As filed with the Securities and Exchange Commission on December 16, 1998
Registration No. 333-52619
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
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.
================================================================================
776420.4
<PAGE>
CAPITAL TRUST
605 Third Avenue
26th Floor
New York, New York 10016
December __, 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 January 28, 1998
at 10:00 a.m., New York City time, at The Penn Club of New York, 30 West 44th
Street, New York, New York 10036.
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 delineates 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 (the "Board") 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, (vi) to approve the Company's 1998 non-employee
share purchase plan, (vii) to approve the Company's share purchase loan plan and
(viii) 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.
776420.4
<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
776420.4
<PAGE>
CAPITAL TRUST
605 Third Avenue
26th Floor
New York, New York 10016
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on January 281999
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 The
Penn Club of New York, 30 West 44th Street, New York, New York 10036 on January
28, 1999 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 November 12, 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 approve the
Company's 1998 non-employee share purchase plan, as set forth and
included in the accompanying proxy statement/prospectus.
(8) To consider and vote upon a proposal to approve the
Company's share purchase loan plan, as set forth and included in the
accompanying proxy statement/prospectus.
776420.4
<PAGE>
(9) 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.
(10) To transact such other business as may properly come
before the Annual Meeting or any adjournment thereof.
The board of trustees of the Company has fixed the close of business on
December 21, 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: December __, 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.
776420.4
<PAGE>
PROXY STATEMENT/PROSPECTUS
----------------
CAPITAL TRUST
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 28, 1999
----------------
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 January 28, 1999 at 10:00
a.m., New York City time, at The Penn Club of New York, 30 West 44th Street, New
York, New York 10036.
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"). The Reorganization is
governed by the agreement and plan of merger, dated November 12, 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 December __, 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.
See "Risk Factors" beginning on page 8 for certain information that
should be considered by shareholders.
(continued on the next page)
--------------------
THE REORGANIZATION AND THE NEW COMPANY STOCK 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 December __, 1998. This
Proxy Statement/Prospectus is first being mailed to shareholders of the Company
on or about December __, 1998.
776420.4
<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 amended and restated 1997
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 "Employee Share Purchase Plan") ("Proposal 6"), (vi) to approve the
Company's 1998 non-employee share purchase plan (the "Non-Employee Share
Purchase Plan") ("Proposal 7"), (vii) to approve the Company's share purchase
loan plan (the "Loan Plan") ("Proposal 8"), (viii) 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 9") 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, the form of Employee Share Purchase Plan is included as Annex E
hereto, the form of Non-Employee Share Purchase Plan is included as Annex F
hereto and the form of Loan Plan is included as Annex G 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.
Pursuant to the Company's amended and restated declaration of trust,
dated as of July 15, 1997 (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 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 Employee Share
Purchase Plan, the approval of the Non-Employee Share Purchase Plan, the
approval of the Loan 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, L.L.C., a limited liability company controlled
by the officers and trustees of the Company and 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 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, the Employee
Share Purchase Plan, the Non-Employee Share Purchase Plan, the Loan Plan and
the election of the Nominees and the ratification of Ernst & Young LLP as
independent auditors by the required vote under the Current Declaration of Trust
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 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
776420.4
-ii-
<PAGE>
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 10016 (TELEPHONE: (212) 655-0220).
