terminated for any reason other than for cause.
Outstanding Performance Units and Performance Shares will entitle the
Participant to receive pro-rated payments based upon the full months of service
during the Performance Period. Share Units will be payable to the Participant
(or his estate) if vested in the event of death, disability or retirement. If a
Participant terminates service for any other reason, Performance Units and
Performance Shares and unvested Share Units will be forfeited.
Amendment and Discontinuance. The Amended and Restated Incentive Plan
may be amended, altered or discontinued by the Board of Trustees but except as
specifically provided therein, no amendment, alteration or discontinuance may be
made which would in any manner adversely affect any Award theretofore granted
under the plan, without the written consent of the Participant. Except as
expressly provided in the Amended and Restated Incentive Plan, the plan may not
be amended without shareholder approval to the extent such approval is required
by law or the rules of a securities exchange on which the Company's Common
Shares are listed.
Federal Income Tax Consequences. The following is a brief discussion of
the relevant federal income tax rules. The rules are highly technical and are
subject to change.
NQSOs and SARs. Upon the grant of a NQSO (with or without an SAR), the
optionee will not recognize any taxable income and the Company will not be
required to record an expense. Upon the exercise of a NQSO or an SAR, the excess
of the fair market value of the shares acquired on the exercise of the NQSO over
the purchase price (the "spread"), or the consideration paid to the optionee
upon the exercise of the SAR, will constitute compensation taxable to the
optionee as ordinary income. In determining the amount of the spread or the
amount of consideration paid to the optionee, the fair market value of the
shares on the date of exercise is used, except that special timing rules may
apply in the case of an optionee subject to the six month short-swing profit
recovery provisions of Section 16(b) of the Exchange Act. The Company, in
computing its federal income tax, will generally be entitled to a deduction in
an amount equal to the compensation taxable to the optionee in the Company's
taxable year in which the amount is included as income to the optionee. The
optionee's tax basis in an Award paid in Common Shares is equal to the amount of
ordinary income recognized and the holding period commences as of the date that
income is recognized. Upon a subsequent sale or exchange of the Common Shares
acquired, the optionee will have capital gain or loss measured by the difference
between the amount realized on the disposition and his or her tax basis in the
shares.
ISOs. An optionee will not recognize taxable income on the grant or
exercise of an ISO. However, the spread at exercise will constitute an item
includible in alternative minimum tax. Such alternative minimum tax may be
payable even though the optionee receives no cash upon the exercise of his ISO
with which to pay such tax. Upon the disposition of shares acquired pursuant to
the exercise of an ISO after the later of (i) two years from the date of grant
of the ISO and (ii) one year after the transfer of the shares to the optionee
(the "ISO Holding Period"), the optionee will recognize capital gain or loss, as
the case may be, measured by the difference between the sale price and the
exercise price. The Company is not entitled to any tax deduction by reason of
the grant or exercise of an ISO, or by reason of a disposition of shares
received upon exercise of an ISO if the ISO Holding Period is satisfied.
Different rules apply if the optionee disposes of the shares acquired pursuant
to the exercise of an ISO before the expiration of the ISO Holding Period.
Option grants for shares which are exercisable for the first time by an optionee
during any calendar year (under all plans of the Company and any parent
corporation or Subsidiary of the Company), which have a fair market value in
excess of $100,000, shall be treated as options which are not ISOs, and will be
subject to the same tax treatment as the grant of NQSO's discussed above.
Restricted Shares. A Participant who is granted Restricted Shares may
make a Section 83(b) election to have the grant taxed as ordinary income at the
date of receipt, with the result that any future appreciation (or depreciation)
in the value of the shares shall be taxed as capital gain (or loss) upon a
subsequent sale. However, if the Participant does
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not make a Section 83(b) election, the grant will be compensation taxed as
ordinary income at the full fair market value on the date that the restrictions
imposed on the shares expire. Unless a Participant makes a Section 83(b)
election, any dividends paid on shares subject to the restrictions is
compensation taxed as ordinary income to the Participant and a deduction expense
to the Company. The Company is generally entitled to a tax deduction for any
ordinary income taxed to the Participant with respect to the shares. Upon a
subsequent sale or exchange of the Common Shares acquired, the Participant will
have capital gain or loss measured by the difference between the amount realized
on the disposition and his or her tax basis in the shares.
Performance Units, Performance Shares and Share Units. A Participant
who has been granted a Performance Unit, Performance Share or Share Unit Award
will not realize taxable income until the units or shares vest and the
Participant is in receipt of the Common Shares and/or cash distributed in
payment of the award, at which time such Participant will realize compensation
taxed as ordinary income equal to the fair market value of the shares delivered
or the amount of cash paid. At that time, the Company generally will be allowed
a corresponding tax deduction equal to the ordinary income taxed to the
Participant, subject to the provisions of Section 162(m) of the Code in the case
of Share Unit Awards. The Participant's tax basis in an Award paid in Common
Shares is equal to the amount of ordinary income recognized and the holding
period commences as of the date that income is recognized. Upon a subsequent
sale or exchange of the Common Shares acquired, the Participant will have
capital gain or loss measured by the difference between the amount realized on
the disposition and his or her tax basis in the shares.
Share Plan Benefits. Inasmuch as there are no pending proposals with
respect to the grant of Awards, future Awards to executive officers and
employees of the Company under the Amended and Restated Incentive Plan are
discretionary and therefor cannot be determined at this time.
Vote Required. The affirmative vote of a majority of votes cast at the
Annual Meeting is required to approve the Amended and Restated Incentive Plan.
Such vote will also satisfy the shareholder approval requirements of Section
162(m) and Section 422 of the Code with respect to the grant of ISOs.
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PROPOSAL 5 -- APPROVAL OF AMENDED AND RESTATED TRUSTEE PLAN
CERTAIN ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. THIS SUMMARY
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE COMPLETE TEXT OF THE AMENDED AND RESTATED TRUSTEE PLAN ATTACHED TO THIS
PROXY STATEMENT/PROSPECTUS AS ANNEX D. SHAREHOLDERS ARE URGED TO READ THE
ANNEXES TO THIS PROXY STATEMENT/PROSPECTUS IN THEIR ENTIRETY. ALL CAPITALIZED
TERMS WHICH ARE NOT DEFINED HEREIN ARE DEFINED IN THE AMENDED AND RESTATED
TRUSTEE PLAN.
The Company instituted the 1997 Non-Employee Trustee Share Plan in July
1997 (the "Original Trustee Plan"). The Amended and Restated Trustee Plan would
amend such Original Trustee Plan to increase the number of Class A Common Shares
authorized for issuance under the plan. The increase in the authorized shares
will allow the Board of Trustees to grant Awards to Trustees in excess of the
current limit enabling them to continue to link their compensation to the
long-term financial success of the Company and to growth in shareholder value.
The Amended and Restated Trustee Plan contains an amendment that
includes a so-called "evergreen" limitation on the number of Class A Common
Shares that can be granted in respect of Awards made under the Amended and
Restated Trustee Plan (i.e., the Amended and Restated Trustee Plan expresses the
maximum number of shares which may be granted in respect of Awards in terms of a
percentage of outstanding shares (on a fully diluted basis with respect to Class
A Common Shares or Preferred Shares). The Board of Trustees adopted this
amendment to ensure that the Company can continue to grant under the Awards as
compensation for their service as Trustees. This type of limitation will
replenish the Class A Common Shares available under the Amended and Restated
Trustee Plan, without the need for further amendment, in the event there is an
increase in the number of Class A Common Shares the Company has outstanding. The
limit contained in the Original Trustee Plan was shared with the Original
Incentive Plan so that the maximum number of shares that may be made subject to
Awards under the Original Trustee Plan is reduced by the maximum number of
shares made the subject of Awards under the Original Incentive Plan. Consistent
with the foregoing, the Amended and Restated Trustee Plan provides for a pool of
shares that may be made the subject of Awards under both the Amended and
Restated Trustee Plan and the Amended and Restated Incentive Plan equal to ten
percent (10%) of the outstanding Class A Common Shares (on a fully diluted basis
with respect to certain convertible securities), calculated generally with
respect to the number of Class A Common Shares outstanding (on a fully diluted
basis with respect to certain convertible securities) as of the last day of the
prior calendar year.
In addition, the Amended and Restated Trustee Plan permits the Board to
allow retired trustees to exercise options for up to one year following
retirement. The amendment also permits, with respect to performance-based
Awards, the use of asset growth as an objective measure of performance and the
calculation of performance goals as of the date of a trustee's death, disability
or retirement.
Set forth herein is a description of the terms of Amended and Restated
Trustee Plan. The Amended and Restated Trustee Plan will be effective upon
shareholder approval. The Amended and Restated Trustee Plan permits the grant of
Nonqualified Share Option (NQSO), Restricted Share, Share Appreciation Right
(SAR), Performance Unit, Performance Share and Share Unit Awards.
Purpose. The purpose of the Amended and Restated Trustee Plan is to
promote the success of the Company by providing incentives to Trustees to link
their compensation to the long-term financial success of the Company and to
growth in shareholder value. The plan is designed to provide flexibility to the
Company in its ability to attract and retain the services of Trustees upon whose
judgment, interest and special effort the successful conduct of the Company's
operations is largely dependent.
Administration. The Amended and Restated Trustee Plan will be
administered by the Board of Trustees. Among other things, the Board will have
the authority to select Trustees to whom Awards may be granted, to determine the
type of Awards as well as the number of Common Shares to be covered by each
Award and to determine the terms and conditions of any such Awards. The Board
will also have the authority to construe and interpret the plan, establish,
amend or waive rules and regulations for its administration, accelerate the
exercisability of any Award and amend the terms and conditions of any
outstanding Award. All decisions made by the Board will be final and binding.
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Eligibility. Participants in the plan will be members of the Board of
Trustees of the Company who are not, and who have not been at any time within
the preceding three years, employees of the Company or any of its Subsidiaries.
Number of Shares. With respect to calendar year 1998, the maximum
number of shares that may be made the subject of Awards under the Amended and
Restated Trustee Plan is equal to (i) ten percent (10%) of the number of Common
Shares that were outstanding on a fully diluted basis with respect to the Common
Shares underlying any outstanding Convertible Securities as of December 31, 1997
(subject to rounding), minus (ii) the number of shares remaining subject to or
issued in respect of Awards which were granted prior to December 31, 1997, which
maximum number shall be reduced by the number of shares remaining subject to or
issued in respect of Awards which were granted prior to December 31, 1997 under
the Amended and Restated Incentive Plan and the number of shares made the
subject of Awards under the Amended and Restated Incentive Plan during the 1998
calendar year. Thereafter, for any given calendar year, the maximum number of
Shares that may be made the subject of Awards granted under the Plan shall be
equal to (i) ten percent (10%) of the number of Common Shares that were
outstanding on a fully diluted basis with respect to the Common Shares
underlying any outstanding Convertible Securities as of the end of the
immediately preceding calender year (rounded downward if necessary to eliminate
fractional shares), minus (ii) the number of shares remaining subject to or
issued in respect of Awards which were granted under the Plan through the last
day of the immediately preceding calendar year (the "Year End Date"), which
maximum number shall be reduced by the number of shares remaining subject to or
issued in respect of Awards which were granted prior to the Year End Date under
the Amended and Restated Incentive Plan and the number of Shares made the
subject of Awards under the Amended and Restated Incentive Plan during the
current calendar year. Upon the grant of an Award, except for the grant of a
Performance Unit Award denominated in dollars, the maximum number of shares
shall be reduced by the number of shares in respect to which the Award is
granted or denominated. For a Performance Unit Award denominated in dollars, the
number of shares shall be reduced by an amount equal to the dollar amount of the
Award, divided by the Fair Market Value of a share on the date the Award is
granted.
Subject to the foregoing limits, the shares available under the Amended
and Restated Trustee Plan can be divided among the various types of Awards and
among the Participants as the Board determines. The shares are to be made
available from authorized but unissued Company Common Shares or shares
reacquired by the Company in the open market. The maximum number of shares
subject to Awards under the Amended and Restated Trustee Plan will adjust with
any share dividend or split, recapitalization, reclassification, merger,
consolidation, combination or exchange of shares or similar change to the
Company's Common Shares.
Description of Awards. Share Options. The Amended and Restated Trustee
Plan permits the award of NQSOs. Each NQSO granted under the plan must be
evidenced by an Option Agreement specifying terms, the number of shares covered,
the exercise price, when it is exercisable, any restriction on transferability
of shares obtained upon the exercise of the option and the duration. The
purchase price per Common Share covered by a NQSO shall be determined by the
Board. Payment of a NQSO may be made with cash, with previously owned Common
Shares, by foregoing compensation in accordance with Board rules or by a
combination of these.
Share Appreciation Rights. The Amended and Restated Trustee Plan
authorizes the Board to grant SARs in tandem with a NQSO, in addition to a NQSO,
independent of a NQSO or as a combination of the foregoing. A holder of a SAR is
entitled upon exercise to receive a number of shares of Common Shares, or cash
or a combination, as the Board may determine, equal in value on the date of
exercise to the amount by which the Fair Market Value of one Common Share on the
date of exercise exceeds the exercise price fixed by the Board on the date of
grant (which price shall not be less than 100% of the of the market price of a
Common Share on the date of grant) multiplied by the number of shares in respect
of which the SARs are exercised. If granted in tandem with a NQSO, the SAR is
exercisable at the same time as the related NQSO and, when exercised, the
related NQSO must be surrendered and ceases to be exercisable. If granted in
addition to a NQSO, the exercise of the related NQSO causes the SAR also to be
exercised. If granted independently of a NQSO, the SAR will be exercisable at
such time as the Board determines and its exercise will be unrelated to any
NQSO. The term of any SAR will not exceed ten years.
Restricted Shares. The Amended and Restated Trustee Plan authorizes the
Board to grant Restricted Shares to individuals with such Periods of Restriction
as the Board may designate. Each grant of Restricted Shares will be evidenced by
a Restricted Share Agreement that shall specify the Period of Restriction, the
number of Restricted Shares
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granted and such other provisions determined by the Board. These provisions may
include Performance Goals that must be satisfied before payout of an Award is
made. The Performance Goals may be objectively based on measures such as total
shareholder return, return on equity, return on capital, earnings per share,
cash flow per share, market share, share price, revenues, costs, net income,
cash flow and retained earnings, asset growth, or subjectively based. During the
Period of Restriction, Restricted Shares may not be sold, assigned, transferred,
pledged or otherwise encumbered. During the Period of Restriction, participants
holding Restricted Shares may exercise full voting rights with respect to the
shares and are entitled to all dividends and other distributions paid on those
shares.
Performance Units, Performance Shares and Share Units. The Amended and
Restated Trustee Plan authorizes the Board to grant Performance Units and
Performance Shares which may be earned if specified long-term Company goals are
achieved over a period of time selected by the Board (a "Performance Period").
Prior to the grant of Performance Units or Performance Shares, the Board may
establish the Performance Goals (from among the performance measures described
above relating to Restricted Shares) that must be satisfied before a payout of
such Awards is made. At the conclusion of a particular Performance Period, the
Board will determine the extent to which such Performance Goals have been met.
It will then determine the applicable percentage (which may exceed 100%) to be
applied to, and will apply such percentage to, the value of the Performance
Units or Performance Shares awarded to determine the payout to be received by
the Participant. As a result, depending upon the Company's performance in
relation to the Performance Goals, a Participant may earn less or more than the
number of Performance Shares or Performance Units initially awarded. In
addition, to the extent that the value of a Performance Share or Performance
Unit is related to the Company's Common Shares, the value of any payout will be
dependent upon the changing value of the Common Shares. Payments may be made in
cash, Common Shares or a combination as determined by the Board.
The Amended and Restated Trustee Plan also authorizes the grant of
Share Units at any time and from time to time on such terms as shall be
determined by the Board of Trustees. A Share Unit is a derivative interest in a
Common Share based on a share equivalent. Share Units shall be payable in Common
Shares upon the occurrence of certain trigger events set forth on the
Participant's Election Form in his or her complete discretion ("Trigger
Events"). The terms and conditions of the Trigger Events may vary by Share Unit
Award, by the Participant, or both. Each Share Unit awarded is credited to a
Share Unit Account to reflect the Company's liability to that Participant.
Additional share equivalents may be added to the Share Unit Account equal to the
amount of Common Shares that could be purchased with dividends equal to that
paid on one Common Share, multiplied by the number of share equivalents then
existing in the Share Unit Account and based on the Fair Market Value of the
Common Shares on the date a dividend is paid. A Participant is entitled to
receive the Common Shares in his or her Share Unit Account to which a Share Unit
Award relates upon the occurrence of the applicable Trigger Event.
Change in Control. Upon a Change in Control of the Company, all NQSOs,
SARs, Share Units and Restricted Shares shall vest 100%. All Performance Units
and Performance Shares shall immediately be paid out in cash, based upon the
extent, as determined by the Board, to which the Performance Goals have been met
through the effective date of the Change in Control or based upon the assumed
achievement of such goals, whichever is higher.
Limits on Transferability and Exercisability. Generally, no Award under
the Amended and Restated Trustee Plan may be sold, transferred, assigned,
pledged or hypothecated, other than by will or by the laws of descent and
distribution and all rights to any Award shall be exercisable only by the
Participant during his or her lifetime. NQSOs may, in the Board's discretion, be
transferrable to members of the optionee's immediate family, a trust established
for the benefit of one or more such family members or a partnership in which
such family members are the only partners. The optionee may not receive any
consideration for such transfers.
All outstanding Awards granted under the plan will be forfeited
immediately if the Trustee is removed. Upon ceasing service as a Trustee due to
death or disability, all outstanding and vested NQSOs and SARs may be exercised
within one year but in no event after the expiration date. If a Trustee retires
or terminates service for any other reason, all outstanding and vested NQSOs and
SARs may be exercised within three months but in no event after the expiration
date.
In the event a Trustee terminates service for any reason during the
Period of Restriction, then any Restricted Shares subject to restrictions as of
the date of such termination shall automatically be forfeited subject to the
discretion
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of the Board to waive the forfeiture and impose new restrictions to such
Restricted Shares in the event a Participant's service terminates for any reason
other than for removal. Outstanding Performance Units and Performance Shares
will entitle the Trustee to receive pro-rated payments based upon the full
months of service during the Performance Period. Share Units will be payable to
the Participant if vested in the event of death, disability or retirement. If a
Trustee terminates service for any other reason, Performance Units, Performance
Shares and unvested Share Units will be forfeited.
Amendment and Discontinuance. The Amended and Restated Trustee Plan may
be amended, altered or discontinued by the Board of Trustees, but except as
specifically provided therein, no amendment, alteration or discontinuance may be
made which would in any manner adversely affect any Award theretofore granted
without the written consent of the Participant. Except as expressly provided in
the Amended and Restated Trustee Plan, the plan may not be amended without
shareholder approval to the extent such approval is required by law or the rules
of a securities exchange on which the Company's Common Shares are listed.
Federal Income Tax Consequences. The following is a brief discussion of
the relevant federal income tax rules. The rules are highly technical and are
subject to change.
NQSOs and SARs. Upon the grant of a NQSO (with or without an SAR), the
optionee will not recognize any taxable income and the Company will not be
required to record an expense. Upon exercise, the excess of the fair market
value of the shares acquired on the exercise of a NQSO over the purchase price
(the "spread"), or the consideration paid to the optionee upon the exercise of
the SAR, will constitute a payment for services taxable to the optionee as
ordinary income. In determining the amount of the spread or the amount of
consideration paid to the optionee, the fair market value of the shares on the
date of exercise is used, except that special timing rules may apply as a result
of Section 16(b) of the Exchange Act. The Company, in computing its federal
income tax, will generally be entitled to a deduction in an amount equal to the
amount included in the optionee's gross income in the Company's taxable year in
which the amount is included as income to the optionee. The optionee's tax basis
in an Award paid in Common Shares is equal to the amount of ordinary income
recognized and the holding period commences as of the date that income is
recognized. Upon a subsequent sale or exchange of the Common Shares acquired,
the optionee will have capital gain or loss measured by the difference between
the amount realized on the disposition and his or her tax basis in the shares.
Transferable NQSO. The transfer of a NQSO will have no immediate tax
consequences to the Company, the Participant or the transferee. Upon the
subsequent exercise of the transferred NQSO by the transferee, the Participant
will realize ordinary income in an amount measured by the difference between the
option price and the fair market value of the shares on the date of exercise,
and the Company will be entitled to a deduction in the same amount. Any
difference between such fair market value and the price at which the transferee
may subsequently sell such shares will be treated as capital gain or loss to the
transferee, long-term or short-term depending on the length of time the shares
have been held by the transferee.
Restricted Shares. A Participant who is granted Restricted Shares may
make a Section 83(b) election to have the grant taxed as ordinary income at the
date of receipt, with the result that any future appreciation (or depreciation)
in the value of the shares granted shall be taxed as capital gain (or loss) upon
a subsequent sale of the shares. However, if the Participant does not make a
Section 83(b) election, the grant will be taxed as ordinary income at the full
fair market value on the date that the restrictions imposed on the shares
expire. Unless a Participant makes a Section 83(b) election, any dividends paid
on shares subject to the restrictions is ordinary income to the Participant and
an expense to the Company. The Company is generally entitled to a tax deduction
for any ordinary income taxed to the Participant with respect to the shares. The
Participant's tax basis is equal to the amount of ordinary income recognized and
the tax holding period commences as of the date that income is recognized. Upon
a subsequent sale or exchange of the Common Shares acquired, the Participant
will have capital gain or loss measured by the difference between the amount
realized on the disposition and his or her tax basis in the shares.
Performance Units, Performance Shares and Share Units. A Participant
who has been granted a Performance Unit, Performance Share or Share Unit Award
will not realize taxable income until the units or shares vest and the
Participant is in receipt of the Common Share and/or cash distributed in payment
of the Award, at which time the Participant will realize ordinary income equal
to the fair market value of the shares delivered or the amount of cash paid.
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At that time, the Company generally will be allowed a corresponding tax
deduction equal to the ordinary income taxed to the Participant. The
Participant's tax basis in an Award paid in Common Shares is equal to the amount
of ordinary income recognized and the holding period commences as of the date
that income is recognized. Upon a subsequent sale or exchange of the Common
Shares acquired, the Participant will have capital gain or loss measured by the
difference between the amount realized on the disposition and his or her tax
basis in the shares.
Trustee Plan Benefits. No specific Awards under the Amended and
Restated Trustee Plan have been determined at this time except the Company
expects to make Awards of Share Units as compensation for the Trustee's service
on the Board of Trustees in accordance with the existing compensation
arrangement.
Vote Required. The Board of Trustees determined to adopt the Amended
and Restated Trustee Plan, subject to shareholder approval at the Annual
Meeting. The affirmative vote of a majority of the votes cast at the Annual
Meeting is required to approve the Amended and Restated Trustee Plan.
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PROPOSAL 6 -- APPROVAL OF SHARE PURCHASE PLAN
CERTAIN ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. THIS SUMMARY
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE COMPLETE TEXT OF THE SHARE PURCHASE PLAN ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS ANNEX E. SHAREHOLDERS ARE URGED TO READ THE ANNEXES TO
THIS PROXY STATEMENT/PROSPECTUS IN THEIR ENTIRETY. ALL CAPITALIZED TERMS WHICH
ARE NOT DEFINED HEREIN ARE DEFINED IN THE SHARE PURCHASE PLAN.
In April 1998, the Board of Trustees adopted the 1998 Employee Share
Purchase Plan. The Share Purchase Plan will be effective upon shareholder
approval. The principal provisions of the Share Purchase Plan are summarized
below.
Shares Reserved. The Board of Trustees has authorized and reserved for
issuance of up to 1,000,000 Class A Common Shares under the Share Purchase Plan.
The Share Purchase Plan provides eligible employees of the Company with a means
to purchase such shares at a discount, subject to adjustments under certain
circumstances such as stock splits, stock dividends, recapitalization or other
changes in the outstanding Class A Common Shares. The reserved shares consist of
authorized but unissued Class A Common Shares.
Purpose of Plan. The Share Purchase Plan is intended as an employment
incentive and to encourage share ownership by all eligible employees of the
Company and its subsidiaries at a favorable price so that employees may
participate in the economic progress of the Company and to engender between the
Company's employees and its shareholders a commonality of interests. The Share
Purchase Plan is also designed to encourage eligible employees to remain in the
employ of the Company. The Share Purchase Plan provides eligible employees with
an opportunity to purchase Class A Common Shares through payroll deductions.
Offerings. The first Offering under the Share Purchase Plan will
commence on the later of July 1, 1998 or the effective date of the registration
statement covering the shares issuable under the plan and terminate on December
31, 1998. The second Offering will begin on January 1, 1999 and terminate on
June 30, 1999. Subsequent Offerings will commence on the successive July 1 and
January 1 dates until the Board of Trustees terminates the Share Purchase Plan
or no additional shares of Common Shares are available for purchase under the
Share Purchase Plan.
Eligible Employees. The Share Purchase Plan provides that all employees
of the Company will be eligible to participate in the Share Purchase Plan,
provided that each such employee: (a) is regularly employed for more than 20
hours per week and for more than five months in a calender year and has been
employed, as of the applicable Offering Date, for at least three months; and (b)
is employed on the first day of the applicable Plan Period. To participate in
the plan, each eligible employee must complete an Authorization Form and related
documents at least 30 days prior to the applicable Offering Commencement Date of
an Offering in which he or she desires to participate. An eligible employee
remains enrolled for subsequent Offerings, unless earlier terminated by the
employee under the terms of the plan. However, participation in one Offering
does not limit, or require, participation in any other Offering.
No employee may be granted an Option if, after the grant of an Option
under the plan, such employee would own, share or possess 5% or more of the
total combined voting power or value of the shares of beneficial interest or
capital stock of the Company or any subsidiary, after taking into account
outstanding options and certain attribution rules. Further, if a participating
employee requests that certificates for Class A Common Shares that have been
purchased under the plan be issued to him before one year from the date such
shares were purchased, the employee will not be permitted to participate in the
next Offering. As of June 30, 1998, approximately 31 employees would be eligible
to participate in the Share Purchase Plan as of July 1, 1998.
Purchases. The Share Purchase Plan authorizes the grant of Options to
purchase Class A Common Shares to eligible participating employees on January 1
and July 1 of each year. The purchase price is payable by the employee through
automatic payroll deductions during the year, which deductions may not be less
than $10 or more than the dollar amount or percentage of his base pay that is
designated by the employee. No employee may be granted an Option for which his
rights to purchase Class A Common Shares under the plan and any other share
purchase plan of the Company
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or any subsidiary accrue at a rate which exceeds $25,000 of the fair market
value of such Class A Common Shares (determined as of the Offering Commencement
Period for the Plan Period) for each calender year in which the Option is
outstanding at any time.
The purchase price for each Common Share subject to an Option granted
under the Stock Purchase Plan shall be 85% of the average closing prices for the
Class A Common Shares on each business day of the applicable Offering, provided
the purchase price shall not be less than the lesser of (i) 85% of the closing
price on the first business day of such Plan Period or (ii) 85% of the closing
price on the last business day of the Plan Period.
On the Offering Commencement Date of each Plan Period, each eligible
employee who elects to participate in an Offering will receive an Option to
purchase the number of Class A Common Shares that he will be able to purchase
with the payroll deduction credited to his account during such Plan Period,
provided that the maximum number of shares that an eligible employee may
purchase under an Offering shall not exceed $12,500 divided by the fair market
value of a Class A Common Share on the first business day of the applicable Plan
Period.
Withdrawal; Termination of Employment; Deduction Changes. Subject to
certain limitations set forth in the Share Purchase Plan, an employee is
permitted, at any time prior to the end of an Offering, to terminate or to
withdraw all of the amounts in his or her account, without interest. If an
employee's employment is terminated (a) within 90 days of the last day of the
current Offering by reason of retirement or disability or (b) at any time during
the current Offering by reason of death, he or she will have the right prior to
the end of the current Offering to elect to have the balance of his or her
account either paid to him or her in cash or applied at the end of the current
Offering toward the purchase of Class A Common Shares. Upon the termination of
the employee's employment with the Company prior to the last day of an Offering
for any other reason, the employee's only right will be to receive the amount of
cash that is in his or her account, without interest. An Employee is permitted
to decrease or discontinue payroll deductions once during an Offering. If an
employee discontinues payroll deductions, but does not withdraw the amounts in
his or her account, the funds deducted prior to the discontinuance will be
applied to the purchase of Class A Common Shares. Other than as set forth in
this paragraph, an employee may not change the amount of his or her payroll
deductions during an Offering.
Amendment. The Share Purchase Plan may be amended from time to time by
the Board of Trustees provided, however, that no amendment will be effective
without the prior approval of the shareholders to increase the aggregate number
of shares to be issued under the plan and change the class of employees eligible
to receive Options. The Share Purchase Plan may be terminated at any time by the
Board of Trustees.
Federal Income Tax Consequences. The Share Purchase Plan is intended to
qualify as an employee "stock purchase plan" under Section 423 of the Code, such
that the transfer of a Class A Common Share to an employee pursuant to the plan
will generally be governed by Section 421(a) of the Code. Under Section 421(a),
an employee will not be required to recognize income with respect to the
discount at the time the Option is granted or at the time the Option is
exercised. The Company or its subsidiary will not be entitled to any deduction
with respect to the plan, except in connection with a disqualifying disposition
(as discussed below). In order for the subscription for shares pursuant to the
Share Purchase Plan to qualify for the foregoing tax treatment, the employee
generally must be an employee of the Company or a subsidiary (within the meaning
of Section 423 of the Code) from the date the purchase right is granted through
the date three months before the date the shares are purchased by the employee.
If the employee has held the shares subscribed for pursuant to the
Share Purchase Plan for at least two years after the date of grant and for at
least one year after the date of purchase, upon disposition of the shares by the
employee (or upon the employee's death), the employee will be taxed as follows:
if the market price of the shares on the date they are sold is equal to or less
than the price paid for the shares under the plan, the employee will incur a
long-term capital loss in the amount equal to the price paid over the sale
price. If the sale price is higher than the price paid under the Share Purchase
Plan, the employee will recognize ordinary income in an amount equal to the
lesser of (a) the market price of the shares on the day the applicable purchase
period commenced over the price paid or (b) the excess of the market price at
the time of disposition over the price paid. Any further gain is treated as a
capital gain.
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If the employee sells the shares before he or she has owned them for
more than one year and before the expiration of a two-year period commencing on
the day the purchase period commenced (a "disqualifying disposition"), the
employee will recognize ordinary income on the amount of the difference between
the actual purchase price and the market price of the shares on the date of
purchase and the Company will receive an expense deduction for the same amount.
The employee will recognize a capital gain or loss for the difference between
the sale price and the fair market value on the date of purchase.
The foregoing is only a summary of certain provisions of the Code, and
employees are urged to consult with their own tax advisors regarding these
matters.
Vote Required. The affirmative vote of the holders of a majority of the
votes cast at the Annual Meeting is required to approve the Share Purchase Plan.
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PROPOSAL 7 -- RATIFICATION OF INDEPENDENT AUDITORS
The Board of Trustees of the Company has appointed Ernst & Young LLP
("E&Y") as independent auditors of the Company for the fiscal year ending
December 31, 1998, and has further directed that the appointment of such
auditors be submitted for ratification by the shareholders at the Annual
Meeting. The Company has been advised by E&Y that neither that firm nor any of
its associates has any relationship with the Company or its subsidiaries other
than the usual relationship that exists between independent certified public
accountants and clients. E&Y will have a representative at the Annual Meeting
who will have an opportunity to make a statement, if he or she so desires, and
who will be available to respond to appropriate questions.
Shareholder ratification of the appointment of E&Y as the Company's
independent auditors is not required by the Current Declaration of Trust or
otherwise. However, the Board of Trustees is submitting the appointment of E&Y
to the shareholders for ratification as a matter of what it considers to be good
corporate practice. Even if the appointment is ratified, the Board of Trustees
in its discretion may direct the appointment of a different independent
accounting firm at any time during the year if the Board of Trustees determines
that such a change would be in the best interests of the Company and its
shareholders.
On April 14, 1997, the Board of Trustees adopted a resolution (i) not
to retain Coopers & Lybrand LLP ("C&L") as the Company's auditors for the fiscal
year ending December 31, 1997 and (ii) to engage E&Y as the Company's
independent auditors for the fiscal year ending December 31, 1997.
The reports of C&L on the Company's consolidated financial statements
as of and for the two years ended December 31, 1996 and December 31, 1995 did
not contain an adverse opinion or a disclaimer of opinion nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's two fiscal years ended December 31, 1996 and
through the date of their replacement on April 14, 1997, there were no
disagreements with C&L on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of C&L, would have caused
them to make reference thereto in their report(s) on the Company's financial
statements for such fiscal year(s), nor were there any "reportable events"
within the meaning of Item 304(a)(1)(v) of Regulation S-K promulgated under the
Exchange Act.
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EXPERTS
The consolidated financial statements of the Company as of and for the
year ended December 31, 1997, appearing elsewhere in this Proxy
Statement/Prospectus and Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement and are included in reliance
upon such report, given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements and schedules of the Company as
of December 31, 1996 and for the two years ended December 31,1996, appearing
elsewhere in this Proxy Statement/Prospectus and Registration Statement have
been audited by PricewaterhouseCoopers LLP (f/k/a Coopers & Lybrand L.L.P.),
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration and are included in reliance upon such report,
given upon the authority of such firm as experts in accounting and auditing.
LEGAL OPINIONS
The validity of the New Company Stock being issued in connection with
the Reorganization has been passed upon by Ballard Spahr Andrews & Ingersoll,
LLP, Baltimore, Maryland, Maryland counsel to New Company. Battle Fowler LLP has
passed upon the federal income tax consequences of the Reorganization to the
holders of Company Shares. Martin L. Edelman, who is a Trustee of and a
consultant to the Company, is also of counsel to Battle Fowler LLP.
REPORTS TO SHAREHOLDERS
The Company, or if the Reorganization is approved, the New Company will
continue to provide shareholders with annual reports containing financial
statements reported upon by independent auditors, and also unaudited quarterly
statements of operations.
OTHER MATTERS
The management of the Company does not know of any other matters to
come before the Annual Meeting. However, if any other matters come before the
Annual Meeting, it is the intention of the persons designated as proxies to vote
in accordance with their discretion on such matters.
SHAREHOLDER PROPOSALS
Any Company Shareholder who wishes to submit a proposal for
presentation at the Company's 1999 annual meeting of shareholders must submit
such proposal to the Company at its office at 605 Third Avenue, New York, New
York 10016, Attention: Secretary, no later than December 31, 1998, in order to
be considered for inclusion, if appropriate, in the Company's, or if the
Reorganization is approved, the New Company's, proxy statement and form of proxy
relating to its 1999 annual meeting of shareholders.
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ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), is made as of
August __, 1998, by and among Capital Trust, a California business trust (the
"Company"), Captrust Limited Partnership, a Maryland limited partnership (the
"Limited Partnership"), and Capital Trust, Inc., a Maryland corporation (the
"New Company").
PRELIMINARY STATEMENT
The Board of Trustees of the Company has determined that it is
advisable and in the best interest of the Company to reorganize from a business
trust organized under the laws of the State of California into a corporation
incorporated under the laws of the State of Maryland. In connection with the
foregoing reorganization, the Company has formed the Limited Partnership and the
New Company as direct or indirect wholly-owned subsidiaries of the Company. The
parties hereto desire to effect the Mergers (as hereinafter defined) upon the
terms and subject to the conditions set forth herein.
Accordingly, in consideration of these premises, the covenants and
agreements made herein and for other good and valuable consideration the receipt
and sufficiency of which is hereby acknowledged, the parties hereto adopt the
plan of merger encompassed by this Agreement and agree as follows:
ARTICLE I
THE MERGERS; CLOSING; EFFECTIVE TIME
1.1. THE LIMITED PARTNERSHIP MERGER. Subject to the terms and
conditions of this Agreement, at the Effective Time (as defined in Section 1.4),
the Company shall be merged with and into the Limited Partnership and the
separate existence of the Company shall thereupon cease (the "Limited
Partnership Merger"). The Limited Partnership shall be the surviving entity in
the Limited Partnership Merger (sometimes hereinafter referred to as the
"Surviving Limited Partnership"), shall continue to be governed by the laws of
the State of Maryland and the separate existence of the Limited Partnership with
all its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Limited Partnership Merger.
The Limited Partnership Merger shall have the effects specified in the
Maryland Revised Uniform Limited Partnership Act (the "MRULPA").
1.2. THE COMPANY MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.4), the Surviving
Limited Partnership
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shall be merged with and into the New Company and the separate existence of the
Surviving Limited Partnership shall thereupon cease (the "Company Merger" and,
together with the Limited Partnership Merger, the "Mergers"). The New Company
shall be the surviving entity in the Company Merger (sometimes hereinafter
referred to as the "Surviving Corporation") and shall continue to be governed by
the laws of the State of Maryland and the separate existence of the New Company
with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Mergers.
The Company Merger shall have the effects specified in the Maryland
General Corporation Law (the "MGCL").
The parties intend that the Mergers qualify as a reorganization under
Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended.
1.3. CLOSING. The closing of the Mergers (the "Closing") shall take
place (i) at the offices of the New Company, 605 Third Avenue, 26th Floor, New
York, New York 10016 at 10:00 a.m. local time on the first business day on which
the last to be fulfilled or waived of the conditions set forth in Section 5.1
hereof shall be fulfilled or (ii) at such other place and time and/or on such
other date as the Company, the Limited Partnership and the New Company may
agree.
1.4. EFFECTIVE TIME. Following the fulfillment or waiver of the
conditions set forth in Section 5.1 hereof, and provided that this Agreement has
not been terminated or abandoned pursuant to Article VII hereof, the Company and
the Limited Partnership will, at such time as they deem advisable, cause
Articles of Merger (the "Partnership Articles of Merger") to be filed with the
State Department of Assessments and Taxation of Maryland (the "SDAT") as
provided in Section 10-208(d) of the MRULPA. Following the fulfillment or waiver
of the conditions set forth in Section 5.1 hereof, provided that this Agreement
shall not have been terminated or abandoned pursuant to Article VI hereof, the
Surviving Limited Partnership and the New Company will, at such time as they
deem advisable, cause Articles of Merger (the "Company Articles of Merger") to
be filed with the SDAT as provided in Section 3-107 of the MGCL. The Mergers
shall become effective upon the acceptance for record of the Partnership
Articles of Merger and the Company Articles of Merger by the SDAT (the
"Effective Time"). The parties hereto intend the Mergers to become effective
simultaneously.
ARTICLE II
CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
OF THE SURVIVING LIMITED PARTNERSHIP AND THE
CHARTER AND BYLAWS OF THE SURVIVING CORPORATION
2.1. SURVIVING LIMITED PARTNERSHIP. The certificate of limited
partnership and agreement of limited partnership of the Limited Partnership in
effect at the Effective Time
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shall be the certificate of limited partnership and agreement of limited
partnership of the Surviving Limited Partnership, until duly amended in
accordance with the terms thereof and the MRULPA.
2.2. SURVIVING CORPORATION. The charter of the New Company, as in
effect at the Effective Time, shall be amended by the Articles of Amendment and
Restatement in the form attached hereto as Exhibit A, the Articles Supplementary
with respect to New Class A Preferred Stock (as defined below), in the form
attached hereto as Exhibit B, and the Articles Supplementary with respect to
Class B 9.5% Cumulative Convertible Non-Voting Preferred Shares, par value $1.00
per share, of New Company, in the form attached hereto as Exhibit C
(collectively, the "Articles"), and the Articles shall be the charter of the
Surviving Corporation, until duly amended in accordance with the MGCL. The
Bylaws of the New Company, as in effect at the Effective Time, shall be amended
and restated in full, as set forth in the amended and restated Bylaws of the New
Company attached hereto as Exhibit D (the "Amended and Restated Bylaws"), and
said Amended and Restated Bylaws, as so amended and restated, shall be the
Bylaws of the Surviving Corporation, until duly amended in accordance with the
MGCL.
ARTICLE III
DIRECTORS AND EXECUTIVE OFFICERS AND
COMMITTEES OF THE BOARD OF DIRECTORS
OF THE SURVIVING CORPORATION
3.1. DIRECTORS AND OFFICERS. At or before the Effective Time, the
following persons shall be elected or appointed as the executive officers and
directors of the Surviving Corporation and such officers and directors shall
thereafter serve until their successors have been duly elected and qualified or
until their earlier death, resignation or removal in accordance with the charter
of the Surviving Corporation:
Name Office
- ---- ------
Samuel Zell Chairman of the Board and
Director
Jeffrey A. Altman Director
Martin L. Edelman Director
Gary R. Garrabrant Director
Thomas E. Dobrowski Director
Steven Roth Director
Craig M. Hatkoff Vice Chairman and Director
John R. Klopp Vice Chairman, Chief Executive
Officer and Director
Sheli Z. Rosenberg Director
Lynne B. Sagalyn Director
Donald J. Meyer Managing Director and Chief
Investment Officer
Edward L. Shugrue III Managing Director, Chief
Financial Officer and Assistant
Secretary
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3.2. COMMITTEES OF THE BOARD OF DIRECTORS. At or before the Effective
Time, the board of directors of the Surviving Corporation shall create and
constitute the following committees and each member of such committee shall
thereafter serve until his successor shall have been duly appointed in
accordance with the Bylaws of the Surviving Corporation:
Executive Committee
-------------------
Craig M. Hatkoff, Chairman
Gary R. Garrabrant
John R. Klopp
Sheli Z. Rosenberg
Audit Committee
---------------
Jeffrey A. Altman
Craig M. Hatkoff (non-voting)
Lynne B. Sagalyn, Chairwoman
Compensation Committee
----------------------
Jeffrey A. Altman
Martin L. Edelman
John R. Klopp
Lynne B. Sagalyn
Sheli Z. Rosenberg, Chairwoman
Performance Compensation Committee
----------------------------------
Jeffrey A. Altman
Lynne B. Sagalyn
Sheli Z. Rosenberg, Chairwoman
The foregoing committees shall have the same functions and powers delegated to
the same committees of the board of trustees of the Company as set forth in the
minutes of the board of trustees of the Company.
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ARTICLE IV
EFFECT OF THE MERGER
ON SHARES OF BENEFICIAL INTEREST;
EXCHANGE OF CERTIFICATES
4.1. EFFECT ON STOCK. At the Effective Time, by virtue of the Mergers
and without any action on the part of the holders thereof:
(a) Each class A common share of beneficial interest, $1.00 par value,
in the Company (the "Class A Common Shares") issued and outstanding immediately
prior to the Effective Time shall be converted into, and shall become, one
validly issued, fully paid and nonassessable share of class A common stock,
$0.01 par value per share ("New Class A Common Stock"), of the New Company. At
the Effective Time, all Class A Common Shares shall no longer be outstanding and
shall be canceled and retired and shall cease to exist.
(b) Each class A 9.5% cumulative convertible share of beneficial
interest, $1.00 par value, in the Company (the "Class A Preferred Shares"),
issued and outstanding immediately prior to the Effective Time shall be
converted into, and shall become, one share of class A 9.5% cumulative
convertible preferred stock, $0.01 par value per share (the "New Class A
Preferred Stock"), of the New Company. At the Effective Time, all Class A
Preferred Shares shall no longer be outstanding and shall be canceled and
retired and shall cease to exist.
(c) Each Class A Common Share and Class A Preferred Share issued and
held in the Company's treasury at the Effective Time shall, by virtue of the
Mergers and without any action on the part of the holder thereof, cease to be
outstanding, shall be canceled and retired without payment of any consideration
therefor and shall cease to exist.
(d) At the Effective Time, each partnership interest in the Limited
Partnership existing immediately prior to the Effective Time shall, by virtue of
the Mergers and without any action on the part of the Limited Partnership or the
holder of such interests, be canceled and retired without payment of any
consideration therefor.
(e) At the Effective Time, each share of common stock, $.01 par value
per share, of the New Company issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Mergers and without any action on the
part of the New Company or the holder thereof, be canceled and retired without
payment of any consideration therefor, and such shares shall have the status of
unauthorized and unissued shares of New Class A Common Stock.