776420.4
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<PAGE>
TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION.........................................................................................-vii-
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................................................-vii-
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......................................................................................7
Approval of Proposals Assured............................................................................7
RISK FACTORS......................................................................................................8
Effects of Change of Legal Form of Organization..........................................................8
No Appraisal Rights......................................................................................8
No Assurance of Tax-Free Reorganization..................................................................8
Veqtor Control of Shareholder Vote on Proposals..........................................................8
HISTORICAL AND PRO FORMA CAPITALIZATION..........................................................................10
BUSINESS ........................................................................................................11
THE ANNUAL MEETING...............................................................................................13
Introduction............................................................................................13
Matters to be Considered at the Annual Meeting..........................................................13
Voting Rights and Vote Required.........................................................................13
Voting of Proxies; Solicitation.........................................................................14
No Appraisal Rights.....................................................................................15
PROPOSAL 1 -- APPROVAL OF THE REORGANIZATION.....................................................................16
Principal Reasons for the Reorganization................................................................16
Terms of the Reorganization.............................................................................17
Certain Changes in the Rights of Shareholders Resulting from the Reorganization.........................18
Description of Authorized Stock of the New Company......................................................24
Federal Income Tax Matters..............................................................................27
Vote Required; Recommendation...........................................................................27
PROPOSAL 2 -- APPROVAL OF THE DECLARATION AMENDMENT..............................................................28
Reasons for and Description of Declaration Amendment....................................................28
Vote Required; Recommendation...........................................................................28
PROPOSAL 3 -- ELECTION OF TRUSTEES...............................................................................29
Nominees for Election as Trustees.......................................................................29
Vote Required; Recommendation...........................................................................31
Board of Trustees; Committees...........................................................................31
Compensation of Trustees................................................................................32
Compensation Committee Interlocks and Insider Participation.............................................32
</TABLE>
776420.4
-iv-
<PAGE>
<TABLE>
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Executive and Senior Officers...........................................................................33
Executive Compensation..................................................................................34
Employment Agreements...................................................................................34
Incentive Share Option Plan.............................................................................36
Compliance with Section 16(a)...........................................................................37
Report on Executive Compensation........................................................................38
Performance Graph.......................................................................................40
Security Ownership of Certain Beneficial Owners and Management..........................................41
Buy/Sell Agreement......................................................................................43
Certain Relationships and Related Transactions..........................................................44
PROPOSAL 4 -- APPROVAL OF AMENDED AND RESTATED INCENTIVE PLAN..................................................48
Description of Plan.....................................................................................48
Vote Required; Recommendation...........................................................................53
PROPOSAL 5 -- APPROVAL OF AMENDED AND RESTATED TRUSTEE PLAN.....................................................54
Description of Plan.....................................................................................54
Vote Required; Recommendation...........................................................................58
PROPOSAL 6 -- APPROVAL OF EMPLOYEE SHARE PURCHASE PLAN...........................................................59
Description of Plan.....................................................................................59
Vote Required; Recommendation...........................................................................61
PROPOSAL 7 -- APPROVAL OF NON-EMPLOYEE SHARE PURCHASE PLAN.......................................................62
Description of Plan.....................................................................................62
Vote Required; Recommendation...........................................................................63
PROPOSAL 8 -- APPROVAL OF LOAN PLAN..............................................................................64
Description of Plan.....................................................................................64
Vote Required; Recommendation...........................................................................65
PROPOSAL 9 -- RATIFICATION OF INDEPENDENT AUDITORS...............................................................66
Description of Proposal.................................................................................66
Vote Required; Recommendation...........................................................................66
EXPERTS ........................................................................................................67
LEGAL OPINIONS...................................................................................................67
REPORTS TO SHAREHOLDERS..........................................................................................67
OTHER MATTERS....................................................................................................67
SHAREHOLDER PROPOSALS............................................................................................67
</TABLE>
ANNEX A Agreement and Plan of Merger, by and among Capital Trust,
Capital Trust, Inc. and the Captrust Limited Partnership,
dated as of November 12, 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).
776420.4
-v-
<PAGE>
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 Form of 1998 Non-Employee Share Purchase Plan.
ANNEX G Form of Share Purchase Loan Plan.
ANNEX H Capital Trust Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997.
ANNEX I Capital Trust Quarterly Report on Form 10-Q/A for the fiscal
quarter ended September 30, 1998.
ANNEX J Capital Trust Prospectus, dated December 10, 1997, excerpts of
Victor Capital Group, L.P. historical Financial.
776420.4
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<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 "Commission"). Such reports, proxy
statements and other information may be inspected at and, upon payment of the
Commission's customary charges, copies obtained from, the Public Reference
Section of the Commission, 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 Commission'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 Commission 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 Commission, 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
Commission, 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 Commission noted above, and copies of which can be obtained
from the Commission 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 (File No. 1-8063), as filed with the Commission on April 30, 1998,
as further amended by Annual Report on Form 10-K/A (File No. 1-8063), as filed
with the Commission on August 17, 1998, as further amended by Annual Report on
Form 10-K/A (File No. 1- 8063), as filed with the Commission on October 23,
1998, and as further amended by Annual Report on Form 10-K/A (File No. 1-8063),
as filed with the Commission on December 11, 1998;
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
(File No. 1-8063) as filed with the Commission on May 14, 1998, as amended by
Quarterly Report on Form 10-Q/A (File No. 1-8063), as filed with the Commission
on August 14, 1998, as further amended by Quarterly Report on Form 10-Q/A (File
No. 1- 8063), as filed with the Commission on October 23, 1998, and as further
amended by Annual Report on Form 10-K/A (File No. 1-8063), as filed with the
Commission on December 11, 1998;;
776420.4
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<PAGE>
3. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(File No. 1-8063) as filed with the Commission on August 14, 1998, as amended by
Quarterly Report on Form 10-Q/A (File No. 1-8063), as filed with the Commission
on October 23, 1998, and as amended by Quarterly Report on Form 10-Q/A (File No.
1-8063), as filed with the Commission on December 11, 1998;
4. Quarterly Report on Form 10-Q for the quarter ended September 30,
1998 (File No. 1-8063), as filed with the Commission on November 16, 1998, and
as amended by Quarterly Report on Form 10-Q-A (File No. 1-8063), as filed with
the Commission on December 11, 1998;
5. Current Report on Form 8-K, dated February 9, 1998 (File No.
1-8063), as filed with the Commission on February 23, 1998;
6. Current Report on Form 8-K, dated February 27, 1998 (File No.
1-8063), as filed with the Commission on March 13, 1998;
7. Current Report on Form 8-K/A, dated January 1, 1998 (File No.
1-8063), as filed with the Commission on March 18, 1998;
8. Current Report on Form 8-K, dated March 12, 1998 (File No. 1-8063),
as filed with the Commission on March 19, 1998;
9. Current Report on Form 8-K, dated April 21, 1998 (File No. 1-8063),
as filed with the Commission on April 23, 1998;
10. Current Report on Form 8-K, dated May 14, 1998 (File No. 1-8063), as
filed with the Commission on May 22, 1998;
11. Current Report on Form 8-K, dated June 2, 1998 (File No. 1-8063),
as filed with the Commission on June 12, 1998;
12. Current Report on Form 8-K, dated June 16, 1998 (File No. 1-8063),
as filed with the Commission on June 24, 1998, as amended by Current Report on
Form 8-K/A (File No. 1-8063), as filed with the Commission on October 19, 1998;
13. Current Report on Form 8-K, dated June 30, 1998 (File No. 1-8063),
as filed with the Commission on July 13, 1998; and
14. Current Report on Form 8-K, dated July 28, 1998 (File No. 1-8063),
as filed with the Commission on August 6, 1998.
15. Current Report on Form 8-K, dated August 7, 1998, as filed with the
Commission on August 24, 1998.
16. The audited combined balance sheets of Victor Capital Group, L.P.,
a Delaware limited partnership, and the affiliates thereof (collectively "Victor
Capital") as of December 31, 1996 and 1995, and the related combined statements
of income, changes in partners' and members' capital (deficiency) and
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1996, the unaudited combined balance sheets of Victor Capital
as of June 30, 1997 and the related combined statements of income, changes in
partners' and members' capital (deficiency) and stockholder's equity, and cash
flows for the six months then ended, and the combined statements of income and
cash flows for the six months ended June 30, 1996, the Company's unaudited pro
forma condensed combined statements for the year ended December 31, 1996 and the
nine months ended September 30, 1997 (presented under the caption "Unaudited Pro
Forma Condensed Combined Financial Information") contained in the Company's
Prospectus, dated December 10, 1997 (File No. 333-37271), as filed with the
Commission on December 11, 1997.
776420.4
-viii-
<PAGE>
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.
776420.4
-ix-
<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.
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 January 28, 1999 at 10:00 a.m., New York time, at The Penn Club of New York,
30 West 44th Street, New York, New York 10036. The Board of Trustees fixed the
close of business on December 21, 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 Annual 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 Annual 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 Annual Meeting are to
consider and vote upon proposals to approve the Reorganization, the Declaration
Amendment, the Amended and Restated Incentive Plan, the Amended and Restated
Trustee Plan, the Employee Share Purchase Plan, the Non-Employee Share Purchase
Plan and the Loan Plan, the election of the Nominees as trustees and the
ratification of the appointment of the Company's independent auditors and any
other business as may properly come before the Annual 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. Pursuant to the Current
Declaration of Trust, the approval of the Reorganization
776420.4
<PAGE>
requires 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. Pursuant to
the Current Declaration of Trust, the approval of the Declaration Amendment
requires the affirmative vote of a majority of the outstanding Company Shares.
Pursuant to the Current Declaration of Trust, the election of each of the
Nominees requires a plurality of the votes cast by the holders of Company Shares
at the Annual Meeting. Pursuant to the Current Declaration of Trust, the
approval of the Amended and Restated Incentive Plan, the approval of the Amended
and Restated Trustee Plan, the approval of the Employee Share Purchase Plan, the
approval of the Non-Employee Share Purchase Plan, the approval of the Loan 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 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.