4.2. STOCK CERTIFICATES. From and after the Effective Time, (i) each
certificate which immediately prior to the Effective Time represented Class A
Common Shares (each, a "Common Certificate") shall be deemed for all purposes to
represent ownership of an equal number of, shares of New Class A Common Stock
and (ii) each certificate which immediately prior to the Effective Time
represented Class A Preferred Shares (each a "Preferred Certificate," and
together
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with the Common Certificate, the "Certificates") shall be deemed for all
purposes to represent ownership of an equal number of, shares of Class A
Preferred Stock. The registered owner on the books and records of the Company or
its transfer agent of any Certificate shall, until such Certificate shall have
been surrendered for transfer or otherwise accounted for to the Surviving
Corporation or its transfer agent, have and be entitled to exercise any voting
or other rights with respect to and to receive any dividends and other
distributions upon the shares of New Class A Common Stock or the New Class A
Preferred Stock, as the case may be, represented by any such outstanding
Certificate as provided above. Nothing contained herein shall be deemed to
require the holder of any Class A Common Shares or Class A Preferred Shares, as
the case may be, to surrender any Certificate(s) representing such shares in
exchange for a certificate or certificates representing shares of New Class A
Common Stock or the New Class A Preferred Stock.
4.3. OPTIONS. Each unit providing the right to acquire or an option to
purchase or otherwise acquire Class A Common Shares granted under the Company's
1997 Long-Term Incentive Share Plan and Trustee Share Plan (collectively, the
"Plans"), which is outstanding immediately prior to the Effective Time shall, by
virtue of the Mergers and without any action on the part of the holder of such
option or unit, be converted into and become a unit providing the right to
acquire or an option to purchase or otherwise acquire the same number of shares
of New Class A Common Stock, upon the same terms and subject to the same
conditions as set forth in the Plans as in effect at the Effective Time. The
same number of shares of New Class A Common Stock shall be reserved for purposes
of the outstanding options as is equal to the number of Class A Common Shares so
reserved as of the Effective Time. As of the Effective Time, the Surviving
Corporation assumes the Plans and all obligations of the Company under the
Plans, including the outstanding units or options or portions thereof granted
pursuant to the Plans.
ARTICLE V
CONDITIONS
5.1. CONDITION TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of the Company, the Limited Partnership and the New
Company to consummate the Mergers are subject to the fulfillment of each of the
following conditions:
(a) The registration statement on Form S-4 to be filed by the New
Company, which will include the proxy statement of the Company soliciting
proxies to approve the Mergers, shall have been declared effective in accordance
with the Securities Act of 1933, as amended, by the Securities and Exchange
Commission and no stop order shall have been issued or threatened.
(b) This Agreement shall have been duly approved by (i) the requisite
vote of holders of the Class A Common Shares and Class A Preferred Shares, in
accordance with applicable law and the amended and restated declaration of trust
and by-laws of the Company, (ii) the New Company as the general partner of the
Limited Partnership, and (iii) the Company, as the sole shareholder of the New
Company.
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(c) The shares of New Class A Common Stock to be issued in the Mergers
and the shares of New Class A Common Stock underlying the New Class A Preferred
Stock to be issued in the Mergers shall have been listed on the New York Stock
Exchange ("NYSE"), subject to official notice of issuance.
(d) No order to restrain, enjoin or otherwise prevent the consummation
of this Agreement or either of the Mergers shall have been entered by any court
or administrative body and shall remain in full force and effect.
(e) The obligations to consummate the Mergers contemplated hereby shall
not have been terminated pursuant to Article VI hereof.
(f) All consents and approvals, if any, necessary for the transactions
contemplated hereby shall have been obtained and be in full force and effect.
ARTICLE VI
TERMINATION
6.1. TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated
and the Mergers may be abandoned at any time prior to the Effective Time, before
or after the approval by holders of the Class A Common Shares and the Class A
Preferred Shares, by the mutual consent of the Board of the Trustees of the
Company and the general partner of the Limited Partnership and the Board of
Directors of the New Company.
6.2. EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination
of this Agreement and abandonment of the Mergers pursuant to this Article VI, no
party hereto (or any of its directors, trustees or officers) shall have any
liability or further obligation to any other party to this Agreement.
ARTICLE VII
MISCELLANEOUS AND GENERAL
7.1. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. From and
after the Effective Time, the Surviving Corporation will indemnify, and pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to, (i) any individual who is a present or former director or officer of the
Company or the Limited Partnership or its general partner or (ii) any individual
who, while a director of the Company and at the request of the Company, serves
or has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or trustee
of such corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, arising out of or pertaining to matters existing or
occurring at or prior to the Effective Time, whether asserted or
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claimed prior to, at or after the Effective Time, to the fullest extent required
or permitted by Maryland law.
7.2. MODIFICATION OR AMENDMENT. Subject to the applicable provisions of
the MRULPA and the MGCL, at any time prior to the Effective Time, the parties
hereto may amend or modify this Agreement by written agreement, executed and
delivered by duly authorized officers of the respective parties; provided,
however, that after the Mergers have been approved by the Company's
shareholders, no amendment or modification may change the amount or form of the
consideration to be received by such shareholders in the Mergers.
7.3. WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the relevant Merger are for the sole benefit of such
party and may be waived by such party in whole or in part to the extent
permitted by applicable law.
7.4. COUNTERPARTS. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original, and all of which shall constitute one and the same
agreement.
7.5. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the States of California and Maryland in the case
of the Limited Partnership Merger, and in accordance with the laws of the State
of Maryland in the case of the Company Merger.
7.6. NO THIRD PARTY BENEFICIARIES. Except as provided in Section 7.1,
no provision of this Agreement is intended, nor shall it be interpreted, to
provide or create any third party beneficiary rights or any other rights of any
kind in any client, customer, affiliate, stockholder, partner or employee or any
other person or entity.
7.7. HEADINGS. The Article, Section and Paragraph headings herein are
for convenience of reference only and shall have no effect on the construction
or meaning of this Agreement.
7.8. SERVICE OF PROCESS.
(a) The New Company may be served with process in the State of Maryland
in any proceeding for the enforcement of any obligation of the Company or the
Limited Partnership, as well as for enforcement of any obligations of the New
Company arising from the Mergers, and to the New Company is Ballard Spahr
Andrews & Ingersoll, 300 Lombard Street, Baltimore, Maryland 21202, Attn: James
J. Hanks, Jr.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of the parties hereto on the date first
hereinabove written.
CAPITAL TRUST, INC.
By:/s/ John R. Klopp
------------------------
Name: John R. Klopp
Title: President
CAPTRUST LIMITED PARTNERSHIP
By: CAPITAL TRUST, INC.,
its general partner
By:/s/ John R. Klopp
-----------------------
Name: John R. Klopp
Title: President
CAPITAL TRUST
By:/s/John R. Klopp
--------------------------------
Name: John R. Klopp
Title: Vice Chairman and Chief
Executive Officer
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Exhibit A
CAPITAL TRUST, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: Capital Trust, Inc., a Maryland corporation (the "Corporation"),
desires to amend and restate its charter as currently in effect and as
hereinafter amended.
SECOND: The following provisions are all the provisions of the charter
currently in effect and as hereinafter amended:
ARTICLE I
INCORPORATOR
The undersigned, Tonya Mitchem Grindon whose address is c/o Ballard
Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland 21202,
being at least 18 years of age, does hereby form a corporation under the general
laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (the "Corporation") is: Capital Trust, Inc.
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed are to engage in any
lawful act or activity for which corporations may be organized under the general
laws of the State of Maryland as now or hereafter in force.
697816.3
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ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of
Maryland is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street,
Baltimore, Maryland 21202, Attention: James J. Hanks, Jr. The name of the
resident agent of the Corporation in the State of Maryland is James J. Hanks,
Jr., whose post address is c/o Ballard Spahr Andrews & Ingersoll, 300 East
Lombard Street, Baltimore, Maryland 21202. The resident agent is a citizen of
and resides in the State of Maryland.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number of Directors. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. The
number of directors of the Corporation initially shall be ten (10), which number
may be increased or decreased pursuant to the Bylaws, but shall never be less
than the minimum number required by the Maryland General Corporation Law. The
names of the directors who shall serve until the first annual meeting of
stockholders and until their successors are duly elected and qualified are:
Samuel Zell
Jeffrey A. Altman
Sheli Z. Rosenberg
Gary R. Garrabrant
Martin L. Edelman
John R. Klopp
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Lynne B. Sagalyn
Craig M. Hatkoff
Thomas E. Dobrowski
Steven Roth
These directors may increase the number of directors and may fill any vacancy,
whether resulting from an increase in the number of directors or otherwise, on
the Board of Directors occurring before the first annual meeting of stockholders
in the manner provided in the Bylaws.
Section 5.2 Extraordinary Actions. Notwithstanding any provision of law
permitting or requiring any action to be taken or approved by the affirmative
vote of the holders of shares entitled to cast a greater number of votes, any
such action shall be effective and valid if taken or approved by the affirmative
vote of holders of shares entitled to cast a majority of all the votes entitled
to be cast on the matter.
Section 5.3 Authorization by Board of Stock Issuance. The Board of
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable (or without consideration in the case of a stock
split or stock dividend), subject to such restrictions or limitations, if any,
as may be set forth in the charter or the Bylaws.
Section 5.4 Preemptive Rights. Except as may be provided by the Board
of Directors in setting the terms of classified or reclassified shares of stock
pursuant to Section 6.4 or as may otherwise be provided by contract, no holder
of shares of stock of the Corporation shall, as such holder, have any preemptive
right to purchase or subscribe for any additional shares of stock of the
Corporation or any other security of the Corporation which it may issue or sell.
Section 5.5 Indemnification. The Corporation shall have the power, to
the maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any individual who is a
present or former director or officer of the Corporation or (b) any individual
who, while a director of the Corporation and at the request of the Corporation,
697816.3
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serves or has served as a director, officer, partner or trustee of another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise from and against any claim or
liability to which such person may become subject or which such person may incur
by reason of his status as a present or former director or officer of the
Corporation. The Corporation shall have the power, with the approval of the
Board of Directors, to provide such indemnification and advancement of expenses
to a person who served a predecessor of the Corporation in any of the capacities
described in (a) or (b) above and to any employee or agent of the Corporation or
a predecessor of the Corporation.
Section 5.6 Determinations by Board. The determination as to any of the
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its capital
stock: the amount of the net income of the Corporation for any period and the
amount of assets at any time legally available for the payment of dividends,
redemption of its capital stock or the payment of other distributions on its
capital stock; the amount of paid-in surplus, net assets, other surplus, annual
or other net profit, net assets in excess of capital, undivided profits or
excess of profits over losses on sales of assets; the amount, purpose, time of
creation, increase or decrease, alteration or cancellation of any reserves or
charges and the propriety thereof (whether or not any obligation or liability
for which such reserves or charges shall have been created shall have been paid
or discharged); the fair value, or any sale, bid or asked price to be applied in
determining the fair value, of any asset owned or held by the Corporation; any
matter relating to the acquisition, holding and disposition of any assets by the
Corporation; or any other matter relating to the business and affairs of the
Corporation.
697816.3
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ARTICLE VI
STOCK
Section 6.1 Authorized Shares. The total number of shares of stock
which the Corporation shall have the authority to issue is 300,000,000 shares,
consisting of three classes of stock as follows:
(a) 100,000,000 shares of class A common stock, par value $.01
per share (the "Class A Stock");
(b) 100,000,000 shares of class B common stock, par value $.01
per share (the "Class B Stock," and together with the Class A Stock, the "Common
Stock"); and
(c) 100,000,000 shares of preferred stock, par value $.01 per
share (the "Preferred Stock"). The aggregate par value of all authorized shares
of stock having par value is $3,000,000. If shares of one class of stock are
classified or reclassified into shares of another class of stock pursuant to
this Article VI, the number of authorized shares of the former class shall be
automatically decreased and the number of shares of the latter class shall be
automatically increased, in each case by the number of shares so classified or
reclassified, so that the aggregate number of shares of stock of all classes
that the Corporation has authority to issue shall not be more than the total
number of shares of stock set forth in the first sentence of this paragraph. To
the extent permitted by Maryland law, the board of directors, without any action
by the stockholders of the Corporation, may amend the charter from time to time
to increase or decrease the aggregate number of shares of stock of any class or
series that the Corporation has the authority to issue.
Section 6.2 Common Stock. Except as may otherwise be provided in this
Article VI, all shares of Common Stock shall be identical and shall entitle the
holders thereof to the same rights and privileges with respect thereto. Subject
to the provisions of Section 6.3, the Common Stock shall have the following
preferences, rights, powers, restrictions, limitations and qualifications, and
such others as may be afforded by law: (a) Voting Rights. Except as may
otherwise be provided by law, each holder of Class A Stock shall have one vote
in respect to each share of Class A Stock held of
697816.3
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record on all matters to be voted upon by stockholders and the shares of Class B
Stock shall not have voting rights and shall not be counted in determining the
presence of a quorum at any meeting of stockholders.
(b) Dividend Rights. The holders of Common Stock shall be
entitled to receive, ratably in proportion to the number of shares of Common
Stock held by them, such dividends as may be authorized from time to time by the
Board of Directors out of assets legally available therefor.
(c) Liquidation Rights. In the event of the voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation, after
payment in full or reasonable provision for payment in full of all claims and
obligations of the Corporation shall have been made, all of the assets of the
Corporation, if any, remaining, of whatever kind available for distribution to
stockholders, shall be distributed to the holders of Common Stock, ratably, in
proportion to the number of shares of Common Stock held by them.
(d) Conversion. The Common Stock shall have the following
conversion rights:
(i) Each share of Class A Stock shall be convertible at the
option of the holder thereof at any time and from time to time into one
validly issued, fully paid and nonassessable share of Class B Stock.
Subject to delivery of the certification described in Section
6.2(d)(ii) below, each share of Class B Stock shall be convertible at
the option of the holder thereof at any time and from time to time into
one validly issued, fully paid and nonassessable share of Class A
Stock.
(ii) In order to exercise the conversion right, the holder of
any shares of Common Stock to be converted in whole or in part shall
surrender the certificate or certificates representing such shares of
Common Stock to the Corporation and shall give written notice to the
Corporation ("Conversion Notice") that the stockholder elects to
convert such shares of Common Stock or the portion thereof specified in
said notice into shares of Class A Stock or shares of Class B
697816.3
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Stock, as specified by the stockholder in the Conversion Notice. The
Conversion Notice shall also (x) state the name or names (with address)
in which the certificates for the shares of Common Stock shall be
issued and (y) if the shares of Class B Stock are to be converted into
shares of Class A Stock, contain a certification by the stockholder
that the stockholder either (a) will not, together with such
stockholder's Aggregated Transferors (as defined below), upon the
issuance of such shares of Class A Stock, own more than 4.9% of any
class of Voting Stock (as defined below) of the Corporation or (b) is
not limited by the Bank Holding Company Act of 1956, as amended, to
holding no more than 4.9% of any class or series of Voting Stock of the
Corporation. Each certificate representing shares of Common Stock
surrendered for conversion shall, unless the shares issuable on
conversion are to be issued in the same name as the registration of
such shares of Common Stock, be duly endorsed by, or be accompanied by
instruments of transfer in form satisfactory to the Corporation duly
executed by, the stockholder or its duly authorized attorney. As
promptly as practicable after receipt of a Conversion Notice and
surrender of the certificate or certificates representing the shares of
Common Stock relating thereto, the Corporation shall issue and deliver
to such stockholder (or upon the written order of such stockholder) a
certificate or certificates for the number of full shares of Common
Stock issuable upon the conversion of such Common Stock or portion
thereof in accordance with the provisions of this Section 6.2(d)(ii).
In the event that less than all the shares of Common Stock represented
by a certificate are to be converted, the Corporation shall issue and
deliver or cause to be issued and delivered to (or upon the written
order of) the holder of the shares of Common Stock so surrendered,
without charge to such stockholder, a new certificate or certificates
representing a number of shares of Common Stock equal to the
unconverted portion of the surrendered certificate. Each conversion
shall be deemed to have been effected on the date (the "Conversion
Date") on which the certificate or certificates representing such
697816.3
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shares of Common Stock shall have been surrendered to the Corporation
or its transfer agent and a Conversion Notice with respect to such
shares of Common Stock shall have been received by the Corporation, as
described above. Any Person (as defined below) in whose name any
certificate or certificates for shares of Common Stock shall be
issuable upon conversion shall be deemed to have become the holder of
record of the shares of Common Stock represented thereby on the
Conversion Date; provided, however, if the certificate or certificates
representing shares of Common Stock are surrendered on any date when
the stock transfer books of the Corporation shall be closed, the
stockholder shall constitute the Person in whose name the certificates
are to be issued as the record holder thereof for all purposes until
the next succeeding day on which such stock transfer books are open,
but such conversion shall be at the Conversion Price in effect on the
date on which such certificate or certificates shall have been
surrendered. No payment or adjustment will be made for dividends or
other distributions with respect to any shares of Common Stock issuable
upon conversion of shares of Common Stock as provided herein.
(iii) The issuance of stock certificates upon conversion of
shares of Common Stock shall be made without charge to the converting
stockholder for any tax in respect of the issuance thereof.
(iv) The Corporation covenants that all shares of Common Stock
which may be issued upon conversion of shares of Common Stock will upon
issuance be validly issued, fully paid and nonassessable by the
Corporation and free from all taxes, liens and charges with respect to
the issuance thereof.
(v) For purposes of this Section 6.2(d), (x) the term
"Aggregated Transferor" of a Person shall mean any other Person other
than the Corporation who previously held Voting Stock of the
Corporation now held by such Person,
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(y) the term "Person" shall mean an individual, a corporation, a
partnership, a limited liability company, a joint venture, an
association, a joint-stock company, a trust, a business trust, a
government or any agency or any political subdivision thereof, any
unincorporated organization or any other entity, and (z) the term
"Voting Shares" shall mean, collectively, the shares of Class A Stock
and the shares of Preferred Stock created pursuant to Section 6.3 and
designated at such time as entitled to vote generally in the election
of directors.
The Board of Directors may reclassify any unissued shares of Common Stock from
time to time in one or more classes or series of stock.
Section 6.3 Preferred Stock. The Board of Directors may classify any
unissued shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock of any series from time to time, in one or
more classes or series of stock.
Section 6.4 Classified or Reclassified Shares. Prior to issuance of
classified or reclassified shares of any class or series, the Board of Directors
by resolution shall: (a) designate that class or series to distinguish it from
all other classes and series of stock of the Corporation; (b) specify the number
of shares to be included in the class or series; (c) set or change, subject to
the provisions of Section 6.3 and subject to the express terms of any class or
series of stock of the Corporation outstanding at the time, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms and conditions of
redemption for each class or series; and (d) cause the Corporation to file
articles supplementary with the State Department of Assessments and Taxation of
Maryland ("SDAT"). Any of the terms of any class or series of stock set or
changed pursuant to clause (c) of this Section 6.4 may be made dependent upon
facts or events ascertainable outside the charter (including determinations by
the Board of Directors or other facts or events within the control of the
Corporation) and may vary among holders thereof, provided that the manner in
which such facts, events or variations shall operate upon the terms of such
class or series of stock is clearly and expressly set forth in the articles
supplementary filed with the SDAT.
697816.3
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<PAGE>
Section 6.5 Charter and Bylaws. All persons who shall acquire capital
stock in the Corporation shall acquire the same subject to the provisions of the
charter and the Bylaws.
ARTICLE VII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendment to its charter, now or hereafter authorized by law, including any
amendment altering the terms or contract rights, as expressly set forth in the
charter, of any shares of outstanding stock. All rights and powers conferred by
the charter on stockholders, directors and officers are granted subject to this
reservation.
ARTICLE VIII
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers of a corporation,
no director or officer of the Corporation shall be liable to the Corporation or
its stockholders for money damages. Neither the amendment nor repeal of this
Article VIII, nor the adoption or amendment of any other provision of the
charter or Bylaws inconsistent with this Article VIII, shall apply to or affect
in any respect the applicability of the preceding sentence with respect to any
act or failure to act which occurred prior to such amendment, repeal or
adoption.
THIRD: The amendment to and restatement of the charter as hereinabove
set forth have been duly advised by the Board of Directors and approved by the
stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the Corporation
is as set forth in Article IV of the foregoing amendment and restatement of the
charter.
FIFTH: The name and address of the Corporation's current resident agent
is as set forth in Article IV of the foregoing amendment and restatement of the
charter.
SIXTH: The number of directors of the Corporation and the names of
those currently in office are as set forth in Article V of the foregoing
amendment and restatement of the charter.
697816.3
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<PAGE>
SEVENTH: The total number of shares of capital stock which the
Corporation had authority to issue immediately prior to this amendment and
restatement was 100 shares, consisting of 1,000 shares of Common Stock, $.01 par
value per share. The aggregate par value of all shares of capital stock having
par value was $10.
EIGHTH: The total number of shares of stock which the Corporation has
authority to issue pursuant to the foregoing amendment and restatement of the
charter is 300,000,000, consisting of 200,000,000 shares of Common Stock, $.01
par value per share, and 200,000,000 shares of Preferred Stock, $.01 par value
per share. The aggregate par value of all shares of stock having par value is
$3,000,000.
NINTH: The undersigned chief executive officer acknowledges these
Articles of Amendment and Restatement to be the corporate act of the Corporation
and as to all matters or facts required to be verified under oath, the
undersigned chief executive officer acknowledges that to the best of his
knowledge, information and belief, these matters and facts are true in all
material respects and that this statement is made under the penalties for
perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
chief executive officer and attested to by its secretary on this _____ day of
__________, 1998.
ATTEST: CAPITAL TRUST, INC.
By: (SEAL)
- ------------------------ ------------------------------
Secretary Chief Executive Officer
697816.3
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<PAGE>
Exhibit B
CAPITAL TRUST, INC.
AMENDED AND RESTATED
BYLAWS
<PAGE>
TABLE OF CONTENTS
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Page
ARTICLE I OFFICES.........................................................1
Section 1. PRINCIPAL OFFICE....................................1
Section 2. ADDITIONAL OFFICES..................................1
ARTICLE II MEETINGS OF STOCKHOLDERS........................................1
Section 1. PLACE...............................................1
Section 2. ANNUAL MEETING......................................1
Section 3. SPECIAL MEETINGS....................................1
Section 4. NOTICE..............................................1
Section 5. SCOPE OF NOTICE.....................................2
Section 6. ORGANIZATION........................................2
Section 7. QUORUM..............................................2
Section 8. VOTING..............................................2
Section 9. PROXIES.............................................2
Section 10. VOTING OF STOCK BY CERTAIN HOLDERS..................3
Section 11. INSPECTORS..........................................4
Section 12. NOMINATIONS AND PROPOSALS BY
STOCKHOLDERS........................................4
Section 13. VOTING BY BALLOT....................................6
ARTICLE III DIRECTORS.......................................................6
Section 1. GENERAL POWERS......................................6
Section 2. NUMBER, TENURE AND QUALIFICATIONS...................6
Section 3. ANNUAL AND REGULAR MEETINGS.........................6
Section 4. SPECIAL MEETINGS....................................6
Section 5. NOTICE..............................................7
Section 6. QUORUM..............................................7
Section 7. VOTING..............................................7
Section 8. TELEPHONE MEETINGS..................................7
Section 9. INFORMAL ACTION BY DIRECTORS........................7
Section 10. VACANCIES...........................................7
Section 11. COMPENSATION........................................8
Section 12. LOSS OF DEPOSITS....................................8
Section 13. SURETY BONDS........................................8
Section 14. RELIANCE............................................8
Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS................................8
ARTICLE IV COMMITTEES......................................................9
Section 1. NUMBER, TENURE AND QUALIFICATIONS...................9
Section 2. POWERS..............................................9
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Section 3. MEETINGS............................................9
Section 4. TELEPHONE MEETINGS..................................9
Section 5. INFORMAL ACTION BY COMMITTEES.......................9
Section 6. VACANCIES...........................................9
ARTICLE V OFFICERS.......................................................10
Section 1. GENERAL PROVISIONS.................................10
Section 2. REMOVAL AND RESIGNATION............................10
Section 3. VACANCIES..........................................10
Section 4. CHAIRMAN OF THE BOARD..............................10
Section 5. VICE CHAIRMEN......................................10
Section 6. CHIEF EXECUTIVE OFFICER............................11
Section 7. CHIEF OPERATING OFFICER............................11
Section 8. CHIEF FINANCIAL OFFICER............................11
Section 9. CHIEF INVESTMENT OFFICER...........................11
Section 10. PRESIDENT..........................................11
Section 11. MANAGING DIRECTORS.................................11
Section 12. VICE PRESIDENTS....................................11
Section 13. SECRETARY..........................................11
Section 14. TREASURER..........................................12
Section 15. ASSISTANT SECRETARIES AND ASSISTANT
TREASURERS.........................................12
Section 16. SALARIES...........................................12
ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS..........................13
Section 1. CONTRACTS..........................................13
Section 2. CHECKS AND DRAFTS..................................13
Section 3. DEPOSITS...........................................13
ARTICLE VII STOCK..........................................................13
Section 1. CERTIFICATES.......................................13
Section 2. TRANSFERS..........................................14
Section 3. REPLACEMENT CERTIFICATE............................14
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF
RECORD DATE........................................14
Section 5. STOCK LEDGER.......................................15
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS................15
ARTICLE VIII ACCOUNTING YEAR................................................15
ARTICLE IX DISTRIBUTIONS..................................................16
Section 1. AUTHORIZATION......................................16
Section 2. CONTINGENCIES......................................16
ARTICLE X INVESTMENT POLICY..............................................16
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ARTICLE XI SEAL...........................................................16
Section 1. SEAL...............................................16
Section 2. AFFIXING SEAL......................................16
ARTICLE XII INDEMNIFICATION AND ADVANCE OF EXPENSES........................17
ARTICLE XIII WAIVER OF NOTICE...............................................17
ARTICLE XIV AMENDMENT OF BYLAWS............................................17
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CAPITAL TRUST, INC.
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Corporation
shall be located at such place or places as the Board of Directors may
designate.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders for
the election of directors and the transaction of any business within the powers
of the Corporation shall be held on a date and at the time set by the Board of
Directors.
Section 3. SPECIAL MEETINGS. The president, chief executive officer or
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than 33 percent (33%) of all the votes entitled to be cast at such
meeting. Such request shall state the purpose of such meeting and the matters
proposed to be acted on at such meeting. The secretary shall inform such
stockholders of the reasonably estimated cost of preparing and mailing notice of
the meeting and, upon payment to the Corporation by such stockholders of such
costs, the secretary shall give notice to each stockholder entitled to notice of
the meeting. Unless requested by the stockholders entitled to cast a majority of
all the votes entitled to be cast at such meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of the stockholders held during the preceding twelve
months.
Section 4. NOTICE. Not less than ten nor more than 90 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time and
place of the meeting and, in the case of a special meeting or as otherwise may
be required by any statute, the purpose for which the meeting is called, either
by mail or by presenting it to such stockholder personally or by leaving it at
his residence or usual
<PAGE>
place of business. If mailed, such notice shall be deemed to be given when
deposited in the United States mail addressed to the stockholder at his post
office address as it appears on the records of the Corporation, with postage
thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of stockholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of stockholders, the chairman
of the board, if there be one, shall conduct the meeting or, in the case of
vacancy in office or absence of the chairman of the board, one of the following
officers present shall conduct the meeting in the order stated: the vice
chairman of the board, if there be one, the president, the vice presidents in
their order of rank and seniority, or a chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as chairman, and the
secretary, or, in his absence, an assistant secretary, or in the absence of both
the secretary and assistant secretaries, a person appointed by the chairman
shall act as secretary.
Section 7. QUORUM. At any meeting of stockholders, the presence in
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure. If, however,
such quorum shall not be present at any meeting of the stockholders, the
stockholders entitled to vote at such meeting, present in person or by proxy,
shall have the power to adjourn the meeting from time to time to a date not more
than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted. A majority of the votes cast at a meeting of stockholders duly called and
at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute or by the charter of the Corporation. Unless
otherwise provided in the charter, each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.
Section 9. PROXIES. A stockholder may cast the votes entitled to be
cast by the shares of the stock owned of record by him either in person or by
proxy executed in writing by the stockholder or by his duly authorized agent.
Such proxy shall be filed with the secretary of the Corporation before or at the
time of the meeting. No proxy shall be valid after eleven months from the date
of its execution, unless otherwise provided in the proxy.
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Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the
Corporation registered in the name of a corporation, partnership, trust or other
entity, if entitled to be voted, may be voted by the president or a vice
president, a general partner or trustee thereof, as the case may be, or a proxy
appointed by any of the foregoing individuals, unless some other person who has
been appointed to vote such stock pursuant to a bylaw or a resolution of the
governing body of such corporation or other entity or agreement of the partners
of a partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such stock. Any director or other
fiduciary may vote stock registered in his name as such fiduciary, either in
person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it
shall not be voted at any meeting and shall not be counted in determining the
total number of outstanding shares entitled to be voted at any given time,
unless they are held by it in a fiduciary capacity, in which case they may be
voted and shall be counted in determining the total number of outstanding shares
at any given time.
The Board of Directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure which
the Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the stockholder of record of
the specified stock in place of the stockholder who makes the certification.
Notwithstanding any other provision of the chapter of the Corporation
or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations
Article of the Annotated Code of Maryland (or any successor statute) shall not
apply to any acquisition by Veqtor Finance Company, LLC, a Delaware limited
liability company ("Veqtor"), or any affiliates thereof, or a Permitted
Transferee of Veqtor (as defined herein) of shares of stock of the Corporation.
For purposes of this section, the term "Permitted Transferee of Veqtor" includes
each of the following entities to the extent any such entity acquires shares of
stock of the Corporation, directly or indirectly, from Veqtor: Capital Trust
Investors Limited Partnership, an Illinois limited partnership, V2 Holdings LLC,
a Delaware limited liability company, BankAmerica Investment Corporation, an
Illinois corporation, First Chicago Capital Corporation, a Delaware corporation,
and Wells Fargo & Company, a Delaware corporation. This section may be repealed,
in whole or in part, at any time, whether before or after an acquisition of
control shares and, upon such repeal, may, to the extent provided by any
successor bylaw, apply to any prior or subsequent control share acquisition.
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Section 11. INSPECTORS. At any meeting of stockholders, the chairman of
the meeting may appoint one or more persons as inspectors for such meeting. Such
inspectors shall ascertain and report the number of shares represented at the
meeting based upon their determination of the validity and effect of proxies,
count all votes, report the results and perform such other acts as are proper to
conduct the election and voting with impartiality and fairness to all the
stockholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
Section 12. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS.
(a) Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board of Directors
and the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders (i) pursuant to the Corporation's notice of
meeting, (ii) by or at the direction of the Board of Directors or (iii) by any
stockholder of the Corporation who was a stockholder of record both at the time
of giving of notice provided for in this Section 12(a) and at the time of the
annual meeting, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 12(a).
(2) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1)
of this Section 12, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation and such other business must
otherwise be a proper matter for action by stockholders. To be timely, a
stockholder's notice shall be delivered to the secretary at the principal
executive offices of the Corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
30 days or delayed by more than 60 days from such anniversary date or if the
Corporation has not previously held an annual meeting, notice by the stockholder
to be timely must be so delivered not earlier than the close of business on the
90th day prior to such annual meeting and not later than the close of business
on the later of the 60th day prior to such annual meeting or the tenth day
following the day on which public announcement of the date of such meeting is
first made by the Corporation. In no event shall the public announcement of a
postponement or adjournment of an annual meeting to a later date or time
commence a new time period for the giving of a stockholder's notice as described
above. Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")
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(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (ii) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the stockholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (x) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (y) the number of shares
of each class of stock of the Corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a) (2) of this Section 12 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is no
public announcement by the Corporation naming all of the nominees for director
or specifying the size of the increased Board of Directors at least 70 days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 12 (a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth day
following the day on which such public announcement is first made by the
Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record both at the time of giving of notice
provided for in this Section 12(b) and at the time of the special meeting, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 12(b). In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate a person or persons (as
the case may be) for election to such position as specified in the Corporation's
notice of meeting, if the stockholder's notice containing the information
required by paragraph (a) (2) of this Section 12 shall be delivered to the
secretary at the principal executive offices of the Corporation not earlier than
the close of business on the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting. In no event shall the
public announcement of a postponement or adjournment of a special meeting to a
later date or time commence a new time period for the giving of a stockholder's
notice as described above.
(c) General. (1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 12 shall be eligible to serve as
directors and only such business
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shall be conducted at a meeting of stockholders as shall have been brought
before the meeting in accordance with the procedures set forth in this Section
12. The chairman of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the meeting
was made or proposed, as the case may be, in accordance with the procedures set
forth in this Section 12 and, if any proposed nomination or business is not in
compliance with this Section 12, to declare that such nomination or proposal
shall be disregarded.
(2) For purposes of this Section 12, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15 (d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a
stockholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 12. Nothing in this Section 12 shall be deemed
to affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 13. VOTING BY BALLOT. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or
at any special meeting called for that purpose, a majority of the entire Board
of Directors may establish, increase or decrease the number of directors,
provided that the number thereof shall never be less than the minimum number
required by the Maryland General Corporation Law, nor more than 15, and further
provided that the tenure of office of a director shall not be affected by any
decrease in the number of directors.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board
of Directors shall be held immediately after and at the same place as the annual
meeting of stockholders, no notice other than this Bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without other notice than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the chairman of the board, president or by
a majority of the directors then in office. The person or persons authorized to
call special meetings of the Board
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of Directors may fix any place, either within or without the State of Maryland,
as the place for holding any special meeting of the Board of Directors called by
them.
Section 5. NOTICE. Notice of any special meeting of the Board of
Directors shall be delivered personally or by telephone, facsimile transmission,
United States mail or courier to each director at his business or residence
address. Notice by personal delivery, by telephone or a facsimile transmission
shall be given at least two days prior to the meeting. Notice by mail shall be
given at least five days prior to the meeting and shall be deemed to be given
when deposited in the United States mail properly addressed, with postage
thereon prepaid. Telephone notice shall be deemed to be given when the director
is personally given such notice in a telephone call to which he is a party.
Facsimile transmission notice shall be deemed to be given upon completion of the
transmission of the message to the number given to the Corporation by the
director and receipt of a completed answer-back indicating receipt. Neither the
business to be transacted at, nor the purpose of, any annual, regular or special
meeting of the Board of Directors need be stated in the notice, unless
specifically required by statute or these Bylaws.
Section 6. QUORUM. A majority of the directors shall constitute a
quorum for transaction of business at any meeting of the Board of Directors,
provided that, if less than a majority of such directors are present at said
meeting, a majority of the directors present may adjourn the meeting from time
to time without further notice, and provided further that if, pursuant to the
charter of the Corporation or these Bylaws, the vote of a majority of a
particular group of directors is required for action, a quorum must also include
a majority of such group.
The directors present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough directors to leave less than a quorum.
Section 7. VOTING. The action of the majority of the directors present
at a meeting at which a quorum is present shall be the action of the Board of
Directors, unless the concurrence of a greater proportion is required for such
action by applicable statute.
Section 8. TELEPHONE MEETINGS. Directors may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
director and such written consent is filed with the minutes of proceedings of
the Board of Directors.
Section 10. VACANCIES. If for any reason any or all the directors cease
to be directors, such event shall not terminate the Corporation or affect these
Bylaws or the powers of the remaining directors hereunder (even if fewer than
three directors remain). Any vacancy on the Board of Directors for any cause
other than an increase in the number of directors shall be
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filled by a majority of the remaining directors, even if such majority is less
than a quorum. Any vacancy in the number of directors created by an increase in
the number of directors may be filled by a majority vote of the entire Board of
Directors. Any individual so elected as director shall hold office until the
next annual meeting of stockholders and until his successor is elected and
qualifies.
Section 11. COMPENSATION. Directors shall not receive any stated salary
for their services as directors but, by resolution of the Board of Directors,
may receive compensation per year and/or per meeting and/or per visit to real
property or other facilities owned or leased by the Corporation and for any
service or activity they performed or engaged in as directors. Directors may be
reimbursed for expenses of attendance, if any, at each annual, regular or
special meeting of the Board of Directors or of any committee thereof and for
their expenses, if any, in connection with each property visit and any other
service or activity they performed or engaged in as directors; but nothing
herein contained shall be construed to preclude any directors from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 12. LOSS OF DEPOSITS. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or stock of the
Corporation have been deposited.
Section 13. SURETY BONDS. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 14. RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the advisers, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS. The directors shall have no responsibility to devote their full time to
the affairs of the Corporation. Any director or officer, employee or agent of
the Corporation, in his personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or in
competition with those of or relating to the Corporation.
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ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors
may appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee, a Performance Compensation Committee and other
committees, composed of one or more directors, to serve at the pleasure of the
Board of Directors.
Section 2. POWERS. The Board of Directors may delegate to committees
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except as prohibited by law.
Section 3. MEETINGS. Notice of committee meetings shall be given in the
same manner as notice for special meetings of the Board of Directors. A majority
of the members of the committee shall constitute a quorum for the transaction of
business at any meeting of the committee. The act of a majority of the committee
members present at a meeting shall be the act of such committee. The Board of
Directors may designate a chairman of any committee, and such chairman or any
two members (if there are more than two members) of any committee may fix the
time and place of its meeting unless the Board shall otherwise provide. In the
absence of any member of any such committee, the members thereof present at any
meeting, whether or not they constitute a quorum, may appoint another director
to act in the place of such absent member. Each committee shall keep minutes of
its proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent is filed with the
minutes of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
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ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall
include a chairman of the board, two vice chairmen, a chief executive officer, a
president, a secretary and a treasurer and may include a chief operating
officer, a chief financial officer, one or more managing directors, one or more
vice presidents, one or more assistant secretaries and one or more assistant
treasurers. In addition, the Board of Directors may from time to time appoint
such other officers with such powers and duties as they shall deem necessary or
desirable. The officers of the Corporation shall be elected annually by the
Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of stockholders, except that the chief executive officer may
appoint one or more vice presidents, assistant secretaries and assistant
treasurers. If the election of officers shall not be held at such meeting, such
election shall be held as soon thereafter as may be convenient. Each officer
shall hold office until his successor is elected and qualifies or until his
death, resignation or removal in the manner hereinafter provided. Any two or
more offices except president and vice president may be held by the same person.
In its discretion, the Board of Directors may leave unfilled any office except
that of president, treasurer and secretary. Election of an officer or agent
shall not of itself create contract rights between the Corporation and such
officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the chairman of the board, the
president or the secretary. Any resignation shall take effect at any time
subsequent to the time specified therein or, if the time when it shall become
effective is not specified therein, immediately upon its receipt. The acceptance
of a resignation shall not be necessary to make it effective unless otherwise
stated in the resignation. Such resignation shall be without prejudice to the
contract rights, if any, of the Corporation.
Section 3. VACANCIES. A vacancy in any office may be filled by the
Board of Directors for the balance of the term.
Section 4. CHAIRMAN OF THE BOARD. The Board of Directors shall
designate a chairman of the board. The chairman of the board shall preside over
the meetings of the Board of Directors and of the stockholders at which he shall
be present. The chairman of the board shall perform such other duties as may be
assigned to him or them by the Board of Directors.
Section 5. VICE CHAIRMEN. The Vice Chairmen shall have the general
responsibility for the implementation of the policies of the Corporation, as
determined by the Board of Directors, and for the management of the business and
affairs of the Corporation.
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Section 6. CHIEF EXECUTIVE OFFICER. The Board of Directors may
designate a chief executive officer. In the absence of such designation, the
chairman of the board shall be the chief executive officer of the Corporation.
Subject to the direction of the Board of Directors, the chief executive officer
shall in general supervise and control all of the business and affairs of the
Corporation and shall exercise chief executive powers and such specific powers
and shall perform such duties as from time to time may be conferred upon or
assigned to him by the Board of Directors or any committee thereof designated by
it to so act. He may execute any deed, mortgage, bond, contract or other
instrument, except in cases where the execution thereof shall be expressly
delegated by the Board of Directors or by these Bylaws to some other officer or
agent of the Corporation or shall be required by law to be otherwise executed.
Section 7. CHIEF OPERATING OFFICER. The Board of Directors may
designate a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 8. CHIEF FINANCIAL OFFICER. The Board of Directors may
designate a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 9. CHIEF INVESTMENT OFFICER. The Board of Directors may
designate a chief investment officer. The chief investment officer shall have
the responsibilities and duties as set forth by the Board of Directors or the
chief executive officer.
Section 10. PRESIDENT. The president shall have general executive
powers and shall have such specific powers and shall perform all duties incident
to the office of president and such other duties as may be prescribed by the
Board of Directors from time to time. In the absence of a designation of a chief
operating officer by the Board of Directors, the president shall be the chief
operating officer.
Section 11. MANAGING DIRECTORS. The Board of Directors may designate
one or more managing directors. A managing director shall have the
responsibilities and duties as set forth by the Board of Directors or chief
executive officer.
Section 12. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there be
more than one vice president, the vice presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the president and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Board of Directors. The Board of
Directors may designate one or more vice presidents as executive vice president
or as vice president for particular areas of responsibility.
Section 13. SECRETARY. The secretary shall (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in
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accordance with the provisions of these Bylaws or as required by law; (c) be
custodian of the corporate records and of the seal of the Corporation; (d) keep
a register of the post office address of each stockholder which shall be
furnished to the secretary by such stockholder; (e) have general charge of the
share transfer books of the Corporation; and (f) in general perform such other
duties as from time to time may be assigned to him by the chief executive
officer, the president or by the Board of Directors.
Section 14. TREASURER. The treasurer shall have the custody of the
funds and securities of the Corporation and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors. In the absence of a designation of a chief financial officer by
the Board of Directors, the treasurer shall be the chief financial officer of
the Corporation.
The treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and Board of Directors, at the
regular meetings of the Board of Directors or whenever it may so require, an
account of all his transactions as treasurer and of the financial condition of
the Corporation.
If required by the Board of Directors, the treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, moneys and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 15. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be assigned to them by the secretary or treasurer, respectively,
or by the president or the Board of Directors. The assistant treasurers shall,
if required by the Board of Directors, give bonds for the faithful performance
of their duties in such sums and with such surety or sureties as shall be
satisfactory to the Board of Directors.
Section 16. SALARIES. The salaries and other compensation of the
officers shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving such salary or other compensation by
reason of the fact that he is also a director.
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ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the Corporation and such authority may be general
or confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the directors or by an authorized person
shall be valid and binding upon the Board of Directors and upon the Corporation
when authorized or ratified by action of the Board of Directors.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or agent of the
Corporation in such manner as shall from time to time be determined by the Board
of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. Each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each certificate
shall be signed by the chief executive officer, the president or a vice
president and countersigned by the secretary or an assistant secretary or the
treasurer or an assistant treasurer and may be sealed with the seal, if any, of
the Corporation. The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the Corporation shall, from time to
time, issue several classes of stock, each class may have its own number series.
A certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued. Each certificate representing shares
which are restricted as to their transferability or voting powers, which are
preferred or limited as to their dividends or as to their allocable portion of
the assets upon liquidation or which are redeemable at the option of the
Corporation, shall have a statement of such restriction, limitation, preference
or redemption provision, or a summary thereof, plainly stated on the
certificate. If the Corporation has authority to issue stock of more than one
class, the certificate shall contain on the face or back a full statement or
summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption of each
class of stock and, if the Corporation is authorized to issue any preferred or
special class in series, the differences in the relative rights and preferences
between the shares of each series to the extent they have been set and the
authority of the Board of Directors to set the relative rights and preferences
of subsequent series. In lieu of such statement or summary, the certificate may
state that the Corporation will furnish a full statement
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of such information to any stockholder upon request and without charge. If any
class of stock is restricted by the Corporation as to transferability, the
certificate shall contain a full statement of the restriction or state that the
Corporation will furnish information about the restrictions to the stockholder
on request and without charge.
Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer
agent of the Corporation of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of any class of
stock will be subject in all respects to the charter of the Corporation and all
of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board
of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
Board of Directors may set, in advance, a record date for the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or determining stockholders entitled to receive payment of any
dividend or the allotment of any other rights, or in order to make a
determination of stockholders for any other proper purpose. Such date, in any
case, shall not be prior to the close of business on the day the record date is
fixed and shall be not more than ninety days and, in the case of a meeting of
stockholders, not less than ten days, before the date on which the meeting or
particular action requiring such determination of stockholders of record is to
be held or taken.
In lieu of fixing a record date, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not longer
than 20 days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of or to vote at a
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meeting of stockholders, such books shall be closed for at least ten days before
the date of such meeting.
If no record date is fixed and the stock transfer books are not closed
for the determination of stockholders, (a) the record date for the determination
of stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of stockholders entitled
to receive payment of a dividend or an allotment of any other rights shall be
the close of business on the day on which the resolution of the directors,
declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the record date fixed for the original meeting, in either of which case a new
record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Corporation shall maintain at its
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors
may issue fractional stock or provide for the issuance of scrip, all on such
terms and under such conditions as they may determine. Notwithstanding any other
provision of the charter or these Bylaws, the Board of Directors may issue units
consisting of different securities of the Corporation. Any security issued in a
unit shall have the same characteristics as any identical securities issued by
the Corporation, except that the Board of Directors may provide that for a
specified period securities of the Corporation issued in such unit may be
transferred on the books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix
the fiscal year of the Corporation by a duly adopted resolution.