776420.4
2
<PAGE>
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 (the "Original Incentive Plan") and the 1997 Non-Employee Trustee Share
Plan (the "Original Trustee Plan," and together with the Original Incentive
Plan, the "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 Current Declaration of Trust and current By-laws (the "Current ByLaws"),
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 Current Declaration of Trust and Current Bylaws
of the Company (the "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 Directors are elected by a plurality of all the
Trustees/Directors plurality of the voting shares present in votes cast at a meeting at which a quorum is
person or represented by proxy. 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 Under the MGCL, unless the charter
Trustees/Directors any time either (a) with or without cause by provides otherwise (which the Charter does
the vote or written consent of either (i) a not), directors may be removed from office,
majority of the trustees then in office and a with or without cause, by the affirmative vote
majority of the outstanding voting shares or of the holders of at least a majority of votes
(ii) 662/3% of the outstanding voting shares, entitled to be cast in the election of directors.
or (b) with cause by the vote or written
consent of a majority of the trustees then in
office.
</TABLE>
776420.4
3
<PAGE>
<TABLE>
<CAPTION>
COMPANY NEW COMPANY
<S> <C> <C>
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 authorized by the board of directors out of
be declared and paid on outstanding assets legally available therefor. Dividends
Company Shares out of funds legally and other distributions may be paid in cash,
available therefor, at such times, in such property or stock of the New Company.
amounts and from such sources, whether
income, surplus, capital or any combination
thereof, as they in their discretion may
determine.
Voting by Shareholders' action may be taken without Under the MGCL, any action required or
Unanimous a meeting by written consent if such consent permitted to be taken at a meeting of
Consent is signed by the holders of outstanding stockholders may be taken without a meeting
voting shares having not less than the if (i) a unanimous written consent setting
minimum number of votes that would be forth the action is signed by each stockholder
necessary to authorize such action at a entitled to vote on the matter. Thus,
meeting at which all voting shares entitled to stockholders of the New Company will be
vote thereon were present and voted. effectively prevented from taking action by
written consent.
Amendment of Any amendment to the Current Declaration Any amendment to the Charter (with certain
Constitutional of Trust must be in writing and, subject to minor exceptions) requires approval of the
Documents the changes required by law or the board of directors and stockholder approval
provisions of any outstanding preferred by a majority of the aggregate votes entitled
shares, requires the affirmative vote or to be cast thereon. The board of directors
written consent of either (i) a majority of the has the exclusive power to adopt, alter or
trustees and a majority of the outstanding repeal any provision of the Bylaws.
voting shares or (ii) 662/3% of the
outstanding voting shares.
Voting on Other Subject to special voting rights of preferred Unless otherwise provided in the Charter,
Matters shares, the approval of matters brought holders of voting stock may vote on all
before the shareholders requires the matters provided for by the MGCL. Subject
affirmative vote of a majority of voting to the special voting rights of preferred stock,
shares present in person or represented by a majority of the votes cast at a meeting of
proxy, unless otherwise required by law or stockholders duly called and at which a
the Current Declaration of Trust. quorum is present shall be sufficient to
approve any matter other than the election 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 called by the president, the chief executive
Special Meeting written request of the holders of 331/3% of officer or by the board of directors and must
the outstanding voting shares entitled to vote be called by the Secretary upon the written
on any matter to be voted on at such special request of the stockholders entitled to cast not
meeting. less than 33% of all the votes entitled to be
cast at the meeting.
</TABLE>
776420.4
4
<PAGE>
<TABLE>
<CAPTION>
COMPANY NEW COMPANY
<S> <C> <C>
Exculpation of The Current By-Laws provide that no Under the MGCL and the Charter, directors
Trustees, Officers trustee, officer, employee or agent of the and officers are not liable to New Company
and Others, Company is liable to the Company or any or its stockholders for money damages (with
Fidelity Bond other person for any act or omission except two limited exceptions).
for his 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."
MGCL Takeover Defense Provisions - Although the Reorganization was
neither proposed nor approved by the Board of Trustees as a takeover defense
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 Board of Directors of the New Company (the "New
Company 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 New Company Board of Directors. See "PROPOSAL 1 --
APPROVAL OF THE REORGANIZATION--Principal Reasons for the Reorganization,"
PROPOSAL 1 -- APPROVAL OF THE REORGANIZATION--Certain Changes in the Rights of
Shareholders Resulting from the Reorganization," and "RISK FACTORS--Effects of
Change of Legal Form of Organization."
The Reorganization, the Merger Agreement, the 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
Current Declaration of Trust to (i) expressly permit the Company to merge or
consolidate with
776420.4
5
<PAGE>
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."
Proposal 3 -- Election of Trustees. At the Annual Meeting, shareholders
will be asked to elect the 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 Employee Share Purchase Plan. At the
Annual Meeting, the shareholders will be asked to approve the Employee Share
Purchase Plan which allows employees periodically to purchase Class A Common
Shares at a discount. The Employee Share Purchase Plan is described more
specifically herein under "PROPOSAL 6 -- APPROVAL OF THE EMPLOYEE SHARE PURCHASE
PLAN."
Proposal 7 -- Approval of the Non-Employee Share Purchase Plan. At the
Annual Meeting, shareholders will be asked to approve the Non-Employee Share
Purchase Plan which allows non-employee trustees, consultants and service
providers periodically to purchase Class A Common Shares at a discount. The
Non-Employee Share Purchase Plan is described more specifically herein under
"PROPOSAL 7 -- APPROVAL OF THE NON-EMPLOYEE SHARE PURCHASE PLAN."
Proposal 8 -- Approval of the Loan Plan. At the Annual Meeting,
shareholders will be asked to approve the Loan Plan which allows the Company to
make loans to eligible participants for the purpose of purchasing Common Shares
up to an amount equal to the full fair market value of the Common Shares
purchased thereby. The Loan Plan is described more specifically herein under
"PROPOSAL 8 -- APPROVAL OF THE LOAN PLAN."
Proposal 9 -- 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 9 -- 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.
776420.4
6
<PAGE>
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, L.L.C., a limited liability company controlled
by officers and trustees of the Company and 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 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, the Employee Share
Purchase Plan, the Non-Employee Share Purchase Plan and the Loan Plan and the
election of the Nominees and the ratification of Ernst & Young LLP as
independent auditors by the required vote under the Current Declaration of Trust
is assured.
776420.4
7
<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 New Company Board of Directors. As a Maryland
corporation, the New Company will be subject to the takeover protections of
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 Board of Directors
otherwise be in their best interest. See "PROPOSAL 1 -- APPROVAL OF THE
REORGANIZATION--Principal Reasons for the Reorganization" and " -- 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
The Company 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"
Veqtor Control of Shareholder Vote on Proposals
Veqtor Finance Company, L.L.C. ("Veqtor"), a limited liability company
controlled by John R. Klopp, Craig M. Hatkoff and Samuel Zell, trustees and
executive officers of the Company, 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). Veqtor therefore has the voting power to
control the outcome of the election of trustees and the vote on actions
requiring shareholder approval. Inasmuch as Veqtor has advised the Company that
it intends to vote in favor of all of the Proposals, shareholder approval of the
Reorganization, the Declaration Amendment, the
776420.4
8
<PAGE>
Amended and Restated Incentive Plan, the Amended and Restated Trustee Plan, the
Employee Share Purchase Plan, the Loan Plan and the Non-Employee Share Purchase
Plan and the election of the Nominees and the ratification of Ernst & Young LLP
as independent auditors by the required vote under the Current Declaration of
Trust is assured. See PROPOSAL 3 -- ELECTION OF TRUSTEES--Security Ownership of
Certain Beneficial Owners and Management.
776420.4
9
<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 September
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>
September 30, 1998
Historical Pro Forma
---------- ---------
(thousands)
<S> <C> <C>
Short-Term Debt
Current maturities of long-term notes payable(1)..................... $ 784 $ 784
--------------------- -------------------
Total short-term debt................................................ $ 784 $ 784
===================== ===================
Long-Term Debt
Long-term notes payable(2)........................................... $ 3,399 $ 3,399
Credit Facilities.................................................... 348,780 348,780
Repurchase Obligations............................................... 80,420 80,420
--------------------- -------------------
Total long-term debt................................................. 432,597 432,597
--------------------- -------------------
Company-Obligated, mandatorily redeemable, convertible preferred securities of
CT Convertible Trust I, holding solely 8.25% junior subordinated debentures
of Capital Trust ("Convertible Trust Preferred Securities") 145,334 145,334
-------------------- -------------------
Shareholders' Equity; Pro Forma Stockholders' Equity(3) Class A preferred
shares, $1.00 par value, $0.26 cumulative annual dividend,
12,639,405 authorized, 12,267,658 issued and outstanding (liquidation
preference of $33,000,000)...................................... 12,268
Class A convertible common shares, $1.00 par value, unlimited shares
authorized, 18,158,816 issued and outstanding................... 18,159
Restricted class A common shares, $1.00 par value,
55,000 shares issued and outstanding............................ 55
Pro forma convertible preferred stock, $0.01 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, $0.01 par value; 200,000,000 shares authorized,
18,158,316 shares of class A common stock authorized, issued and
outstanding(4)..................................................