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ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
stock of the Corporation may be authorized and declared by the Board of
Directors, subject to the provisions of law and the charter of the Corporation.
Dividends and other distributions may be paid in cash, property or stock of the
Corporation, subject to the provisions of law and the charter.
Section 2. CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other distributions,
for repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall determine to be in the best interest of
the Corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board
of Directors may from time to time adopt, amend, revise or terminate any policy
or policies with respect to investments by the Corporation as it shall deem
appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption of a
seal by the Corporation. The seal shall contain the name of the Corporation and
the year of its incorporation and the words "Incorporated Maryland." The Board
of Directors may authorize one or more duplicate seals and provide for the
custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
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ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation shall indemnify and, without requiring a preliminary
determination of the ultimate entitlement to indemnification, shall pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any individual who is a present or former director or officer of the
Corporation and who is made a party to the proceeding by reason of his service
in that capacity or (b) any individual who, while a director of the Corporation
and at the request of the Corporation, serves or has served another corporation,
real estate investment trust, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or trustee
of such corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Corporation may, with
the approval of its Board of Directors, provide such indemnification and advance
for expenses to a person who served a predecessor of the Corporation in any of
the capacities described in (a) or (b) above and to any employee or agent of the
Corporation or a predecessor of the Corporation.
Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of
the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose
of any meeting need be set forth in the waiver of notice, unless specifically
required by statute. The attendance of any person at any meeting shall
constitute a waiver of notice of such meeting, except where such person attends
a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter
or repeal any provision of these Bylaws and to make new Bylaws.
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ANNEX B
AMENDMENT NO. 1
TO
AMENDED AND RESTATED DECLARATION OF TRUST
OF
CAPITAL TRUST
Capital Trust, a California business trust (the "Company")
organized and existing under the laws of the State of California, does hereby
amend its Amended and Restated Declaration of Trust, dated as of July 15, 1997
(the "DOT"), as follows:
1. Article X of the DOT is hereby amended as follows:
"ARTICLE X
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 10.1. Subject to other requirements and restrictions
of this Declaration of Trust (including this Article X) and the
provisions of the Certificate of Designation relating to any class or
series of Preferred Shares which may at the time be outstanding, the
Company shall not be incorporated, merged into another entity,
consolidated with one or more entities into a new entity, reorganized
as a new entity, liquidated or dissolved, and all or substantially all
of the assets of the Company shall not be sold, leased, exchanged or
otherwise disposed of, except in each case upon the affirmative vote or
written consent of a majority of the outstanding Voting Shares of the
Company entitled to vote, voting as a single class or series. Upon any
such approval of the holders of the Voting Shares, no approval of such
transaction by the Board shall be required.
Section 10.2. (a) The Company may merge or be consolidated
with or into one or more limited partnerships, of any state or states
of the United States or of the District of Columbia, which permits such
merger or consolidation. Such merger or consolidation shall be made
pursuant to an agreement of merger or consolidation, as the case may
be, complying and approved in accordance with this Section 10.2.
(b) The Board of Trustees shall adopt a resolution approving
an agreement of merger or consolidation. The agreement shall state: (1)
the terms and conditions of the merger or consolidation; (2) the mode
of carrying the same into effect; (3) the manner of converting the
trust interests or partnership interests of each of the constituent
entities into trust interests or partnership interests or other
securities of the entity surviving or resulting from such merger or
consolidation, and if any trust interests or partnership interests are
not to be converted solely into trust interests, partnership interests
or other securities of the entity surviving or resulting from such
merger or consolidation, the cash, property, rights or securities of
any other partnership, corporation or entity which the holders of such
trust interests or partnership interests are to receive in exchange
for, or upon conversion of such trust interests or partnership
interests and the surrender of any certificates evidencing them, which
cash, property, rights or securities of any other partnership,
corporation or entity may be in addition to or in lieu of trust
interests, partnership interests or other securities of the entity
surviving or resulting from such merger or consolidation; and (4) such
other details or provisions as are deemed desirable, including, without
limiting the generality of the foregoing,
<PAGE>
a provision for the payment of cash in lieu of the issuance of
fractional trust interests, partnership interests or other securities
of the entity surviving or resulting from the merger or consolidation
or other partnership, corporation or other entity. Any of the terms of
the agreement of merger or consolidation may be made dependent upon
facts ascertainable outside of such agreement, provided that the manner
in which such facts shall operate upon the terms of the agreement is
clearly and expressly set forth in the agreement of merger or
consolidation. The term "facts,' as used in the preceding sentence,
includes, but is not limited to, the occurrence of any event, including
a determination or action by any person or body, including the
constituent entities subject of the merger or consolidation.
Section 10.4. The agreement required by Section 10.2 of this
Article shall be adopted, approved, certified, executed and
acknowledged by each of the constituent entities in accordance with the
laws under which it was formed or, in the case of the Company, in the
manner provided in this Declaration of Trust whereupon it shall become
effective."
2. This amendment of the DOT herein certified has been duly
adopted in accordance with its provisions.
IN WITNESS WHEREOF, the Company has caused this Amendment of
the DOT to be duly executed and acknowledged, this ____ day of June, 1998.
------------------------------------
Name: John R. Klopp
Title: Chief Executive Officer
<PAGE>
ANNEX C
CAPITAL TRUST
AMENDED AND RESTATED
1997 LONG-TERM INCENTIVE SHARE PLAN
<PAGE>
CAPITAL TRUST
AMENDED AND RESTATED
1997 LONG-TERM INCENTIVE SHARE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION
1.1 Establishment of the Plan. On May 23, 1997, the Board of Trustees
of Capital Trust (f/k/a California Real Estate Investment Trust) (the "Company")
adopted, subject to the approval of shareholders, an incentive share
compensation plan known as the "1997 Long-Term Incentive Share Plan", which
permits the grant of Incentive Share Options, Nonqualified Share Options, Share
Appreciation Rights, Restricted Shares, Performance Units, Performance Shares
and Share Units. The plan became effective upon shareholder approval on July 15,
1997 and was amended by Amendment No. 1 effective on that date which changed all
references to "California Real Estate Investment Trust" in the plan to "Capital
Trust." On April 24, 1998, the Board of Trustees adopted, subject to the
approval of shareholders, this "Amended and Restated 1997 Long-Term Incentive
Share Plan" which amends and restates the original plan (hereinafter referred to
as the "Plan"). The terms of the Plan are set forth herein.
The Plan is designed to comply with the performance-based compensation
exemption under the proposed regulations to Internal Revenue Code Section 162(m)
issued by the Department of Treasury.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the
success of the Company and its Subsidiaries by providing incentives to Eligible
Individuals that will link their personal interests to the long-term financial
success of the Company and its Subsidiaries and to growth in shareholder value.
The Plan is designed to provide flexibility to the Company and its Subsidiaries
in their ability to motivate, attract, and retain the services of Eligible
Individuals upon whose judgment, interest, and special effort the successful
conduct of their operations is largely dependent.
1.3 Duration of the Plan. The Plan became effective on July 15, 1997
and shall remain in effect, subject to the right of the Board of Trustees to
terminate the Plan at any time pursuant to Article 13 herein, until all Shares
subject to it shall have been purchased or acquired according to the provisions
herein. However, in no event may an Award be granted under the Plan on or after
July 15, 2007.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
2.1 Definitions. Whenever used in the Plan, the following terms shall
have the meanings set forth below and, when the meaning is intended, the initial
letter of the word is capitalized:
(a) "Amended and Restated Trustee Share Plan" means the Amended
and Restated 1997 Non-Employee Trustee Share Plan of the
Company.
(b) "Award" or "Awards" means, individually or collectively, a
grant under this Plan of Incentive Share Options, Nonqualified
Share Options, Share Appreciation Rights, Restricted Shares,
Performance Units, Performance Shares or Share Units.
(c) "Award Agreement" means the agreement required under Article 3
evidencing an Award under this Plan.
<PAGE>
(d) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under
the Exchange Act.
(e) "Board" or "Board of Trustees" means the Board of Trustees of
the Company.
(f) "Cause" means the occurrence of any one of the following:
(i) The willful and continued failure by a Participant to
substantially perform his/her duties (other than any
such failure resulting from the Participant's
disability), after a written demand for substantial
performance is delivered to the Participant that
specifically identifies the manner in which the
Company or any of its Subsidiaries, as the case may
be, believes that the Participant has not
substantially performed his/her duties, and the
Participant has failed to remedy the situation within
ten (10) business days of receiving such notice; or
(ii) the Participant's conviction for committing a felony
in connection with the employment or service
relationship; or
(iii) the willful engaging by the Participant in gross
misconduct materially and demonstrably injurious to
the Company or any of its Subsidiaries. However, no
act, or failure to act, on the Participant's part
shall be considered "willful" unless done, or omitted
to be done, by the Participant not in good faith and
without reasonable belief, that his/her action or
omission was in the best interest of the Company or
any of its Subsidiaries.
(g) "Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs
shall have been satisfied:
(i) any Person (other than Veqtor Finance Company, LLC or
its affiliates as that term is defined under the
rules and regulations promulgated under the Exchange
Act, a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any
of its Subsidiaries, or a corporation owned directly
or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership
of Shares of the Company), is or becomes the
Beneficial Owner, directly or indirectly, of 20% or
more of the Voting Securities of the Company;
(ii) the Board shall at any time consist of a majority of
individuals (the "New Majority") who where elected or
appointed Trustees of the Company without the
approval of a majority of the Trustees either (A) in
office prior to the election or appointment of the
first of the Trustees comprising the New Majority, or
(B) appointed by or elected with the approval of such
Trustees; or
(iii) the shareholders of the Company approve (A) a plan of
complete liquidation of the Company; or (B) an
agreement for the sale or disposition of all or
substantially all the Company's assets; or (C) a
merger or consolidation of the Company with any other
corporation, other than a merger or consolidation
which would result in the Voting Securities of the
Company outstanding immediately prior thereto
continuing to represent (either by remaining
outstanding or by being converted into voting
securities of the surviving entity), at least 50% of
the combined voting power of the Voting Securities of
the Company (or such surviving entity) outstanding
immediately after such merger or consolidation.
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However, in no event shall a Change in Control be deemed to
have occurred, with respect to a Participant, if the
Participant is part of a purchasing group which consummates
the Change in Control transaction. The Participant shall be
deemed "part of a purchasing group..." for purposes of the
preceding sentence if the Participant is an equity participant
or has agreed to become an equity participant in the
purchasing company or group (except for (i) passive ownership
of less than 5% of the combined voting power of the purchasing
company or (ii) ownership of equity participation in the
purchasing company or group which is otherwise not deemed to
be significant, as determined prior to the Change in Control
by a majority of the nonemployee continuing members of the
Board).
(h) "Class B Common Shares" means the class B common shares of
beneficial interest, $1.00 par value, in the Company.
(i) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(j) "Committee" means the committee appointed by the Board to
administer the Plan pursuant to Article 3 herein.
(k) "Common Shares" means the class A common shares of beneficial
interest, $1.00 par value, in the Company.
(l) "Company" means Capital Trust, a California business trust, or
any successor thereto.
(m) "Convertible Securities" means the Common Shares, the Class B
Common Shares, the Preferred Shares and any securities issued
by the Company or any subsidiary thereof in capital raising or
merger and acquisition transactions that are by their terms
exercisable, convertible or exchangeable into or for Common
Shares.
(n) "Covered Employee" means any Participant designated prior to
the grant of Restricted Shares, Performance Units or
Performance Shares by the Committee who is or may be a
"covered employee" within the meaning of Section 162(m)(3) of
the Code in the year in which such Restricted Shares,
Performance Units or Performance Shares are taxable to such
Participant.
(o) "Eligible Individual" means an employee of the Company or any
of its Subsidiaries, including an employee who is an officer
or a Trustee of the Company or any of its Subsidiaries, or a
consultant or service provider to the Company or any of its
Subsidiaries who, in the opinion of the Committee, can
contribute significantly to the growth and profitability of
the Company and its Subsidiaries.
"Eligible Individual" also may include any other employee,
consultant or service provider, identified by the Committee,
in special situations involving extraordinary performance,
promotion, retention, or recruitment.
(p) "Election Form" means the form under which a Participant
elects to receive Shares granted under a Share Unit Award upon
the occurrence of certain events.
(q) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(r) "Fair Market Value" means the closing price of the Shares on a
securities exchange, or if the Shares were not traded on an
exchange, the average of the highest price and lowest price at
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which the Shares were traded, as reported on the Nasdaq
National Market, on the relevant date, or on the most recent
date on which the Shares were traded prior to such date.
(s) "Incentive Share Option" or "ISO" means an option to purchase
Shares, granted to a Participant pursuant to Article 6 herein,
which is designated as an incentive share option and is
intended to meet the requirements of Section 422 of the Code.
(t) "Nonqualified Share Option" or "NQSO" means an option to
purchase Shares, granted to a Participant pursuant to Article
6 herein, which is not intended to be an Incentive Share
Option.
(u) "Option" or "Options" means an Incentive Share Option or a
Nonqualified Share Option.
(v) "Option Agreement" means an Award Agreement evidencing an
Option Award granted under Article 6 herein.
(w) "Outside Trustee" means any Trustee who qualifies as an
"outside director" as that term is defined in Code Section
162(m) and the regulations issued thereunder.
(x) "Participant" means an Eligible Individual who has been
granted an Award under the Plan.
(y) "Performance Share" means an Award, designated as a
performance share, granted to a Participant pursuant to
Article 9 herein.
(z) "Performance Unit" means an Award, designated as a performance
unit, granted to a Participant pursuant to Article 9 herein.
(aa) "Period of Restriction" means the period during which the
transfer of Restricted Shares is restricted, during which the
Participant is subject to a substantial risk of forfeiture,
pursuant to Article 8 herein.
(bb) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d)
and 14(d) thereof, including a "group" as defined in Section
13(d) thereof.
(cc) "Plan" means this Amended and Restated 1997 Long-Term
Incentive Share Plan of the Company, as herein described and
as hereafter from time to time amended.
(dd) "Pooling Transaction" means an acquisition of the Company in a
transaction which is intended to be treated as a "pooling of
interests" under generally accepted accounting principles.
(ee) "Preferred Shares" means the class A 9.5% cumulative
convertible preferred shares of beneficial interest, $1.00 par
value, in the Company and the class B 9.5% cumulative
convertible non-voting preferred shares of beneficial
interest, $1.00 par value, in the Company.
(ff) "Restricted Shares" means an Award granted to a Participant
pursuant to Article 8 herein.
(gg) "Restricted Share Agreement" means an Award Agreement
evidencing a Restricted Share Award granted under Article 8
herein.
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(hh) "Subsidiary" means any corporation of which more than 50% (by
number of votes) of the combined voting power of outstanding
securities is owned, directly or indirectly, by the Company.
(ii) "Share" or "Shares" means the Common Shares.
(jj) "Share Unit" means a derivative interest in Shares granted to
a Participant pursuant to Article 9 herein which is credited
to a bookkeeping account and paid out on a one-for-one basis
in Shares.
(kk) "Share Appreciation Right" or "SAR" means an Award, designated
as a Share Appreciation Right, granted to a Participant
pursuant to Article 7 herein.
(ll) "Trustee" means a member of the Board.
(mm) "Voting Securities" means Shares or securities of any class or
classes of securities of the Company, the holders of which are
ordinarily, in the absence of contingencies, entitled to elect
a majority of the Trustees.
2.2 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.
2.3 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
ARTICLE 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Board or by a
committee (the "Committee") consisting of not less than two Trustees who shall
be appointed from time to time by, and shall serve at the discretion of, the
Board of Trustees. To the extent required to comply with Rule 16b-3 under the
Exchange Act, each member of the Committee shall qualify as a "Non-Employee
Director" as defined in Rule 16b-3 or any successor definition adopted by the
Securities and Exchange Commission or Awards made under the Plan will be made in
accordance with another available exception, including approval by the full
Board or Trustees or the shareholders. To the extent required to comply with
Code Section 162(m), each member of the Committee also shall be an Outside
Trustee.
3.2 Authority of the Committee. Subject to the provisions of the Plan,
the Committee shall have full power to construe and interpret the Plan; to
establish, amend or waive rules and regulations for its administration; to
accelerate the exercisability of any Award or the end of a Performance Period
(as defined herein) or the termination of any Period of Restriction or any Award
Agreement, or any other instrument relating to an Award under the Plan; and
(subject to the provisions of Article 13 herein) to amend the terms and
conditions of any outstanding Option, Share Appreciation Right or other Award to
the extent such terms and conditions are within the discretion of the Committee
as provided in the Plan. Notwithstanding the foregoing, the Committee shall have
no authority to adjust upwards the amount payable to a Covered Employee with
respect to a particular Award. Also notwithstanding the foregoing, no action of
the Committee (other than pursuant to Section 4.3 hereof or Section 9.6 hereof)
may, without the consent of the person or persons entitled to exercise any
outstanding Option or Share Appreciation Right or to receive payment of any
other outstanding Award, adversely affect the rights of such person or persons.
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3.3 Selection of Participants. The Committee shall have the authority
to grant Awards under the Plan, from time to time, to such Eligible Individuals
(including officers and Trustees who are employees) as may be selected by it.
The Committee shall select Participants from among those who they have
identified as being Eligible Individuals.
3.4 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board of Trustees shall be final, conclusive and binding on
all persons, including the Company and its Subsidiaries, its shareholders,
employees, and Participants and their estates and beneficiaries, and such
determinations and decisions shall not be reviewable.
3.5 Delegation of Certain Responsibilities. The Committee may, in its
sole discretion, delegate to an officer or officers of the Company the
administration of the Plan under this Article 3; provided, however, that no such
delegation by the Committee shall be made with respect to the administration of
the Plan as it affects officers of the Company or its Subsidiaries and provided
further that the Committee may not delegate its authority to correct errors,
omissions or inconsistencies in the Plan. The Board or the Committee may
delegate to the Chief Executive Officer of the Company its authority under this
Article 3 to grant Awards to Eligible Individuals who are not Covered Employees
or who are not officers or Trustees of the Company or its Subsidiaries subject
to the reporting requirements of Section 16(a) of the Exchange Act. All
authority delegated by the Board or the Committee under this Section 3.5 shall
be exercised in accordance with the provisions of the Plan and any guidelines
for the exercise of such authority that may from time to time be established by
the Board or the Committee.
3.6 Procedures of the Board or the Committee. All determinations of the
Board or the Committee shall be made by not less than a majority of its members
present at the meeting (in person or otherwise) at which a quorum is present. A
majority of the entire Board or the Committee shall constitute a quorum for the
transaction of business. Any action required or permitted to be taken at a
meeting of the Board or the Committee may be taken without a meeting if a
unanimous written consent, which sets forth the action, is signed by each member
of the Board or the Committee and filed with the minutes for proceedings of the
Board or the Committee. Service on the Board or the Committee shall constitute
service as a Trustee of the Company so that members of the Board or the
Committee shall be entitled to indemnification, limitation of liability and
reimbursement of expenses with respect to their services as members of the Board
or the Committee to the same extent that they are entitled under the Company's
declaration of trust and California law for their services as Trustees of the
Company.
3.7 Award Agreements. Each Award under the Plan shall be evidenced, as
necessary, by an Award Agreement which shall be signed by an authorized officer
of the Company and by the Participant, and shall contain such terms and
conditions as may be approved by the Board or the Committee. Such terms and
conditions need not be the same in all cases.
3.8 Rule 16b-3 Requirements. Notwithstanding any other provision of the
Plan, the Board or the Committee may impose such conditions on any Award
(including, without limitation, the right of the Board or the Committee to limit
the time of exercise to specified periods) as may be required to satisfy the
requirements of Rule 16b-3 (or any successor rule) under the Exchange Act ("Rule
16b-3").
ARTICLE 4. STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. With respect to calendar year 1998, the maximum
number of Shares that may be made the subject of Awards granted under the Plan
shall be equal to (i) ten (10%) percent of the number of Shares that were
outstanding on a fully diluted basis with respect to the Shares underlying any
outstanding Convertible Securities as of December 31, 1997 (rounded downward if
necessary to eliminate fractional shares), minus (ii) the number of shares
remaining subject to or issued in respect of Awards which were granted prior to
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<PAGE>
December 31, 1997, which maximum number shall be reduced by the number of Shares
remaining subject to or issued in respect of Awards which were granted prior to
December 31, 1997 under the Amended and Restated Trustee Share Plan and the
number of shares made the subject of Awards under the Amended and Restated
Trustee Share Plan during the 1998 calendar year. Thereafter, for any given
calendar year, the maximum number of Shares that may be made the subject of
Awards granted under the Plan shall be equal to (i) ten (10%) percent of the
number of Shares that were outstanding on a fully diluted basis with respect to
the Shares underlying any outstanding Convertible Securities as of the end of
the immediately preceding calender year (rounded downward if necessary to
eliminate fractional shares), minus (ii) the number of shares remaining subject
to or issued in respect of Awards which were granted under the Plan through the
last day of the immediately preceding calendar year (the "Year End Date"), which
maximum number shall be reduced by the number of shares remaining subject to or
issued in respect of Awards which were granted through the Year End Date under
the Amended and Restated Trustee Share Plan and the number of Shares made the
subject of Awards under the Amended and Restated Trustee Share Plan during the
current calendar year. Notwithstanding the foregoing, (i) the maximum number of
Shares that may be the subject of Awards granted to any Eligible Individual
during any calendar year may not exceed 500,000 Shares, (ii) the maximum amount
payable in cash to any Eligible Individual with respect to any Performance
Period (as defined herein) pursuant to any Performance Unit or Performance Share
Award shall be $1,000,000 and (iii) the maximum number of shares covered by
outstanding ISOs when combined with the number of Shares issued pursuant to the
exercise of ISOs granted under the Plan shall not exceed 2,500,000 Shares. Upon
a change in capitalization or authorized shares (as described in Section 4.3)
the maximum number of Shares shall be adjusted in number and kind pursuant to
Section 4.3. The Company shall reserve for the purposes of the Plan, out of its
authorized but unissued Shares or out of Shares held in the Company's treasury,
or partly out of each, the number of Shares as shall be determined by the Board.
Upon the granting of an Award, the number of Shares available under Section 4.1
for the granting of further Awards shall be reduced as follows:
(a) In connection with the granting of an Award (other than
the granting of a Performance Unit denominated in dollars), the number of Shares
shall be reduced by the number of Shares in respect of which the Award is
granted or denominated.
(b) In connection with the granting or a Performance Unit
denominated in dollars, the number of Shares shall be reduced by an amount equal
to the quotient of (a) the dollar amount in which the Performance Unit is
denominated, divided by (b) the Fair Market value of a Share on the date the
Performance Unit is granted.
4.2 Lapsed Awards. If any Award (other than Restricted Shares) granted
under this Plan terminates, expires, or lapses for any reason, any Share subject
to such Award again shall be available for the grant of an Award under the Plan,
subject to Section 7.2 herein.
4.3 Adjustments in Authorized Shares. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, share
dividend, split-up, share combination, or other change in affecting the
Company's Common Shares, such adjustment shall be made in the number and class
of Shares which may be delivered under the Plan, and in the number and class of
and/or price of Shares subject to outstanding Options, Share Appreciation
Rights, Restricted Share Awards, Performance Shares, Performance Units and Share
Units granted under the Plan, as may be determined to be appropriate and
equitable by the Board or the Committee, in its sole discretion, to prevent
dilution or enlargement of rights; and provided that the number of Shares
subject to any Award shall always be a whole number. Any adjustment of an
Incentive Share Option under this paragraph shall be made in such a manner so as
not to constitute a modification within the meaning of Section 425(h)(3) of the
Code.
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ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 Eligibility. Persons eligible to participate in this Plan include
all employees of and consultants or service providers to the Company or any of
its Subsidiaries who, in the opinion of the Board or the Committee, are Eligible
Individuals. "Eligible Individuals" may include employees who are members of the
Board, but may not include Trustees who are not employees of the Company or any
of its Subsidiaries.
5.2 Actual Participation. Subject to the provisions of the Plan, the
Board or the Committee may from time to time select those Eligible Individuals
to whom Awards shall be granted and determine the nature and amount of each
Award. No individual shall have any right to be granted an Award under this Plan
even if previously granted an Award.
ARTICLE 6. STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Eligible Individuals at any time and from time to time
as shall be determined by the Board or the Committee. The Board or the Committee
shall have the sole discretion, subject to the requirements of the Plan, to
determine the actual number of Shares subject to Options granted to any
Participant. The Board or the Committee may grant any type of Option that is
permitted by law at the time of grant including, but no limited to, ISOs and
NQSOs; provided, however, ISOs may only be granted to Eligible Individuals who
are employees or the Company or a Subsidiary at the time of grant. Unless
otherwise expressly provided at the time of grant, Options granted under the
Plan will be NQSOs.
6.2 Limitation on Exercisability. The aggregate Fair Market Value
(determined as of the date of grant) of the Shares issuable pursuant to an ISO
under this Plan and under any other plan of the Company, any parent corporation
or any Subsidiary of the Company, which are exercisable for the first time by
any employee during any calendar year, shall not exceed $100,000. Options for
Shares which are exercisable for the first time by any employee during any
calendar year in excess of $100,000 shall be treated as NQSOs, in accordance
with Section 422(d)(i) of the Code.
6.3 Option Agreement. Each Option grant shall be evidenced by an Option
Agreement that shall specify the type of Option granted, the Option price, the
duration of the Option, the number of Shares to which the Option pertains, and
such other provisions as the Board or the Committee shall determine. The Option
Agreement shall specify whether the Option is intended to be an Incentive Share
Option within the meaning of Section 422 of the Code, or a Nonqualified Share
Option whose grant is not intended to be subject to the provisions of Code
Section 422.
6.4 Option Price. The purchase price per share of an Option shall be
determined by the Board or the Committee but shall not be less than the Fair
Market Value of the Shares on the date the Option is granted.
An Incentive Share Option granted to an employee, who at the time of
grant, owns (within the meaning of Section 425(d) of the Code) Shares possessing
more than 10% of the total combined voting power of all classes of Shares of the
Company, shall have an exercise price which is at least 110% of the Fair Market
Value of the Shares subject to the Option.
6.5 Duration of Options. Each Option shall expire at such time as the
Board or the Committee shall determine at the time of grant, provided, however,
that no ISO shall be exercisable later than the tenth (10th) anniversary date of
its grant, and no ISO granted to any individual who owns more than 10% of the
Voting Securities of the Company shall be exercisable later than the fifth (5th)
anniversary date of its grant.
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6.6 Exercise of Options. Subject to Section 3.8 herein, Options granted
under the Plan shall be exercisable at such times and be subject to such
restrictions and conditions as the Board or the Committee shall in each instance
approve, which need not be the same for all Participants.
6.7 Payment. Options shall be exercised by the delivery of a written
notice to the Company setting forth the number of Shares with respect to which
the Option is to be exercised, accompanied by full payment for the Shares. The
purchase price upon exercise of any Option shall be payable to the Company in
full either (a) in cash or its equivalent, (b) by tendering previously acquired
Shares having a Fair Market Value at the time of exercise equal to the total
purchase price, (c) by foregoing compensation under rules established by the
Board or the Committee, or (d) by a combination of (a), (b), or (c). The
proceeds from such a payment shall be added to the general funds of the Company
and shall be used for general purposes. As soon as practicable, after receipt of
written notification and payment, the Company shall deliver to the Participant
Share certificates in an appropriate amount based upon the number of Options
exercised, issued in the Participant's name.
6.8 Restrictions on Share Transferability. The Board or the Committee
shall impose such restrictions on any Shares acquired pursuant to the exercise
of an Option under the Plan as it may deem advisable, including, without
limitation, restrictions under applicable Federal securities law, under the
requirements of any securities exchange upon which such Shares are then listed
and under any applicable blue sky or state securities laws.
6.9 Termination of Employment or Service Due to Death, Disability, or
Retirement. In the event the employment or service of a Participant is
terminated by reason of death, the Participant's outstanding Options may be
exercised at any time prior to the expiration date of the Options or within one
year after such date of termination of employment or service, whichever period
is shorter, but only to the extent that the Participant was entitled to exercise
the Options at the date of his termination, by such person or persons as shall
have acquired the Participant's rights under the Option pursuant to Article 10
hereof or by will or by the laws of descent and distribution. In the event the
employment of a Participant is terminated by reason of disability (as defined
under the then established rules of the Company or any of its Subsidiaries, as
the case may be), the Participant's outstanding Options may be exercised at any
time prior to the expiration date of the Options or within one year after such
date of termination of employment or service, whichever period is shorter but
only to the extent that the Participant was entitled to exercise the Options on
the date of his termination. In the event the employment or service of a
Participant who is an employee is terminated by reason of retirement, the
Participant's outstanding Options may be exercised (subject to Section 3.8
herein) at any time prior to the expiration date of the Options or within 90
days after such date of termination of employment or service, whichever period
is shorter, but only to the extent that the Participant was entitled to exercise
the Options on the date of his termination. In its sole discretion, the Company
may extend the 90 days up to one year, but in no event beyond the expiration
date of the Option. In the case of Incentive Share Options, the favorable tax
treatment prescribed under Section 422 of the Internal Revenue Code of 1986, as
amended, may not be available if the Options are not exercised within the Code
Section 422 prescribed time period after termination of employment for death,
disability, or retirement.
6.10 Termination of Employment or Service for Other Reasons. If the
employment or service of a Participant shall terminate for any reason other than
death, disability, retirement (in the case of an employee) or for Cause, the
Participant shall have the right to exercise outstanding Options at any time
prior to the expiration date of the Options or within the 90 days after the date
of his termination, whichever period is shorter, but only to the extent that the
Participant was entitled to exercise the Options at the date of his termination
of employment or service. In its sole discretion, the Company may extend the 90
days to up to one year, but in no event beyond the expiration date of the
Option.
If the employment or service of the Participant shall terminate for
Cause, all of the Participant's outstanding Options shall be immediately
forfeited back to the Company.
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6.11 Nontransferability of Options. No Option granted under the Plan
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, otherwise than by will or by the laws of descent and distribution.
Further, all Options granted to a Participant under the Plan shall be
exercisable during his lifetime only by such Participant.
ARTICLE 7. SHARE APPRECIATION RIGHTS
7.1 Grant of Share Appreciation Rights. Subject to the terms and
conditions of the Plan, Share Appreciation Rights may be granted to
Participants, at the discretion of the Board or the Committee, in any of the
following forms:
(a) In tandem with Options;
(b) In addition to Options;
(c) Independent of Options; or
(d) In any combination of (a), (b), or (c).
The Board or the Committee shall have the sole discretion, subject to the
requirements of the Plan, to determine the actual number of Shares subject to
SARs granted to any Participant.
7.2 Exercise of SARs in Tandem with Options. SARs granted in tandem
with Options may be exercised for all or part of the Shares subject to the
related Option upon the surrender of the related Options representing the right
to purchase an equivalent number of Shares. SARs may be exercised only with
respect to the Shares for which its related Option is then exercisable. Shares
with respect to which SARs shall have been exercised may not be subject again to
an Award under the Plan.
Notwithstanding any other provision of the Plan to the contrary, with
respect to an SAR granted in lieu of an Incentive Share Option, (i) the SAR will
expire no later than the expiration of the underlying Incentive Share Option;
(ii) the SAR amount may be for no more than one hundred percent (100%) of the
difference between the exercise price of the underlying Incentive Share Option
and the Fair Market Value of the Shares subject to the underlying Incentive
Share Option at the time the SAR is exercised; and (iii) the SAR may be
exercised only when the Fair Market Value of the Shares subject to the Incentive
Share Option exceeds the exercise price of the Incentive Share Option.
7.3 Exercise of SARs in Addition to Options. SARs granted in addition
to Options shall be deemed to be exercised upon the exercise of the related
Options. The deemed exercise of SARs granted in addition to Options shall not
necessitate a reduction in the number of related Options.
7.4 Exercise of SARs Independent of Options. Subject to Section 3.8
herein and Section 7.5 herein, SARs granted independently of Options may be
exercised upon whatever terms and conditions the Board or the Committee, in its
sole discretion, imposes upon the SARs, including, but not limited to, a
corresponding proportional reduction in previously granted Options.
7.5 Payment of SAR Amount. Upon exercise of the SAR, the holder shall
be entitled to receive payment of an amount determined by multiplying:
(a) The difference between the Fair Market Value of a Share on the
date of exercise over the price fixed by the Board or the
Committee at the date of grant (which price shall not be less
than 100% of the market price of a Share on the date of grant)
(the "Exercise Price"); by
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(b) The number of Shares with respect to which the SAR is
exercised.
7.6 Form and Timing of Payment. Payment to a Participant, upon SAR
exercise, will be made in cash or Shares, at the discretion of the Board or the
Committee, within ten calendar days of the exercise.
7.7 Term of SAR. The term of an SAR granted under the Plan shall not
exceed ten years.
7.8 Termination of Employment or Service. In the event the employment
or service of a Participant is terminated by reason of death, disability,
retirement (in the case of an employee), for Cause, or any other reason, the
exercisability of any outstanding SAR granted in tandem with or in addition to
an Option shall terminate in the same manner as its related Option as specified
under Sections 6.8 and 6.9 herein. The exercisability of any outstanding SARs
granted independent of Options also shall terminate in the manner provided under
Sections 6.8 and 6.9 hereof.
7.9 Nontransferability of SARs. No SAR granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
otherwise than by will or by the laws of descent and distribution. Further, all
SARs granted to a Participant under the Plan shall be exercisable during his
lifetime only by such Participant.
ARTICLE 8. RESTRICTED SHARES
8.1 Grant of Restricted Shares. Subject to the terms and provisions of
the Plan, the Board or the Committee, at any time and from time to time, may
grant Restricted Shares under the Plan to such Participants and in such amounts
as it shall determine. In the case of Covered Employees, the Board or the
Committee may condition the vesting or lapse of the Period of Restriction
established pursuant to Section 8.4 upon the attainment of one or more of the
Performance Goals utilized for purposes of Performance Units and Performance
Shares pursuant to Article 9 hereof.
8.2 Restricted Share Agreement. Each Restricted Share grant shall be
evidenced by a Restricted Share Agreement that shall specify the Period of
Restriction, or periods, the number of Restricted Shares granted, and such other
provisions as the Board or the Committee shall determine.
8.3 Transferability. Except as provided in this Article 8 or in Section
3.8 herein, the Restricted Shares granted hereunder may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated until the
termination of the applicable Period of Restriction or for such period of time
as shall be established by the Board or the Committee and as shall be specified
in the Restricted Share Agreement, or upon earlier satisfaction of other
conditions (including any Performance Goals as defined below) as specified by
the Board or the Committee in its sole discretion and set forth in the
Restricted Share Agreement. All rights with respect to the Restricted Shares
granted to a Participant under the Plan shall be exercisable during his lifetime
only by such Participant.
8.4 Other Restrictions. The Board or the Committee shall impose such
other restrictions on any Restricted Shares granted pursuant to the Plan as it
may deem advisable including, without limitation, restrictions under applicable
Federal or state securities laws, and the Board or the Committee may legend
certificates representing Restricted Shares to give appropriate notice of such
restrictions.
8.5 Certificate Legend. In addition to any legends placed on
certificates pursuant to Section 8.4 herein, each certificate representing
Restricted Shares granted pursuant to the Plan shall bear the following legend:
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"The sale or other transfer of the shares represented by this
certificate, whether voluntary, involuntary, or by operation of law, is
subject to certain restrictions on transfer set forth in the Amended
and Restated 1997 Long-Term Incentive Share Plan of Capital Trust, in
the rules and administrative procedures adopted pursuant to such Plan,
and in a Restricted Share Agreement dated ___. A copy of the Plan,
such rules and procedures and such Restricted Share Agreement
may be obtained from the Secretary of Capital Trust."
8.6 Removal of Restrictions. Except as otherwise provided in this
Article and subject to applicable securities laws and restrictions imposed
pursuant thereto, Restricted Shares shall become transferable by the Participant
after the last day of the Period of Restriction. Once the Shares are released
from the restrictions, the Participant shall be entitled to have the legend
required by Section 8.5 removed from his Share certificate.
8.7 Voting Rights. During the Period of Restriction, Participants
holding Restricted Shares granted hereunder may exercise full voting rights with
respect to those Shares.
8.8 Dividends and Other Distributions. During the Period of
Restriction, Participants holding Restricted Shares granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares while they are so held. If any such dividends or distributions are
paid in Shares, the Shares shall be subject to the same restrictions on
transferability as the Restricted Shares with respect to which they were paid.
8.9 Termination of Employment or Service. In the event that a
Participant terminates his employment or service with the Company or any of its
Subsidiaries for any reason or is terminated for Cause during the Period of
Restriction, then any Restricted Shares still subject to restrictions as of the
date of such termination shall automatically be forfeited and returned to the
Company; provided, however, that in the event of an involuntary termination of
the employment or service of a Participant by the Company or any of its
Subsidiaries other than for Cause, the Board or the Committee, in its sole
discretion (subject to Section 3.8 herein), may waive the automatic forfeiture
of any or all such Shares and may add such new restrictions to such Restricted
Shares as it deems appropriate.
ARTICLE 9. PERFORMANCE UNITS, PERFORMANCE SHARES AND SHARE UNITS
9.1 Grant of Performance Units, Performance Shares or Share Units.
Subject to the terms and provisions of the Plan, Performance Units, Performance
Shares or Share Units may be granted to Participants at any time and from time
to time as shall be determined by the Board or the Committee. The Board or the
Committee shall have complete discretion in determining the number of
Performance Units, Performance Shares or Share Units granted to each
Participant.
9.2 Value of Performance Units and Performance Shares. The Board or the
Committee shall set certain periods to be determined in advance by the Board or
the Committee (the "Performance Periods"). Prior to each grant of Performance
Units or Performance Shares, the Board or the Committee shall establish an
initial value for each Performance Unit and an initial number of Shares for each
Performance Share granted to each Participant for that Performance Period. Prior
to each grant of Performance Units or Performance Shares, the Board or the
Committee also shall set the performance goals (the "Performance Goals") that
will be used to determine the extent to which the Participant receives a payment
of the value of the Performance Units or number of Shares for the Performance
Shares awarded for such Performance Period. These goals will be based on the
attainment, by the Company or its Subsidiaries, of certain objective or
subjective performance measures, which shall include one or more of the
following: total shareholder return, return on equity, return on capital, asset
growth, earnings per share, market price, share price, revenues, costs, net
income, cash flow and retained earnings. Such Performance Goals also may be
based upon the attainment of specified levels of performance of the Company or
one or more Subsidiaries under one or more measures described above relative to
the
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<PAGE>
performance of other corporations. With respect to each such performance measure
utilized during a Performance Period, the Board or the Committee shall assign
percentages to various levels of performance which shall be applied to determine
the extent to which the Participant shall receive a payout of the values of
Performance Units and number of Performance Shares awarded. With respect to
Covered Employees, all Performance Goals shall be objective performance goals
satisfying the requirements for "performance-based compensation" within the
meaning of Section 162(m)(4) of the Code, and shall be set by the Board or the
Committee within the time period prescribed by Section 162(m) of the Code and
related regulations.
9.3 Payment of Performance Units and Performance Shares. After a
Performance Period has ended, the holder of a Performance Unit or Performance
Share shall be entitled to receive the value thereof as determined by the Board
or the Committee. The Board or the Committee shall make this determination by
first determining the extent to which the Performance Goals set pursuant to
Section 9.2 have been met. It will then determine the applicable percentage
(which may exceed 100%) to be applied to, and will apply such percentage to, the
value of Performance Units or number of Performance Shares to determine the
payout to be received by the Participant. In addition, with respect to
Performance Units and Performance Shares granted to any Covered Employee, no
payout shall be made hereunder except upon written certification by the Board or
the Committee that the Applicable Performance Goal or Goals have been satisfied
to a particular extent.
9.4 Value of Share Units. Subject to the terms and provisions of the
Plan, Share Units may be granted to Participants at any time and from time to
time on such terms as shall be determined by the Board or the Committee. The
Board or the Committee shall have complete discretion in determining the number
of Share Units granted to each Participant. Share Units shall be payable in
Shares upon the occurrence of certain trigger events set forth on the
Participant's Election Form in his or her complete discretion (the "Trigger
Events"). The terms and conditions of the Trigger Events may vary by Share Unit
Award, by Participant, or both. The Election Form shall be filed with the
Secretary of the Company prior to the date on which any Share Unit Award is
made. Such election will be irrevocable as to any Share Unit Award made after
delivery of the Election Form to the Company, and it shall continue in effect
until revoked, increased or decreased prospectively by Participant prior to the
grant of any future Share Unit Award for which the change is effective.
9.5 Accounting for Share Units. The Participant's Share Unit Award
shall be credited by the Company to a bookkeeping account to reflect the
Company's liability to that Participant (the "Share Unit Account"). Each Share
Unit is credited as a Share equivalent on the date so credited. Additional Share
equivalents may be added to the Share Unit Account equal to the amount of Share
that could be purchased with dividends equal to that paid on one Share,
multiplied by the number of Share equivalents then existing in the Share Unit
Account, based on the Fair Market Value of the Share on the date a dividend is
paid. Because the Trigger Events of each Share Unit Award may differ, the
Company shall establish a separate Share Unit Account for each separate Share
Unit Award. Upon the occurrence of particular Trigger Events, the holder of a
Share Unit Award shall be entitled to receive a number of Shares which
corresponds to the number of Share Units granted as part of the initial Share
Unit Award, as such amount may have been increased to reflect dividends paid
with respect thereto. Because the payout of Share Unit Awards is not based on
objective performance goals, such award will not constitute "performance-based"
compensation within the meaning of Section 162(m)(4)(C) of the Code and, as
such, will count toward the annual $1,000,000 deduction limit.
9.6 Board or Committee Discretion to Adjust Awards. Subject to Section
3.2 regarding Awards to Covered Employees, the Board or the Committee shall have
the authority to modify, amend or adjust the terms and conditions of any
Performance Unit Award, Performance Share Award or Share Unit Award, at any time
or from time to time, including but not limited to the Performance Goals.
9.7 Form of Payment. The value of a Performance Unit or a Performance
Share may be paid in cash, Shares, or a combination thereof as determined by the
Board or the Committee. In the case of Share Units, payment shall be made in
Shares. Payment may be made in a lump sum or installments as prescribed by the
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Board or the Committee. If any payment is to be made on a deferred basis, the
Board or the Committee may provide for the payment of dividend equivalents or
interest during the deferral period.
9.8 Termination of Employment or Service Due to Death, Disability, or
Retirement. In the case of death, disability, or retirement (in the case of a
Participant who is an employee) (each of disability and retirement as defined
under the established rules of the Company or any of its Subsidiaries, as the
case may be), the holder of a Performance Unit or Performance Share shall
receive a prorated payment based on the Participant's number of full months of
service during the Performance Period and on the percentage of the Performance
Goals achieved through the date of termination, as computed by the Board or the
Committee. Payment shall be made at the time payments are made to Participants
who did not terminate service during the Performance Period. In the case of
Share Units, all such Share Units held, to the extent vested at the date of such
Participant's termination of employment or service, will be paid as set forth in
the Participant's Election Form.
9.9 Termination of Employment or Service for Other Reasons. In the
event that a Participant terminates employment or service with the Company or
any of its Subsidiaries for any reason other than death, disability, or
retirement, all Performance Units and Performance Shares shall be forfeited;
provided, however, that in the event of an involuntary termination of the
employment or service of the Participant by the Company or any of its
Subsidiaries other than for Cause, the Board or the Committee in its sole
discretion may waive the automatic forfeiture provisions and pay out on a pro
rata basis. In the case of termination other than for Cause, all Share Units
held, to the extent vested at the date of such Participant's termination of
employment or service, will be paid as set forth in the Participant's Election
Form. However, in the event of termination for Cause, all Share Units held will
be forfeited.
9.10 Nontransferability. No Performance Units, Performance Shares or
Share Units granted under the Plan may be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated, otherwise than by will or by the laws of
descent and distribution until the termination of the applicable Performance
Period or, in the case of Share Units, vesting and payment. All rights with
respect to Performance Units, Performance Shares and Share Units granted to a
Participant under the Plan shall be exercisable during his lifetime only by such
Participant.
ARTICLE 10. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively and
who may include a trustee under a will or living trust) to whom any benefit
under the Plan is to be paid in case of his death before he receives any or all
of such benefit. Each designation will revoke all prior designations by the same
Participant, shall be in a form prescribed by the Board or the Committee, and
will be effective only when filed by the Participant in writing with the Board
or the Committee during his lifetime. In the absence of any such designation or
if all designated beneficiaries predecease the Participant, benefits remaining
unpaid at the Participant's death shall be paid to the Participant's estate.