Pro forma restricted class A common stock, $0.01 par value; 182
55,000 shares issued and outstanding............................ 1
Additional paid-in capital........................................... 158,641 188,817
Unearned compensation................................................ (454) (454)
Accumulated other comprehensive income............................... (2,306) (2,306)
Accumulated deficit.................................................. (36,387) (36,387)
--------------------- -------------------
Total shareholders' equity........................................... 149,976
---------------------
Pro forma total stockholders' equity................................. 149,976
-------------------
Total Capitalization(5).................................................. $727,907
=====================
Pro Forma Total Capitalization(5)........................................ $727,907
===================
</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 $216,000.
(2) Includes the long-term portion of the Acquisition Notes, net of an
unamortized discount of $447,000.
(3) The New Company is authorized to issue 100,000,000 shares of class A common
stock, $0.01 par value, and 100,000,000 shares of class B common stock,
$0.01 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 convertible 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
convertible preferred stock, respectively, except that neither the class B
common stock nor class B convertible preferred stock entitle the holders
thereof to voting rights.
(4) Each share of class A convertible 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 convertible 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.
776420.4
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<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.
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, 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 on two occasions, and now provides
for a $355 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
8.25% 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 8.25% 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
776420.4
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<PAGE>
financial covenants in the Credit Facilities, the Company's current business
plan does not provide for 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, lenders of the Credit Facilities and Veqtor's preferred
members for which there can be no assurance.
Further information regarding the Company, including the audited and
unaudited 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/A for the nine months ended September 30,
1998, which reports are incorporated herein by reference and are attached hereto
as Annex H and Annex I, respectively. Pro forma financial information with
respect to the Company's acquisition of Victor Capital in July 1997 and separate
audited and unaudited historical financial statements of Victor Capital prior to
such acquisition is contained in the Company's Prospectus, dated December 10,
1997, which financial statements and information are incorporated herein by
reference and are attached hereto as Annex J. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
776420.4
12
<PAGE>
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
January 28, 1999 at 10:00 a.m., New York City time, at The Penn Club of New
York, 30 West 44th Street, New York, New York, 10036, 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 Employee Share Purchase Plan.
o Proposal 7: To consider and vote upon a proposal to
approve the Non-Employee Share Purchase
Plan.
o Proposal 8: To consider and vote upon a proposal to
approve the Loan Plan.
o Proposal 9: 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 18,213,816 Class A Common Shares issued and outstanding held by
approximately 1,536 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 matter 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
776420.4
13
<PAGE>
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.
Pursuant to Current Declaration of Trust, the affirmative vote of the holders of
a majority of the outstanding Company Shares is required to approve the
Declaration Amendment. Pursuant to the Current Declaration of Trust, the
election of each of the Nominees as trustees requires a plurality of the votes
cast at the Annual Meeting. Pursuant to the Current Declaration of Trust, the
approval of the Amended and Restated Incentive Plan, the approval of the Amended
and Restated Trustee Plan, the approval of the Employee Share Purchase Plan, the
approval of the Non-Employee Share Purchase Plan, the approval of the Loan Plan
and the ratification of the appointment of Ernst & Young LLP as 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 and Restated Incentive Plan, the Amended
and Restated Trustee Plan, the Employee Share Purchase Plan, the Non-Employee
Share Purchase Plan and the Loan 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 and Restated Incentive Plan, the Amended and
Restated Trustee Plan, the Employee Share Purchase Plan and the Non-Employee
Share Purchase Plan and the ratification of the appointment of Ernst & Young LLP
as independent auditors 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 and Restated Incentive Plan, the Amended and Restated
Trustee Plan, the Employee Share Purchase Plan, the Non-Employee Share Purchase
Plan and the Loan Plan, the election of the Nominees and the ratification of
Ernst & Young LLP by the required vote under the Current Declaration of Trust 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
776420.4
14
<PAGE>
(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 Avenue,
Brooklyn, New York 11219, Attention: Paula Caroppoli, or hand delivered to the
Company c/o 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 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.
776420.4
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<PAGE>
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 -- 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 Board of
Directors.
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 New Company 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
776420.4
16
<PAGE>
or effects described above. However, the Board of Trustees believes that the
potential disadvantages of unapproved 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 New Company
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 of Trustees did not
believe that New York's business corporation law was a modern and flexible
alternative to the MGCL. The Board of Trustees rejected the State of Delaware as
the jurisdiction for incorporation because a provision of the state's business
corporation law that prohibits the use of the word "trust" as part of a
corporate name by non-regulated banking companies would have necessitated a
change in name. The Board of Trustees 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 of Trustees 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 Annual 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, together with
certain provisions of the MGCL, may have certain takeover defense effects. A
copy of the proposed Charter and Bylaws are set forth in their entirety as
exhibits to the Merger Agreement attached hereto as Annex A.
776420.4
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<PAGE>
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."
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 the participants in the Share Plans who have rights to receive grants of
options and share units and to exercise options and share units granted
thereunder in respect of Company Shares will have 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 their
Company Share certificates in exchange for certificates representing shares of
New Company Stock.
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
Current Declaration of Trust, the Current Bylaws, Certificate of Designation of
the Company, 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 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, 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, 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.
776420.4
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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 $1.00 per share (the "Class B Preferred Shares"
and together with the Class A Preferred Shares, the "Preferred Shares"). As of
December 21, 1998, there were 12,267,658 Class A Preferred Shares issued and
outstanding, no Class B Preferred Shares issued and outstanding, 18,229,650
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 12,639,405 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 New Class A
Common Stock, (b) 100,000,000 shares of class B common stock, $.01 par value
(the "New Class B Common Stock," and together with the New 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, New Class A Preferred Stock and class B preferred stock. $.01
par value (the "New Class B Preferred Stock," and together with the New 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 New Company Board of Directors generally will have the power to
issue shares of authorized stock without stockholder approval. Other than the
100 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 New Company
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 New Company Board of
Directors. Prior to the issuance of shares of each class or series, the New
Company 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 New Company 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 consummation of 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
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unissued shares could give the New Company Board of Directors 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 the New Company or other transaction that may, contrary to the judgment of
the New Company 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 a
location in 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 provide for annual meetings of stockholders to be held at
such time on such day as shall be set by the New Company Board of Directors.
Special meetings of stockholders may be called by the chief executive officer,
the president or the New Company 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 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
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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 New Company Board of Directors.
Board of Trustees Compared to New Company Board of Directors. 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 New Company 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 New Company Board of
Directors. The stockholders may fill any vacancy on the New Company 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 New Company 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 may be amended by the affirmative vote of a
majority of the Board of Trustees at any regular meeting thereof.
The Bylaws may be amended only by the New Company 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 the affirmative vote of holders of shares entitled to cast a
majority of all the votes entitled to be cast on any such matter at a meeting of
the stockholders.
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Dissolution/Termination. The 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
of a corporation 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 proper notice as to the purpose of the
meeting, by the stockholders of the corporation 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 the
affirmative vote of holders of shares entitled to cast 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 or associate (as defined in the MGCL) 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 (an "interested stockholder") 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 or associate) the
business combination is to be effected, unless, among other conditions, the
corporation's common 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 the MGCL 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 New Company
Board of Directors 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 stockholders meeting.
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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 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 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
authorizes the New Company, 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 obligate the New Company, 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
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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 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 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. The New Company Board of Directors 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 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 New Company 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,
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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 New Company 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 Stock, if any, shall be entitled, the remaining
assets of the Company available for payment and distribution to holders of
shares of 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 New Class A Common Stock and New Class B Common
Stock held by each such holder, among the holders of outstanding shares of New
Class A Common Stock and New Class B Common Stock.
Voting Rights. Each holder of New 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 New 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 New 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 New Class B Common Stock
and, subject to delivery of the certification described below, each share of New
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 New
Class A Common Stock. If shares of New Class B Common Stock are to be converted
into shares of New Class A Common Stock, the holder of the shares of New 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 New 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 New Company 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 New
Class A Common Stock and New Class A Preferred Stock to holders of New Class A
Preferred Stock and in New Class B Common Stock and New Class B Preferred Stock
to holders of New 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)).