ARTICLE 11. RIGHTS OF EMPLOYEES
11.1 Employment or Service. Nothing in the Plan shall interfere with or
limit in any way the right of the Company or any of its Subsidiaries to
terminate any Participant's employment or service at any time, nor confer upon
any Participant any right to continue in the employ or service of the Company or
any of its Subsidiaries.
11.2 Participation. No individual shall have the right to be selected
as a Participant, or, having been so selected, to be selected again as a
Participant.
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11.3 No Implied Rights; Rights on Termination of Service. Neither the
establishment of the Plan nor any amendment thereof shall be construed as giving
any Participant, beneficiary, or any other person any legal or equitable right
unless such right shall be specifically provided for in the Plan or conferred by
specific action of the Board or the Committee in accordance with the terms and
provisions of the Plan. Except as expressly provided in this Plan, neither the
Company nor any of its Subsidiaries shall be required or be liable to make any
payment under the Plan.
11.4 No Right to Company Assets. Neither the Participant nor any other
person shall acquire, by reason of the Plan, any right in or title to any
assets, funds or property of the Company or any of its Subsidiaries whatsoever
including, without limiting the generality of the foregoing, any specific funds,
assets, or other property which the Company or any of its Subsidiaries, in its
sole discretion, may set aside in anticipation of a liability hereunder. Any
benefits which become payable hereunder shall be paid from the general assets of
the Company or the applicable subsidiary. The Participant shall have only a
contractual right to the amounts, if any, payable hereunder unsecured by any
asset of the Company or any of its Subsidiaries. Nothing contained in the Plan
constitutes a guarantee by the Company or any of its Subsidiaries that the
assets of the Company or the applicable Subsidiary shall be sufficient to pay
any benefit to any person.
ARTICLE 12. CHANGE IN CONTROL
12.1 Share Based Awards. Notwithstanding any other provisions of the
Plan, in the event of a Change in Control, all Share based Awards granted under
this Plan shall immediately vest 100% in each Participant (subject to Section
3.8 herein), including Incentive Share Options, Nonqualified Share Options,
Share Appreciation Rights, Restricted Shares and Share Units.
12.2 Performance Based Awards. Notwithstanding any other provisions of
the Plan, in the event of a Change in Control, all performance based Awards
granted under this Plan shall be immediately paid out in cash, including
Performance Units and Performance Shares. The amount of the payout shall be
based on the higher of: (i) the extent, as determined by the Board or the
Committee, to which Performance Goals, established for the Performance Period
then in progress have been met up through and including the effective date of
the Change in Control or (ii) 100% of the value on the date of grant of the
Performance Units or number of Performance Shares.
12.3 Pooling Transactions. Notwithstanding anything contained in the
Plan or any agreement to the contrary, in the event of a Change in Control which
is also intended to constitute a Pooling Transaction, the Board or the Committee
shall take such actions, if any, which are specifically recommended by an
independent accounting firm retained by the Company to the extent reasonably
necessary in order to assure that the Pooling Transaction will qualify as such,
including but not limited to (a) deferring the vesting, exercise, payment or
settlement with respect to any Award, (b) providing that the payment or
settlement in respect of any Award be made in the form of cash, Shares or
securities of a successor or acquired of the Company, or a combination of the
foregoing and (c) providing for the extension of the term of any Award to the
extent necessary to accommodate the foregoing, but not beyond the maximum term
permitted for any Award.
ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION
13.1 Amendment, Modification and Termination. At any time and from time
to time, the Board may terminate, amend, or modify the Plan, subject to the
approval of the shareholders of the Company if required by the Code, by the
insider trading rules of Section 16 of the Exchange Act, by any securities
exchange or system on which the Shares are then listed or reported or by any
regulatory body having jurisdiction with respect hereto.
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<PAGE>
13.2 Awards Previously Granted. No termination, amendment or
modification of the Plan other than pursuant to Section 4.3 hereof shall in any
manner adversely affect any Award theretofore granted under the Plan, without
the written consent of the Participant.
ARTICLE 14. WITHHOLDING
14.1 Tax Withholding. The Company and any of its Subsidiaries shall
have the power and the right to deduct or withhold, or require a Participant to
remit to the Company or any of its Subsidiaries, an amount sufficient to satisfy
Federal, state and local taxes (including the Participant's FICA obligation)
required by law to be withheld with respect to any grant, exercise, or payment
made under or as a result of this Plan.
14.2 Share Delivery or Withholding. With respect to withholding
required upon the exercise of Nonqualified Share Options, or upon the lapse of
restrictions on Restricted Shares, Participants may elect, subject to the
approval of the Board or the Committee, to satisfy the withholding requirement,
in whole or in part, by tendering to the Company previously acquired Shares or
by having the Company withhold Shares, in each such case in an amount having a
Fair Market Value equal to the amount required to be withheld to satisfy the tax
withholding obligations described in Section 14.1. The value of the Shares to be
tendered or withheld is to be based on the Fair Market Value of the Shares on
the date that the amount of tax to be withheld is to be determined. All Share
withholding elections shall be irrevocable and made in writing, signed by the
Participant on forms approved by the Board or the Committee in advance of the
day that the transaction becomes taxable.
Share withholding elections made by Participants who are subject to the
short-swing profit restrictions of Section 16 of the Exchange Act must comply
with the additional restrictions of Section 16 and Rule 16b-3 in making their
elections.
ARTICLE 15. EFFECT OF CERTAIN TRANSACTIONS
Effect of Certain Transactions. Subject to Section 12, or as otherwise
provided in an agreement, in the event of (a) the liquidation or dissolution of
the Company or (b) a merger, consolidation or combination of the Company (a
"Transaction"), the Plan and the Awards issued hereunder shall continue in
effect in accordance with their respective terms except that following a
Transaction each Participant shall be entitled to receive in respect of each
Share subject to any outstanding Options or Awards, as the case may be, upon
exercise of any Option or payment or transfer in respect of any Award, the same
number and kind of Shares, securities, cash, property, or other consideration
that each holder of a Share was entitled to receive in the Transaction in
respect of a Share; provided, however, that such Shares, securities, cash,
property, or other consideration shall remain subject to all of the conditions,
restrictions and performance criteria which were applicable to the Options or
Awards prior to such Transaction.
ARTICLE 16. REQUIREMENTS OF LAW
16.1 Requirements of Law. The granting of Awards and the issuance of
Shares under this Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or securities
exchanges as may be required.
16.2 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of New York.
Effective Date of the Amended and Restated 1997 Long-Term Incentive Share Plan:
June __, 1998
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ANNEX D
CAPITAL TRUST
AMENDED AND RESTATED
1997 NON-EMPLOYEE TRUSTEE SHARE PLAN
<PAGE>
CAPITAL TRUST
AMENDED AND RESTATED
1997 NON-EMPLOYEE TRUSTEE SHARE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION
1.1 Establishment of the Plan. On May 23, 1997, the Board of Trustees
of Capital Trust (f/k/a California Real Estate Investment Trust), a California
business trust (the "Company") adopted, subject to the approval of shareholders,
an incentive share plan for non-employee members of the Board of Trustees known
as the "1997 Non-Employee Trustee Share Plan" (hereinafter referred to as the
"Plan"), which permits the grant of Nonqualified Share Options, Share
Appreciation Rights, Restricted Shares, Performance Units, Performance Shares
and Share Units. The plan became effective upon shareholder approval on July 15,
1997 and was amended by Amendment No. 1 effective on that date which changed all
references to "California Real Estate Investment Trust" in the plan to "Capital
Trust." On April 24, 1998, the Board of Trustees adopted, subject to the
approval of shareholders, this Amended and Restated 1997 Non-Employee Trustee
Share Plan which amends and restates the original plan (hereinafter referred to
as the "Plan"). The terms of the Plan are set forth herein.
1.2 Purpose of the Plan. The Purpose of the Plan is to promote the
success of the Company by providing incentives to Trustees that will link their
personal interests to the long-term financial success of the Company and to
growth in shareholder value. The Plan is designed to provide flexibility to the
Company in its ability to motivate, attract, and retain the services of Trustees
upon whose judgment, interest and special effort the successful conduct of the
Company's operations is largely dependent.
1.3 Duration of the Plan. The Plan became effective on July 15, 1997,
and shall remain in effect, subject to the right of the Board of Trustees to
terminate the Plan at any time pursuant to Article 13 herein, until all Shares
subject to it shall have been purchased or acquired according to the provisions
herein. However, in no event may an Award be granted under the Plan on or after
July 15, 2007.
ARTICLE 2. DEFINITIONS AND CONSTRUCTIONS
2.1 Definitions: Whenever used in the Plan, the following terms shall
have the meanings set forth below and, when the meaning is intended, the initial
letter of the word is capitalized:
(a) "Amended and Restated Incentive Share Plan" means the
Amended and Restated 1997 Long-Term Incentive Share
Plan.
(b) "Award" or "Awards" means, individually or
collectively, a grant under this Plan of Nonqualified
Share Options, Share Appreciation Rights, Restricted
Shares, Performance Units, Performance Shares, or
Share Units.
(c) "Award Agreement" means the agreement required under
Article 3 evidencing an Award under this Plan.
(d) "Beneficial Owner" shall have the meaning ascribed to
such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
(e) "Board" or "Board of Trustees" means the Board of
Trustees of the Company.
(f) "Change in Control" shall be deemed to have occurred
if the conditions set forth in any one of the
following paragraphs shall have been satisfied:
<PAGE>
(i) any Person (other than Veqtor
Finance Company, LLC or its
affiliates as that term is defined
under the rules and regulations
promulgated under the Exchange Act,
a trustee or other fiduciary holding
securities under an employee benefit
plan of the Company, or a
corporation owned directly or
indirectly by the shareholders of
the Company in substantially the
same proportions as their ownership
of Shares of the Company), is or
becomes the Beneficial Owner,
directly or indirectly, of 20% or
more of the Voting Securities of the
Company;
(ii) the Board shall at any time consist
of a majority of individuals (the
"New Majority") who where elected or
appointed Trustees of the Company
without the approval of a majority
of the Trustees either (A) in office
prior to the election or appointment
of the first of the Trustees
comprising the New Majority, or (B)
appointed by or elected with the
approval of such Trustees; or
(iii) the shareholders of the Company
approve (A) a plan of complete
liquidation of the Company; or (B)
an agreement for the sale or
disposition of all or substantially
all the Company's assets; or (C) a
merger or consolidation of the
Company with any other corporation,
other than a merger or consolidation
which would result in the Voting
Securities of the Company
outstanding immediately prior
thereto continuing to represent
(either by remaining outstanding or
by being converted into voting
securities of the surviving entity),
at least 50% of the combined voting
power of the combined voting power
of the Company (or such surviving
entity) outstanding immediately
after such merger or consolidation.
However, in no event shall a Change in Control be deemed to
have occurred, with respect to a Participant, if the
Participant is part of a purchasing group which consummates
the Change in Control transaction. The Participant shall be
deemed "part of a purchasing group..." for purposes of the
preceding sentence if the Participant is an equity participant
or has agreed to become an equity participant in the
purchasing company or group (except for (i) passive ownership
of less than 5% of the Voting Securities of the purchasing
company or (ii) ownership of equity participation in the
purchasing company or group which is otherwise not deemed to
be significant, as determined prior to the Change in Control
by a majority of the nonemployee continuing members of the
Board).
(g) "Class B Common Shares" means the class B common
shares of beneficial interest, $1.00 par value, in
the Company.
(h) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(i) "Common Shares" means the class A common shares of
beneficial interest, $1.00 par value, in the Company.
(j) "Company" means Capital Trust, a California business
trust, or any successor thereto.
(k) "Convertible Securities" means the Common Shares, the
Class B Common Shares, the Preferred Shares and any
securities issued by the Company or any subsidiary
thereof in
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<PAGE>
capital raising or merger and acquisition
transactions that are by their terms exercisable,
convertible or exchangeable into or for Common
Shares.
(l) "Election Form" means the form under which a
Participant elects to receive Shares granted under a
Share Unit Award upon the occurrence of certain
events.
(m) "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time.
(n) "Fair Market Value" means the closing price of the
Shares on a securities exchange or, if not traded on
an exchange, the average of the highest price and
lowest price at which the Shares were traded as
reported on the Nasdaq National Market, on the
relevant date, or on the most recent date on which
the Shares were traded prior to such date.
(o) "Nonqualified Share Option" or "NQSO" means an option
to purchase Shares, which is not intended to satisfy
the requirements of Section 422 of the Code, granted
under Article 6 herein.
(p) "Option" or "Options" means a Nonqualified Share
Option.
(q) "Option Agreement" means an Award Agreement
evidencing an Option Award granted under Article 6
herein.
(r) "Participant" means a Trustee who has been granted an
Award under the Plan.
(s) "Performance Share" means an Award, designated as a
performance share, granted to a Participant pursuant
to Article 9 herein.
(t) "Performance Unit" means an Award, designated as a
performance unit, granted to a Participant pursuant
to Article 9 herein.
(u) "Period of Restriction" means the period during which
the transfer of Restricted Shares is restricted,
during which the Participant is subject to a
substantial risk of forfeiture, pursuant to Article 8
herein.
(v) "Person" shall have the meaning ascribed to such term
in Section 3(a)(9) of the Exchange Act and used in
Sections 13(d) and 14(d) thereof; including a "group"
as defined in Section 13(d) thereof.
(w) "Plan" means this Amended and Restated 1997
Non-Employee Trustee Share Plan of the Company, as
herein described and as hereafter from time to time
amended.
(x) "Pooling Transaction" means an acquisition of the
Company in a transaction which is intended to be
treated as a "pooling of interests" under generally
accepted accounting principles.
(y) "Preferred Shares" means the class A 9.5% cumulative
convertible preferred shares of beneficial interest,
$1.00 par value, in the Company and the class B 9.5%
cumulative convertible non-voting preferred shares of
beneficial interest, $1.00 par value, in the Company.
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(z) "Restricted Shares" means an Award granted to a
Participant pursuant to Article 8 herein.
(aa) "Restricted Share Agreement" means an Award Agreement
evidencing a Restricted Share Award granted under
Article 8 herein.
(bb) "Share" or "Shares" means the Common Shares.
(cc) "Share Unit" means a derivative interest in Shares
granted to a Participant pursuant to Article 9 herein
which is credited to a bookkeeping account and paid
out on a one-for-one basis in Shares.
(dd) "Share Appreciation Right" or "SAR" means an Award,
designated as a share appreciation right, granted to
a Participant pursuant to Article 7 herein.
(ee) "Trustee" means a member of the Board.
(ff) "Voting Securities" means Shares or securities of any
class or classes of securities of the Company, the
holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the
Trustees.
2.2 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.
2.3 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
ARTICLE 3. ADMINISTRATION
3.1 Authority of Board. The Plan shall be administered by the full
Board of Trustees of the Company. Subject to the provisions of the Plan, the
Board shall have full power to construe and interpret the Plan; to establish,
amend or waive rules and regulations for its administration; to accelerate the
exercisability of any Award or the end of a Performance Period (as defined
herein) or the termination of any Period of Restriction or any Award Agreement,
or any other instrument relating to an Award under the Plan; and (subject to the
provisions of Article 13 herein) to amend the terms and conditions of any
outstanding Option, Share Appreciation Right or other Award to the extent such
terms and conditions are within the discretion of the Board as provided in the
Plan. Also notwithstanding the foregoing, no action of the Board (other than
pursuant to Section 4.3 hereof or Section 9.6 hereof) may, without the consent
of the person or persons entitled to exercise any outstanding Option or Share
Appreciation Right or to receive payment of any other outstanding Award,
adversely affect the rights of such person or persons.
3.2 Selection of Participants. Subject to Section 5.1, the Board shall
have the authority to grant Awards under the Plan, from time to time, to such
Trustees as may be selected by it.
3.3 Decisions Binding. All determinations and decisions made by the
Board pursuant to the provisions of the Plan and all related orders or
resolutions of the Board shall be final, conclusive and
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binding on all persons, including the Company, its shareholders and Participants
and their estates and beneficiaries, and such determinations and decisions shall
not be reviewable.
3.4 Delegation of Certain Responsibilities. The Board may, in its sole
discretion, delegate to the Chairman of the Board of the Company (or if there
shall be Co-Chairmen, individually or jointly to such Co-Chairmen) the
administration of the Plan under this Article 3; provided, however, that the
Board may not delegate its authority to correct errors, omissions or
inconsistencies in the Plan and the Board may not delegate its authority under
this Article 3 to grant Awards to Trustees. All authority delegated by the Board
under this Section 3.4 shall be exercised in accordance with the provisions of
the Plan and any guidelines for the exercise of such authority that may from
time to time be established by the Board.
3.5 Procedures of the Board. All Awards and other determinations of the
Board shall be made by not less than a majority of its members present at the
meeting (in person or otherwise) at which a quorum is present. A majority of the
entire Board shall constitute a quorum for the transaction of business. Any
action required or permitted to be taken at a meeting of the Board may be taken
without a meeting if a unanimous written consent, which sets forth the action,
is signed by each member of the Board and filed with the minutes for proceedings
of the Board.
3.6 Award Agreements. Each Award under the Plan shall be evidenced by
an Award Agreement which shall be signed by the Chairman of the Board (or by a
Vice Chairman) on behalf of the Board and by the Participant, and shall contain
such terms and conditions as may be approved by the Board. Such terms and
conditions need not be the same in all cases.
3.7 Rule 16b-3 Requirements. Notwithstanding any other provision of the
Plan, the Board may impose such conditions on any Award (including, without
limitation, the right of the Board to limit the time of exercise to specified
periods) as may be required to satisfy the requirements of Rule 16b-3 (or any
successor rule), under the Exchange Act ("Rule 16b-3").
ARTICLE 4. STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. With respect to calendar year 1998, the maximum
number of shares of Shares that may be made the subject of Awards granted under
the Plan shall be equal of (i) ten (10%) percent of the number of Shares that
were outstanding on a fully diluted basis with respect to the Shares underlying
any outstanding Convertible Securities as of December 31, 1997 (rounded downward
if necessary to eliminate fractional shares), minus (ii) the number of shares
remaining subject to or issued in respect of Awards which were granted prior to
December 31, 1997, which maximum number shall be reduced by the number of shares
remaining subject to or issued in respect of Awards which were granted prior to
December 31, 1997 under the Amended and Restated Incentive Share Plan and the
number of shares made the subject of Awards under the Amended and Restated
Incentive Share Plan during the 1998 calendar year. Thereafter, for any given
calendar year, the maximum number of Shares that may be made the subject of
Awards granted under the Plan shall be equal to (i) ten (10%) percent of the
number of Shares that were outstanding on a fully diluted basis with respect to
the Shares underlying any outstanding Convertible Securities as of the end of
the immediately preceding calender year (rounded downward if necessary to
eliminate fractional shares), minus (ii) the number of shares remaining subject
to or issued in respect of Awards which were granted
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under the Plan through the last day of the immediately preceding calendar year
(the "Year End Date), which maximum number shall be reduced by the number of
shares remaining subject to or issued in respect of Awards which were granted
prior to the Year End Date under the Amended and Restated Incentive Share Plan
and the number of Shares made the subject of Awards under the Amended and
Restated Incentive Share Plan during the current calendar year. Upon a change in
the capitalization or authorized Shares (as described in Section 4.3) the
maximum number of Shares shall be adjusted in number and kind pursuant to
Section 4.3. The Company shall reserve for the purposes of the Plan, out of its
authorized but unissued shares or out of such numbers of Shares held in the
Company's treasury, or partly out of each, such number of Shares as shall be
determined by the Board. Upon the granting of an Award, the number of Shares
available under Section 4.1 for the granting of further Awards shall be reduced
as follows:
(a) In connection with the granting of an Award (other than
the granting of a Performance Unit denominated in dollars), the number of Shares
shall be reduced by the number of Shares in respect of which the Award is
granted or denominated.
(b) In connection with the granting of a Performance Unit
denominated in dollars, the number of Shares shall be reduced by an amount equal
to the quotient of (a) the dollar amount in which the Performance Unit is
denominated, divided by (b) the Fair Market Value of a Share on the date the
Performance Unit is granted.
4.2 Lapsed Awards. If any Award (other than Restricted Shares) granted
under this Plan terminates, expires, or lapses for any reason, any Shares
subject to such Award again shall be available for the grant of an Award under
the Plan, subject to Section 7.2 herein.
4.3 Adjustments in Authorized Shares. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, share
dividend, split-up, share combination, or other change affecting the Company's
Common Shares, such adjustment shall be made in the number and class of Shares
which may be delivered under the Plan, and in the number and class of and/or
price of Shares subject to outstanding Options, Share Appreciation Rights,
Restricted Shares, Performance Shares, Performance Units and Share Units granted
under the Plan, as may be determined to be appropriate and equitable by the
Board, in its sole discretion, to prevent dilution or enlargement of rights; and
provided that the number of Shares subject to any Award shall always be a whole
number.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 Eligibility. Persons eligible to participate in this Plan include
all Trustees who are not and have not been at any time, within the preceding
three years, employees of the Company or any of its Subsidiaries.
5.2 Actual Participation. Subject to the provisions of the Plan, the
Board may from time to time select those Trustees to whom Awards shall be
granted and determine the nature and amount of each Award. No Trustee shall have
any right to be granted an Award under this Plan even if previously granted an
Award.
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ARTICLE 6. STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Trustees at any time and from time to time as shall be
determined by the Board. The Board shall have the sole discretion, subject to
the requirements of the Plan, to determine the actual number of Shares subject
to Options granted to any Participant. Options granted under the Plan will be
NQSOs.
6.2 Option Agreement. Each Option grant shall be evidenced by an Option
Agreement that shall specify the Option price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as the
Board shall determine.
6.3 Option Price. The purchase price per share of Shares covered by an
Option shall be determined by the Board.
6.4 Duration of Options. Each Option shall expire at such time as the
Board shall determine at the time of grant.
6.5 Exercise of Options. Subject to Section 3.7 herein, Options granted
under the Plan shall be exercisable at such times and be subject to such
restrictions and conditions as the Board shall in each instance approve, which
need not be the same for all Participants.
6.6 Payment. Options shall be exercised by the delivery of a written
notice to the Company setting forth the number of Shares with respect to which
the Option is to be exercised, accompanied by full payment for the Shares. The
Option price upon exercise of any Option shall be payable to the Company in full
either (a) in cash or its equivalent, (b) by tendering shares of previously
acquired Company Shares having a Fair Market Value at the time of exercise equal
to the total Option price, (c) by foregoing compensation under rules established
by the Board, or (d) by a combination of (a), (b), or (c). The proceeds from
such a payment shall be added to the general funds of the Company and shall be
used for general purposes. As soon as practicable, after receipt of written
notification and payment, the Company shall deliver to the Participant Share
certificates in an appropriate amount based upon the number of Options
exercised, issued in the Participant's name.
6.7 Restrictions on Share Transferability. The Board shall impose such
restrictions on any Shares acquired pursuant to the exercise of an Option under
the Plan as it may deem advisable, including, without limitation, restrictions
under applicable Federal securities law, under the requirements of any
securities exchange upon which such Shares are then listed and under any
applicable blue sky or state securities laws.
6.8 Termination of Service Due to Death, Disability, or Retirement. In
the event a Participant dies while serving as a Trustee, any of such
Participant's outstanding Options may be exercised at any time prior to the
expiration date of the Options or within one year after his death, whichever
period is shorter, but only to the extent that the Participant was entitled to
exercise the Options at the date of his termination of service, by such person
or persons as shall have acquired the Participant's rights under the Option
pursuant to Article 10 hereof or by will or by the laws of descent and
distribution. In the event a Participant is unable to serve as a Trustee by
reason of disability (as defined under the then established rules of the
Company), the Participant shall have the right to
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exercise outstanding Options at any time prior to the expiration date of the
Options or within one year after his disability, whichever period is shorter,
but only to the extent that the Participant was entitled to exercise the Options
on the date of his termination of service. In the event a Participant retires
from the Board, the Participant shall have the right to exercise outstanding
Options at any time prior to the expiration date of the Options or within 90
days after his retirement, whichever period is shorter, but only to the extent
that the Participant was entitled to exercise the Options on the date of his
termination of service. In its sole discretion, the Board may extend the 90 days
to up to one year, but in no event beyond the expiration date of the Option.
6.9 Termination of Service for Other Reasons. If a Participant ceases
service as a Trustee for any reason other than death, disability, retirement or
removal, the Participant shall have the right to exercise outstanding Options at
any time prior to the expiration date of the Options or within the 90 days after
the date of his termination, whichever period is shorter, but only to the extent
that the Participant was entitled to exercise the Options at the date of his
termination of service. In its sole discretion, the Board may extend the 90 days
to up to one year, but in no event beyond the expiration date of the Option.
Notwithstanding anything contained herein, if a Trustee is removed from
service, all of the Participant's outstanding Options shall be immediately
forfeited back to the Company.
6.10 Limited Transferability of Options. No Option granted under the
Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, otherwise than by will or by the laws of descent and distribution
or as provided for by the Board. Further, all Options (except for Options on
which SARs were granted) granted to a Participant under the Plan, unless
transferable, shall be exercisable during his lifetime only by such Participant.
If the Option Agreement provides, an Option may be transferred by a Participant
to the Participants children, grandchildren, spouse, one or more trusts for the
benefit of such family members or a partnership in which such family members are
the only partners (collectively, "Permitted Family Members"); provided, however,
that the Participant may not receive any consideration for the transfer. The
holder of an Option transferred pursuant to this section shall be bound by the
same terms and conditions that governed the Option during the period that it was
held by the Participant.
ARTICLE 7. SHARE APPRECIATION RIGHTS
7.1 Grant of Share Appreciation Rights. Subject to the terms and
conditions of the Plan, Share Appreciation Rights may be granted to
Participants, at the discretion of the Board, in any of the following forms:
(a) In tandem with Options;
(b) In addition to Options;
(c) Independent of Options; or
(d) In any combination of (a), (b), or (c).
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The Board shall have the sole discretion, subject to the requirements of the
Plan, to determine the actual number of Shares subject to SARs granted to any
Participant.
7.2 Exercise of SARs in Tandem with Options. SARs granted in tandem
with Options may be exercised for all or part of the Shares subject to the
related Option upon the surrender of the related Options representing the right
to purchase an equivalent number of Shares. The SAR may be exercised only with
respect to the Shares for which its related Option is then exercisable. Option
Shares with respect to which the SAR shall have been exercised may not be
subject again to an Award under the Plan.
7.3 Exercise of SARs in Addition to Options. SARs granted in addition
to Options shall be deemed to be exercised upon the exercise of the related
Options. The deemed exercise of SARs granted in addition to Options shall not
necessitate a reduction in the number of related Options.
7.4 Exercise of SARs Independent of Options. Subject to Section 3.7
herein and Section 7.5 herein, SARs granted independently of Options may be
exercised upon whatever terms and conditions the Board, in its sole discretion,
imposes upon the SARs, including, but not limited to, a corresponding
proportional reduction in previously granted Options.
7.5 Payment of SAR Amount. Upon exercise of the SAR, the holder shall
be entitled to receive payment of an amount determined by multiplying:
(a) The difference between the Fair Market Value of a
Share on the date of exercise over the price fixed by
the Board at the date of grant (which price shall not
be less than 100% of the market price of a Share on
the date of grant) (the "Exercise Price"); by
(b) The number of Shares with respect to which the SAR is
exercised.
7.6 Form and Timing of Payment. Payment to a Participant, upon SAR
exercise, will be made in cash or Shares, at the discretion of the Board, within
ten calendar days of the exercise.
7.7 Term of SAR. The term of an SAR granted under the Plan shall not
exceed ten years.
7.8 Termination of Service. In the event a Participant ceases service
as a Trustee by reason of death, disability, retirement, removal or any other
reason, the exercisability of any outstanding SAR granted in tandem with or in
addition to an Option shall terminate in the same manner as its related Option
as specified under Sections 6.8 and 6.9 herein. The exercisability of any
outstanding SARs granted independent of Options also shall terminate in the
manner provided under Sections 6.8 and 6.9 hereof.
7.9 Nontransferability of SARs. No SAR granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
otherwise than by will or by the laws of descent and distribution. Further, all
SARs granted to a Participant under the Plan shall be exercisable during his
lifetime only by such Participant.
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ARTICLE 8. RESTRICTED SHARES
8.1 Grant of Restricted Shares. Subject to the terms and provisions of
the Plan, the Board, at any time and from time to time, may grant Restricted
Shares under the Plan to such Participants and in such amounts as it shall
determine.
8.2 Restricted Share Agreement. Each Restricted Share grant shall be
evidenced, as necessary, by a Restricted Share Agreement that shall specify the
Period of Restriction, or periods, the number of Shares of Restricted Share
granted, and such other provisions as the Board shall determine.
8.3 Transferability. Except as provided in this Article 8, the
Restricted Shares granted hereunder may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated until the termination of the
applicable Period of Restriction or for such period of time as shall be
established by the Board and as shall be specified in the Restricted Share
Agreement, or upon earlier satisfaction of other conditions (including any
Performance Goals as defined below) as specified by the Board in its sole
discretion and set forth in the Restricted Share Agreement. All rights with
respect to the Restricted Shares granted to a Participant under the Plan shall
be exercisable during his lifetime only by such Participant.
8.4 Other Restrictions. The Board shall impose such other restrictions
on any Restricted Shares granted pursuant to the Plan as it may deem advisable
including, without limitation, restrictions under applicable Federal or state
securities laws, and the Board may legend certificates representing Restricted
Shares to give appropriate notice of such restrictions.
8.5 Certificate Legend. In addition to any legends placed on
certificates pursuant to Section 8.4 herein, each certificate representing
Restricted Shares granted pursuant to the Plan shall bear the following legend:
"The sale or other transfer of the shares represented by this
certificate, whether voluntary, involuntary, or by operation of law, is
subject to certain restrictions on transfer set forth in the Amended
and Restated 1997 Non-Employee Trustees Share Plan of Capital Trust, in
the rules and administrative procedures adopted pursuant to such Plan,
and in a Restricted Share Agreement dated ___________. A copy of the
Plan, such rules and procedures, and such Restricted Share Agreement
may be obtained from the Secretary of Capital Trust."
8.6 Removal of Restrictions. Except as otherwise provided in this
Article and subject to applicable securities laws and restrictions imposed
pursuant thereto, Restricted Shares shall become transferable by the Participant
after the last day of the Period of Restriction. Once the Shares are released
from the restrictions, the Participant shall be entitled to have the legend
required by Section 8.5 removed from his Share certificate.
8.7 Voting Rights. During the Period of Restriction, Participants
holding Restricted Shares granted hereunder may exercise full voting rights with
respect to those Shares.
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8.8 Dividends and Other Distributions. During the Period of
Restriction, Participants holding Restricted Shares granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares while they are so held. If any such dividends or distributions are
paid in Shares, the Shares shall be subject to the same restrictions on
transferability as the Restricted Shares with respect to which they were paid.
8.9 Termination of Service. In the event that a Participant ceases to
be a Trustee of the Company for any reason during the Period of Restriction,
then any Restricted Shares still subject to restrictions as of the date of such
termination shall automatically be forfeited and returned to the Company;
provided, however, that in the event that Participant ceases to be a Trustee for
any reason other than removal, the Board, in its sole discretion (subject to
Section 3.7 herein) may waive the automatic forfeiture of any and all Shares and
may add such new restrictions to such Restricted Shares as it deems appropriate.
ARTICLE 9. PERFORMANCE UNITS, PERFORMANCE SHARES AND SHARE UNITS
9.1 Grant of Performance Units, Performance Shares or Share Units.
Subject to the terms and provisions of the Plan, Performance Units, Performance
Shares or Share Units may be granted to Participants at any time and from time
to time as shall be determined by the Board. The Board shall have complete
discretion in determining the number of Performance Units, Performance Shares or
Share Units granted to each Participant.
9.2 Value of Performance Units and Performance Shares. The Board shall
set certain periods to be determined in advance by the Board (the "Performance
Periods"). Prior to each grant of Performance Units or Performance Shares, the
Board shall establish an initial value for each Performance Unit and an initial
number of Shares for each Performance Share granted to each Participant for that
Performance Period. Prior to each grant of Performance Units or Performance
Shares, the Board also shall set the Performance Goals (the "Performance Goals")
that will be used to determine the extent to which the Participant receives a
payment of the value of the Performance Units or number of Shares for the
Performance Shares awarded for such Performance Period. These goals will be
based on the attainment by the Company of certain objective or subjective
performance measures, which may include one or more of the following: total
shareholder return, return on equity, return on capital, earnings per share,
asset growth, market share, share price, revenues, costs, net income, cash flow
and retained earnings. Such Performance Goals also may be based upon the
attainment of specified levels of performance of the Company under one or more
of the measures described above relative to the performance of other
corporations. With respect to each such performance measure utilized during a
Performance Period, the Board shall assign percentages to various levels of
performance which shall be applied to determine the extent to which the
Participant shall receive a payout of the values of Performance Units and number
of Performance Shares awarded.
9.3 Payment of Performance Units and Performance Shares. After a
Performance Period has ended, the holder of a Performance Unit or Performance
Share shall be entitled to receive the value thereof as determined by the Board.
The Board shall make this determination by first determining the extent to which
the Performance Goals set pursuant to Section 9.2 have been met. It will then
determine the applicable percentage (which may exceed 100%) to be applied to,
and will apply such
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percentage to, the value of Performance Units or number of Performance Shares to
determine the payout to be received by the Participant.
9.4 Value of Share Units. Subject to the terms and provisions of the
Plan, Share Units may be granted to Participants at any time and from time to
time on such terms as shall be determined by the Board. The Board shall have
complete discretion in determining the number of Share Units granted to each
Participant. Share Units shall be payable in Shares upon the occurrence of
certain trigger events set forth on the Participant's Election Form in his or
her complete discretion (the "Trigger Events"). The terms and conditions of the
Trigger Events may vary by Share Unit Award, by Participant, or both. The
Election Form shall be filed with the Secretary of the Company prior to the date
on which any Share Unit Award is made. Such election will be irrevocable as to
any Share Unit Award made after delivery of the Election Form to the Company,
and it shall continue in effect until revoked, increased or decreased
prospectively by a Participant prior to the grant of any future Share Unit Award
for which the change is effective.
9.5 Accounting for Share Units. A Participant's Share Unit Award shall
be credited by the Company to a bookkeeping account to reflect the Company's
liability to that Participant (the "Share Unit Account"). Each Share Unit is
credited as a Share equivalent on the date so credited. Additional share
equivalents may be added to the Share Unit Account equal to the amount of Shares
that could be purchased with dividends equal to that paid on one Share,
multiplied by the number of stock equivalents then existing in the Share Unit
Account, based on the Fair Market Value of the Shares on the date a dividend is
paid on the Share. Because the Trigger Events for each Share Unit Award may
differ, the Company shall establish a separate Share Unit Account for each
separate Share Unit Award. Upon the occurrence of particular Trigger Events, the
holder of a Share Unit Award shall be entitled to receive a number of Shares
which corresponds to the number of Share Units granted as part of the initial
Share Unit Award, as such amount may have been increased to reflect dividends
paid with respect thereto.
9.6 Board Discretion to Adjust Awards. The Board shall have the
authority to modify, amend or adjust the terms and conditions of any Performance
Unit Award, Performance Share Award or Share Unit Award, at any time or from to
time, including but not limited to the Performance Goals.
9.7 Form of Payment. The value of a Performance Unit or Performance
Share may be paid in cash, Shares or a combination thereof as determined by the
Board. In the case of Share Units, payment shall be made in Shares. Payment may
be made in a lump sum or installments as prescribed by the Board. If any payment
is to be made on a deferred basis, the Board may provide for the payment of
dividend equivalents or interest during the deferral period.
9.8 Termination of Service Due to Death, Disability or Retirement. In
the case of death, disability or retirement (each of disability and retirement
as defined under the established rules of the Company), the holder of a
Performance Unit or Performance Share shall receive a prorated payment based on
the Participant's number of full months of service during the Performance Period
and on the percentage of the Performance Goals achieved through the date of
termination, as computed by the Board. Payment shall be made at the time
payments are made to Participants who did not terminate service during the
Performance Period. In the case of Share Units, all such Share Units held to the
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extent vested on the date that the Participant ceases to be a Trustee, will be
paid as set forth in the Participant's Election Form.
9.9 Termination of Service for Other Reasons. In the event that a
Participant ceases to be a Trustee of the Company for any reason other than
death, disability or retirement, the Board shall have the discretion to
determine the deposition of the Participant's Performance Units and Performance
Shares. In the case of termination other than due to removal, all Share Units
held to the extent vested on the date that the Participant ceases to be a
Trustee, will be paid as set forth in the Participant's Election Form. However,
in the event of termination due to removal, all Share Units held will be
forfeited.
9.10 Nontransferability. No Performance Units, Performance Shares or
Share Units granted under the Plan may be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated, otherwise than by will or by the laws of
descent and distribution until the termination of the applicable Performance
Period or, in the case of Share Units, until payment. All rights with respect to
Performance Units, Performance Shares and Share Units granted to a Participant
under the Plan shall be exercisable during his lifetime only by such
Participant.
ARTICLE 10. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively and
who may include a trustee under a will or living trust) to whom any benefit
under the Plan is to be paid in case of his death before he receives any or all
of such benefit. Each designation will revoke all prior designations by the same
Participant, shall be in a form prescribed by the Board, and will be effective
only when filed by the Participant in writing with the Board during his
lifetime. In the absence of any such designation or if all designated
beneficiaries predecease the Participant, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
ARTICLE 11. RIGHTS OF TRUSTEES
11.1 Trusteeship. Nothing in the Plan shall interfere with or limit in
any way the right of the Board of Trustees or shareholders under applicable law
to remove any Participant from the Board at any time, nor confer upon any
Participant any right to continue in the service of the Company.
11.2 Participation. No Trustee shall have a right to be selected as a
Participant, or, having been so selected, to be selected again as a Participant.
11.3 No Implied Rights; Rights on Termination of Service. Neither the
establishment of the Plan nor any amendment thereof shall be construed as giving
any Participant, beneficiary, or any other person any legal or equitable right
unless such right shall be specifically provided for in the Plan or conferred by
specific action of the Board in accordance with the terms and provisions of the
Plan. Except as expressly provided in this Plan, the Company shall not be
required or be liable to make any payment under the Plan.
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11.4 No Right to Company Assets. Neither the Participant nor any other
person shall acquire, by reason of the Plan, any right in or title to any
assets, funds or property of the Company whatsoever including, without limiting
the generality of the foregoing, any specific funds, assets, or other property
which the Company, in its sole discretion, may set aside in anticipation of a
liability hereunder. Any benefits which become payable hereunder shall be paid
from the general assets of the Company. The Participant shall have only a
contractual right to the amounts, if any, payable hereunder unsecured by any
asset of the Company. Nothing contained in the Plan constitutes a guarantee by
the Company that the assets of the Company shall be sufficient to pay any
benefit to any person.
ARTICLE 12. CHANGE IN CONTROL
12.1 Share-Based Awards. Notwithstanding any other provisions of the
Plan, in the event of a Change in Control, all Share-based Awards granted under
this Plan shall immediately vest 100% in each Participant, including
Nonqualified Share Options, Share Appreciation Rights, Restricted Shares and
Share Units.
12.2 Performance Based Awards. Notwithstanding any other provision of
the Plan, in the event of a Change in Control, all performance based Awards
granted under this Plan shall be immediately paid out in cash, including
Performance Units and Performance Shares. The amount of the payout shall be
based on the higher of: (i) the extent, as determined by the Board, to which
Performance Goals, established for the Performance Period then in progress have
been met up through and including the effective date of the Change in Control or
(ii) 100% of the value on the date of grant of the Performance Units or number
of Performance Shares.
12.3 Pooling Transactions. Notwithstanding anything contained in the
Plan or any agreement to the contrary, in the event of a Change in Control which
is also intended to constitute a Pooling Transaction, the Committee shall take
such actions, if any, which are specifically recommended by an independent
accounting firm retained by the Company to the extent reasonably necessary in
order to assure that the Pooling Transaction will qualify as such, including but
not limited to (a) deferring the vesting, exercise, payment or settlement with
respect to any Award, (b) providing that the payment or settlement in respect of
any Award be made in the form of cash, Shares or securities of a successor or
acquired of the Company, or a combination of the foregoing and (c) providing for
the extension of the term of any Award to the extent necessary to accommodate
the foregoing, but not beyond the maximum term permitted for any Award.
ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION
13.1 Amendment, Modification and Termination. At any time and from time
to time, the Board may terminate, amend or modify the Plan, subject to the
approval of the shareholders of the Company if required by the Code, by the
insider trading rules of Section 16 of the Exchange Act, by any securities
exchange or system on which the Shares are then listed or reported, or by any
regulatory body having jurisdiction with respect hereto.
-14-
<PAGE>
13.2 Awards Previously Granted. No termination, amendment or
modification of the Plan other than pursuant to Section 4.3 hereof shall in any
manner adversely affect any Award theretofore granted under the Plan, without
the written consent of the Participant.
ARTICLE 14. WITHHOLDING
Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any grant, exercise, or payment made under or as a result of this Plan.
ARTICLE 15. EFFECT OF CERTAIN TRANSACTIONS
Effect of Certain Transactions. Subject to Section 12, or as otherwise
provided in an agreement, in the event of (a) the liquidation or dissolution of
the Company or (b) a merger, consolidation or combination of the Company (a
"Transaction"), the Plan and the Awards issued hereunder shall continue in
effect in accordance with their respective terms except that following a
Transaction each Participant shall be entitled to receive in respect of each
Share subject to any outstanding Options or Awards, as the case may be, upon
exercise of any Option or payment or transfer in respect of any Award, the same
number and kind of Shares, securities, cash, property, or other consideration
that each holder of a Share was entitled to receive in the Transaction in
respect of a Share; provided, however, that such Shares, securities, cash,
property, or other consideration shall remain subject to all of the conditions,
restrictions and performance criteria which were applicable to the Options or
Awards prior to such Transaction.
ARTICLE 16. REQUIREMENTS OF LAW
16.1 Requirements of Law. The granting of Awards and the issuance of
Shares under this Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or securities
exchanges as may be required.
16.2 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of New York.
Effective Date of the Amended and Restated 1997 Non-Employee Trustee Share Plan:
June __, 1998
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<PAGE>
ANNEX E
CAPITAL TRUST
1998 EMPLOYEE SHARE PURCHASE PLAN
The purpose of this Plan is to provide eligible employees of Capital
Trust, a California business trust, and any corporate successor to all or
substantially all of the assets or voting shares of Capital Trust which shall by
appropriate action adopt the Plan (the "Company") and certain of its
subsidiaries with opportunities to purchase class A common shares of beneficial
interest, par value $1.00 per share, in the Company (the "Common Shares").
1. Definitions. For purposes of administration of the Plan, the
following terms shall have the meanings indicated:
"Authorization Form" shall be defined in Section 6.
"Board" shall mean the Board of Trustees of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the committee of the Board, if any, appointed
to administer the Plan.
"Compensation" means the amount of money reportable on the employee's
Federal Income Tax Withholding Statement, excluding allowances and
reimbursements for expenses such as relocation allowances for travel expenses,
income or gains on the exercise of Company share options and similar items,
whether or not shown on the employee's Federal Income Tax Withholding Statement.
"Continuity of Control" shall be defined in Section 19.
"Designated Subsidiary" shall be defined in Section 4.
"Exercise Date" shall be defined in Section 11.
"Investment Account" shall mean the separate account for each
participating employee reflecting the number of Common Shares purchased under
the Plan that have not been withdrawn by the employee.
"Offering Commencement Date" shall be defined in Section 5.
"Offerings" shall be defined in Section 5.
703524.4
<PAGE>
"Option" shall be defined in Section 11.
"Plan" shall mean the Capital Trust 1998 Employee Share Purchase Plan.
"Plan Period" shall be defined in Section 5.
2. Share Authorization. 1,000,000 Common Shares in the aggregate have
been approved and reserved for issuance under the Plan.
3. Administration. The Plan will be administered by the Board or by
the Committee. The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.
4. Eligibility. Participation in the Plan will neither be permitted
nor denied contrary to the requirements of Section 423 of the Code and
regulations promulgated thereunder. All employees of the Company, including
directors who are employees, and all employees of any subsidiary of the Company
(as defined in Section 424(f) of the Code) designated by the Board or the
Committee from time to time (a "Designated Subsidiary"), are eligible to
participate in any one or more of the offerings of Options to purchase Common
Shares under the Plan provided that:
(a) they are regularly employed by the Company or a Designated
Subsidiary for more than 20 hours a week and for more than five months
in a calendar year and they have been employed, as of the applicable
Offering Date, for at least three months; and
(b) they are employees of the Company or a Designated Subsidiary
on the first day of the applicable Plan Period (as defined below).
No employee may be granted an Option hereunder if such employee,
immediately after the option is granted, owns five (5%) percent or more of the
total combined voting power or value of the shares of beneficial interest of the
Company or any subsidiary. For purposes of the preceding sentence, the
attribution rules of Section 424(d) of the Code shall apply in determining the
shares ownership of an employee, and all shares which the employee has a
contractual right to purchase shall be treated as shares owned by the employee.
5. Offerings. Shares shall be offered for purchase under the Plan
through a series of successive offerings ("Offerings") until such time as (i)
the maximum number of Shares available for issuance under the Plan shall have
been issued pursuant to purchase rights granted under the Plan or (ii) the Plan
shall have been sooner terminated in accordance with Section 22. The initial
Offering will begin upon the later of (i) July 1, 1998 or (ii) the effective
date of the S-8 Registration Statement covering the Shares issuable under the
Plan, and will end on December 31, 1998. The second Offering will begin on
January 1, 1999 and end on June 30, 1999. Subsequent Offerings will begin on the
successive July 1 or January 1 (each, an "Offering Commencement Date"). Each
Offering Commencement Date will begin a six (6) month period (a "Plan Period")
during which payroll
703524.4
2
<PAGE>
deductions will be made and held for the purchase of Common Shares at the end of
the Plan Period. The Board or the Committee may, at its discretion, choose a
different Plan Period of twelve (12) months or less for subsequent Offerings.
6. Participation. An employee eligible on the Offering Commencement
Date of any Offering may participate in such Offering by completing and
forwarding a payroll deduction authorization form ("Authorization Form") to the
employee's appropriate payroll office at least 30 days prior to the applicable
Offering Commencement Date. The Authorization Form will authorize a regular
payroll deduction from the Compensation received by the employee during the Plan
Period. Unless an employee files a new form or withdraws from the Plan, his
deductions and purchases will continue at the same rate for future Offerings
under the Plan as long as the Plan remains in effect.
7. Deductions. The Company will maintain payroll deduction accounts
for participating employees. Payroll deductions may be at a set dollar amount
not less than $10.00 or a rate of any whole percentage of Compensation, subject
to the limitations in Section 11, with any change in Compensation during the
Plan Period to result in an automatic corresponding change in the dollar amount
withheld.
No employee may be granted an Option (as defined in Section 11) which
permits his rights to purchase Common Shares under this Plan and any other share
purchase plan of the Company and its subsidiaries, to accrue at a rate which
exceeds $25,000 of the fair market value of such Common Shares (determined at
the Offering Commencement Date of the Plan Period) for each calendar year in
which the Option is outstanding at any time.
8. Deduction Changes. An employee may decrease or discontinue his
payroll deduction once during any Plan Period, by filing a new Authorization
Form. However, an employee may not increase his payroll deduction during a Plan
Period. If an employee elects to discontinue his payroll deductions during a
Plan Period, but does not elect to withdraw his funds pursuant to Section 10
hereof, funds deducted prior to his election to discontinue will be applied to
the purchase of Common Shares on the Exercise Date.
9. Interest. Interest will not be paid on any employee accounts,
except to the extent that the Board or the Committee, in its sole discretion,
elects to credit employee accounts with interest at such per annum rate as it
may from time to time determine.
10. Withdrawal of Funds. An employee may at any time prior to the
close of business on the last business day in a Plan Period and for any reason
permanently draw out the balance accumulated in the employee's account and
thereby withdraw from participation in an Offering. Partial withdrawals are not
permitted. The employee may not begin participation again during the remainder
of the Plan Period. The employee may participate in any subsequent Offering in
accordance with terms and conditions established by the Board or the Committee.
11. Purchase of Shares. On the Offering Commencement Date of each Plan
Period, the Company will grant to each eligible employee who is then a
participant in the Plan an
703524.4
3
<PAGE>
option ("Option") to purchase on the last business day of such Plan Period (the
"Exercise Date"), at the Option Price hereinafter provided for, such number of
whole Common Shares obtained by dividing the amount collected from the
participant through payroll deductions during the Plan Period for which such
Option is outstanding, together with any amount carried over from the preceding
Plan Period pursuant to this Section 11, by the Option Price in effect for the
Plan Period. However, the maximum number of Common Shares purchasable by any
participant during any one Plan Period shall not exceed $12,500 divided by the
fair market value of a Common Share on the first business day of the applicable
Plan Period.
The purchase price for each Common Share purchased shall be 85% of the
average of the closing prices of the Common Shares on each business day of the
applicable Offering, provided the purchase price shall not be less than the
lesser of (i) 85% of the closing price on the first business day of such Plan
Period or (ii) 85% of the closing price on the last business day of the Plan
Period (the "Option Price"). Such closing prices shall be (a) the closing price
on any national securities exchange on which the Common Shares are listed, (b)
the closing price of the Common Shares on the Nasdaq National Market or (c) the
average of the closing bid and asked prices in the over-the-counter-market,
whichever is applicable, as published in The Wall Street Journal.
Each employee who continues to be a participant in the Plan on the
Exercise Date shall be deemed to have exercised his option at the Option Price
on such date and shall be deemed to have purchased from the Company the number
of full Common Shares reserved for the purpose of the Plan that his accumulated
payroll deductions on such date will pay for pursuant to the formula set forth
above (but not in excess of the maximum number determined in the manner set
forth above). The Company, or its designated agent, shall hold in its name or in
the name of its nominee all certificates for Common Shares purchased until the
Common Shares are withdrawn under Section 13.
Any balance remaining in an employee's payroll deduction account at
the end of a Plan Period will be automatically refunded to the employee, except
that any balance which is less than the purchase price of one Common Share will
be carried forward into the employee's payroll deduction account for the
following Offering, unless the employee elects not to participate in the
following Offering under the Plan, in which case the balance in the employee's
account shall be refunded.
12. Employee's Rights as a Shareholder. No participating employee
shall have any right as a shareholder with respect to any Common Shares under
the Plan until the Common Shares have been purchased in accordance with Section
11.
All cash dividends paid with respect to Common Shares in a employee's
Investment Account shall, unless otherwise directed by the Board or Committee,
be used to purchase additional Common Shares on the next date shares are
purchased pursuant to Section 11, subject to the limitations in Section 11. Such
shares shall be added to the employee's Investment Account.
Each employee shall be entitled to direct the Company, or its
designated agent, as to the voting of any Common Shares held in the employee's
Investment Account.
703524.4
4
<PAGE>
13. Withdrawal from Investment Account. An employee shall have the
right to request, not more than once per calendar quarter, that a certificate be
issued for all or a portion of the Common Shares credited to his Investment
Account by giving notice to the Company; provided that if any of the Common
Shares with respect to which a certificate has been requested has been credited
to the employee's Investment Account for less than one year, the employee shall
not be permitted to participate in the Offering that commences immediately after
such certificate is issued.
Each certificate withdrawn by a employee may be registered only in the
name of the employee, or if the employee so directs, in the names of the
employee and one other person, as joint tenants with right of survivorship,
tenants in common, or as community property, or (in the Company's sole
discretion) in street name of a brokerage firm, bank or other nominee holder
designated by the employee to the extent and in the manner permitted by
applicable law.
14. Rights Not Transferable. No employee shall be permitted to sell,
assign, transfer, pledge, or otherwise dispose of or encumber either the payroll
deductions credited to his or her payroll deduction account, Common Shares
credited to his or her Investment Account, or any rights with regard to the
exercise of an Option or to receive shares under the Plan other than by will or
the laws of descent and distribution, and such right and interest shall not be
liable for, or subject to, the debts, contracts, or liabilities of the employee.
If any such action is taken by the employee, or any claim is asserted by any
other party in respect of such right and interest whether by garnishment, levy,
attachment or otherwise, such action or claim will be treated as an election to
withdraw in accordance with Sections 10 or 13, whichever is applicable.
15. Rights on Retirement, Death or Termination of Employment. In the
event an employee's employment shall be terminated prior to the last business
day of a Plan Period by reason of resignation, layoff or discharge, no payroll
deduction shall be taken from any pay due and owing to an employee and the
balance in the employee's payroll deduction account and the shares in the
employee's Investment Account shall be paid in cash or issued to the employee,
as the case may be. In the event an employee's employment shall be terminated
(a) within 90 days of the last day of the current Offering by reason of
retirement or disability, or (b) at any time during the current Offering by
reason of death, the employee (or the employee's a beneficiary previously
designated in a revocable notice signed by the employee (with any spousal
consent required under state law) or, in the absence of such a designated
beneficiary, the executor or administrator of the employee's estate or, if no
such executor or administrator has been appointed to the knowledge of the
Company, to such other person(s) as the Company may, in its discretion,
designate) shall have the right prior to the end of the current Offering to
elect to have the balance of his payroll deduction account either paid to him in
cash or applied at the end of the current Offering toward the purchase of Common
Shares and the Company shall otherwise issue to him the shares in his Investment
Account. If an employee's employment shall be terminated more than 90 days from
the last day of the current Offering by reason of retirement or disability, the
balance of the employee's payroll deduction account and the shares in his
Investment Account shall be paid in cash or issued to him, as the case may be.
If, prior to the last business day of the Plan Period, the Designated Subsidiary
by which an employee is employed shall cease to be a subsidiary of the Company,
or if the employee is transferred to a subsidiary of the Company that is not a
Designated Subsidiary, the employee shall be deemed to have terminated
employment for the purposes of this Plan.
703524.4
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<PAGE>
16. Optionees Not Shareholders. Neither the granting of an Option to
an employee nor the deductions from his pay shall constitute such employee a
shareholder of the shares of Common Shares covered by an Option under this Plan
until such shares have been purchased by him.
17. Application of Funds. All funds received or held by the Company
under this Plan may be combined with other corporate funds and may be used for
any corporate purpose.
18. Adjustment in Case of Changes Affecting Common Shares. In the
event of a subdivision of outstanding Common Shares, or the payment of a
dividend in Common Shares, the number of shares approved for this Plan, and the
share limitation set forth in Section 11, shall be increased proportionately,
and such other adjustment shall be made as may be deemed equitable by the Board
or the Committee. In the event of any other change affecting the Common Shares
such adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.
19. Merger. If the Company shall at any time merge or consolidate with
another corporation and the holders of the capital shares of the Company
immediately prior to such merger or consolidation continue to hold at least 80%
by voting power of the capital stock of the surviving corporation ("Continuity
of Control"), the holder of each Option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such Option
for each share as to which such Option shall be exercised the securities or
property which a holder of Common Shares was entitled to receive at the time of
such merger, and the Committee shall take such steps in connection with such
merger as the Committee shall deem necessary to assure that the provisions of
Section 18 shall thereafter be applicable, as nearly as reasonably may be, in
relation to the said securities or property as to which such holder of such
Option might thereafter be entitled to receive thereunder.
In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clauses (b) and (c), after the effective date of such transaction, each holder
of an outstanding Option shall be entitled, upon exercise of such Option, to
receive in lieu of Common Shares, shares of such stock or other securities as
the holders of Common Shares received pursuant to the terms of such transaction;
or (b) all outstanding Options may be canceled by the Board or the Committee as
of a date prior to the effective date of any such transaction and all payroll
deductions shall be paid out to the participating employees; or (c) all
outstanding Options may be canceled by the Board or the Committee as of the
effective date of any such transaction, provided that notice of such
cancellation shall be given to each holder of an Option, and each holder of an
Option shall have the right to exercise such Option in full based on payroll
deductions then credited to his account as of a date determined by the Board or
the Committee, which date shall not be less than ten (10) days preceding the
effective date of such transaction.
20. Amendment of the Plan. The Board may at any time, and from time to
time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the
703524.4
6
<PAGE>
shareholders of the Company is required by Section 423 of the Code, such
amendment shall not be effected without such approval, and (b) in no event may
any amendment be made which would cause the Plan to fail to comply with Section
423 of the Code.
21. Insufficient Shares. In the event that the total number of Common
Shares specified in elections to be purchased under any Offering plus the number
of Common Shares purchased under previous Offerings under this Plan exceeds the
maximum number of Common Shares issuable under this Plan, the Board or the
Committee will allot the Common Shares then available on a pro rata basis.
22. Termination of the Plan. This Plan may be terminated at any time
by the Board or the Committee. The Plan will terminate in any case on the date
on which all or substantially all of the unissued Common Shares reserved for
issuance under the Plan have been purchased. Upon termination of this Plan all
amounts in the payroll deduction accounts of participating employees shall be
promptly refunded.
23. Governmental Regulations. The Company's obligation to sell and
deliver Common Shares under this Plan is subject to listing on a national stock
exchange or quotation on the Nasdaq National Market and the approval of all
governmental authorities required in connection with the authorization, issuance
or sale of such Common Shares.
The Plan shall be governed by New York law except to the extent that
such law is preempted by federal law.
The Plan is intended to constitute a "Stock Purchase Plan" within the
meaning of Rule 16b-3(b)(5) promulgated under the Securities Exchange Act of
1934.
24. Issuance of Shares. Shares may be issued upon exercise of an
Option from authorized but unissued Common Shares, from shares held in the
treasury of the Company, or from any other proper source.
25. Notification upon Sale of Shares. Each employee agrees, by
entering the Plan, to promptly give the Company notice of any disposition of
Common Shares purchased under the Plan where such disposition occurs within two
years after the date of grant of the Option pursuant to which such Common Shares
were purchased.
26. Effective Date and Approval of Shareholders. The Plan shall become
effective as of April 24, 1998, subject to approval of the Company's
shareholders on or before April 23, 1999. If the Plan is not so approved, the
Plan shall not become effective.
703524.4
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<PAGE>
Annex F
As filed with the Securities and Exchange Commission on August 17, 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997
[ ] 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
incorporation or organization) Identification No.)
605 Third Avenue, 26th Floor, New York, NY 10016
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 655-0220
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Class A Common Shares of Beneficial Interest, New York Stock Exchange
$1.00 par value ("Class A Common Shares") Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 the filing
requirements for at least the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
<PAGE>
MARKET VALUE
Based on the closing sales price of $10.00 per share, the aggregate market value
of the outstanding Class A Common Shares held by non-affiliates of the
registrant as of February 18, 1998 was $111,433,570.
OUTSTANDING SHARES
As of February 18, 1998 there were 18,157,150 outstanding Class A Common Shares.
The Class A Common Shares are listed on the New York and Pacific Stock Exchanges
(trading symbol "CT"). Trading is reported in many newspapers as "CapitalTr".
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's definitive
Proxy Statement to be filed with the Commission within 120 days after the close
of the Registrant's fiscal year.
<PAGE>
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CAPITAL TRUST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART I PAGE
- --------------------------------------------------------------------------------
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 20
Signatures 21
Index to Consolidated Financial Statements F-1
</TABLE>
-i-
<PAGE>
EXPLANATORY NOTE FOR PURPOSES OF THE "SAFE HARBOR PROVISIONS" OF SECTION 21E OF
THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS ANNUAL REPORT ON
FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SECTION
21E OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, WHICH INVOLVE
CERTAIN RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS ARE INCLUDED WITH
RESPECT TO, AMONG OTHER THINGS, THE COMPANY'S CURRENT BUSINESS PLAN, BUSINESS
STRATEGY AND PORTFOLIO MANAGEMENT. THE COMPANY'S ACTUAL RESULTS OR OUTCOMES MAY
DIFFER MATERIALLY FROM THOSE ANTICIPATED. IMPORTANT FACTORS THAT THE COMPANY
BELIEVES MIGHT CAUSE SUCH DIFFERENCES ARE DISCUSSED IN THE CAUTIONARY STATEMENTS
PRESENTED UNDER THE CAPTION "FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS
STRATEGY" IN ITEM 1 OF THIS FORM 10-K OR OTHERWISE ACCOMPANY THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FORM 10-K. IN ASSESSING FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY ALL CAUTIONARY STATEMENTS
CONTAINED IN THIS FORM 10-K.
-ii-
<PAGE>
PART I
- --------------------------------------------------------------------------------
Item 1. Business
- ------------------------------------------------------------------------------
General
Capital Trust (together with its subsidiaries the "Company") is a recently
recapitalized specialty finance company designed to take advantage of
high-yielding lending and investment opportunities in commercial real estate and
related assets. The Company makes investments in various types of
income-producing commercial real estate and its current investment program
emphasizes senior and junior commercial mortgage loans, preferred equity
investments, direct equity investments and subordinated interests in commercial
mortgage-backed securities ("CMBS"). The Company's current business plan
contemplates that a majority of the loans and other assets held in its portfolio
for the long-term will be structured so that the Company's investment is
subordinate to third-party financing but senior to the owner/operator's equity
position. The Company also provides real estate investment banking, advisory and
asset management services through its wholly owned subsidiary, Victor Capital
Group, L.P. ("Victor Capital"). The Company anticipates that it will invest in a
diverse array of real estate and finance-related assets and enterprises,
including operating companies, which satisfy its investment criteria.
In executing its business plan, the Company utilizes the extensive real
estate industry contacts and relationships of Equity Group Investments, Inc.
("EGI"). EGI is a privately held real estate and corporate investment firm
controlled by Samuel Zell, who serves as chairman of the Board of Trustees of
the Company. EGI's affiliates include Equity Office Properties Trust and Equity
Residential Properties Trust, the largest U.S. real estate investment trusts
("REITs") operating in the office and multifamily residential sectors,
respectively. The Company also draws upon the extensive client roster of Victor
Capital for potential investment opportunities.
Developments with Respect to Implementation of the Company's Current Business
Plan During Fiscal Year 1997
During the past fiscal year, the Company ceased operations as a real estate
investment trust following full implementation of its current business plan in
July 1997. This action coincided with the appointment of a new management team
following the acquisition of Victor Capital and a private placement of $33
million of preferred equity in the Company to Veqtor Finance Company, LLC
("Veqtor"), an affiliate of certain members of the new management team that
currently owns 19,227,251 (or approximately 63%) of the outstanding voting
shares of the Company.
In connection with the implementation of its current business plan, in
September 1997, the Company entered into a credit arrangement with a commercial
lender that provides for a three-year $150 million line of credit (the "Credit
Facility"). In addition, in December 1997, the Company completed a public
securities offering (the "Offering") by issuing 9,000,000 new class A common
shares of beneficial interest, $1.00 par value ("Class A Common Shares"), in the
Company at $11.00 per share. The Company raised approximately $91.4 million in
net proceeds from the Offering. The Company believes that the Credit Facility
and the proceeds of the Offering provide the Company with the capital necessary
to expand and diversify its portfolio of loans and other investments and enable
the Company to compete for and consummate larger transactions meeting the
Company's target risk/return profile.
Since initiating full implementation of the current business plan, the
Company has completed twelve loan and investment transactions. The Company has
originated or acquired six Mortgage Loans (as defined herein) totaling $169.7
million (one of which was satisfied prior to December 31, 1997), five Mezzanine
Loans (as defined herein) totaling $75.0 million and one CMBS subordinated
interest for $49.6 million.
1
<PAGE>
Real Estate Lending and Investment Market
The Company believes that the significant recovery in commercial real
estate property values, coupled with fundamental structural changes in the real
estate capital markets (primarily related to the growth in CMBS issuance), has
created significant market-driven opportunities for finance companies
specializing in commercial real estate lending and investing. Such opportunities
are expected to result from the following developments:
o Scale and Rollover. The U.S. commercial mortgage market--a market that
is comparable in size to the corporate and municipal bond markets--has
approximately $1 trillion in total mortgage debt outstanding, which debt
is primarily held privately. In addition, a significant amount of
commercial mortgage loans held by U.S. financial institutions is
scheduled to mature in the near future.
o Rapid Growth of Securitization. With annual issuance volume of
approximately $44 billion, the total amount of CMBS currently
outstanding has grown to over $170 billion from approximately $6 billion
in 1990. To date, the CMBS market expansion has been fueled in large
part by "conduits" which originate whole loans primarily for resale to
financial intermediaries, which in turn package the loans as securities
for distribution to public and private investors.
The Company believes that as securitized lenders replace traditional
lenders such as banks and life insurance companies as the primary source
for commercial real estate finance, borrowers are often constrained by
relatively inflexible underwriting standards, including lower
loan-to-value ratios, thereby creating significant demand for mezzanine
financing (typically between 65% and 90% of total capitalization). In
addition, since many high quality loans may not immediately qualify for
securitization, due primarily to rating agency guidelines, significant
opportunities are created for shorter-maturity bridge and transition
mortgage financings.
o Consolidation. As the real estate market continues to evolve, the
Company expects that consolidation will occur and efficiency will
increase. Over time, the Company believes that the market leaders in the
real estate finance sector will be fully integrated finance companies
capable of originating, underwriting, structuring, managing and
retaining real estate risk.
The Company believes that the commercial real estate capital markets for
both debt and equity are in the midst of dramatic structural change. Although
the issuance volume of CMBS has grown to $44 billion per annum, the terms and
conditions of securitized debt are driven significantly by rating agency
criteria, resulting in restrictive underwriting parameters and relatively
inflexible transaction structures. At the same time, existing equity owners are
faced with high levels of maturing debt that will need to be refinanced, and new
buyers are seeking greater leverage than is available from securitized or
traditional providers. As a result, the need for mezzanine investment capital
has grown significantly. The Company, through its current business plan, seeks
to capitalize on this market opportunity.
Business Strategy
The Company believes that it is well positioned to capitalize on the
resultant opportunities, which, if carefully underwritten, structured and
monitored, represent attractive investments that pose potentially less risk than
direct equity ownership of real property. Further, the Company believes that the
rapid growth of the CMBS market has given rise to opportunities for the Company
to selectively acquire non-investment grade tranches of such securities which
the Company believes are priced inefficiently in terms of their risk/reward
profile.
The Company seeks to generate returns from a portfolio of leveraged
investments. The Company currently pursues investment and lending opportunities
designed to capitalize on inefficiencies in the real estate capital, mortgage
and finance markets. The Company also earns revenue from its real estate
investment banking, investment and management services.
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The Company's investment program emphasizes, but is not limited to, the
following general categories of real estate and finance-related assets:
o Mortgage Loans. The Company pursues opportunities to originate and fund
senior and junior mortgage loans ("Mortgage Loans") to commercial real
estate owners and property developers who require interim financing
until permanent financing can be obtained. The Company's Mortgage Loans
are generally not intended to be permanent in nature, but rather are
intended to be of a relatively short-term duration, with extension
options as deemed appropriate, and typically require a balloon payment
of principal at maturity. The Company may also originate and fund
permanent Mortgage Loans in which the Company intends to sell the senior
tranche, thereby creating a Mezzanine Loan.
o Mezzanine Loans. The Company originates high-yielding loans that are
subordinate to first lien mortgage loans on commercial real estate and
are secured either by a second lien mortgage or a pledge of the
ownership interests in the borrowing property owner. Alternatively, the
Company's mezzanine loans can take the form of a preferred equity
investment in the borrower with substantially similar terms
(collectively, "Mezzanine Loans"). Generally, the Company's Mezzanine
Loans have a longer anticipated duration than its Mortgage Loans and are
not intended to serve as transitional mortgage financing.
o Subordinated Interests. The Company pursues rated and unrated
investments in public and private subordinated interests ("Subordinated
Interests") in commercial collateralized mortgage obligations ("CMOs" or
"CMO Bonds") and other CMBS.
o Other Investments. The Company intends to assemble an investment
portfolio of commercial real estate and finance-related assets meeting
the Company's target risk/return profile. The Company is not limited in
the kinds of commercial real estate and finance-related assets in which
it can invest and believes that it is positioned to expand
opportunistically its financing business. The Company may pursue
investments in, among other assets, construction loans, distressed
mortgages, foreign real estate and finance-related assets, operating
companies, including loan origination and loan servicing companies, and
fee interests in real property (collectively, "Other Investments").
The Company seeks to maximize yield through the use of leverage, consistent
with maintaining an acceptable level of risk. Although there may be limits to
the leverage that can be applied to certain of the Company's investments, the
Company does not intend to exceed a debt-to-equity ratio of 5:1. At December 31,
1997, the Company's debt-to-equity ratio was 1.17:1.
Other than restrictions which result from the Company's intent to avoid
regulation under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), the Company is not subject to any restrictions on the particular
percentage of its portfolio invested in any of the above-referenced asset
classes, nor is it limited in the kinds of assets in which it can invest. The
Company has no predetermined limitations or targets for concentration of asset
type or geographic location. Instead of adhering to any prescribed limits or
targets, the Company makes acquisition decisions through asset and collateral
analysis, evaluating investment risks on a case-by-case basis. To the extent
that the Company's assets become concentrated in a few states or a particular
region, the Company's return on investment will become more dependent on the
economy of such states or region. Until appropriate investments are made, cash
available for investment may be invested in readily marketable securities or in
interest-bearing deposit accounts.
Principal Investment Categories
The discussion below describes the principal categories of assets
emphasized in the Company's current business plan.
Mortgage Loans. The Company actively pursues opportunities to originate and
fund Mortgage Loans to real estate owners and property developers who need
interim financing until permanent financing can be obtained. The Company's
Mortgage Loans generally are not intended to be "permanent" in nature, but
rather are intended to be of a relatively short-term duration, with extension
options as deemed appropriate, and generally require a balloon payment at
maturity. These types of loans are intended to be higher-
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yielding loans with higher interest rates and commitment fees. Property owners
or developers in the market for these types of loans include, but are not
limited to, promoters of pre-formation REITs desiring to acquire attractive
properties to contribute to the REIT before the formation process is complete,
traditional property owners and operators who desire to acquire a property
before it has received a commitment for a long-term mortgage from a traditional
commercial mortgage lender, or a property owner or investor who has an
opportunity to purchase its existing mortgage debt or third party mortgage debt
at a discount; in each instance, the Company's loan would be secured by a
Mortgage Loan. The Company may also originate traditional, long-term mortgage
loans and, in doing so, would compete with traditional commercial mortgage
lenders. In pursuing such a strategy, the Company generally intends to sell or
refinance the senior portion of the mortgage loan, individually or in a pool,
and retain a Mezzanine Loan. In addition, the Company believes that, as a result
of the recent increase in commercial real estate securitizations, there are
attractive opportunities to originate short-term bridge loans to owners of
mortgaged properties that are temporarily prevented as a result of timing and
structural reasons from securing long-term mortgage financing through
securitization.
Mezzanine Loans. The Company seeks to take advantage of opportunities to
provide mezzanine financing on commercial property that is subject to first lien
mortgage debt. The Company believes that there is a growing need for mezzanine
capital (i.e., capital representing the level between 65% and 90% of property
value) as a result of current commercial mortgage lending practices setting
loan-to-value targets as low as 65%. The Company's mezzanine financing takes the
form of subordinated loans, commonly known as second mortgages, or, in the case
of loans originated for securitization, partnership loans (also known as pledge
loans) or preferred equity investments. For example, on a commercial property
subject to a first lien mortgage loan with a principal balance equal to 70% of
the value of the property, the Company could lend the owner of the property
(typically a partnership) an additional 15% to 20% of the value of the property.
The Company believes that as a result of (i) the significant changes in the
lending practices of traditional commercial real estate lenders, primarily
relating to more conservative loan-to-value ratios, and (ii) the significant
increase in securitized lending with strict loan-to-value ratios imposed by the
rating agencies, there will continue to be an increasing demand for mezzanine
capital by property owners.
Typically in a Mezzanine Loan, as security for its debt to the Company, the
property owner would pledge to the Company either the property subject to the
first lien (giving the Company a second lien position typically subject to an
inter-creditor agreement) or the limited partnership and/or general partnership
interest in the owner. If the owner's general partnership interest is pledged,
then the Company would be in a position to take over the operation of the
property in the event of a default by the owner. By borrowing against the
additional value in their properties, the property owners obtain an additional
level of liquidity to apply to property improvements or alternative uses.
Mezzanine Loans generally provide the Company with the right to receive a stated
interest rate on the loan balance plus various commitment and/or exit fees. In
certain instances, the Company may negotiate to receive a percentage of net
operating income or gross revenues from the property, payable to the Company on
an ongoing basis, and a percentage of any increase in value of the property,
payable upon maturity or refinancing of the loan, or the Company will otherwise
seek terms to allow the Company to charge an interest rate that would provide an
attractive risk-adjusted return. Alternatively, the Mezzanine Loans can take the
form of a non-voting preferred equity investment in a single purpose entity
borrower with substantially similar terms.
In connection with its mezzanine lending and investing activities, the
Company may elect to pursue strategic alliances with lenders such as commercial
banks and Wall Street conduits who do not have a mezzanine lending capability
and are therefore perceived to be at a competitive disadvantage. The Company
believes that such alliances could accelerate the Company's loan origination
volume, assist in performing underwriting due diligence and reduce potential
overhead.
Subordinated Interests. The Company acquires rated and unrated Subordinated
Interests in commercial mortgage-backed securities issued in public or private
transactions. CMBS typically are divided into two or more classes, sometimes
called "tranches." The senior classes are higher "rated" securities, which are
rated from low investment grade ("BBB") to higher investment grade ("AA" or
"AAA"). The junior, subordinated classes typically include a lower rated,
non-investment grade "BB" and "B" class, and an unrated, high yielding, credit
support class (which generally is required to absorb the first losses on the
underlying mortgage loans). The Company currently invests in the non-investment
grade tranches of Subordinated Interests. The Company may pursue the acquisition
of performing and non-performing (i.e., defaulted) Subordinated Interests. CMBS
generally are issued either as CMOs or pass-
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through certificates that are not guaranteed by an entity having the credit
status of a governmental agency or instrumentality, although they generally are
structured with one or more of the types of credit enhancement arrangements to
reduce credit risk. In addition, CMBS may be illiquid.
The credit quality of CMBS depends on the credit quality of the underlying
mortgage loans forming the collateral for the securities. CMBS are backed
generally by a limited number of commercial or multifamily mortgage loans with
larger principal balances than those of single family mortgage loans. As a
result, a loss on a single mortgage loan underlying a CMBS will have a greater
negative effect on the yield of such CMBS, especially the Subordinated Interests
in such CMBS.
Before acquiring Subordinated Interests, the Company performs certain
credit underwriting and stress testing to attempt to evaluate future performance
of the mortgage collateral supporting such CMBS, including (i) a review of the
underwriting criteria used in making mortgage loans comprising the Mortgage
Collateral for the CMBS, (ii) a review of the relative principal amounts of the
loans, their loan-to-value ratios as well as the mortgage loans' purpose and
documentation, (iii) where available, a review of the historical performance of
the loans originated by the particular originator and (iv) some level of
re-underwriting the underlying mortgage loans, including, selected site visits.
Unlike the owner of mortgage loans, the owner of Subordinated Interests in
CMBS ordinarily does not control the servicing of the underlying mortgage loans.
In this regard, the Company attempts to negotiate for the right to cure any
defaults on senior CMBS classes and for the right to acquire such senior classes
in the event of a default or for other similar arrangements. The Company may
also seek to acquire rights to service defaulted mortgage loans, including
rights to control the oversight and management of the resolution of such
mortgage loans by workout or modification of loan provisions, foreclosure, deed
in lieu of foreclosure or otherwise, and to control decisions with respect to
the preservation of the collateral generally, including property management and
maintenance decisions ("Special Servicing Rights") with respect to the mortgage
loans underlying CMBS in which the Company owns a Subordinated Interest. Such
rights to cure defaults and Special Servicing Rights may give the Company, for
example, some control over the timing of foreclosures on such mortgage loans
and, thus, may enable the Company to reduce losses on such mortgage loans. The
Company is currently a special servicer with respect to one of its Subordinated
Interest investments, but is not currently a rated special servicer. The Company
may seek to become rated as a special servicer, or acquire a rated special
servicer. Until the Company can act as a rated special servicer, it will be
difficult to obtain Special Servicing Rights with respect to the mortgage loans
underlying Subordinated Interests. Although the Company's strategy is to
purchase Subordinated Interests at a price designed to return the Company's
investment and generate a profit thereon, there can be no assurance that such
goal will be met or, indeed, that the Company's investment in a Subordinated
Interest will be returned in full or at all.
The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act generally exempts entities
that are "primarily engaged in purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate" ("Qualifying Interests"). The
Company intends to rely on current interpretations by the staff of the
Commission in an effort to qualify for this exemption. To comply with the
foregoing guidance, the Company, among other things, must maintain at least 55%
of its assets in Qualifying Interests and also may be required to maintain an
additional 25% in Qualifying Interests or other real estate-related assets.
Generally, the Mortgage Loans and certain of the Mezzanine Loans in which the
Company may invest constitute Qualifying Interests. While Subordinated Interests
generally do not constitute Qualifying Interests, the Company may seek to
structure such investments in a manner where the Company believes such
Subordinated Interests may constitute Qualifying Interests. The Company may
seek, where appropriate, (i) to obtain foreclosure rights or other similar
arrangements (including obtaining Special Servicing Rights before or after
acquiring or becoming a rated special servicer) with respect to the underlying
mortgage loans, although there can be no assurance that it will be able to do so
on acceptable terms or (ii) to acquire Subordinated Interests collateralized by
whole pools of mortgage loans. As a result of obtaining such rights or whole
pools of mortgage loans as collateral, the Company believes that the related
Subordinated Interests will constitute Qualifying Interests for purposes of the
Investment Company Act. The Company does not intend, however, to seek an
exemptive order, no-action letter or other form of interpretive guidance from
the Commission or its staff on this position. Any decision by the Commission or
its staff advancing a position with respect to whether such Subordinated
Interests constitute Qualifying
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Interests that differs from the position taken by the Company could have a
material adverse effect on the Company.
Other Investments. The Company may also pursue a variety of complementary
commercial real estate and finance-related businesses and investments in
furtherance of executing its current business plan. Such activities include, but
are not limited to, investments in other classes of mortgage-backed securities,
financial asset securitization investment trusts ("FASITs"), distressed
investing in non-performing and sub-performing loans and fee owned commercial
real property, whole loan acquisition programs, foreign real estate-related
asset investments, note financings, environmentally hazardous lending, operating
company investing/lending, construction and rehabilitation lending and other
types of financing activity. Any lending with regard to the foregoing may be on
a secured or an unsecured basis and will be subject to risks similar to those
attendant to investing in Mortgage Loans, Mezzanine Loans and Subordinated
Interests. The Company seeks to maximize yield by managing credit risk by
employing its credit underwriting procedures, although there can be no assurance
that the Company will be successful in this regard. The Company is actively
investigating potential business acquisition opportunities that it believes will
complement the Company's operations including firms engaged in commercial loan
origination, loan servicing, mortgage banking, financing activities, real estate
loan and property acquisitions and real estate investment banking and advisory
services similar to or related to the services provided by the Company. No
assurance can be given that any such transactions will be negotiated or
completed or that any business acquired can be efficiently integrated with the
Company's ongoing operations.
Portfolio Management
The following describes some of the portfolio management practices that the
Company may employ from time to time to earn income, facilitate portfolio
management (including managing the effect of maturity or interest rate
sensitivity) and mitigate risk (such as the risk of changes in interest rates).
There can be no assurance that the Company will not amend or deviate from these
policies or adopt other policies in the future.
Leverage and Borrowing. The success of the Company's current business plan
is dependent upon the Company's ability to grow its portfolio of invested assets
through the use of leverage. The Company intends to leverage its assets through
the use of, among other things, bank credit facilities including the Credit
Facility, secured and unsecured borrowings, repurchase agreements and other
borrowings, when there is an expectation that such leverage will benefit the
Company; such borrowings may have recourse to the Company in the form of
guarantees or other obligations. If changes in market conditions cause the cost
of such financing to increase relative to the income that can be derived from
investments made with the proceeds thereof, the Company may reduce the amount of
leverage it utilizes. Obtaining the leverage required to execute the current
business plan will require the Company to maintain interest coverage ratios and
other covenants meeting market underwriting standards. In leveraging its
portfolio, the Company plans not to exceed a debt-to-equity ratio of 5:1. The
Company has also agreed it will not incur any indebtedness if the Company's
debt-to-equity ratio would exceed 5:1 without the prior written consent of the
holders of a majority of the outstanding Class A Preferred Shares.
Leverage creates an opportunity for increased income, but at the same time
creates special risks. For example, leveraging magnifies changes in the net
worth of the Company. Although the amount owed will be fixed, the Company's
assets may change in value during the time the debt is outstanding. Leverage
will create interest expense for the Company that can exceed the revenues from
the assets retained. To the extent the revenues derived from assets acquired
with borrowed funds exceed the interest expense the Company will have to pay,
the Company's net income will be greater than if borrowing had not been used.
Conversely, if the revenues from the assets acquired with borrowed funds are not
sufficient to cover the cost of borrowing, the net income of the Company will be
less than if borrowing had not been used.
In order to grow and enhance its return on equity, the Company currently
utilizes two sources for liquidity and leverage: the Credit Facility and
repurchase agreements.
Credit Facility. As previously discussed, the Company entered into the
Credit Facility with a commercial lender in September 1997 that provides for a
three-year $150 million line of credit. The Credit Facility provides for
advances to fund lender-approved loans and investments made by the Company
("Funded Portfolio Assets").
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The obligations of the Company under the Credit Facility are to be secured
by pledges of the Funded Portfolio Assets acquired with advances under the
Credit Facility. Borrowings under the Credit Facility bear interest at specified
rates over LIBOR, which rate may fluctuate based upon the credit quality of the
Funded Portfolio Assets. Upon the signing of the credit agreement, a commitment
fee was due and when the total borrowings under the agreement exceed $75
million, an additional fee is due. In addition, each advance requires payment of
a drawdown fee. The Credit Facility provides for margin calls on asset-specific
borrowings in the event of asset quality and/or market value deterioration as
determined under the credit agreement. The Credit Facility contains customary
representations and warranties, covenants and conditions and events of default.
The Credit Facility also contains a covenant obligating the Company to avoid
undergoing an ownership change that results in Craig M. Hatkoff, John R. Klopp
or Samuel Zell no longer retaining their senior offices and trusteeships with
the Company and practical control of the Company's business and operations.
On December 31, 1997, the unused Credit Facility amounted to $70.1 million
providing the Company with adequate liquidity for its short term needs.
Repurchase Agreements. The Company has entered into four repurchase
agreements and may enter into other such agreements under which the Company
would sell assets to a third party with the commitment that the Company
repurchase such assets from the purchaser at a fixed price on an agreed date.
Repurchase agreements may be characterized as loans to the Company from the
other party that are secured by the underlying assets. The repurchase price
reflects the purchase price plus an agreed market rate of interest, which is
generally paid on a monthly basis.
Interest Rate Management Techniques
The Company has engaged in and will continue to engage in a variety of
interest rate management techniques for the purpose of managing the effective
maturity or interest rate of its assets and/or liabilities. These techniques
also may be used to attempt to protect against declines in the market value of
the Company's assets resulting from general trends in debt markets. Any such
transaction is subject to risks and may limit the potential earnings on the
Company's investments in real estate-related assets. Such techniques include
interest rate swaps (the exchange of fixed rate payments for floating-rate
payments) and interest rate caps. The Company uses interest rate swaps and
interest rate caps to hedge mismatches in interest rate maturities, to reduce
the Company's exposure to interest rate fluctuations and to provide more stable
spreads between investment yields and the rates on their financing sources.
Amounts arising from the differential are recognized as an adjustment to
interest income related to the earning asset. In June 1998, The FASB issued
statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), effective for fiscal years beginning after June
15, 1999, although earlier application is permitted. The adoption of SFAS No.
133 is not expected to have a material impact on the Company's business strategy
or financial reporting.
Real Estate Investment Banking, Advisory and Asset Management Services
The Company provides real estate investment banking, advisory and asset
management services through its Victor Capital subsidiary, which commenced
operations in 1989. Victor Capital provides such services to an extensive client
roster of real estate investors, owners, developers and financial institutions
in connection with mortgage financings, securitizations, joint ventures, debt
and equity investments, mergers and acquisitions, portfolio evaluations,
restructurings and disposition programs. Victor Capital's senior professionals
average 16 years of experience in the real estate financial services industry.
Real Estate Investment Banking and Advisory Services. Victor Capital
provides an array of real estate investment banking and advisory services to a
variety of clients such as financial institutions, including banks and insurance
companies, public and private owners of commercial real estate, creditor
committees and investment funds. In such transactions, Victor Capital typically
negotiates for a retainer and/or a monthly fee plus disbursements; these fees
are typically applied against a success-oriented fee, which is based on
achieving the client's goals. While dependent upon the size and complexity of
the transaction, Victor Capital's fees for capital raising assignments are
generally in the range of 0.5% to 3% of the total amount of debt and equity
raised. For pure real estate advisory assignments, a fee is typically negotiated
in advance and can take the form of a flat fee or a monthly retainer. In certain
instances, Victor Capital
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negotiates for the right to receive a portion of its compensation in-kind, such
as the receipt of stock in a publicly traded company.
Real Estate Asset Management Services. Victor Capital provides its real
estate asset management services primarily to institutional investors such as
public and private money management firms. Victor
Capital's services may include the identification and acquisition of specific
mortgage loans and/or properties and the management and disposition of these
assets. As of the date hereof, Victor Capital had seven such assignments
representing an asset value of approximately $1 billion and of approximately 7
million square feet.
Factors which may Affect the Company's Business Strategy
The success of the Company's business strategy depends in part on important
factors, many of which are not within the control of the Company. The
availability of desirable loan and investment opportunities and the results of
the Company's operations will be affected by the amount of available capital,
the level and volatility of interest rates, conditions in the financial markets
and general economic conditions. There can be no assurances as to the effects of
unanticipated changes in any of the foregoing. The Company's business strategy
also depends on the ability to grow its portfolio of invested assets through the
use of leverage. There can be no assurance that the Company will be able to
obtain and maintain targeted levels of leverage or that the cost of debt
financing will increase relative to the income generated from the assets
acquired with such financing and cause the Company to reduce the amount of
leverage it utilizes. The Company risks the loss of some or all of its assets or
a financial loss if the Company is required to liquidate assets at a
commercially inopportune time.
The Company confronts the prospect that competition from other providers of
mezzanine capital may lead to a lowering of the interest rates earned on the
Company's interest-earning assets that may not be offset by lower borrowing
costs. Changes in interest rates are also affected by the rate of inflation
prevailing in the economy. A significant reduction in interest rates could
increase prepayment rates and thereby reduce the projected average life of the
Company's CMBS investments. While the Company may employ various hedging
strategies, there can be no assurance that the Company would not be adversely
affected during any period of changing interest rates. In addition, many of the
Company's assets will be at risk to the deterioration in or total losses of the
underlying real property securing the assets, which may not be adequately
covered by insurance necessary to restore the Company's economic position with
respect to the affected property.
Competition
The Company is engaged in a highly competitive business. The Company
competes for loan and investment opportunities with many new entrants into the
specialty finance business emphasized in its current business plan, including
numerous public and private real estate investment vehicles, including financial
institutions (such as mortgage banks, pension funds, and REITs) and other
institutional investors, as well as individuals. Many competitors are
significantly larger than the Company, have well established operating histories
and may have access to greater capital and other resources. In addition, the
real estate services industry is highly competitive and there are numerous
well-established competitors possessing substantially greater financial,
marketing, personnel and other resources than Victor Capital. Victor Capital
competes with national, regional and local real estate service firms.
Government Regulation
Capital Trust's activities, including the financing of its operations, are
subject to a variety of federal and state regulations such as those imposed by
the Federal Trade Commission and the Equal Credit Opportunity Act. In addition,
a majority of states have ceilings on interest rates chargeable to customers in
financing transactions.
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Employees
As of December 31, 1997, the Company employed 23 full-time professionals
and six other full-time employees. None of the Company's employees are covered
by a collective bargaining agreement and management considers the relationship
with its employees to be good.
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Item 2. Properties
- --------------------------------------------------------------------------------
The Company's principal executive and administrative offices are located in
approximately 18,700 square feet of office space leased at 605 Third Avenue,
26th Floor, New York, New York 10016 and its telephone number is (212) 655-0220.
The lease for such space expires in April 2000. The Company believes that this
office space is suitable for its current operations for the foreseeable future.
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Item 3. Legal Proceedings
- --------------------------------------------------------------------------------
The Company is not a party to any material litigation or legal proceedings,
or to the best of its knowledge, any threatened litigation or legal proceedings,
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.
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Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
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PART II
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Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters
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Capital Trust's Shares are listed on the New York Stock Exchange ("NYSE)
and the Pacific Stock Exchange. The trading symbol for Capital Trust's Class A
Common Shares is "CT". The Trust had approximately 1,577 shareholders-of-record
at February 20, 1998.
The table below sets forth, for the calendar quarters indicated, the
reported high and low sale prices of the Company's Class A Common Shares and the
Company's common shares of beneficial interest, $1.00 par value (the "Old Common
Shares"), which were reclassified as the Class A Common Shares on July 15, 1997
in connection with the adoption of the Company's Amended and Restated
Declaration of Trust (the "Restated Declaration"), as reported on the NYSE based
on published financial sources.
High Low
1995
First Quarter............................... $ 1 7/8 $ 1 5/8
Second Quarter.............................. 1 7/8 1 1/2
Third Quarter............................... 1 7/8 1 1/2
Fourth Quarter.............................. 1 5/8 1 1/8
1996
First Quarter............................... 1 1/2 1 1/8
Second Quarter.............................. 1 7/8 1 3/8
Third Quarter............................... 2 3/4 1 5/8
Fourth Quarter.............................. 2 7/8 1 7/8
1997
First Quarter............................... 6 7/8 2 5/8
Second Quarter.............................. 6 1/8 4 1/2
Third Quarter............................... 11 3/8 5 3/4
Fourth Quarter.............................. 15 1/8 9 13/16
The Company paid no dividends to holders of Class A Common Shares (or Old
Common Shares) in 1997 and 1996.
The Company does not expect to declare or pay dividends on its Class A
Common Shares in the foreseeable future. The Company's current policy with
respect to dividends is to reinvest earnings to the extent that such earnings
are in excess of the dividend requirements on the Class A Preferred Shares.
Pursuant to the certificate of designation, preferences and rights (the
"Certificate of Designation") of the class A 9.5% cumulative preferred shares of
beneficial interest, $1.00 par value (the "Class A Preferred Shares"), and the
class B 9.5% cumulative preferred shares of beneficial interest, $1.00 par value
(the "Class B Preferred Shares and together with the Class A Preferred Shares,
the Preferred Shares"), in the Company unless all accrued dividends and other
amounts then accrued through the end of the last dividend period and unpaid with
respect to the Preferred Shares have been paid in full, the Company may not
declare or pay or set apart for payment any dividends on the Class A Common
Shares or Class B Common Shares. The Certificate of Designation provides for a
semi-annual dividend of $0.1278 per share on the Class A Preferred Shares based
on a dividend rate of 9.5%, amounting to an aggregate annual dividend of
$3,135,000 based on the 12,267,658 shares of Class A Preferred Shares currently
outstanding. There are no Class B Preferred Shares currently outstanding.
11
<PAGE>
- --------------------------------------------------------------------------------
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------
Prior to July 1997, the Company operated as a REIT, originating, acquiring,
operating or holding income-producing real property and mortgage-related
investments. Therefore, the Company's historical financial information as of and
for the years ended December 31, 1996, 1995, 1994, and 1993 does not reflect any
operating results from its specialty finance or real estate investment banking
services operations. The following selected financial data relating to the
Company have been derived from the historical financial statements as of and for
the years ended December 31, 1997, 1996, 1995, 1994, and 1993. Other than the
data for the year ended December 31, 1997, none of the following data reflect
the results of the acquisition of Victor Capital and the issuance of 12,267,658
Class A Preferred Shares for $33 million, both of which occurred on July 15,
1997, or the Offering completed in December 1997. For these reasons, the Company
believes that the following information is not indicative of the Company's
current business.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ------------------------ -----------
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Interest and investment income............ $6,445 $ 1,136 $1,396 $ 1,675 $ 924
Advisory and asset management fees........ 1,698 -- -- -- --
Rental income............................. 307 2,019 2,093 2,593 4,555
Gain (loss) on sale of investments........ (432) 1,069 66 (218) 131
Other..................................... -- -- 46 519 --
------------ ----------- ------------------------ -----------
Total revenues......................... 8,018 4,224 3,601 4,569 5,610
------------ ----------- ------------------------ -----------
OPERATING EXPENSES:
Interest.................................. 2,379 547 815 1,044 1,487
General and administrative................ 9,463 1,503 933 813 662
Rental property expenses.................. 124 781 688 2,034 2,797
Provision for possible credit losses...... 462 1,743 3,281 119 7,928
Depreciation and amortization............. 92 64 662 595 847
------------ ----------- ------------------------ -----------
Total operating expenses............... 12,520 4,638 6,379 4,605 13,721
------------ ----------- ------------------------ -----------
Loss before income tax expense............ (4,502) (414) (2,778) (36) (8,111)
Income tax expense (55) -- -- -- --
------------ ----------- ------------------------ -----------
NET LOSS.................................. (4,557) (414) (2,778) (36) (8,111)
Less: Class A Preferred Share dividend and
dividend requirement................... (1,471) -- -- -- --
------------ ----------- ------------------------ -----------
Net loss allocable to Class A Common Shares $(6,028) $ (414) $(2,778) $ (36) $(8,111)
============ =========== ======================== ===========
PER SHARE INFORMATION:
Net loss per Class A Common Share, basic $ (0.63) $ (0.05) $ (0.30) $ (0.00) $ (0.88)
and diluted.............................
============ =========== ======================== ===========
Weighted average Class A Common Shares
outstanding, basic and diluted.......... 9,527 9,157 9,157 9,157 9,165
============ =========== ======================== ===========
As of December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ------------------------ -----------
BALANCE SHEET DATA:
Total assets............................... $317,366 $30,036 $33,532 $36,540 $42,194
Total liabilities.......................... 174,077 5,565 8,625 8,855 13,583
Shareholders' equity....................... 143,289 24,471 24,907 27,685 28,611
</TABLE>
The average net loss per Class A Common Share amounts prior to 1997 have
been restated as required to comply with Statement of Financial Standards No.
128, "Earnings per Share" ("Statement No. 128"). For further discussion of
Earnings per Class A Common Share and the impact of Statement No. 128, see Note
3 to the Company's consolidated financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Overview
Prior to July 1997, the Company operated as a REIT, originating, acquiring,
operating or holding income-producing real property and mortgage-related
investments. Since the Company's 1997 annual meeting of shareholders held on
July 15, 1997 (the "1997 Annual Meeting"), the Company has pursued a new
strategic direction with a focus on becoming a specialty finance company
designed primarily to take advantage of high-yielding mezzanine investments and
other real estate asset and finance opportunities in commercial real estate. As
contemplated by its new business plan, the Company no longer qualifies for
treatment as a REIT for federal income tax purposes. Consequently, the
information set forth below with regard to historical results of operations for
the years ended December 31, 1996 and 1995 does not reflect any operating
results from the Company's specialty finance activities or real estate
investment banking services nor the Company's current loan and other investment
portfolio. The results for the year ended December 31, 1997 reflect partial
implementation of the Company's current business plan as discussed below.
The discussion contained herein gives effect to the reclassification on
July 15, 1997 of the Old Common Shares as Class A Common Shares.
Recent Developments Preceding Implementation of the New Business Plan
On January 3, 1997, CRIL, an affiliate of 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
presented to the Company's then-incumbent Board of Trustees a proposed new
business plan in which the Company would cease to be a REIT and instead become a
specialty finance company designed primarily to take advantage of high-yielding
mezzanine investment and other real estate asset opportunities in commercial
real estate. EGI and Victor Capital also proposed that they provide the Company
with a new management team to implement the business plan and that they invest
through an affiliate a minimum of $30.0 million in a new class of preferred
shares to be issued by the Company.
The Board of Trustees approved CRIL's purchase of the former parent's Class
A Common Shares, the new business plan and the issuance of a minimum of $30.0
million of a new class of preferred shares of the Company at $2.69 per share,
such shares to be convertible into Class A Common Shares of the Company on a
one-for-one basis. The Board of Trustees considered a number of factors in
approving the foregoing, including the attractiveness of the proposed new
business plan, the significant real estate investment and financing experience
of the proposed new management team and the significant amount of equity capital
the Company would obtain from the proposed preferred share investment. The Board
also considered the terms of previous alternative offers to purchase the former
parent's interest in the Company of which the Board was aware and the fact that
the average price of the Company's Old Common Shares during the 60 trading days
preceding the Board of Trustees meeting at which the proposed preferred equity
investment was approved was $2.38 per share. The Company subsequently agreed
that, concurrently with the consummation of the proposed preferred equity
investment, it would acquire for $5.0 million Victor Capital's real estate
investment banking, advisory and asset management businesses, including the
services of its experienced management team.
At the 1997 Annual Meeting, 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 Preferred Shares to Veqtor, an affiliate
of Samuel Zell and the principals of Victor Capital (the "Investment"). The
Company's shareholders also approved the Restated Declaration, which, among
other things, reclassified the Company's Old Common Shares as Class A Common
Shares and changed the Company's name to "Capital Trust."
13
<PAGE>
Immediately following the 1997 Annual Meeting, the Investment was
consummated; 12,267,658 Class A Preferred Shares were sold to Veqtor for an
aggregate purchase price of $33,000,000 pursuant to the terms of the preferred
share purchase agreement, dated as of June 16, 1997, by and between the Company
and Veqtor. Concurrently with the foregoing transaction, Veqtor purchased the
6,959,593 Class A Common Shares held by CRIL for an aggregate purchase price of
approximately $21.3 million. As a result of these transactions, currently,
Veqtor beneficially owns 19,227,251 (or approximately 63%) of the outstanding
voting shares of the Company. Veqtor funded the approximately $54.3 million
aggregate purchase price for the Class A Common Shares and Class A Preferred
Shares with $5.0 million of capital contributions from its members and $50.0
million of borrowings under the 12% convertible redeemable notes (the "Veqtor
Notes") issued to four 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.
Overview of Financial Condition Following Implementation of the New Business
Plan
During 1997, the Company completed two significant equity capital raising
share issuance transactions and obtained its $150 million Credit Facility that
enabled the Company to grow its assets from $30.0 million to $317.4 million. On
July 15, 1997, the Company sold 12,267,658 Class A Preferred Shares to Veqtor
resulting in net proceeds to the Company of approximately $32.9 million. As of
September 30, 1997, the Company obtained the $150 million Credit Facility. On
December 16, 1997, the Company sold 9,000,000 Class A Common Shares in the
Offering resulting in net proceeds to the Company of approximately $91.4
million. This significant infusion of cash allowed the Company to fully
implement its current business plan as a specialty finance company. The Company
used a combination of its additional capital and borrowings under the Credit
Facility to make the investments described in the following paragraph.
Since June 30, 1997, the Company has identified, negotiated and committed
to fund or acquire twelve loan and investment transactions, including six
Mortgage Loans totaling $169.7 million (including unfunded commitments of $26.9
million which remain outstanding), five Mezzanine Loans totaling $75.0 million
and one CMBS subordinated interest investment for $49.6 million. 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 December 31, 1997, the
Company had loans and investments totaling in excess of $250 million outstanding
resulting from transactions completed since the implementation of its current
business plan and had existing commitments for approximately $26.9 million of
additional funding under certain of the loans originated in such transactions.
The Company received satisfaction on a Mortgage loan for $9.8 million and
sold portions of two Mortgage loans for $10.0 million (net of repurchases) and a
paid a premium of $1.4 million to acquire one Mortgage loan. The Company also
paid premiums totaling $1.4 million to acquire two Mezzanine loans and received
payments of $100,000 on the CMBS subordinated interest investment.
When possible, in connection with the acquisition of investments, the
Company obtains seller financing in the form of repurchase agreements. Three of
the transactions described in the above paragraph were financed in this manner
for a total of $72.7 million. These financings are generally completed at
discounted terms from those available under the Credit Facility. The remaining
transactions were funded with cash on hand from the proceeds of the sale of the
Company's shares and through borrowings under the Credit Facility. At December
31, 1997, the Company had $79.9 million of outstanding borrowings under the
Credit Facility.
14
<PAGE>
As of December 31, 1997, 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. The Company has entered into interest rate swap
agreements for notional amounts totaling approximately $49.9 million with
financial institution counterparties whereby the Company swapped fixed rate
instruments, which averages approximately 6.14%, for floating rate instruments
based on the London Interbank Offered Rate ("LIBOR"). The agreements mature at
varying times from December 1998 to April 2006.
Results of Operations
Total Revenues. Total revenues were $8,450,000 in 1997, an increase from
$3,155,000 in 1996, which were down from $3,535,000 in 1995. The increase in
1997 was due to the implementation of the Company's current business plan in the
second half of the year. The Company began to collect interest on loans and
investments originated or acquired during this period and began to generate
advisory and management fees from its newly acquired subsidiary, Victor Capital.
The Company also generated additional interest income from bank deposits over
the amount earned the previous year due to significant cash balances on hand
from the sale of Class A Preferred Shares in the Investment and Class A Common
Shares in the Offering. These increases were offset by a decrease in rental
income resulting from the disposition of all rental properties during 1996 and
1997. The decrease reported in 1996 was primarily attributable to a decrease in
interest revenue as a result of the liquidation of a portion of the Company's
note portfolio and decreased rental revenues.
Interest and related income from loans and other investments was
$4,992,000, up from $470,000 in 1996, which was down from $1,148,000 in 1995.
The increase in 1997 was due to the implementation of the Company's business
plan in the second half of the year when the Company began to collect interest
on loans and investments made during this period. The decrease in 1996 was the
result of a lower amount of interest received due to the sale of certain
mortgage notes.
Rental revenues at the Company's commercial properties were $307,000, down
from $2,019,000 in 1996, which were down from $2,093,000 in 1995. The decrease
in 1997 from that received in 1996 was due to the sale of the properties during
1996 and 1997 which were generating the income. The decrease in rental revenues
reported in 1996 was attributable primarily to the absence of rent collected at
the two properties that were sold in the first half of 1996. No rental revenues
were generated by the Company's hotel property in 1996, which was foreclosed
upon after the Company suspended debt service payments.
Other interest income was $1,453,000 in 1997, up from $666,000 in 1996,
which was up from $248,000 in 1995. The increase in 1997 was a result of the
Company generating additional interest income from bank deposits due to
significant cash balances on hand from sale of Class A Preferred Shares in the
Investment and Class A Common Shares in the Offering. The increase in 1996 was
created by an increase in interest earned on cash accounts and marketable
securities, the additional cash balances generated from the sale of several
rental properties and notes receivable.
Total Expenses. Total expenses were $12,058,000, up from $2,895,000 in
1996, which was down from $3,098,000 in 1995. In 1997, total expenses were up
due primarily to a $7,960,000 increase in general and administrative expenses
from the implementation of the current business plan and the related hiring of
executive officers and employees, principally from the ranks of Victor Capital,
following the acquisition thereof. The reduction in expenses in 1996 was
primarily the result of the downsizing of the Company's portfolio, which reduced
depreciation, interest expense and associated property operating expenses.
Interest and related expense from loans and other investments was
$2,223,000, up from $86,000 in 1996, which was down from $370,000 in 1995. The
increase in 1997 was due to an increase in borrowing under the Company's Credit
Facility and repurchase agreements to fund new loans and investments made in the
second half of 1997. The decrease in 1996 was the result of a lower amount of
interest received due to the sale of certain mortgage notes offset by an
increase in interest earned on cash accounts and marketable securities.
15
<PAGE>
Other interest expense was $156,000 in 1997, down from $461,000 in 1996,
which was consistent with the $445,000 amount in 1994. The decrease in 1997 from
the amounts in 1996 and 1995 resulted from the elimination of mortgage debt upon
sale of the Totem Square property.
General and administrative expenses were $9,463,000 in 1997, up
significantly from $1,503,000 in 1996. General and administrative expenses in
1996 were up from the $933,000 reported in 1995. The increase in general and
administrative costs in 1997 was due primarily to the addition of the new
executive officers and employees hired in 1997 whose salaries and benefits
totaled more than $5 million. The Company also incurred significant
non-recurring professional fees (an increase of more than $2 million over the
fees incurred in 1996) in conjunction with the reconstitution of the Company,
the termination of its REIT status and the implementation of its current
business plan. While the Company was able to lower a number of office expenses
in 1996, a net increase in general and administrative costs occurred due
primarily to an accelerated investigation of potential merger or acquisition
transactions plus related due diligence costs.
The 1997 non-cash depreciation charge was $92,000, an increase from $64,000
in 1996, which charge decreased in 1996 compared to the depreciation charge of
$662,000 in 1995. The increase in 1997 came as a result of the Company
purchasing additional equipment and leasehold improvements to its newly leased
office space in New York City. The decrease in 1996 reflected the sale of two
properties and the disposition of the hotel property. In addition, the Company's
two remaining properties were not depreciated in 1996 because they were being
held for sale.
Rental property expenses were relatively consistent when comparing 1995 to
1996 but decreased significantly, by $657,000, in 1997 when the remaining rental
properties were sold.
Net Loss. The net loss for the Company in 1997 was $4,557,000. The
significant increase in the loss was a result of the expenses associated with
the Company's hiring activity outpacing its income generation pursuant to the
acquisition of Victor Capital and implementation of its business plan. The net
loss for the Company in 1996 was $414,000, a substantial decrease over the net
loss of $2,778,000 reported in 1995. This improvement was primarily the result
of sales proceeds received by the Company from property and mortgage note
dispositions offset by valuation losses discussed further below.
Net Gain or Loss on Sale of Investments. Net Gain or Loss on Foreclosure or
Sale of Investments was a loss of 432,000 in 1997, a gain of $1,069,000 in 1996
and a gain of $66,000 in 1995. The losses incurred in 1997 were due to the sales
of the two remaining rental properties during the first quarter of 1997.
The net gain recognized from the sale of a property in the first quarter of
1996 was $299,000. There was no gain or loss upon the foreclosure of the motel
property in the first quarter of 1996 as the net book value of the property was
equal to its debt.
During the second quarter of 1996, the Company incurred a net loss of
$164,000 from the sale of a storage facility property. Also during the second
quarter of 1996, the Company sold two of its seven mortgage notes. A gain of
$430,000 was recognized upon the sale of the Company's mortgage note which was
collateralized by a first deed of trust on an office/commercial building in
Phoenix, Arizona; and a gain of $30,000 was recognized upon the sale of the
Company's mortgage note which was collateralized by a second deed of trust on a
commercial building in Pacheco, California. During the third quarter of 1996,
the Company sold two more mortgage notes. A gain of $115,000 was recognized upon
the sale of the Company's mortgage note which was collateralized by a first deed
of trust on an office building in Scottsdale, Arizona; and a gain of $357,000
was recognized upon the sale of the Company's mortgage note which was
collateralized by a second deed of trust on an office/industrial building in
Sunnyvale, California.
In 1995, the Company recognized a deferred gain from the partial principal
payment received on one of its mortgage notes. During the first five months of
1994, the Company's hotel property experienced an average operating loss after
debt service of $107,000 per month. With the execution of a lease with the hotel
management company in 1994, this amount was reduced to approximately $8,600 per
month, the difference between the monthly lease payment of $20,000 and the
property's monthly debt service requirement of $28,600. The lease was
renegotiated in June 1995, reducing the monthly lease payments from $20,000 to
approximately $9,000, increasing the loss recorded by the Company. In 1994, the
16
<PAGE>
Company experienced a gain of $114,000 on the sale of one property and the
recognition of a deferred gain from the partial principal payment on one of its
mortgage notes. This was offset by a $344,000 loss from the release of and
default on two of the Company's mortgage notes held at that time.
Provision for Possible Credit Losses. The provision for possible credit
losses is the charge to income to increase the reserve for possible credit
losses to the level that management estimates to be adequate considering
delinquencies, loss experience and collateral quality. Other factors considered
relate to geographic trends and product diversification, the size of the
portfolio and current economic conditions. Based upon these factors, the Company
establishes the provision for possible credit losses by category of asset. When
it is probable that the Company will be unable to collect all amounts
contractually due, the account is considered impaired. Where impairment is
indicated, a valuation write-down or write-off is measured based upon the excess
of the recorded investment amount over the net fair value of the collateral, as
reduced for selling costs. Any deficiency between the carrying amount of an
asset and the net sales price of repossessed collateral is charged to the
reserve for credit losses.
For the year ended December 31, 1997, the Company recorded a provision for
possible credit losses of $462,000. During 1997, the Company had no known assets
which were considered impaired and as such no significant additional provisions
were necessary. Management believes that the reserve for possible credit losses
is adequate based on the factors detailed above.
For the year ended December 31, 1996, the Company reported a provision for
possible credit losses of $1,743,000. By year end, the Company had reduced the
book value of its Sacramento, California shopping center to $1,215,000 and the
book value of its Kirkland, Washington retail property to $7,370,000. Since
these properties were no longer being held for investment, but rather for sale,
their book value was reduced to more accurately reflect the then-current market
value of the assets. The decline in the shopping center's value was the result
of the Company's relatively short lease term on the land underlying the center,
the physical condition of the property and changed market conditions in the
Sacramento area. Disposition efforts on behalf of retail property also indicated
the need to reduce this property's book value, as it was no longer being held
for investment purposes but actively marketed for sale. Both properties were
sold during the first quarter of 1997.
In 1995, the provision for possible credit losses of $3,281,000 resulted
from the write-down in value of two commercial properties and five mortgage
notes.
Preferred Share Dividend and Dividend Requirement. 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 December 31, 1997, the Company had $49,268,000 in cash. Liquidity in
1998 will be provided primarily by cash on hand, cash generated from operations,
principal and interest payments received on investments, loans and securities,
and additional borrowings under the Credit Facility. The Company believes these
sources of capital will adequately meet future cash requirements. Consistent
with its current business plan, the Company expects that during 1998 it will use
a significant amount of its available capital resources to originate and fund
loans and other investments. In connection with such investment and loan
transactions, the Company intends to employ significant leverage, up to a 5:1
debt-to-equity ratio, to enhance its return on equity.
The Company experienced a net increase in cash of approximately $44.6
million for the year ended December 31, 1997, compared to a net decrease in cash
of $80,000 for the year ended December 31, 1996. For the year ended December 31,
1997, cash provided by operating activities was $2,901,000, up approximately
$2.4 million from cash provided by operations of $449,000 during the same period
in 1996. Cash used in investing activities during this same period increased by
approximately $242.7 million to approximately $243.2 million, up from $452,000,
primarily as a result of the loans and other investments completed since June
30, 1997. Cash provided by financing activities increased approximately $284.9
million due primarily to the proceeds of repurchase obligations, borrowings
under the Credit Facility and net proceeds from the issuance of Class A
Preferred Shares and the Class A Common Shares.
17
<PAGE>
The Company has two outstanding notes payable totaling $4,953,000 and
outstanding borrowings of $79,864,000 under the Credit Facility in addition to
the outstanding repurchase obligations of $82,173,000.
The Company's Credit Facility with a commercial lender provided for
borrowings up to $150 million. The Credit Facility has a term that expires on
September 30, 2000, including extensions, provided that the Company is in
compliance with the covenants and terms of the Credit Facility, there have been
no material adverse changes in the Company's financial position, and the Company
is not otherwise in material default of the terms of the Credit Facility. The
Credit Facility provides for advances to fund lender-approved investments
("Funded Portfolio Assets") made by the Company pursuant to its business plan.
The Company is currently negotiating with its commercial lender to the increase
the Credit Facility by $100 million thereby increasing liquidity.
The obligations of the Company under the Credit Facility are to be secured
by pledges of the Funded Portfolio Assets acquired with advances under the
Credit Facility. Borrowings under the Credit Facility bear interest at specified
rates over LIBOR, averaging approximately 8.2% for those borrowings outstanding
as of December 31, 1997, which rate may fluctuate based upon the credit quality
of the Funded Portfolio Assets. The Company incurred a commitment fee upon the
signing of the credit agreement and is obligated to pay an additional commitment
fee when total borrowings under the Credit Facility exceed $75 million. In
addition, each advance requires payment of a drawdown fee. Future repayments and
redrawdowns of amounts previously subject to the drawdown fee will not require
the Company to pay any additional fees. The Credit Facility provides for margin
calls on or collateral enhancement of asset-specific borrowings in the event of
asset quality and/or market value deterioration as determined under the Credit
Facility. The Credit Facility contains customary representations and warranties,
covenants and conditions and events of default. The Credit Facility also
contains a covenant obligating the Company to avoid undergoing an ownership
change that results in Craig M. Hatkoff, John R. Klopp or Samuel Zell no longer
retaining their senior offices with the Company and practical control of the
Company's business and operations.
On December 31, 1997, the unused Credit Facility amounted to $70.1 million.
Impact of Inflation
The Company's operating results depend in part on the difference between
the interest income earned on its interest-earning assets and the interest
expense incurred in connection with its interest-bearing liabilities. Changes in
the general level of interest rates prevailing in the economy in response to
changes in the rate of inflation or otherwise can affect the Company's income by
affecting the spread between the Company's interest-earning assets and
interest-bearing liabilities, as well as, among other things, the value of the
Company's interest-earning assets and its ability to realize gains from the sale
of assets and the average life of the Company's interest-earning assets.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations, and other factors beyond the control of the Company. The Company
employs the use of hedging strategies to limit the effects of changes in
interest rates on its operations, including engaging in interest rate swaps and
interest rate caps to minimize its exposure to changes in interest rates. There
can be no assurance that the Company will be able to adequately protect against
the foregoing risks or that the Company will ultimately realize an economic
benefit from any hedging contract into which it enters.
Year 2000 Information
The Company has assessed the potential impact of the Year 2000 computer
systems issue in its operations. The Company believes that no significant
actions are required to be taken by the Company to address the issue and
therefore the impact of the issue will not materially affect the Company's
future operating results or financial condition.
18
<PAGE>
- --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- -------------------------------------------------------------------------------
The financial statements required by this item and the reports of the
independent accountants thereon required by Item 14(a)(2) appear on pages F-2 to
F-31. See accompanying Index to the Consolidated Financial Statements on page
F-1. The supplementary financial data required by Item 302 of Regulation 5-K
appears in Note 19 to the consolidated financial statements.
19
<PAGE>
- --------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
- --------------------------------------------------------------------------------
On April 14, 1997, the Board of Trustees adopted a resolution (i) not to
retain Coopers & Lybrand L.L.P. ("C&L") as the Company's auditors for the fiscal
year ending December 31, 1997 and (ii) to engage Ernst and Young LLP ("E&Y") as
the Company's independent auditors for the fiscal year ending December 31, 1997.
The reports of C&L on the Company's consolidated financial statements as of
and for the two years ended December 31, 1996 and 1995 did not contain an
adverse opinion or a disclaimer opinion nor were they qualified or modified as
to uncertainty, audit scope or accounting principles.
During the Company's fiscal years ended December 31, 1996 and 1995 and
through the date of their replacement on April 14, 1997, there were no
disagreements with C&L on any matter of accounting principals or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of C&L, would have caused
them to make reference thereto in their report(s) on the Company's financial
statements for such fiscal year(s), nor were there any "reportable events"
within the meaning of item 304(a)(1)(v) of regulation S-K promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) 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.
August 17, 1998 /s/ John R. Klopp
- ----------------- -----------------
Date John R. Klopp
Vice Chairman and Chief Executive Officer
21
<PAGE>
Index to Consolidated Financial Statements
Reports of Independent
Auditors.....................................................................F-2
Audited Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996.................F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.............................................F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995.......................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.............................................F-7
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
Report of Independent Auditors
The Board of Trustees
Capital Trust and Subsidiaries
We have audited the consolidated balance sheet of Capital Trust and Subsidiaries
(the "Company") as of December 31, 1997 and the related consolidated statement
of operations, shareholders' equity and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 1997, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
New York, New York
January 23, 1998
F-2
<PAGE>
Report of Independent Auditors
The Board of Trustees of Capital Trust
(f/k/a California Real Estate Investment Trust):
We have audited the accompanying consolidated balance sheet of Capital
Trust (f/k/a California Real Estate Investment Trust and Subsidiary) (the
"Trust") as of December 31, 1996, and the related consolidated statements of
operations, cash flows, and changes in shareholders' equity for each of the two
years in the period ended December 31, 1996. These financial statements and
financial statement schedules are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Capital
Trust (f/k/a California Real Estate Investment Trust and Subsidiary) as of
December 31, 1996, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Coopers & Lybrand
L.L.P.
San Francisco, California
February 14, 1997
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a Swiss
limited liability association.
F-3
<PAGE>
<TABLE>
<CAPTION>
Capital Trust and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands)
1997 1996
------------------ ------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 49,268 $ 4,698
Available-for-sale securities 11,975 14,115
Loans and other investments, net of $462 and $0 reserve for possible credit
losses in 1997 and 1996, respectively 251,812 1,576
Rental properties - 8,585
Excess of purchase price over net tangible assets acquired, net 331 -
Deposits and other receivables 284 707
Accrued interest receivable 818 -
Prepaid and other assets 2,878 355
------------------ ------------------
Total assets $ 317,366 $ 30,036
================== ==================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 5,718 $ 396
Notes payable 4,953 5,169
Credit facility 79,864 -
Repurchase obligations 82,173 -
Deferred origination fees and other revenue 1,369 -
------------------ ------------------
Total liabilities 174,077 5,565
------------------ ------------------
Commitments and contingencies
Shareholders' equity:
Class A Preferred Shares, $1.00 par value; $0.26 cumulative annual
dividend; 12,639 shares authorized, 12,268 shares issued and
outstanding at
December 31, 1997 and no shares issued and outstanding at 12,268 -
December 31, 1996; (liquidation preference of $33,000)
Class A Common Shares, $1.00 par value; unlimited shares authorized,
18,157 shares issued and outstanding at December 31, 1997 and 9,157
shares issued
and outstanding at December 31, 1996 18,157 9,157
Additional paid-in capital 158,137 55,098
Unrealized gain (loss) on available-for-sale securities 387 (22)
Accumulated deficit (45,660) (39,762)
------------------ ------------------
Total Shareholders' equity 143,289 24,471
------------------ ------------------
Total liabilities and Shareholders' equity $ 317,366 $ 30,036
================== ==================
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Capital Trust and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands, except per share data)
1997 1996 1995
------------ ------------- -------------
Income from loans and other investments:
<S> <C> <C> <C>
Interest and related income $ 4,992 $ 470 $ 1,148
Less: Interest and related expenses 2,223 86 370
------------ ------------- -------------
Net income from loans and other investments 2,769 384 778
------------ ------------- -------------
Other revenues:
Advisory and asset management fees 1,698 - -
Rental income 307 2,019 2,139
Other interest income 1,453 666 248
(Loss) gain on sale of rental properties and investments (432) 1,069 66
------------ -------------
-------------
Total other revenues 3,026 3,754 2,453
------------ ------------- -------------
Other expenses:
General and administrative 9,463 1,503 933
Other interest expense 156 461 445
Rental property expenses 124 781 688
Depreciation and amortization 92 64 662
Provision for possible credit losses 462 1,743 3,281
------------ ------------- -------------
Total other expenses 10,297 4,552 6,009
------------ ------------- -------------
Loss before income taxes (414) (2,778)
(4,502)
Provision for income taxes 55 - -
------------ ------------- -------------
Net loss (414)
(4,557) (2,778)
Less: Class A Preferred Share dividend (1,341) - -
Class A Preferred Share dividend requirement (130) - -
------------ ------------- -------------
Net loss allocable to Class A Common Shares $ $ $
(6,028) (414) (2,778)
============ ============= =============
Per share information:
Net loss per Class A Common Share
Basic and Diluted $ (0.63) $ (0.05) $ (0.30)
============ ============= =============
Weighted average Class A Common Shares outstanding
Basic and Diluted 9,527,013 9,157,150 9,157,150
============ ============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Capital Trust and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
Class A Class A Additional
Preferred Shares Common Shares Paid-In Unrealized Accumulated
Number Amount Number Amount Capital Gain Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at - $ - 9,157 $ 9,157 $ 55,098 $ - $(36,570) $ 27,685
January 1, 1995
Net Loss - - - - - - (2,778) (2,778)
----------------------------------------------------------------------------------------------------------
Balance at - - 9,157 9,157 55,098 - (39,348) 24,907
December 31, 1995
Change in
unrealized gain - - - - - (22) - (22)
on
available-for-sale
securities
Net Loss - - - - - - 414) (414)
----------------------------------------------------------------------------------------------------------
Balance at - - 9,157 9,157 55,098 (22) (39,762) 24,471
December 31, 1996
Change in
unrealized gain - - - - - 409 - 409
on
available-for-sale
securities
Issuance of 12,268 12,268 - - 20,602 - - 32,870
preferred shares
Issuance of - - 9,000 9,000 82,437 - - 91,437
common shares
Class A Preferred - - - - - - (1,341) (1,341)
Share dividend
Net loss - - - - - - (4,557) (4,557)
==========================================================================================================
Balance at 12,268 $ 12,268 18,157 $ 18,157 $ 158,137 $ 387 $ (45,660) $143,289
December 31, 1997
==========================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Capital Trust and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,557) $ (414) $ (2,778)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 92 64 662
Loss (gain) on sale of rental properties and investments 432 (1,069) (66)
Provision for credit losses 462 1,743 3,281
Changes in assets and liabilities net of effects from subsidiaries purchased:
Deposits and other receivables 2,707 (38) 294
Accrued interest receivable (818) - -
Prepaid and other assets (2,988) (61) (282)
Deferred revenue 1,369 - -
Accounts payable and accrued expenses 5,857 226 166
Other liabilities (64) (2) 11
---------------- -----------------
-----------------
Net cash provided by operating activities 2,492 449 1,288
---------------- ----------------- -----------------
Cash flows from investing activities:
Origination and purchase of loans and other investments (261,233) - -
Principal collections on loans and other investments 9,969 35 850
Purchases of equipment and leasehold improvements (479) - -
Proceeds from sale of rental properties 8,153 13,796 -
Improvements to rental properties - (146) (321)
Purchases of available-for-sale securities - (15,849) -
Principal collections on available-for-sale securities 4,947 1,712 -
Acquisition of Victor Capital Group, L.P., net of cash (4,066) - -
acquired
---------------- ----------------- -----------------
Net cash (used in) provided by investing activities (242,709) (452) 529
---------------- ----------------- -----------------
Cash flows from financing activities:
Proceeds from repurchase obligations 109,458 - -
Termination of repurchase obligations (27,285) - -
Proceeds from credit facility 81,864 - -
Repayment of credit facility (2,000) - -
Proceeds from notes payable 4,001 - -
Repayment of notes payable (4,217) (77) (405)
Dividends paid on preferred shares (1,341) - -
Net proceeds from issuance of Class A Common Shares 91,437 - -
Net proceeds from issuance of Class A Preferred Shares 32,870 - -
---------------- -----------------
-----------------
Net cash provided by (used in) financing activities 284,787 (77) (405)
---------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents 44,570 (80) 1,412
Cash and cash equivalents at beginning of year 4,698 4,778 3,366
================ ================= =================
Cash and cash equivalents at end of year $ 49,268 $ 4,698 $ 4,778
================ ================= =================
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization
Capital Trust (the "Company") is a specialty finance company designed to take
advantage of high-yielding lending and investment opportunities in commercial
real estate and related assets. The Company makes investments in various types
of income producing commercial real estate, including senior and junior
commercial mortgage loans, preferred equity investments, direct equity
investments and subordinate interests in commercial mortgage-backed securities
("CMBS"). The Company also provides real estate investment banking, advisory and
asset management services through its wholly owned subsidiary, Victor Capital
Group, L.P. ("Victor Capital").
The Company, which was formerly known as California Real Estate Investment
Trust, was organized under the laws of the State of California pursuant to a
declaration of trust dated September 15, 1966. On December 31, 1996, 76% of the
Company's then-outstanding common shares of beneficial interest, $1.00 par value
("Common Shares") were held by the Company's former parent ("Former Parent"). On
January 3, 1997, the Former Parent sold its entire 76% ownership interest in the
Company (consisting of 6,959,593 Common Shares) to CalREIT Investors Limited
Partnership ("CRIL"), an affiliate of Equity Group Investments, Inc. ("EGI") and
Samuel Zell, the Company's current chairman of the board of trustees, for an
aggregate price of approximately $20.2 million. Prior to the purchase, which was
approved by the then-incumbent board of trustees, EGI and Victor Capital, a then
privately held company owned by two of the current trustees of the Company,
presented to the Company's then-incumbent board of trustees a proposed new
business plan in which the Company would cease to be a real estate investment
trust ("REIT") and instead become a specialty finance company as discussed
above. EGI and Victor Capital also proposed that they provide the Company with a
new management team to implement the business plan and invest, through an
affiliate, a minimum of $30 million in a new class of preferred shares to be
issued by the Company. In connection with the foregoing, the Company
subsequently agreed that, concurrently with the consummation of the proposed
preferred equity investment, it would acquire for $5 million Victor Capital's
real estate investment banking, advisory and asset management businesses,
including the services of its experienced management team. See Note 2.
On July 15, 1997, the proposed preferred share investment was consummated and
12,267,658 class A 9.5% cumulative convertible preferred shares of beneficial
interest, $1.00 par value ("Class A Preferred Shares"), in the Company were sold
to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of Samuel Zell and the
principals of Victor Capital for an aggregate purchase price of $33.0 million.
Concurrently with the foregoing transaction, Veqtor purchased from CRIL the
6,959,593 Common Shares held by it for an aggregate purchase price of
approximately $21.3 million (which shares were reclassified on that date as
class A common shares of beneficial interest, $1.00 par value ("Class A Common
Shares"), in the Company pursuant to the terms of an amended and restated
declaration of trust, dated July 15, 1997, adopted on that date (the "Amended
and Restated Declaration of Trust")). See Note 11.
As a result of these transactions, a change of control of the Company occurred
with Veqtor beneficially owning 19,227,251, or approximately 90% of the
outstanding voting shares of the Company. Pursuant to the Amended and Restated
Declaration of Trust, the Company's name was changed to "Capital Trust". As a
result of the aforementioned events, the Company, as intended, commenced full
implementation of the new business plan and thereby terminated its status as a
REIT.
F-8
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Acquisition of Victor Capital
On July 15, 1997, the Company consummated the acquisition of the real estate
investment banking, advisory and asset management businesses of Victor Capital
and certain affiliated entities including the following wholly-owned
subsidiaries: VCG Montreal Management, Inc., Victor Asset Management Partners,
L.L.C., VP Metropolis Services, L.L.C., and 970 Management, LLC.
Victor Capital provides services to real estate investors, owners, developers
and financial institutions in connection with mortgage financings,
securitizations, joint ventures, debt and equity investments, mergers and
acquisitions, portfolio evaluations, restructurings and disposition programs.
Victor Capital's wholly owned subsidiaries provide asset management and advisory
services relating to various mortgage pools and real estate properties. In
addition, VCG Montreal Management, Inc. holds a nominal interest in a Canadian
real estate venture.
The purchase price in the Victor Capital acquisition was $5.0 million, which was
paid by the Company with the issuance of non-interest bearing acquisition notes,
payable in ten semi-annual equal installments of $500,000. The acquisition notes
have been discounted to approximately $3.9 million based on an imputed interest
rate of 9.5%. The acquisition has been accounted for under the purchase method
of accounting. The excess of the purchase price of the acquisition in excess of
net tangible assets acquired approximated $342,000.
Had the acquisition occurred on January 1, 1997, pro forma revenues, net loss
(after giving effect to the Class A Preferred Share dividend and dividend
requirement) and net loss per common share (basic and diluted) would have been:
$11,271,000, $5,347,000 and $0.56, respectively.
3. Summary of Significant Accounting Policies
Principles of Consolidation
For the years ended December 31, 1996 and 1995, 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 year ended December 31, 1997 and the
Totem Square L.P. and Totem Square, Inc. subsidiaries were liquidated and
dissolved.
The consolidated financial statements of the Company include the accounts of the
Company, 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 its rental property held by Totem, which
was sold on March 4, 1997 prior to commencement of the Company's new business
plan. See Note 1. All significant intercompany balances and transactions have
been eliminated in consolidation.
Revenue Recognition
Interest income for the Company's mortgage and other loans and investments is
recognized over the life of the investment using the interest method and
recognized on the accrual basis.
Fees received in connection with loan commitments, net of direct expenses, are
deferred until the loan is advanced and are then recognized over the term of the
loan as an adjustment to yield. Fees on commitments that expire unused are
recognized at expiration.
F-9
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies, continued
Income recognition is generally suspended for loans at the earlier of the date
at which payments become 90 days past due or when, in the opinion of management,
a full recovery of income and principal becomes doubtful. Income recognition is
resumed when the loan becomes contractually current and performance is
demonstrated to be resumed.
Fees from professional advisory services are generally recognized at the point
at which all Company services have been performed and no significant
contingencies exist with respect to entitlement to payment. Fees from asset
management services are recognized as services are rendered.
Reserve for Possible Credit Losses
The provision for possible credit losses is the charge to income to increase the
reserve for possible credit losses to the level that management estimates to be
adequate considering delinquencies, loss experience and collateral quality.
Other factors considered relate to geographic trends and product
diversification, the size of the portfolio and current economic conditions.
Based upon these factors, the Company establishes the provision for possible
credit losses by category of asset. When it is probable that the Company will be
unable to collect all amounts contractually due, the account is considered
impaired. Where impairment is indicated, a valuation write-down or write-off is
measured based upon the excess of the recorded investment amount over the net
fair value of the collateral, as reduced for selling costs. Any deficiency
between the carrying amount of an asset and the net sales price of repossessed
collateral is charged to the reserve for credit losses.
Cash and Cash Equivalents
The Company classifies highly liquid investments with original maturities of
three months or less from the date of purchase as cash equivalents. At December
31, 1997, cash equivalents of approximately $48.5 million consisted of an
investment in a money market fund that invests in Treasury bills. At December
31, 1996, the Company's cash was held in demand deposits with banks with strong
credit ratings. Bank balances in excess of federally insured amounts totaled
approximately $1.5 million and $4.3 million as of December 31, 1997 and 1996,
respectively. The Company has not experienced any losses on demand deposits or
money market investments.
Available-for-Sale Securities
Available-for-sale securities are reported on the consolidated balance sheet at
fair market value with any corresponding change in value reported as an
unrealized gain or loss (if assessed to be temporary), as a component of
shareholders' equity, after giving effect to taxes. See Note 5.
Commercial Mortgage-Backed Securities
The Company has the intent and ability to hold its subordinated investment in
CMBS until maturity. See Note 7. Consequently, this investment is classified as
held to maturity and is carried at amortized cost at December 31, 1997.
Income from CMBS is recognized based on the effective interest method using the
anticipated yield over the expected life of the investments. Changes in yield
resulting from prepayments are recognized over the remaining life of the
investment. The Company recognizes impairment on its CMBS whenever it determines
that the impact of expected future credit losses, as currently projected,
exceeds the impact of the expected future credit losses as originally projected.
Impairment losses are determined by comparing the current fair value of a CMBS
to its existing carrying amount, the difference being recognized as a loss in
the current period in the consolidated statements of operations. Reduced
estimates of credit losses are recognized as an adjustment to yield over the
remaining life of the portfolio.
F-10
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies, continued
Derivative Financial Instruments
The Company uses interest rate swaps to effectively convert fixed rate assets to
variable rate assets for proper matching with variable rate liabilities. The
differential to be paid or received on these agreements is recognized as an
adjustment to the interest income related to the earning asset.
The Company also uses interest rate caps to reduce its exposure to interest rate
changes on investments. The Company will receive payments on an interest rate
cap should the variable rate for which the cap was purchased exceeds a specified
threshold level and will be recorded as an adjustment to the interest income
related to the related earning asset.
Each derivative used as a hedge is matched with an asset or liability with which
it has a high correlation. The swap agreements are generally held to maturity
and the Company does not use derivative financial instruments for trading
purposes.
Rental Properties
Prior to December 31, 1996, rental properties were carried at cost, net of
accumulated depreciation and a valuation allowance for possible credit losses.
At December 31, 1996 all rental properties were classified as held for sale and
valued at net estimated sales prices.
Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements, net, are stated at original cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method based on the estimated lives of the depreciable assets.
Amortization is computed over the remaining terms of the related leases.
Expenditures for maintenance and repairs are charged directly to expense at the
time incurred. Expenditures determined to represent additions and betterments
are capitalized. Cost of assets sold or retired and the related amounts of
accumulated depreciation are eliminated from the accounts in the year of sale or
retirement. Any resulting profit or loss is reflected in the consolidated
statements of operations.
Sales of Real Estate
The Company complies with the provisions of Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate." Accordingly, the
recognition of gains are deferred until such transactions have complied with the
criteria for full profit recognition under the Statement. The Company has
deferred gains of $239,000 at December 31, 1997 and 1996.
Deferred Debt Issuance Costs
The Company capitalizes costs incurred related to the issuance of long-term
debt. These costs are deferred and amortized on a straight-line basis over the
life of the related debt, which approximates the level-yield method, and
recognized as a component of interest expense.
F-11
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies, continued
Income Taxes
Prior to commencement of full implementation of the current business plan on
July 15, 1997, the Company had elected to be taxed as a REIT and, as such, was
not taxed on that portion of its taxable income which was distributed to
shareholders, provided that at least 95% of its real estate trust taxable income
was distributed and that the Company met certain other REIT requirements. At
July 15, 1997, the Company did not meet the requirements to continue to be taxed
as a REIT and will therefore not be considered a REIT retroactive to January 1,
1997.
Accordingly, the Company has adopted Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109
utilizes the liability method for computing tax expenses. Under the liability
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying statutory tax rates to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Deferred tax assets are recognized for
temporary differences that will result in deductible amounts in future years and
for carryforwards. A valuation allowance is recognized if it is more likely than
not that some portion of the deferred asset will not be recognized. When
evaluating whether a valuation allowance is appropriate, SFAS No. 109 requires a
company to consider such factors as previous operating results, future earning
potential, tax planning strategies and future reversals of existing temporary
differences. The valuation allowance is increased or decreased in future years
based on changes in these criteria.
Amortization of the Excess of Purchase Price Over Net Tangible Assets Acquired
The Company recognized the excess of purchase price over net tangible assets
acquired in a business combination accounted for as a purchase transaction and
is amortizing it on a straight-line basis over a period of 15 years. The
carrying value of the excess of purchase price over net tangible assets acquired
is analyzed quarterly by the Company based upon the expected revenue and
profitability levels of the acquired enterprise to determine whether the value
and future benefit may indicate a decline in value. If the Company determines
that there has been a decline in the value of the acquired enterprise, the
Company writes down the value of the excess of purchase price over net tangible
assets acquired to the revised fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-12
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies, continued
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 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 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 December
31, 1997, the Class A Preferred Share and Class A Common Share options were not
considered Class A Common Share equivalents for purposes of calculating Diluted
EPS as they were antidilutive. Accordingly, at December 31, 1997, there was no
difference between Basic EPS and Diluted EPS or weighted average Class A Common
Shares outstanding. The adoption of this accounting standard had no effect on
the reported December 31, 1997, 1996 or 1995 earnings per share amounts.
Reclassifications
Certain reclassifications have been made in the presentation of the 1996 and
1995 consolidated financial statements to conform to the 1997 presentation.
New Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") effective for fiscal years beginning after December 15,
1997, although earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all components of comprehensive income shall be reported in the financial
statements in the period in which they are recognized. Furthermore, a total
amount for comprehensive income shall be displayed in the financial statement
where the components of other comprehensive income are reported. The Company was
not previously required to present comprehensive income or the components
therewith under generally accepted accounting principles. The Company intends to
adopt the requirements of this pronouncement in its financial statements for the
year ended December 31, 1998.
In June 1997, the FASB issued Statement No.131, "Disclosure about segments of an
Enterprise and Related Information" ("SFAS No. 131") effective for financial
statements issued for periods beginning after December 15, 1997. SFAS No. 131
requires disclosures about segments of an enterprise and related information
regarding the different types of business activities in which an enterprise
engages and the different economic environments in which it operates. The
Company intends to adopt the requirements of this pronouncement in its
consolidated financial statements for the year ended December 31, 1998. The
adoption of SFAS No. 131 is not expected to have a material impact on the
Company's consolidated financial statement disclosures.
F-13
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Interest Rate Risk Management
The Company uses interest rate swaps and interest rate caps to hedge mismatches
in interest rate maturities, to reduce the Company's exposure to interest rate
fluctuations on certain loans and investments and to provide more stable spreads
between investment yields and the rates on their financing sources. The Company
has entered into interest rate swap agreements for notional amounts totaling
approximately $49.9 million with two investment grade financial institution
counterparties whereby the Company swapped fixed rate instruments, which
averages approximately 6.14%, for floating rate instruments based on the London
Interbank Offered Rate ("LIBOR"). Amounts arising from the differential are
recognized as an adjustment to interest income related to the earning asset. The
agreements mature at varying times from December 1998 to April 2006.
The Company purchased an interest rate cap for a notional amount of $18.75
million at a cost of approximately $71,000. The interest rate cap provides for
payments to the Company should LIBOR exceed a specified threshold level during
the period from November 2003 to November 2007.
The Company is exposed to credit loss in the event of non-performance by the
counterparties to the interest rate swap and cap agreements, although it does
not anticipate such non-performance.
5. Available-for-Sale Securities
At December 31, 1997, the Company's available-for-sale securities consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
Cost Gains Losses Fair Value
-----------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Association, adjustable rate
interest currently at 7.845%, due April 1, 2024 $ 2,176 $ - $ (32) $ 2,144
Federal Home Loan Mortgage Association, adjustable rate
interest currently at 7.916%, due June 1, 2024 752 - (10) 742
Federal National Mortgage Association, adjustable rate
interest currently at 7.362%, due May 1, 2025 440 - (9) 431
Federal National Mortgage Association, adjustable rate
interest currently at 7.965%, due May 1, 2026 1,860 - (20) 1,840
Federal National Mortgage Association, adjustable rate
interest currently at 7.969%, due June 1, 2026 4,545 29 - 4,574
Norwest Corp. Voting Common Stock, 630 shares 17 7 - 24
SL Green Realty Corp. Voting Common Stock,
85,600 shares 1,798 422 - 2,220
===============================================
$11,588 $ 458 $ (71) $ 11,975
===============================================
</TABLE>
F-14
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Available-for-Sale Securities, continued
At December 31, 1996, the Company's available-for-sale securities consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
Cost Gains Losses Fair Value
-----------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Association, adjustable rate
interest at 7.783% at December 31, 1996, due
April 1, 2024 $ 2,879 $ - $ (34) $ 2,845
Federal Home Loan Mortgage Association, adjustable rate
interest at 7.625% at December 31, 1996, due
June 1, 2024 967 - (10) 957
Federal National Mortgage Association, adjustable rate
interest at 7.292% at December 31, 1996, due May 1, 2025 732 - (4) 728
Federal National Mortgage Association, adjustable rate
interest at 6.144% at December 31, 1996, due May 1, 2026 3,260 - (5) 3,255
Federal National Mortgage Association, adjustable rate
interest at 6.116% at December 31, 1996, due June 1, 2026 6,299 31 - 6,330
===============================================
$14,137 $ 31 $ (53) $ 14,115
===============================================
</TABLE>
The maturity dates of debt securities are not necessarily indicative of expected
maturities as principal is often prepaid on such instruments.
The 85,600 shares of SL Green Realty Corp. Common Stock were received as partial
payment for advisory services rendered by Victor Capital to SL Green Realty
Corp. These shares are restricted from sale by the Company for a period of one
year from the date of issuance, August 20, 1997.
The cost of securities sold is determined using the specific identification
method.
6. Rental Properties
At December 31, 1996, the Company's rental property portfolio included a retail
and mixed-use property carried at $8,585,000. These properties were sold during
1997.
The Company has established an allowance for valuation losses on rental
properties as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- --------------
<S> <C> <C> <C>
Beginning balance $ - $ 6,898 $ 5,863
Provision for valuation losses - 1,743 1,035
Amounts charged against allowance for
valuation losses - (8,641) -
============== =============== ==============
Ending balance $ - $ - $ 6,898
============== =============== ==============
</TABLE>
F-15
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Loans and Other Investments
The Company currently pursues investment and lending opportunities designed to
capitalize on inefficiencies in the real estate capital, mortgage and finance
markets. The Company has classified its loans and other investments into the
following general categories:
o Mortgage Loans. The Company originates and funds senior and junior
mortgage loans ("Mortgage Loans") to commercial real estate owners and
property developers who require interim financing until permanent
financing can be obtained. The Company's Mortgage Loans are generally
not intended to be permanent in nature, but rather are intended to be of
a relatively short-term duration, with extension options as deemed
appropriate, and typically require a balloon payment of principal at
maturity. The Company may also originate and fund permanent Mortgage
Loans in which the Company intends to sell the senior tranche, thereby
creating a Mezzanine Loan (as defined below).
o Mezzanine Loans. The Company originates high-yielding loans that are
subordinate to first lien mortgage loans on commercial real estate and
are secured either by a second lien mortgage or a pledge of the
ownership interests in the borrowing property owner. Alternatively, the
Company's mezzanine loans can take the form of a preferred equity
investment in the borrower with substantially similar terms
(collectively, "Mezzanine Loans"). Generally, the Company's Mezzanine
Loans have a longer anticipated duration than its Mortgage Loans and are
not intended to serve as transitional mortgage financing.
o Subordinated Interests. The Company pursues rated and unrated
investments in public and private subordinated interests ("Subordinated
Interests") in commercial collateralized mortgage obligations ("CMOs" or
"CMO Bonds") and other CMBS.
o Other Mortgage Loans Receivable. This classification includes loans
originated during the Company's prior operations as a REIT and other
loans and investments not meeting the above criteria.
At December 31, 1997 and 1996, the Company's loans and other investments
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
<S> <C> <C>
(1) Mortgage Loans $ 124,349 $ -
(2) Mezzanine Loans 76,373 -
(3) Subordinated Interest 49,490 -
(4) Other mortgage loans receivable 2,062 1,576
------------------- ------------------
252,274 1,576
Less: reserve for possible credit losses (462) -
=================== ==================
Total loans and other investments $ 251,812 $ 1,576
=================== ==================
</TABLE>
The weighted average interest rate at December 31, 1997of the Company's loans
and other investments was as follows:
(1) Mortgage Loans 11.47%
(2) Mezzanine Loans 11.44%
(3) Subordinated Interest 8.96%
(4) Other mortgage loans receivable 8.41%
F-16
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Loans and Other Investments, continued
At December 31, 1997, $189.9 million of the aforementioned loans and other
investments bear interest at floating rates ranging from LIBOR plus 375 basis
points to LIBOR plus 600 basis points. The remaining $62.4 million of loans and
other investments were financed at fixed rates ranging from 8.50% to 12.00%. At
December 31, 1997, the average earning rate in effect, before giving effect to
interest rate swaps (See Note 4) but including amortization of fees and
premiums, was 10.95%.
(1) The Company has five Mortgage Loans in its portfolio as described below:
(A) On August 4, 1997, the Company originated, and funded in part, a
$35.0 million commitment for a subordinated mortgage loan for
improvements to a mixed-use property in Chicago, Illinois. The loan is
subordinate to senior indebtedness and is secured by the mixed-use
property and two mortgage notes aggregating $9.6 million on nearby
development sites. The loan has a two-year initial term with a one-year
extension option available to the borrower, subject to certain
conditions, and is payable upon the sale of the property unless the
Company approves the assumption of the debt by an institutional
investor. On August 4, 1997, the Company funded $19.0 million against
the aforementioned commitment and, subsequently, on August 19, 1997,
the Company entered into a participation agreement with a third party
(the "Participant") pursuant to which the Company assigned a 42.9% (or
$15.0 million) interest in the loan. In connection with the
participation agreement, the Participant paid to the Company
approximately $8.2 million or 42.9% of the $19.0 million previously
funded by the Company. During the period to December 31, 1997, the
Company and the Participant funded additional amounts aggregating $4.3
million, of which $1.8 million was funded by the Participant.
On December 31, 1997, the Company reacquired two-thirds (or $10.0
million) of the $15.0 million participation previously assigned to a
third party on August 19, 1997 at par or $6.6 million.
Through December 31, 1997, the Company's portion of the funding
provided under the mortgage loan aggregated $19.9 million and the
Company's remaining share of the commitment amounts to $10.1 million.
(B) On November 7, 1997, the Company originated and funded a $50.3
million second mortgage loan on an office building in New York City.
Simultaneous with the loan funding, the Company entered into a pari
passu participation agreement to which it sold a 50% (or $25.1 million)
participation interest in the loan to EOP Operating Limited
Partnership, whose general partner is Equity Office Properties Trust,
an affiliate of the Company. The loan is subordinate to senior
indebtedness and is further secured by various additional collateral
owned by a principal of the borrower as well as a limited personal
guarantee of a principal of the borrower. Collection under the personal
guarantee and the other collateral is limited to $10.0 million. The
loan has a two-year initial term with a one-year extension option
available to the borrower and bears interest at a specified rate over
LIBOR, which such rate increases during the extension period. Under
certain circumstances, the borrower may defer a portion of the interest
accrued on the loan during the initial two-year term subject to a
specified minimum rate. The loan is interest only during the initial
two-year term with excess cash flow after determined reserves being
applied to amortization during the extension term.
On December 30, 1997, the Company reacquired $20.1 million of the $25.1
million participation previously assigned to EOP Operating Limited
Partnership on November 7, 1997 at par. At December 31, 1997, the
Company's share of the second mortgage loan aggregated $45.3 million.
The following is a summary of the financial information for the year
ended December 31, 1997 of the aforementioned property related to the
Company's mortgage loan:
Revenues (primarily rent) $ 33,237,000
Expenses (primarily utilities, operating and taxes) 10,162,000
F-17
<PAGE>
7. Loans and Other Investments, continued
(C) On December 17, 1997, the Company funded a $6.0 million first
mortgage acquisition loan secured by a first mortgage on an office
building and movie theatre in St. Louis, Missouri. The loan is further
secured by a pledge of all the partnership interests in the borrower.
The loan is for one year and bears interest at a fixed rate. The loan
is non-amortizing and features a conversion option which gives the
borrower the option of converting the loan into a long-term, fixed rate
mortgage, subject to certain covenants.
(D) On December 18, 1997, the Company originated, and funded in part, a
$6.0 million subordinated participation in a $20.5 million first
mortgage acquisition loan on a retail/office building in Boston,
Massachusetts. The Company funded $4.5 million of its participation at
the closing and the other participant has fully funded its commitment.
Additional fundings will be made for approved costs incurred in
conjunction with leases executed in accordance with pre-determined
guidelines. The entire loan is secured by a first mortgage on the
building and a pledge of the ownership interests in the borrower. The
loan has a term of two years and bears interest at a specified rate
above LIBOR. The loan is non-amortizing, and provides for a conversion
option that gives the borrower the option of converting the loan into a
long-term, fixed rate mortgage, subject to certain covenants.
(E) On December 23, 1997, the Company purchased a $62.6 million
mortgage loan obligation from a financial institution at a premium of
approximately $1.4 million. The loan is secured by a first mortgage on
an office and retail property in New York City. With the acquisition of
the mortgage loan obligation, the Company acquired an existing loan of
approximately $47.3 million and assumed an obligation to make
additional advances of approximately $15.3 million. The loan, which
matures in January 2001, bears interest at a fixed rate over LIBOR for
its term. Prepayment of the loan is permitted during the entire term,
but is subject to a prepayment penalty during the first two years.
There is no prepayment penalty during the final year of the loan. A
specified fee is due from the borrower to the Company upon satisfaction
of the loan.
The following is a summary of the financial information for the year
ended December 31, 1997 of the aforementioned property related to the
Company's mortgage loan:
Revenues (primarily rent) $ 7,396,000
Expenses (primarily utilities, operating and taxes) 5,802,000
(2) The Company has entered into five Mezzanine Loans as detailed below:
(A) On September 19, 1997 the Company completed a fixed rate investment
in the form of a $15.0 million portion of a ten year $80.0 million
mezzanine loan secured by a pledge of the ownership interests in the
entities that own an office building in New York City. Additionally,
the investment is secured by a full payment guarantee by the principal
owner of the property owning entities, in the event of certain
circumstances, including bankruptcy. The investment was purchased at a
premium for approximately $15.6 million. In the event that excess cash
flow available, as defined, is insufficient to pay the loan's interest
currently, up to 2% can be accrued and added to principal. Scheduled
maturity of the Note is April 2007, with prepayment prohibited for the
first five years but permitted during the following four years with
yield maintenance. The loan is fully prepayable with no premium or
penalty in the tenth year.
(B) On October 31, 1997 the Company completed a five year, fixed rate
investment in the form of a $10.0 million second mortgage loan secured
by a mortgage on the interests of a 64% tenancy-in-common interest in
an office building in New York City. Additionally, the loan is further
secured by a pledge by 100% of the membership interests in the
borrower. The loan is non-amortizing and may be prepaid with yield
maintenance at any time. The borrower established an interest reserve
at closing.
F-18
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Loans and Other Investments, continued
(C) On December 5, 1997, the Company originated a $3.0 million second
mortgage loan on an assisted living facility in Great Neck, New York.
The fixed rate loan has a term of five years and is secured by a second
mortgage on the property and limited personal guarantees of the
principals of the borrower, which decrease as the occupancy of the
property increases. Amortization is dependent on excess cash flow being
generated. A fee is due from the borrower to the Company upon
satisfaction of the loan that will provide the Company with a stated
internal rate of return, which increases over the term of the loan.
(D) On December 29, 1997, the Company purchased a $25.0 million fixed
rate mezzanine loan, which matures in September 2007, for $25.8
million. The loan is secured by a pledge of the ownership interests in
the entities that own the office and retail property in New York City.
The loan is further secured by a full payment guaranty by the
principals that own the property in the event of certain occurrences,
including bankruptcy. Prepayment of the loan is permitted during the
entire loan period subject to yield maintenance during the first six
years of the loan and without prepayment premium or penalty for the
remainder of the loan term.
(E) On December 31, 1997, the Company completed a $22.0 million investment
in an office/retail property in Santa Monica, California. The
investment was made in the form of an acquisition of an interest in an
entity whose sole asset is the special member interest in the limited
liability company that owns the property. The investment has an
anticipated remaining term of 34 months and pays dividends at a
specified rate over LIBOR until redemption. Early redemption of the
investment is not permitted during the first four months following the
closing of the acquisition transaction. The investment is subject to
early redemption penalties for the period from the fifth through the
twenty-second months of the Company's ownership and is not subject to
any penalties during the last year proceeding the mandatory redemption
date.
(3) On June 30, 1997 the Company completed an investment in a junior,
subordinated class of CMBS. The CMBS investment consists of securities with
a face value of $49.6 million purchased at a discount for $49.2 million
plus accrued fees. The investment was originally collateralized by twenty
short-term commercial notes receivable with original maturities ranging
from two to three years.
In addition, the Company was named "special servicer" for the entire $413
million loan portfolio in which capacity the Company will earn fee income
for management of the collection process should any of the loans become
non-performing. At December 31, 1997, no fees relating to the special
servicing arrangement were earned.
(4) The other mortgage loan receivables are collateralized by real estate
properties in California and Arizona that arose from the sale of real
estate. These mortgage loans receivable mature at varying dates between
February 11, 1999 and March 31, 2012.
As of December 31, 1996, the Company was in the process of monetizing its assets
and accordingly, wrote down such assets to current market value, less estimated
selling costs. The Company has established an allowance for valuation losses on
loans and other investments as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- --------------
<S> <C> <C> <C>
Beginning balance $ - $ 9,151 $ 7,182
Provision for valuation losses 462 - 2,246
Deferred gains on notes and other, net - - (66)
Amounts charged against allowance for
valuation losses - (9,151) (211)
-------------- --------------- --------------
Ending balance $ 462 $ - $ 9,151
============== =============== ==============
</TABLE>
F-19
<PAGE>
8. Equipment and Leasehold Improvements
At December 31, 1997 and 1996, equipment and leasehold improvements, net, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Period of
Depreciation or
Amortization 1997 1996
------------------------- -------------- ----------------
<S> <C> <C> <C>
Office equipment 3 to 7 years $ 307 $ 80
Leasehold improvements Term of leases 143 -
-------------- ----------------
450 80
Less: accumulated depreciation (93) (29)
-------------- ----------------
$ 357 $ 51
============== ================
</TABLE>
Depreciation and amortization expense on equipment and leasehold improvements
totaled $64,000, $19,000 and $10,000 for the years ended December 31, 1997, 1996
and 1995, respectively. Equipment and leasehold improvements are included in
prepaid and other assets in the consolidated balance sheets.
9. Notes Payable
At December 31, 1997, the Company has notes payable aggregating $5.0 million.
In connection with the acquisition of Victor Capital and affiliated entities,
the Company issued $5.0 million of non-interest bearing unsecured notes
("Acquisition Notes") to the sellers, payable in ten semi-annual payments of
$500,000. The Acquisition Notes have been discounted to $3.9 million based on an
imputed interest rate of 9.5%. At December 31, 1997, the net present value of
the Acquisition Notes (including interest payable) amounted to approximately
$4.1 million.
The Company is also indebted under a note payable due to a life insurance
company. This note is secured by the property that was sold in 1997. The note
bears interest at 9.50% per annum with principal and interest payable monthly
until August 7, 2017 when the entire unpaid principal balance and any unpaid
interest is due. The life insurance company has the right to call the entire
note due and payable upon ninety days prior written notice. At December 31,
1997, the balance of the note payable amounted to approximately $859,000.
As of December 31, 1996, the Company had long-term notes payable of $5,169,000,
most of which were collateralized by deeds of trust on rental properties with an
aggregate book value of $8,585,000. These notes were due in installments to the
year 2014 and had interest rates ranging from 8% to 10.75%. Except for the note
payable described in the preceding paragraph, these notes were repaid during
1997.
F-20
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Long-Term Debt
Credit Facility
Effective September 30, 1997, the Company entered into a credit agreement with a
commercial lender that provides for a three-year $150 million line of credit
(the "Credit Facility"). The Credit Facility provides for advances to fund
lender-approved loans and investments made by the Company ("Funded Portfolio
Assets").
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 8.2% for the borrowing outstanding at December 31,
1997) which rates may fluctuate based upon the credit quality of the Funded
Portfolio Assets. The Company incurred an initial commitment fee upon the
signing of the credit agreement and is obligated to pay an additional commitment
fee when the total borrowing under the Credit Facility exceeds $75 million.
Future repayments and redrawdowns of amounts previously subject to the drawdown
fee will not require the Company to pay any additional fees. The Credit Facility
provides for margin calls on asset-specific borrowings in the event of asset
quality and/or market value deterioration as determined under the Credit
Facility. The Credit Facility contains customary representations and warranties,
covenants and conditions and events of default. The Credit Facility also
contains a covenant obligating the Company to avoid undergoing an ownership
change that results in Craig M. Hatkoff, John R. Klopp or Samuel Zell no longer
retaining their senior offices and trusteeships with the Company and practical
control of the Company's business and operations.
On December 31, 1997, the unused Credit Facility amounted to $70.1 million.
Repurchase Obligations
The Company has entered into four repurchase agreements.
Three of the repurchase agreements with CS First Boston arose in connection with
the purchase of a mezzanine loan, the CMBS investment and the preferred equity
investment described in Note 7. At December 31, 1997, the Company has sold such
assets totaling $97.3 million, which approximates market value, and has a
liability to repurchase these assets for $72.7 million. The liability balance of
$72.7 million bears interest at specified rates over LIBOR (weighted average of
6.75% at December 31, 1997), and generally have a one year term with extensions
available by mutual consent. These agreements mature in late December 1998.
The Company also has entered into a repurchase agreement with Paine Webber in
conjunction with the financing of all of its FNMA and FHLMC securities. At
December 31, 1997, the Company has sold such securities with a book value
totaling $9.8 million (market value $9.7 million) and has a liability to
repurchase these assets for $9.5 million. The liability balance of $9.5 million
bears interest at 6.40%, and matures on January 29, 1998.
F-21
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Shareholders' Equity
Authorized Capital
Pursuant to the Company's Amended and Restated Declaration of Trust, all of the
Company's previously issued common shares of beneficial interest, $1.00 par
value, were reclassified as Class A Common Shares on July 15, 1997. The total
number of authorized capital shares of the Company is unlimited and currently
consists of (i) Class A Preferred Shares, (ii) class B 9.5% cumulative
convertible non-voting preferred shares of beneficial interest, $1.00 par value,
in the Company ("Class B Preferred Shares"), (iii) Class A Common Shares, and
(iv) class B common shares of beneficial interest, $1.00 par value, in the
Company ("Class B Common Shares"). As of December 31, 1997, there were
12,267,658 Class A Preferred Shares issued and outstanding, no Class B Preferred
Shares issued and outstanding, 18,157,150 Class A Common Shares issued and
outstanding and no Class B Common Shares issued and outstanding. The board of
trustees is authorized, with certain exceptions, to provide for the issuance of
additional preferred shares of beneficial interest in one or more classes or
series.
Common Shares
Except as described herein or as required by law, all Class A Common Shares and
Class B Common Shares are identical and entitled to the same dividend,
liquidation and other rights. The Class A Common Shares are voting shares
entitled to vote on all matters presented to a vote of shareholders, except as
provided by law or subject to the voting rights of any outstanding preferred
shares. The Class B Common Shares do not have voting rights and are not counted
in determining the presence of a quorum for the transaction of business at any
meeting of the shareholders. Holders of record of Class A Common Shares and
Class B Common Shares on the record date fixed by the Company's board of
trustees are entitled to receive such dividends as may be declared by the board
of trustees subject to the rights of the holders of any series of preferred
shares.
Each Class A Common Share is convertible at the option of the holder thereof
into one Class B Common Share and, subject to certain conditions, each Class B
Common Share is convertible at the option of the holder thereof into Class A
Common Share.
The Company is restricted from declaring or paying any dividends on its Class A
Common Shares or Class B Common Shares unless all accrued and unpaid dividends
with respect to the Class A Preferred Shares have been paid in full.
Preferred Shares
In connection with the adoption of the Amended and Restated Designation of
Trust, the Company created two classes of preferred shares, the Class A
Preferred Shares and the Class B Preferred Shares (collectively, the "Preferred
Shares"). Each class of Preferred Shares consists of 12,639,405 authorized
shares, as specified in the certificate of designation, preferences and rights
with respect thereto adopted on July 15, 1997 (the "Certificate of
Designation"). On July 15, 1997, Veqtor purchased from the Company 12,267,658
Class A Preferred Shares for an aggregate purchase price of approximately $33
million.
F-22
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Shareholders' Equity, continued
Except as described herein or as required by law, both classes of Preferred
Shares are identical and entitled to the same dividend, liquidation and other
rights as provided in the Certificate of Designation and the Restated
Declaration. The Class A Preferred Shares are entitled to vote together with the
holders of the Class A Common Shares as a single class on all matters submitted
to a vote of shareholders. Each Class A Preferred Share entitles the holder
thereof to a number of votes per share equal to the number of Class A Common
Shares into which such Class A Preferred Share is then convertible. Except as
described herein, the Class B Preferred Shares do not have voting rights and are
not counted in determining the presence of a quorum for the transaction of
business at a shareholders' meeting. The affirmative vote of the shareholders of
a majority of the outstanding Preferred Shares, voting together as a separate
single class, except in certain circumstances, have the right to approve any
merger, consolidation or transfer of all or substantially all of the assets of
the Company. Holders of the Preferred Shares are entitled to receive, when and
as declared by the board of trustees, cash dividends per share at the rate of
9.5% per annum on a per share price of $2.69. Such dividends shall accrue
(whether or not declared) and, to the extent not paid for any dividend period,
will be cumulative. Dividends on the Preferred Shares are payable, when and as
declared, semi-annually, in arrears, on December 26 and June 25 of each year
commencing December 26, 1997.
Each Class A Preferred Share is convertible at the option of the holder thereof
into an equal number of Class B Preferred Shares, or into a number of Class A
Common Shares equal to the ratio of (x) $2.69 plus an amount equal to all
dividends per share accrued and unpaid thereon as of the date of such conversion
to (y) the Conversion Price in effect as of the date of such conversion. Each
Class B Preferred Share is convertible at the option of the holder thereof,
subject to certain conditions, into an equal number of Class A Preferred Shares
or into a number of Class B Common Shares equal to the ratio of (x) $2.69 plus
an amount equal to all dividends per share accrued and unpaid thereon as of the
date of such conversion to (y) the Conversion Price in effect as of the date of
such conversion. The Conversion Price as of December 31, 1997 is $2.69.
12. General and Administrative Expenses
General and administrative expenses for the years ended December 31, 1997, 1996
and 1995 consist of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Salaries and Benefits $ 5,035 $ - $ 19
Professional services 2,311 295 212
Other 2,117 1,208 702
------------------ ------------------ ------------------
Total $ 9,463 $ 1,503 $ 933
================== ================== ==================
</TABLE>
The Company incurred significant non-recurring fees for professional services in
1997 (an increase of more than $2,000,000 over 1996) in conjunction with the
reconstitution of the Company, the termination of its REIT status and the
implementation of its current business plan.
F-23
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Income Taxes
The Company and its subsidiaries will elect to file a consolidated federal
income tax return for the year ending December 31, 1997. The provision for
income taxes for the year ended December 31, 1997 is comprised of the following:
Current
Federal -
State -
Local 55
Deferred
Federal -
State -
Local -
--------------
Provision for income taxes $ 55
==============
The Company has federal net operating loss carryforwards ("NOLs") as of December
31, 1997 of approximately $20.2 million. Such NOLs expire through 2012. The
Company also had a federal capital loss carryover of approximately $1.6 million
that can be used to offset future capital gains. Due to CRIL's purchase of
6,959,593 Class A Common Shares from the Company's Former Parent in January 1997
and another prior ownership change, 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 year ended December 31, 1997 is as
follows (in thousands):
<TABLE>
<S> <C> <C>
Federal income tax at statutory rate (34%) $ (1,531) (34.0)%
State and local taxes, net of federal tax benefit 36 0.1%
Tax benefit of net operating loss not currently recognized 1,536 34.0 %
Other 14 0.0 %
------------------------------
$ 55 0.1%
==============================
</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.
The components of the net deferred tax assets recorded under SFAS No. 109 as of
December 31, 1997 is as follows (in thousands):
Net operating loss carryforward $ 9,090
Reserves on other assets and for possible credit losses 3,326
Deferred revenue 616
Reserve for uncollectible accounts 208
---------------
Deferred tax assets $ 13,240
Valuation allowance (13,240)
---------------
$ -
===============
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.
F-24
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Employee Benefit Plans
1997 Long-Term Incentive Share Plan
On May 23, 1997, the board of trustees adopted the 1997 Long-Term Incentive Plan
(the "Incentive Share Plan"), which became effective upon shareholder approval
on July 15, 1997 at the 1997 annual meeting of shareholders (the "1997 Annual
Meeting"). The Incentive Share Plan permits the grant of nonqualified share
option ("NQSO"), incentive share option ("ISO"), restricted share, share
appreciation right ("SAR"), performance unit, performance share and share unit
awards. The Company has reserved an aggregate of 2,000,000 Class A Common Shares
for issuance pursuant to awards under the Incentive Share Plan and the Trustee
Share Plan (as defined below). The maximum number of shares that may be subject
of awards to any employee during the term of the plan may not exceed 500,000
shares and the maximum amount payable in cash to any employee with respect to
any performance period pursuant to any performance unit or performance share
award is $1.0 million. Through December 31, 1997, the Company had outstanding
ISOs and NQSOs (the "Grants") pursuant to the Incentive Share Plan to purchase
an aggregate of 607,000 Class A Common Shares with an exercise price of $6.00
per share (the closing Class A Common Share price on the date of the grant).
None of the options are exercisable at December 31, 1997 and they have a
remaining contractual life of 9-1/2 years.
The ISOs shall be exercisable no more than ten years after their date of grant
and five years after the grant in the case of a 10% shareholder and vest over a
period of three years with one-third vesting at each anniversary date. Payment
of an option may be made with cash, with previously owned Class A Common Shares,
by foregoing compensation in accordance with performance compensation committee
or compensation committee rules or by a combination of these.
Restricted shares may be granted under the Incentive Share Plan with performance
goals and periods of restriction as the board of trustees may designate. The
performance goals may be based on the attainment of certain objective and/or
subjective measures. The Incentive Share Plan also authorizes the grant of share
units at any time and from time to time on such terms as shall be determined by
the board of trustees or administering compensation committee. Share units shall
be payable in Class A Common Shares upon the occurrence of certain trigger
events. The terms and conditions of the trigger events may vary by share unit
award, by the participant, or both.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by the FASB
in October 1995. SFAS No. 123 encourages the adoption of a new fair-value based
accounting method for employee stock-based compensation plans. SFAS No. 123 also
permits companies to continue accounting for stock-based compensation plans as
prescribed by APB Opinion No. 25. However, companies electing to continue
accounting for stock-based compensation plans under the APB Opinion No. 25, must
make pro forma disclosures as if the company adopted the cost recognition
requirements under SFAS No. 123. The Company has continued to account for
stock-based compensation under the APB Opinion No. 25. Accordingly, no
compensation cost has been recognized for the Incentive Share Plan or the
Trustee Share Plan in the accompanying consolidated statement of operations as
the exercise price of the share options granted thereunder equaled the market
price of the underlying shares on the date of the Grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, respectively: (1) dividend yield of zero;
(2) expected volatility of 40%; (3) risk-free interest rate of 5.71% and (4) an
expected life of five years. The weighted average fair value of each share
option granted during the year ended December 31, 1997 was $2.63.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected share price volatility. Because
the Company's employee share options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value
F-25
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Employee Benefit Plans, continued
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee share
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. For the year ended
December 31, 1997, pro forma net loss, after giving effect to the Class A
Preferred Share dividend requirement, and basic and diluted loss per share,
after giving effect to the fair value of the grants would be $6.2 million and
$0.65, respectively.
The pro forma information presented above is not representative of the effect
share options will have on pro forma net income or earnings per share for future
years.
1997 Non-Employee Trustee Share Plan
On May 23, 1997, the board of trustees adopted the 1997 Non-Employee Trustee
Share Plan (the "Trustee Share Plan"), which became effective upon shareholder
approval on July 15, 1997 at the 1997 Annual Meeting. The Trustee Share Plan
permits the grant of NQSO, restricted shares, SAR, performance unit, share and
share unit awards. The Company has reserved an aggregate of 2,000,000 Class A
Common Shares for issuance pursuant to awards under the Trustee Share Plan and
the Incentive Share Plan. Through December 31, 1997, the Company issued to each
of two trustees pursuant to the Trustee Share Plan NQSOs to purchase 25,000
Class A Common Shares with an exercise price of $6.00 per share (the closing
Class A Common Share price on the date of grant).
The board of trustees shall determine the purchase price per Class A Common
Share covered by a NQSO granted under the Trustee Share Plan. Payment of a NQSO
may be made with cash, with previously owned Class A Common Shares, by foregoing
compensation in accordance with board rules or by a combination of these. SARs
may be granted under the plan in lieu of NQSOS, in addition to NQSOS,
independent of NQSOs or as a combination of the foregoing. A holder of a SAR is
entitled upon exercise to receive Class A Common Shares, or cash or a
combination of both, as the board of trustees may determine, equal in value on
the date of exercise to the amount by which the fair market value of one Class A
Common Share on the date of exercise exceeds the exercise price fixed by the
board on the date of grant (which price shall not be less than 100% of the
market price of a Class A Common Share on the date of grant) multiplied by the
number of shares in respect of which the SARs are exercised.
Restricted shares may be granted under the Trustee Share Plan with performance
goals and periods of restriction as the board of trustees may designate. The
performance goals may be based on the attainment of certain objective and/or
subjective measures. The Trustee Share Plan also authorizes the grant of share
units at any time and from time to time on such terms as shall be determined by
the board of trustees. Share units shall be payable in Class A Common Shares
upon the occurrence of certain trigger events. The terms and conditions of the
trigger events may vary by share unit award, by the participant, or both.
F-26
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the statement of financial condition, for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based upon estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and the estimated future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying
value of the Company.
The following methods and assumptions were used to estimate the fair value of
each class financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: The carrying amount of cash on hand and money
market funds is considered to be a reasonable estimate of fair value.
Available-for-sale securities: The fair value was determined based upon the
market value of the securities.
Investing and lending transactions, net: The fair values were estimated by
using current institutional purchaser yield requirements. The fair value of
the investing and lending transactions totaled $252.7 million at December 31,
1997.
Interest rate swap agreement: The fair value was estimated based upon the
amount at which similar financial instruments would be valued. At December
31, 1997, the fair value of the interest rate swaps approximated ($874,000).
Interest rate cap agreement: The fair value was estimated based upon the
amount at which similar financial instruments would be valued. At December
31, 1997, the fair value of the interest rate cap approximated $70,000.
Credit Facility: The Credit Facility was entered into effective September 30,
1997 at floating rates of interest, and therefore, the carrying value is a
reasonable estimate of fair value.
Repurchase obligation: The repurchase obligations bear interest at a floating
rate and the book value is a reasonable estimate of fair value.
The notes included above reflect fair values where appropriate for the financial
instruments of the Company, utilizing the assumptions and methodologies as
defined.
F-27
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Supplemental Schedule of Non-Cash and Financing Activities
The following is a summary of the significant non-cash investing and financing
activities during the year ended December 31, 1997:
<TABLE>
<S> <C>
Stock received as partial compensation for advisory services $ 1,798
In connection with the sale of properties and notes receivable, the Company
entered into various non-cash transactions as follows during the year ended
December 31, 1997 (in thousands):
Sales price less selling costs $ 8,396
Amount due from buyer (1,090)
----------------
Net cash received $ 7,306
================
</TABLE>
Interest paid on the Company's outstanding debt for 1997, 1996 and 1995 was
$1,877,000, $550,000 and $730,000, respectively.
17. Transactions with Related Parties
The Company entered into a consulting agreement, dated as of July 15, 1997, with
a trustee of the Company. The consulting agreement has a term of one year.
Pursuant to the agreement, the Trustee provides consulting services for the
Company including strategic planning, identifying and negotiating mergers,
acquisitions, joint ventures and strategic alliances, and advising as to capital
structure matters. During the year ended December 31, 1997 the Company has
incurred an expense of $300,000 in connection with this agreement.
The Company pays EGI, an affiliate under common control of the Chairman of the
board of trustees, for certain corporate services provided to the Company. These
services include consulting on legal matters, tax matters, risk management,
investor relations and investment banking. During the year ended December 31,
1997, the Company has incurred $134,000 of expenses in connection with these
services.
During 1996 and 1995, the Company shared certain personnel and other costs with
Former Parent. The Company reimbursed Former Parent pursuant to a cost
allocation agreement based on each Company's respective asset values (real
property and notes receivable) that was subject to annual negotiation. During
1996 and 1995, reimbursable costs charged to the Company by Former Owner
approximated $258,000 and $435,000, respectively. The 1995 amount was partially
offset against $202,000 (net of valuation allowances of $141,000) which was
recorded as due from Former Parent at December 31, 1994.
At December 31, 1996, the Company owed $31,000 to the Former Parent pursuant to
the cost allocation agreement. The cost allocation agreement between the Company
and the Former Parent was terminated on January 7, 1997. At December 31, 1997,
the Company had no amounts due to the Former Parent pursuant to the cost
allocation arrangement.
During the year ended December 31, 1997, the Company, through two of its
acquired subsidiaries, earned asset management fees pursuant to agreements with
entities in which two of the executive officers and trustees of the Company have
an equity interest and serve as officers, members or as a general partner
thereof. During the year ended December 31, 1997, the Company earned $327,000
from such agreements, which has been included in the consolidated statement of
operations.
F-28
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Commitments and Contingencies
Leases
The Company leases premises and equipment under operating leases with various
expiration dates. Minimum annual rental payments at December 31, 1997 are as
follows (in thousands):
Years ending December 31:
1998 $ 508
1999 515
2000 197
2001 23
2002 23
---------------
$ 1,266
===============
Rent expense for office space and equipment amounted to $310,000, $40,000 and
$30,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Litigation
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the consolidated financial position or the
results of operations of the company.
Employment Agreements
The Company has employment agreements with three of its executive officers.
The employment agreements with two of the executive officers provide for
five-year terms of employment commencing as of July 15, 1997. Such agreements
contain extension options that extend such agreements automatically unless
terminated by notice, as defined, by either party. The employment agreements
provide for base annual salaries of $500,000, which will be increased each
calendar year to reflect increases in the cost of living and will otherwise be
subject to increase in the discretion of the board of trustees. Such executive
officers are also entitled to annual incentive cash bonuses to be determined by
the board of trustees based on individual performance and the profitability of
the Company and are participants in the Incentive Share Plan and other employee
benefit plans of the Company.
The employment agreement with another executive officer provides for a two-year
employment term. Such agreement contains extension options that extend the
agreement automatically unless terminated by notice by either party. The
employment agreement provides for base annual salary of $300,000, annual
bonuses, as specified, at the end of 1997 and 1998, and participation in the
Incentive Share Plan and other employee benefit plans of the Company. Such
executive officer is also entitled to an annual incentive cash bonus to be
determined by the board of trustees based on individual performance and the
profitability of the Company.
F-29
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. Summary of Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
--------------- --------------- --------------- ---------------
1997
<S> <C> <C> <C> <C>
Revenues $ 613 $ 371 $ 2,729 $ 4,737
Net income (loss) $ (508) $ (352) $ (1,593) $ (2,104)
Class A Preferred Share dividends and
dividend requirement $ - $ - $ 679 $ 792
Net income (loss) per Class A
Common Share $ (0.06) $ (0.04) $ (0.25) $ (0.27)
1996
Revenues $ 871 $ 780 $ 771 $ 733
Net income (loss) $ 440 $ (213) $ (514) $ (127)
Net income (loss) per share $ 0.05 $ (0.02) $ (0.06) $ (0.02)
1995
Revenues $ 879 $ 836 $ 942 $ 878
Net income (loss) $ 242 $ 44 $ 100 $ (3,164)
Net income (loss) per share $ 0.03 $ 0.00 $ 0.01 $ (0.34)
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share".
F-30
<PAGE>
Annex G
As filed with the Securities and Exchange Commission on August 14, 1998
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, 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 August 13, 1998
- ------------------------------------------- ------------------------------
Class A Common Shares of Beneficial Interest, 18,213,816
$1.00 par value ("Class A Common Shares")
<PAGE>
CAPITAL TRUST
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Part I. Financial Information
Item 1: Financial Statements 1
Consolidated Balance Sheets - June 30, 1998 (unaudited) and
December 31, 1997 (audited) 1
Consolidated Statements of Operations - Three and Six Months
Ended June 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Changes in Shareholders' Equity -
Six Months Ended June 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows - Six Months Ended June
30, 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 12
Part II. Other Information
Item 1: Legal Proceedings 18
Item 2: Changes in Securities 18
Item 3: Defaults Upon Senior Securities 18
Item 4: Submission of Matters to a Vote of Security Holders 18
Item 5: Other Information 18
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 20
</TABLE>
<PAGE>
Capital Trust and Subsidiaries
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------------- ----------------
(unaudited) (audited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 9,804 $ 49,268
Commercial mortgage-backed securities and other available-for-sale
securities, at fair value 67,688 11,975
Loans and other investments, net of $1,702 (unaudited) and $462
reserve for possible Credit losses at June 30, 1998 and
December 31, 1997, respectively
545,530 251,812
Excess of purchase price over net tangible assets acquired, net 319 331
Deposits and other receivables 2,438 284
Accrued interest receivable 5,520 818
Prepaid and other assets 5,962 2,878
==================== ====================
Total assets $ 637,261 $ 317,366
==================== ====================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 8,758 $ 5,718
Notes payable 14,611 4,953
Credit Facilities 353,894 79,864
Repurchase obligations 105,954 82,173
Deferred origination fees and other revenue 4,989 1,369
-------------------- --------------------
Total liabilities 488,206 174,077
-------------------- --------------------
Commitments and contingencies
Shareholders' equity:
Class A Preferred Shares, $1.00 par value, $0.26 cumulative annual
dividend, 12,639 shares authorized, 12,268 shares issued and
outstanding (liquidation preference of $33,000) 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 June 30, 1998 72 -
Additional paid-in capital 158,790 158,137
Unearned compensation (646) -
Accumulated other comprehensive income (55) 387
Accumulated deficit (39,531) (45,660)
-------------------- --------------------
Total shareholders' equity 149,055 143,289
-------------------- --------------------
Total liabilities and shareholders' equity $ 637,261 $ 317,366
==================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 1 -
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1998 and 1997
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- -------------------------------------
1998 1997 1998 1997
-------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Income from loans and other investments:
Interest and related income $ 14,066 $ 40 $ 22,043 $ 76
Less: interest and related expenses 6,516 - 9,597 -
--------------
---------------- ---------------- -----------------
Net income from loans and other investments 7,550 40 12,446 76
-------------- ---------------- ----------------- -----------------
Other revenues:
Advisory and investment banking fees 5,790 - 8,650 -
Rental income - 15 - 305
Other interest income 310 316 680 603
Loss on sale of rental properties - - - (432)
-------------- ---------------- ----------------- ----------------
Total other revenues 6,100 331 9,330 476
-------------- ---------------- ----------------- -----------------
Other expenses:
General and administrative 4,020 710 7,261 1,142
Other interest expense 105 24 211 123
Rental property expenses - (14) - 123
Depreciation and amortization 62 3 108 24
Provision for possible credit losses 760 - 1,240 -
-------------- ---------------- ----------------- -----------------
Total other expenses 4,947 723 8,820 1,412
-------------- ---------------- ----------------- -----------------
Net income (loss) before income taxes 8,703 (352) 12,956 (860)
Provision for income taxes 3,679 - 5,259 -
-------------- ---------------- ----------------- -----------------
Net income (loss) $ 5,024 $ (352) $ 7,697 $ (860)
Less: Class A Preferred Share dividend and
dividend requirement 784 - 1,568 -
-------------- ---------------- ----------------- -----------------
Net income (loss) allocable to Class A
Common Shares $ 4,240 $ (352) $ 6,129 $ (860)
============= ================ ================= =================
Per share information:
Net income (loss) per Class A Common Share:
Basic $ 0.23 $ (0.04) $ 0.34 $ (0.09)
============= ================ ================= =================
Diluted $ 0.16 $ (0.04) $ 0.25 $ (0.09)
============= ================ ================= =================
Weighted average Class A Common Shares
outstanding:
Basic 18,229,650 9,157,150 18,218,835 9,157,150
============= ================ ================= =================
Diluted 30,770,567 9,157,150 30,744,162 9,157,150
============= ================ ================= =================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-2-
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Six Months Ended June 30, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Restricted
Class A Class A Class A
Comprehensive Common Preferred Common
Income (Loss) Shares Shares Shares
------------------ ----------------------------------------
<S> <C> <C> <C> <C>
Six months ended June 30, 1997
- -----------------------------
Balance at December 31, 1996 $ - $ - $ 9,157 $ -
Net loss (860) - - -
Change in unrealized gain (loss) 157 - - -
on available-for-sale securities
Other - - - -
================== ========================================
Balance at June 30, 1997 $ (703) $ - $ 9,157 $ -
================== ========================================
Six months ended June 30, 1998
- ------------------------------
Balance at December 31, 1997 $ - $ 12,268 $18,157 $ - $
Net income 7,697 - - -
Change in unrealized gain (loss) (442) - - -
on available-for-sale securities
Issuance of restricted - - - 72
Class A Common Shares
Restricted Class A Common
Shares earned - - - -
Class A Preferred Share
Dividend - - - -
================= ========================================
Balance at June 30, 1998 $ 7,255 $ 12,268 $18,157 $ 72
================= ========================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-In Unearned Comprehensive Accumulated
Capital Compensation Income Deficit Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1997
- -----------------------------
Balance at December 31, 1996 $ 55,098 $ - $ (22) $ (39,762) $ 24,471
Net loss - - - (860) (860)
Change in unrealized gain (loss) - - 157 - 157
on available-for-sale securities
Other 27 - - - 27
============================================================================
Balance at June 30, 1997 $ 55,125 $ - $ 135 $ (40,622) $ 23,795
============================================================================
Six months ended June 30, 1998
- ------------------------------
Balance at December 31, 1997 $ 158,137 $ - $ 387 $ (45,660) $ 143,289
Net income - - - 7,697 7,697
Change in unrealized gain (loss) - - (442) - (442)
on available-for-sale securities
Issuance of restricted 653 (725) - - -
Class A Common Shares
Restricted Class A Common
Shares earned - 79 - - 79
Class A Preferred Share
Dividend - - - (1,568) (1,568)
===========================================================================
Balance at June 30, 1998 $ 158,790 $ (646) $ (55) $ (39,531) $ 149,055
============================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-3-
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
(in thousands)(unaudited)
<TABLE>
<CAPTION>
1998 1997
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,697 $ (860)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 108 25
Restricted Class A Common Shares earned 79 -
Net amortization of premiums and accretion of discounts on loans
and other investments 477 -
Loss on sale of investments and properties - 432
Provision for possible credit losses 1,240 -
Changes in assets and liabilities:
Deposits and receivables (2,154) (89)
Accrued interest receivable (4,702) -
Prepaid and other assets (2,940) (403)
Deferred revenue 3,620 -
Accounts payable and accrued expenses 3,040 834
Other liabilities - (70)
------------------- ------------------
Net cash provided by (used in) operating activities 6,465 (131)
------------------- ------------------
Cash flows from investing activities:
Origination and purchase of loans and other investments (410,599) (49,524)
Principal collections of loans and other investments 54,843 16
Purchases of equipment and leasehold improvements (240) -
Improvements to rental properties - (64)
Proceeds from sale of rental properties - 7,306
Principal collections on available-for-sale securities 4,166 1,576
------------------- ------------------
Net cash used in investing activities (351,830) (40,690)
------------------- ------------------
Cash flows from financing activities:
Proceeds from repurchase obligations 41,837 42,451
Repayment of repurchase obligations (18,056) -
Proceeds from credit facilities 383,289 -
Repayment of credit facilities (109,259) -
Proceeds from notes payable 10,170 -
Repayment of notes payable (512) (4,296)
Dividends paid on Class A Preferred Shares (1,568) -
Additional Paid-in Capital - 27
------------------- ------------------
Net cash provided by financing activities 305,901 38,182
------------------- ------------------
Net decrease in cash and cash equivalents (39,464) (2,639)
Cash and cash equivalents at beginning of period 49,268 4,698
=================== ==================
Cash and cash equivalents at end of period $ 9,804 $ 2,059
=================== ==================
Supplemental disclosure of cash flow information
Interest paid during the period $ 7,640 $ 123
=================== ==================
Taxes paid during the period $ 3,139 $ -
=================== ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 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 and six months ended June
30, 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 June 30, 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 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 outstanding
during the period. Diluted EPS is based on the net earnings applicable to Class
A Common Shares plus dividends on the 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
options to purchase Class A Common Shares. At June 30, 1998, the Class A
Preferred Shares and dilutive portion of options to purchase Class A Common
Shares were considered Class A Common Share equivalents for purposes of
calculating Diluted EPS. At June 30, 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. Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130") which is effective for
fiscal years beginning after December 15, 1997. The statement changes the
reporting of certain items currently reported in the shareholders' equity
section of the balance sheet and establishes standards for reporting of
comprehensive income and its components in a full set of general purpose
financial statements. The Company has adopted this standard effective January 1,
1998. Total comprehensive income (loss) was $4,700,000 and $(236,000) for the
three months ended June 30, 1998 and 1997, respectively, and $7,255,000 and
$(703,000) for the six months ended June 30, 1998 and 1997, respectively. The
primary component of comprehensive income other than net income was unrealized
gain (loss) on available-for-sale securities.
-6-
5. Loans and Other Investments
At June 30, 1998, the amount and weighted average interest rate the Company's
loans and other investments by category was as follows (in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Amount Interest Rate
------------------- -------------------
<S> <C> <C>
Mortgage Loans $ 277,653 11.43%
Mezzanine Loans 267,539 11.60%
Other mortgage loans receivable 2,040 8.41%
-------------------
Total loans and other investments 547,232 11.50%
Less: Reserve for possible credit losses (1,702)
===================
Net loans and other investments $ 545,530
===================
</TABLE>
At June 30, 1998, $414.2 million of the aforementioned loans and other
investments bear interest at floating rates ranging from LIBOR plus 320 basis
points to LIBOR plus 700 basis points before amortization of fees, premiums and
discounts. The remaining $133.0 million of loans and other investments were
originated or purchased with fixed rates ranging from 8% to 12% at June 30,
1998. All of the loans and other investments with fixed rates were the subject
of interest rate swaps to provide a floating rate. The weighted average interest
rate in effect at June 30, 1998, including interest rate swaps and amortization
of fees, premiums and discounts, was 11.50%.
During the six months ended June 30, 1998, the Company completed eighteen new
loan and investment transactions totaling approximately $436.7 million and
provided $7.4 million of additional fundings on four existing loans. The Company
funded $410.6 million of the foregoing loans and investments through June 30,
1998 and had unfunded commitments on such assets totaling $45.4 million at June
30, 1998.
During the quarter ended June 30, 1998, due to prepayments made on underlying
securities that reduced the interest rate/risk profile and maturity of a
subordinated interest security, the Company concluded that it no longer
anticipated holding this security to maturity. The security was sold during the
quarter ended September 30, 1998 at par. Because of this decision to sell a
held-to-maturity security, the Company has transferred all subordinated
interests, which have a book value of $60,321 as of June 30, 1998, from
held-to-maturity securities to available-for-sale at amortized costs which
approximated market value.
At June 30, 1998, the Company had committed to originate one loan for $28.0
million subject to definitive documentation (of which $23.0 million was funded
in early July 1998) and had letters of intent outstanding for various other
lending transactions, which were subject to satisfaction of certain conditions.
-7-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
6. Long-Term Debt
Credit Facilities
Effective January 1, 1998, pursuant to an amended and restated credit agreement,
the Company increased its existing line of credit with a commercial lender to
$250 million (the "Credit Facility") and subsequently further amended the credit
agreement to increase the facility to $300 million effective June 22, 1998. An
additional commitment fee was paid when the Company's borrowings exceeded $250
million. The Credit Facility provides for advances to fund lender-approved loans
and investments made by the Company. The amended and restated agreement expires
on December 31, 2000.
On June 8, 1998, the Company entered into an additional credit agreement with
another commercial lender that provides for a $300 million line of credit that
expires in November 1999 (the "Second Credit Facility" together with the Credit
Facility, the "Credit Facilities"). The Second Credit Facility provides for
advances to fund lender-approved loans and investments made by the Company (such
loans and investments together with loans and investments approved under the
Credit Facility, the "Funded Portfolio Assets").
The Company incurred an initial commitment fee upon the signing of the Second
Credit Facility and will pay an additional commitment fee when borrowings exceed
$250 million. Future repayments and redrawdowns of amounts previously subject to
the drawdown fee will not require the Company to pay any additional fees. The
Second Credit Facility provides for margin calls on asset-specific borrowings in
the event of asset quality and/or market value deterioration as determined under
the Second Credit Facility. The Second Credit Facility contains customary
representations and warranties, covenants and conditions and events of default.
The Second Credit Facility also contains a covenant obligating the Company to
avoid undergoing an ownership change that results in Craig M. Hatkoff, John R.
Klopp or Samuel Zell no longer retaining their senior offices and trusteeships
with the Company and practical control of the Company's business and operations.
The obligations of the Company under the Credit Facilities are secured by
pledges of the Funded Portfolio Assets acquired with advances under the Credit
Facilities. Borrowings under the Credit Facilities bear interest at specified
rates over LIBOR (averaging approximately 8.02% for the borrowings outstanding
at June 30, 1998) which rates vary according to the credit quality of the Funded
Portfolio Assets and the advance rate.
On June 30, 1998, the unused amounts available under the Credit Facilities were
$246.1 million.
-8-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
Repurchase Obligations
In May 1998, the Company entered into a repurchase agreement in connection with
the purchase of a subordinated participation in a note. At June 30, 1998, the
Company has sold such assets totaling $19.0 million and has a liability to
repurchase these assets for $15.2 million. The liability bears interest at
specified rates over LIBOR (reflecting a total borrowing rate of 7.16% at June
30, 1998) and matures in May 1999.
7. 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 six months
ended June 30, 1998 is comprised of the following (in thousands):
Current
Federal $ 2,842
State 1,270
Local 1,147
Deferred
Federal -
State -
Local -
==============
Provision for income taxes $ 5,259
==============
The Company has federal net operating loss carryforwards ("NOLs") as of June 30,
1998 of approximately $17.7 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 Company also has approximately $3.5 million of NOL's from losses in
1997 (after the ownership changes described above) that can be utilized against
taxable income in 1998.
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to the effective income tax rate for the quarter ended June 30, 1998 is as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Federal in/come tax at statutory rate (34%) $ 4,405 34.0%
State and local taxes, net of federal tax benefit 1,595 12.3
Tax benefit of utilization of net operating loss carryforward (850) (6.5)
Other 109 0.8
------------------------------
$ 5,259 40.6%
==============================
</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.
-9-
<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
June 30, 1998 are as follows (in thousands):
Net operating loss carryforward $ 8,240
Reserves on other assets and for possible credit losses 3,552
Deferred revenue 616
Reserve for uncollectible accounts 208
-----------------
Deferred tax assets $ 12,616
Valuation allowance (12,616)
-----------------
$ -
=================
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.
8. 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 Company
Non-Employee Trustee Share Plan. The maximum number of shares that may be
subject of awards to any employee during the term of the Incentive Share 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 June 30, 1998, the Company issued an aggregate of
82,000 options to acquire Class A Common Shares with an exercise price of
between $10.00 and $11.38 per share (which were issued at or above the Class A
Common Share price on the date of the grant).
-10-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
The following table summarizes the activity under the Incentive Share Plan for
the six months ended June 30, 1998:
<TABLE>
<CAPTION>
Options Exercise Price
Outstanding per Share
-------------------------- --------------------------
<S> <C> <C>
Outstanding at January 1, 1998 607,000 $6.00
Granted 1,007,250 $10.00 - $11.38
Exercised -
Canceled 57,500 $6.00 - $10.00
-------------------------- --------------------------
========================== ==========================
Outstanding at June 30, 1998 1,556,750 $6.00 - $11.38
========================== ==========================
</TABLE>
9. Subsequent Event
On July 28, 1998, the Company privately placed 150,000 8.25% Step Up Convertible
Trust Preferred Securities (liquidation amount $1,000 per security) with an
aggregate liquidation amount of $150 million (the "Convertible Trust Preferred
Securities"). The Convertible Trust Preferred Securities were issued by the
Company's consolidated statutory trust subsidiary, CT Convertible Trust I (the
"Trust"). This private placement transaction was completed concurrently with the
related issuance and sale to the Trust of the Company's 8.25% Step Up
Convertible Junior Subordinated Debentures in the aggregate principal amount of
$154,650,000 (the "Convertible Debentures"). Distributions on the Convertible
Trust Preferred Securities are payable quarterly in arrears on each calendar
quarter-end and correspond to the payments of interest made on the Convertible
Debentures, the sole assets of the Trust. Distributions are payable only to the
extent payments are made in respect to the Convertible Debentures.
The Company received $145.2 million in net proceeds, after original issue
discount and transaction expenses, pursuant to the above transactions,
reflecting an original issue discount of 3% from the liquidation amount of the
Convertible Trust Preferred Securities. The proceeds were initially used to pay
down the Company's Credit Facilities. The Convertible Trust Preferred Securities
are convertible at any time by the holders thereof into the Company's listed
Class A Common Shares at a conversion price of $11.70. The Convertible
Debentures have a 20-year maturity and are non-callable for five years. Upon
repayment of the Convertible Debentures at maturity or upon redemption, the
proceeds of such repayment or payment shall be simultaneously paid and applied
to redeem, among other things, the Convertible Trust Preferred Securities. If
the securities have not been redeemed by September 30, 2004, the distribution
rate will step up by 0.75% per annum. The 3% ($4.5 million) discount on the
issuance will be amortized over the life of the Convertible Trust Preferred
Securities or 20 years.
-11-
<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
-12-
<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. In June
1998, the Veqtor Notes were converted into preferred units of Veqtor by
agreement between the common members of Veqtor and the institutional investors.
Pursuant to an amended and restated limited liability company agreement of
Veqtor, the Veqtor notes were converted into preferred units of Veqtor (the
"Veqtor Preferred Units") and the institutional investors were admitted as
preferred members of Veqtor. Veqtor may in the future redeem the Veqtor
Preferred Units for an aggregate of 9,899,710 shares (assuming redemption on the
earliest possible date, July 16, 1999). The common members of Veqtor and Veqtor
agreed with the Company in December 1997 that Veqtor should redeem the preferred
units then authorized by the original limited liability company agreement of
Veqtor in effect at such time at the earliest date upon which Veqtor has the
right to effectuate such redemption. Veqtor has confirmed to the Company that
the foregoing agreement obligates Veqtor to redeem the Veqtor Preferred Units
according to the timetable specified therein.
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 line of credit ("Credit Facility") from a
commercial lender, which was subsequently increased to $250 million as of
January 1, 1998 and $300 million as of June 22, 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.
On July 28, 1998, the Company privately placed 150,000 8.25% Step Up
Convertible Trust Preferred Securities (liquidation amount $1,000 per security)
with an aggregate liquidation amount of $150 million (the "Convertible Trust
Preferred Securities"). The Convertible Trust Preferred Securities were issued
by the Company's consolidated statutory trust subsidiary, CT Convertible Trust I
(the "Trust"). This private placement transaction was completed concurrently
with the related issuance and sale to the Trust of the Company's 8.25% Step Up
Convertible Junior Subordinated Debentures in the aggregate principal amount of
$154,650,000 (the "Convertible Debentures"). Distributions on the Convertible
Trust Preferred Securities are payable quarterly in arrears on each calendar
quarter-end and correspond to the payments of interest made on the Convertible
Debentures, the sole assets of the Trust. Distributions are payable only to the
extent payments are made in respect to the Convertible Debentures.
The Company received $145.2 million in net proceeds, after original
issue discount and transaction expenses, pursuant to the above transactions,
reflecting an original issue discount of 3% from the liquidation amount of the
Convertible Trust Preferred Securities. The proceeds were initially used to pay
down the Company's Credit Facilities. The Convertible Trust Preferred
-13-
<PAGE>
Securities are convertible at any time by the holders thereof into the Company's
listed Class A Common Shares at a conversion price of $11.70. The Convertible
Debentures have a 20-year maturity and are non-callable for five years. Upon
repayment of the Convertible Debentures at maturity or upon redemption, the
proceeds of such repayment or payment shall be simultaneously paid and applied
to redeem, among other things, the Convertible Trust Preferred Securities. If
the securities have not been redeemed by September 30, 2004, the distribution
rate will step up by 0.75% per annum. The 3% ($4.5 million) discount on the
issuance will be amortized over the life of the Convertible Trust Preferred
Securities or 20 years.
Overview of Financial Condition
During the six months ended June 30, 1998, the Company completed
eighteen new loan and investment transactions totaling approximately $436.7
million and provided $7.4 million of additional fundings on four existing loans.
The Company funded $410.6 million of the foregoing loans and investments through
June 30, 1998, which enabled the Company to grow its assets from $317.4 million
to $637.3 million. The significant infusion of cash from the public offering of
Class A Common Shares in December 1997 allowed the Company to expand its
specialty finance company operations. The equity capital provided by the public
offering, used in combination with additional borrowings under the Credit
Facilities (as defined below) 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 eighteen loan and investment transactions. These
include eight Mortgage Loan transactions totaling $153.5 million (of which $16.1
million remains unfunded at June 30, 1998), eight Mezzanine Loan transactions
totaling $246.9 million (of which $17.4 million remains unfunded at June 30,
1998), and two acquisitions of three classes of subordinated interests issued by
a financial asset securitization investment trust totaling $36.3 million. The
Company also funded $7.4 million of commitments under four 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 June 30, 1998, the Company
had outstanding loans and investments totaling in excess of $581 million,
additional commitments for fundings on outstanding loans of approximately $45.4
million and a $28.0 million commitment to originate a new mortgage loan (of
which $23.0 million was funded in early July 1998).
When possible, in connection with the acquisition of investments, the
Company obtains seller financing in the form of repurchase agreements. Four of
the transactions completed during the six months ended June 30, 1998 described
above were financed in this manner representing total original repurchase
financings of $41.8 million. These financings are generally completed at
discounted terms as compared to those available under the Credit Facilities.
Effective January 1, 1998, pursuant to an amended and restated credit
agreement, the Company increased its line of credit under the Credit Facility to
$250 million and subsequently increased the facility to $300 million effective
June 22, 1998. An additional commitment fee was paid when the Company's
borrowings exceeded $250 million. The Credit Facility provides
-14-
<PAGE>
for advances to fund lender-approved loans and investments made by the Company.
The Credit Facility expires on December 31, 2000.
On June 8, 1998, the Company entered into an additional credit
agreement with another commercial lender that provides for a $300 million line
of credit that expires in November 1999 (the "Second Credit Facility" together
with the Credit Facility, the "Credit Facilities"). The Second Credit Facility
provides for advances to fund lender-approved loans and investments made by the
Company (such loans and investments together with loans and investments approved
under the Credit Facility, "Funded Portfolio Assets").
The Company incurred an initial commitment fee upon the signing of the
Second Credit Facility and an additional commitment fee will be due when
borrowings exceed $250 million. Future repayments and redrawdowns of amounts
previously subject to the drawdown fee will not require the Company to pay any
additional fees. The Second Credit Facility provides for margin calls on
asset-specific borrowings in the event of asset quality and/or market value
deterioration as determined under the Second Credit Facility. The Second Credit
Facility contains customary representations and warranties, covenants and
conditions and events of default. The Second Credit Facility also contains a
covenant obligating the Company to avoid undergoing an ownership change that
results in Craig M. Hatkoff, John R. Klopp or Samuel Zell no longer retaining
their senior offices and trusteeships with the Company and practical control of
the Company's business and operations.
At June 30, 1998, the Company had $353.9 million of outstanding
borrowings under the Credit Facilities.
As of June 30, 1998, certain of the Company's loans and other
investments have been hedged so that the assets and the corresponding
liabilities were matched at floating rates over LIBOR. The Company has entered
into interest rate swap agreements for notional amounts totaling approximately
$87.4 million with financial institution counterparties whereby the Company
swapped fixed rate instruments, which averages approximately 6.04%, for floating
rate instruments based on the London Interbank Offered Rate ("LIBOR"). The
agreements mature at varying times from December 1998 to July 2008.
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.
-15-
<PAGE>
Comparison of the Six and Three Months Ended June 30, 1998 to the
Six and Three Months Ended June 30, 1997
The Company reported net income allocable to Class A Common Shares of
$6,129,000 for the six months ended June 30, 1998, an increase of $6,989,000
from the net loss allocable to Class A Common Shares of $860,000 for the six
months ended June 30, 1997. The Company reported net income allocable to Class A
Common Shares of $4,240,000 for the three months ended June 30, 1998, an
increase of $4,592,000, from the net loss allocable to Class A Common Shares of
$352,000 for the three months ended June 30, 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 $12,370,000 to
$12,446,000 for the six months ended June 30, 1998 over the $76,000 for the six
months ended June 30, 1997. Net income from loans and other investments
increased $7,510,000 to $7,550,000 for the three months ended June 30, 1998 over
the $40,000 for the three months ended June 30, 1997. This increase is primarily
attributable to the revenue earned by the Company from new loans and investments
originated or acquired by the Company that increased by more than $550 million
from June 30, 1997 to June 30, 1998. The increase in net income was partially
offset by the interest paid on repurchase agreements and the Credit Facilities
during the six months and quarter ended June 30, 1998. No interest expense for
these types of borrowings was incurred during the six months or quarter ended
June 30, 1997.
During the six months ended June 30, 1998, other revenues increased
$8,854,000 to $9,330,000 over the same period in 1997. The increase during the
three months ended June 30, 1998 over the same period in 1997 was $5,769,000 to
$6,100,000. The increase for the six months ended June 30, 1998 was primarily
due to the addition of $8,650,000 of advisory and investment banking fees
generated by Victor Capital and its related subsidiaries, which was partially
offset by a $305,000 decrease in rental income as the Company sold its remaining
rental properties during the first quarter of 1997. The sales of the rental
properties in the first quarter of 1997 resulted in the Company recognizing a
loss of $432,000. The Company sold a shopping center in Sacramento, California
and recognized a net loss of approximately $34,000. The Company also sold a
retail property located in Kirkland, Washington, resulting in a net loss of
approximately $398,000, the majority of which was attributable to transfer taxes
and the elimination of unamortized tenant improvements and leasing commissions.
The increase for the three months ended June 30, 1998 was primarily due to the
addition of $5,790,000 of advisory and investment banking fees generated by
Victor Capital and its related subsidiaries.
Other expenses increased from $1,412,000 for the six months ended June
30, 1997 to $8,820,000 for six months ended June 30, 1998 and from $723,000 for
the three months ended June 30, 1997 to $4,947,000 for the three months ended
June 30, 1998. The increase was primarily due to the additional general and
administrative expenses necessary for the commencement and continuation of
full-scale operations as a specialty finance company, the largest component of
such expenses is employee salaries and related costs, and the increase in the
provision for possible credit losses. As of June 30, 1998, the Company had 42
full time employees as compared to none at June 30, 1997. The provision for
possible credit losses was $1,240,000 for the six months ended June 30, 1998 and
was $760,000 for the three months ended June 30, 1998 as the Company provided
reserves on its loan and investment portfolio pursuant to
-16-
<PAGE>
its reserve policy. The Company had no provision for possible credit loss in the
quarter or six months ended June 30, 1997.
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 six and three months ended June 30,
1998, the Company accrued $5,259 and 3,679, respectively, of income tax expense
for federal, state and local income taxes. For federal purposes, the Company
utilized one half of the expected net operating loss carryforward to be utilized
in 1998 in calculating the accrual for the six months ended June 30, 1998 and
one quarter of the expected net operating loss carryforward to be utilized in
1998 in calculating the accrual for the three months ended June 30, 1998.
The preferred share dividend and dividend requirement arose in 1997 as
a result of the Company's issuance of $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 for the 12,267,658 shares outstanding.
Liquidity and Capital Resources
At June 30, 1998, the Company had $9,804,000 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, additional
borrowings under the Company's Credit Facilities and the $145.2 million in net
proceeds, after original issue discount and transaction expenses, from the
issuance of the Convertible Trust Preferred Securities. The primary demands on
the Company's capital resources will be the funding required for the origination
or acquisition 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 $39,464,000 for the
six months ended June 30, 1998, compared to $2,639,000 for the six months ended
June 30, 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 six months of 1998 offset by
additional borrowings. Cash provided by operating activities during the six
months ended June 30, 1998 increased by $6,596,000 to $6,465,000, from cash used
in operating activities of $131,000 during the same period of 1997. For the six
months ended June 30, 1998, cash used in investing activities was $351,830,000,
an increase of $311,140,000 from $40,690,000 during the same period in 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
$267,719,000 to $305,901,000 from $38,182,000, was due primarily to the proceeds
of repurchase obligations and net borrowings under the Credit Facilities.
At June 30, 1998, the Company has three outstanding notes payable
totaling $14,611,000, outstanding borrowings on the Credit Facilities of
$353,894,000 and outstanding repurchase obligations of $105,954,000.
-17-
<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 Master Loan and Security Agreement, dated as of June 8,
1998, between the Company and Morgan Stanley Mortgage
Capital Inc.
10.2 CMBS Loan Agreement, dated as of June 30, 1998, between
the Company and Morgan Stanley & Co. International
Limited.
10.3 First Amendment to Amended and Restated Credit Agreement,
dated as of June 22, 1998, between the Company and German
American Capital Corporation.
11.1 Statements regarding computation of earnings (loss) per
share
27.1 Financial Data Schedules
-18-
<PAGE>
(b) Reports on Form 8-K
During the fiscal quarter ended June 30, 1998, the Company filed five
Current Reports on Form 8-K:
(1) Current Report on Form 8-K, dated March 20, 1998, as filed
with the Commission on April 6, 1998, reporting under Item 2
"Acquisition or Disposition of Assets" the origination and
funding in part of a subordinate acquisition loan obligation.
(2) Current Report on Form 8-K, dated April 21, 1998, as filed
with the Commission on April 23, 1998, reporting under Item 2
"Acquisition or Disposition of Assets" the origination and
funding of a junior mezzanine loan obligation.
(3) Current Report on Form 8-K, dated May 14, 1998, as filed with
the Commission on May 22, 1998, reporting under Item 2
"Acquisition or Disposition of Assets" the acquisition of a
subordinate interest in a mortgage loan and tenant improvement
facility.
(4) Current Report on Form 8-K, dated June 2, 1998, as filed with
the Commission on June 12, 1998, reporting under Item 2
"Acquisition or Disposition of Assets" the origination and
funding in part of a first mortgage acquisition and
improvements loan.
(5) Current Report on Form 8-K, dated June 16, 1998, as filed with
the Commission on June 24, 1998, reporting under Item 2
"Acquisition or Disposition of Assets" the origination and
funding of a mezzanine loan.
-19-
<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
August 12. 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
-20-
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Maryland General Corporation Law ("MGCL") permits a Maryland
corporation to include in its charter a provision limiting the liability of its
directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
charter of Capital Trust, Inc. (the "New Company") contains such a provision
which eliminates such liability to the maximum extent permitted by Maryland law.
The charter of the New Company authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director, trustee, officer, agent, employee or plan
administrator of the New Company or (b) any individual who, at the request of
the New Company, serves or has served in any of these capacities another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise. The Bylaws of the New Company obligate it, to the maximum
extent permitted by Maryland law, to indemnify (which, consistent with the
provisions of the charter, the New Company considers to include the obligation
to pay or reimburse reasonable expenses in advance of final disposition of a
proceeding) (a) any present or former director or officer of the New Company or
(b) any individual who, at the request of the New Company, serves or has served
another corporation, partnership, joint venture, trust or other enterprise as a
director or officer.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgements, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However under the MGCL, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court order indemnification and
then only for expenses. In addition, the MGCL permits a corporation to advance
reasonable expenses to a director or officer upon the corporation's receipt of
(a) a written affirmation by the director or officer of his good faith belief
that he has met the standard of conduct necessary for indemnification by the
corporation, and (b) a written undertaking by him or on his behalf to repay the
amount paid or reimbursed by the corporation if it shall ultimately be
determined that the standard of conduct was not met.
The New Company has a claims-made directors and officers liability
insurance policy that insures the trustees and officers of the New Company
against loss from claimed insured wrongful acts and insures the New Company for
indemnifying the trustees and officers against such loss. The policy limit of
liability is $5,000,000 each policy year and is subject to exceptions for each
loss of $100,000, or $250,000 with respect to securities laws related losses,
for the New Company.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit Number Description
2.1 Interest Purchase Agreement, dated as of June 16, 1997,
by and between John R. Klopp, Craig M. Hatkoff, and
Valentine Wildove & Company, Inc. and Capital Trust
(filed as Exhibit 2.1 to Capital Trust's Current Report
on Form 8-K filed on July 30, 1997 and incorporated
herein by reference).
**2.2 Agreement and Plan of Merger, by and among Capital Trust,
the Registrant and the Captrust Limited Partnership,
dated as of August __, 1998 (included as Annex A to the
proxy statement/prospectus forming part of this
registration statement and incorporated herein by
reference).
**3.1 Form of Amended and Restated Charter of the Registrant
(included as Exhibit A in Annex A to the proxy
statement/prospectus forming part of this registration
statement and incorporated herein by reference).
**3.2 Form of Amended and Restated By-Laws of the Registrant
(included as Exhibit B in Annex A to the proxy
statement/prospectus forming part of this registration
statement and incorporated herein by reference).
3.3 Amended and Restated Declaration of Trust, dated July 15,
1997, of Capital Trust (filed as Exhibit 3.1 to Capital
Trust's Current Report on Form 8-K filed on July 15, 1997
and incorporated herein by reference).
3.4 By-Laws of Capital Trust (filed as Exhibit 3.2 to Capital
Trust's Current Report on Form 8-K filed on July 15, 1997
and incorporated herein by reference).
***4.1 Form of Articles Supplementary with respect to Class A
9.5% Cumulative Convertible Preferred Stock of the
Registrant (included as Exhibit C in Annex A to the proxy
statement prospectus forming part of this registration
statement and incorporated herein by reference).
***4.2 Form of Articles Supplementary with respect to Class B
9.5% Cumulative Convertible Non-Voting Preferred Stock of
the Registrant (included as Exhibit D in Annex A to the
proxy statement prospectus forming part of this
registration statement and incorporated herein by
reference).
4.3 Certificate of Designation, Preferences and Rights of the
Class A 9.5% Cumulative Convertible Preferred Shares and
the Class B 9.5% Cumulative Convertible Non-voting
Preferred Shares of Capital Trust (filed as Exhibit 4.2
to Capital Trust's Current Report on Form 8-K filed on
July 15, 1997 and incorporated herein by reference).
4.4 Certificate of Trust of CT Convertible Trust I (filed as
Exhibit 4.1 to Capital Trust's Current Report on Form 8-K
filed August 6, 1998 and incorporated herein by
reference).
II-2
<PAGE>
4.5 Preferred Securities Purchase Agreement dated as of July
27, 1998 among Capital Trust, CT Convertible Trust I,
Vornado Realty L.P., EOP Limited Partnership, Mellon Bank
N.A., as trustee for General Motors Hourly-Rate Employees
Pension Trust, and Mellon Bank N.A., as trustee for
General Motors Salaried Employees Pension Trust (filed as
Exhibit 4.2 to Capital Trust's Current Report on Form 8-K
filed August 6, 1998 and incorporated herein by
reference).
4.6 Declaration of Trust of CT Convertible Trust I ("CT Trust
I") dated as of July 28, 1998 by the Trustees (as defined
therein), Capital Trust, as sponsor, and the holders,
from time to time, of undivided beneficial interests in
CT Trust I to be issued pursuant to such Declaration
(filed as Exhibit 4.3 to Capital Trust's Current Report
on Form 8-K filed August 6, 1998 and incorporated herein
by reference).
4.7 Indenture dated as of July 28, 1998 between Capital Trust
and Wilmington Trust Company, as trustee (filed as
Exhibit 4.4 to Capital Trust's Current Report on Form 8-K
filed August 6, 1998 and incorporated herein by
reference).
4.8 Preferred Securities Guarantee Agreement dated as of July
28, 1998 by Capital Trust and Wilmington Trust Company,
as trustee (filed as Exhibit 4.5 to Capital Trust's
Current Report on Form 8-K filed August 6, 1998 and
incorporated herein by reference).
4.9 Common Securities Guarantee Agreement dated as of July
28, 1998 by Capital Trust (filed as Exhibit 4.6 to
Capital Trust's Current Report on Form 8-K filed August
6, 1998 and incorporated herein by reference).
***5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.
***8.1 Opinion of Battle Fowler LLP.
10.1 Preferred Share Purchase Agreement, dated as of June 16,
1997, by and between Capital Trust and Veqtor Finance
Company, LLC (filed as Exhibit 10.1 to Capital Trust's
Current Report on Form 8-K filed on July 30, 1997 and
incorporated herein by reference).
10.2 Non-Negotiable Notes of Capital Trust payable to John R.
Klopp, Craig M. Hatkoff and Valentine Wildove & Company,
Inc. (filed as Exhibit 10.2 to Capital Trust's Current
Report on Form 8-K filed on July 30, 1997 and
incorporated herein by reference).
10.3 Capital Trust 1997 Long-Term Incentive Share Plan, as
amended (filed as Exhibit 10.1 to Capital Trust's Current
Report on Form 8-K filed on July 15, 1997 and
incorporated herein by reference).
10.4 Capital Trust 1997 Non-Employee Trustee Share Plan, as
amended (filed as Exhibit 10.2 to Capital Trust's Current
Report on Form 8-K filed on July 15, 1997 and
incorporated herein by reference).
10.5 Employment Agreement, dated as of July 15, 1997, by and
between Capital Trust and John R. Klopp (filed as Exhibit
10.5 to Capital Trust's Registration Statement on Form
S-1 filed on October 6, 1997 and incorporated herein by
reference).
II-3
<PAGE>
10.6 Employment Agreement, dated as of July 15, 1997, by and
between Capital Trust and Craig M. Hatkoff (filed as
Exhibit 10.6 to Capital Trust's Registration Statement on
Form S-1 filed on October 6, 1997 and incorporated herein
by reference).
10.7 Consulting Agreement, dated as of July 15, 1997, by and
between Capital Trust and Gary R. Garrabrant (filed as
Exhibit 10.7 to Capital Trust's Registration Statement on
Form S-1 filed on October 6, 1997 and incorporated herein
by reference).
10.8 Sublease, dated as of July 29, 1997, between New York Job
Development Authority and Victor Capital Group, L.P.
(filed as Exhibit 10.8 to Capital Trust's Registration
Statement on Form S-1 filed on October 6, 1997 and
incorporated herein by reference).
10.9 Amended and Restated Credit Agreement, dated as of
January 1, 1998, between Capital Trust and German
American Capital Corporation ("GACC") (filed as Exhibit
10.1 to Capital Trust's Current Report on Form 8-K filed
on March 18, 1998 and incorporated herein by
reference),as amended by First Amendment to Amended and
Restated Credit Agreement, dated as of June 22, 1998,
between the Capital Trust and GACC (filed as Exhibit 10.3
to Capital Trust's Quarterly Report on Form 10-Q filed on
August 14, 1998 and incorporated herein by reference).
10.10 Employment Agreement, dated as of July 15, 1997, by and
between Capital Trust and Donald J. Meyer (filed as
Exhibit 10.10 to Capital Trust's Amendment No. 2 to
Registration Statement on Form S-1 filed on December 9,
1997 and incorporated herein by reference).
10.11 Master Loan and Security Agreement, dated as of June 8,
1998, between Capital Trust and Morgan Stanley Mortgage
Capital Inc. (filed as Exhibit 10.1 to Capital Trust's
Quarterly Report on Form 10-Q filed August 14, 1998 and
incorporated herein by reference).
10.12 CMBS Loan Agreement, dated as of June 30, 1998, between
Capital Trust and Morgan Stanley & Co. International
Limited (filed as Exhibit 10.2 to Capital Trust's
Quarterly Report on Form 10-Q filed August 14, 1998 and
incorporated herein by reference).
10.13 Co-Investment Agreement dated as of July 28, 1998 among
Capital Trust, Vornado Realty L.P., EOP Operating Limited
Partnership, and General Motors Investment Management
Corporation, as agent for and for the benefit of the
Pension Plans (as defined therein) (filed as Exhibit 10.1
to Capital Trust's Current Report on Form 8-K filed
August 6, 1998 and incorporated herein by reference).
10.14 Registration Rights Agreement dated as of July 28, 1998
among Capital Trust, Vornado Realty L.P., EOP Limited
Partnership, Mellon Bank N.A., as trustee for General
Motors Hourly-Rate Employes Pension Trust, and Mellon
Bank N.A., as trustee for General Motors Salaried
Employes Pension Trust (filed as Exhibit 10.2 to Capital
Trust's Current Report on Form 8-K filed August 6, 1998
and incorporated herein by reference).
II-4
<PAGE>
21.1 Subsidiaries of Capital Trust (filed as Exhibit 21.1 to
Capital Trust's Amendment No. 2 to Registration Statement
on Form S-1 filed on December 9, 1997 and incorporated
herein by reference).
**23.1 Consent of PricewaterhouseCoopers LLP.
**23.2 Consent of Ernst & Young L.L.P.
23.3 Consent of Ballard Spahr Andrews & Ingersoll, LLP (to be
included in Exhibit 5.1).
23.4 Consent of Battle Fowler LLP (to be included in Exhibit
8.1).
*27.1 Financial Data Schedule
**99.1 Consent of Samuel Zell to serve as Director.
**99.2 Consent of Jeffrey A. Altman to serve as Director.
**99.3 Consent of Sheli Z. Rosenberg to serve as Director.
***99.4 Consent of Gary R. Garrabrant to serve as Director.
**99.5 Consent of Martin L. Edelman to serve as Director.
**99.6 Consent of Lynn B. Sagalyn to serve as Director.
**99.7 Consent of Craig M. Hatkoff to serve as Director.
***99.8 Consent of Steven Roth to serve as Director.
**99.9 Consent of Thomas E. Dobrowski to serve as Director.
***99.10 Form of Proxy Card
- --------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
(b) Financial Statement Schedules
All schedules are omitted as inapplicable.
Item 22. Undertakings
(a) The undersigned registrants hereby undertake:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate,
II-5
<PAGE>
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of a prospectus filed with
the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b)(1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
the use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the registrant undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
offerings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The undersigned registrant undertakes that every prospectus (i)
that is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933 (the "Act") and is used in connection with an offering of securities
subject to Rule 415, will be filed as part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-6
<PAGE>
(d) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
has duly caused this Amendment No.1 to Registration Statement on Form S-4 to be
signed on its behalf by the undersigned hereunto duly authorized in the City of
New York, State of New York on August 18, 1998.
CAPITAL TRUST, INC.
By: /s/ John R. Klopp
Name: John R. Klopp
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ John R. Klopp President and Director (principal executive August 18, 1998
- --------------------------
John R. Klopp officer)
/s/ Edward L. Shugrue III Treasurer and Director (principal financial August 18, 1998
- -------------------------
Edward L. Shugrue III officer)
</TABLE>
II-8
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Amendment No. 1 to the
Registration Statement on Form S-4 (No. 333-52619), of Capital Trust, Inc. and
Subsidiaries (f/k/a California Real Estate Investment Trust) of our report,
dated February 14, 1998, in the proxy statement/prospectus to be filed as part
of Amendment No. 1 to the Registration Statement, with respect to the
consolidated balance sheet of Capital Trust and Subsidiaries (f/k/a California
Real Estate Investment Trust) as of December 31, 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1996 and 1995. We also consent to the reference of
our firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
San Francisco, California
August 14, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in Amendment
No. 1 to the Registration Statement on Form S-4 (No. 333-52619) of Capital
Trust, Inc. and Subsidiaries (f/k/a California Real Estate Investment Trust) and
to the incorporation by reference and inclusion of our report, dated January 23,
1998, in the proxy statement/prospectus to be filed as part of Amendment No. 1
to the Registration Statement, with respect to the consolidated balance sheet of
Capital Trust and Subsidiaries (f/k/a California Real Estate Investment Trust)
as of December 31, 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended December 31, 1997.
/s/ Ernst & Young LLP
New York, New York
August 12, 1998
<PAGE>
Exhibit 99.1
CONSENT OF NOMINEE FOR DIRECTOR
The undersigned nominee for director hereby consents to the disclosure
in the Registration Statement on Form S-4 of Capital Trust, Inc. (the
"Registrant") (SEC File No. 333-52619) that the undersigned will become a
director of the Registrant upon consummation of the Reorganization.
/s/ Samuel Zell
- --------------------- Date: August 13, 1998
Samuel Zell
746653.1
<PAGE>
Exhibit 99.2
CONSENT OF NOMINEE FOR DIRECTOR
The undersigned nominee for director hereby consents to the disclosure
in the Registration Statement on Form S-4 of Capital Trust, Inc. (the
"Registrant") (SEC File No. 333-52619) that the undersigned will become a
director of the Registrant upon consummation of the Reorganization.
/s/ Jeffrey A. Altman
- ------------------------- Date: August 13, 1998
Jeffrey A. Altman
746653.1
<PAGE>
Exhibit 99.3
CONSENT OF NOMINEE FOR DIRECTOR
The undersigned nominee for director hereby consents to the disclosure
in the Registration Statement on Form S-4 of Capital Trust, Inc. (the
"Registrant") (SEC File No. 333-52619) that the undersigned will become a
director of the Registrant upon consummation of the Reorganization.
/s/ Sheli Z. Rosenberg
- --------------------------- Date: August 13, 1998
Sheli Z. Rosenberg
746653.1
<PAGE>
Exhibit 99.5
CONSENT OF NOMINEE FOR DIRECTOR
The undersigned nominee for director hereby consents to the disclosure
in the Registration Statement on Form S-4 of Capital Trust, Inc. (the
"Registrant") (SEC File No. 333-52619) that the undersigned will become a
director of the Registrant upon consummation of the Reorganization.
/s/ Martin L. Edelman
- ---------------------------- Date: August 13, 1998
Martin L. Edelman
746653.1
<PAGE>
Exhibit 99.6
CONSENT OF NOMINEE FOR DIRECTOR
The undersigned nominee for director hereby consents to the disclosure
in the Registration Statement on Form S-4 of Capital Trust, Inc. (the
"Registrant") (SEC File No. 333-52619) that the undersigned will become a
director of the Registrant upon consummation of the Reorganization.
/s/ Lynne B. Sagalyn
- --------------------------- Date: August 13, 1998
Lynne B. Sagalyn
746653.1
<PAGE>
Exhibit 99.7
CONSENT OF NOMINEE FOR DIRECTOR
The undersigned nominee for director hereby consents to the disclosure
in the Registration Statement on Form S-4 of Capital Trust, Inc. (the
"Registrant") (SEC File No. 333-52619) that the undersigned will become a
director of the Registrant upon consummation of the Reorganization.
/s/ Craig M. Hatkoff
- ----------------------- Date: August 13, 1998
Craig M. Hatkoff
746653.1
<PAGE>
Exhibit 99.9
CONSENT OF NOMINEE FOR DIRECTOR
The undersigned nominee for director hereby consents to the disclosure
in the Registration Statement on Form S-4 of Capital Trust, Inc. (the
"Registrant") (SEC File No. 333-52619) that the undersigned will become a
director of the Registrant upon consummation of the Reorganization.
/s/ Thomas E. Dobrowski
- ------------------------------- Date: August 13, 1998
Thomas E. Dobrowski
746653.1