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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 New Class A Preferred Stock are entitled to
vote together with the holders of New Class A Common Stock as a single class on
all matters submitted to a vote of shareholders. Each share of New Class A
Preferred Stock entitles the holder thereof to a number of votes per share equal
to the number of shares of New Class A Common Stock into which such New Class A
Preferred Stock is then convertible. Except as described below, the New Class 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 New 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 New Company, either voluntary
or involuntary, the holders of Authorized Preferred Stock shall be entitled to
receive out of assets of the New 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 New 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 New Class B Preferred Stock, or
into a number of shares of New 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 New 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 New Class A
Preferred Stock or into a number of shares of New 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 New Class B Preferred
Stock are to be converted into shares of New Class A Preferred Stock, the holder
of the shares of New 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 New 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 New 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.
776420.4
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<PAGE>
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.
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.
Vote Required; Recommendation
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
Board of Trustees unanimously recommends that shareholders vote FOR the approval
of the Reorganization.
776420.4
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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.
Reasons for and Description of Declaration Amendment
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 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.
Vote Required; Recommendation
Pursuant to the Current Declaration of Trust, the affirmative vote a
majority of the outstanding Company Shares is required to approve the
Declaration Amendment. The Board of Trustees unanimously recommends that
shareholders vote FOR the approval of the Declaration Amendment.
776420.4
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<PAGE>
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.
Nominees for Election as Trustees
The name, age as of October 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> <C>
Samuel Zell........................... 57 Chairman of the Board
Jeffrey A. Altman..................... 32 Trustee
Thomas E. Dobrowski................... 55 Trustee
Martin L. Edelman..................... 57 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...................... 51 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 EGI, American Classic
Voyages Co., an owner and operator of cruise lines, 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 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
776420.4
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<PAGE>
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 of the Company 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 served as president of Chartwell Leisure Inc., an owner and
operator of hotel properties ("Chartwell"), from January 1996 until it was sold
in March 1998. He has 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 ("Battle Fowler"), 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 has been a managing director and chief
investment officer of Equity International Properties, Ltd., a privately-held
international real estate investment company, since July 1, 1998. 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 of the Company 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.
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.,
776420.4
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<PAGE>
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.
Vote Required; Recommendation
Pursuant to the Current Declaration of Trust, the election to the Board
of Trustees of each of the ten Nominees will require the affirmative vote of a
plurality of the votes cast at the Annual Meeting. The Board of Trustees
unanimously recommends that shareholders vote FOR the election to the Board of
Trustees of each of the ten Nominees.
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 of Trustees
(while they were members) and 100 percent of the total number
776420.4
31
<PAGE>
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 of Trustees (while
they were members).
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 Original Trustee 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 of Trustees 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 Original Incentive 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 Offering of 9,000,000 Class A Common Shares.
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 Original Incentive 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, including the Trust
Preferred Private Placement, see "--Certain Relationships and Related
Transactions." In view of their professional background and experience, and in
recognition of the proposed purchase of Trust Preferred Securities to be made by
their respective organizations, certain members of the Board of Trustees, prior
to consummation of the Trust Preferred Private Placement, extended an informal
invitation to Steven Roth, chairman of the board of directors of Vornado, the
managing general partner of Vornado Realty, L.P. ("VNO"), and Thomas
776420.4
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<PAGE>
E. Dobrowski, a managing director of GMIMCo, to join the Board of Trustees.
Following consummation of the Trust Preferred Private Placement, upon formal
recommendation to the full Board of Trustees, Messrs. Roth and Dobrowski were
appointed trustees of the Company on August 13, 1998. None of VNO, GMIMCo, Mr.
Roth or Mr. Dobrowski has any contractual right to be appointed or reappointed
to the Board of Trustees.
Executive and Senior Officers
The following sets forth the positions with the Company, their ages as
of October 16, 1998 and selected biographical information for the executive and
senior officers of the Company who are not trustees.
Carol J. Eglow, age 38, 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, age 35, 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, age 49, 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.
Stephen D. Plavin, age 39, has been the chief operating officer of the
Company since August 15, 1998. Prior to that time, Mr. Plavin was employed for
fourteen years with the Chase Manhattan Bank and its securities affiliate, Chase
Securities Inc. (collectively, "Chase"). Mr. Plavin held various positions
within the real estate finance unit of Chase including the management of real
estate loan syndications, portfolio management, banking services and REO (real
estate owned) sales. Since 1995, he served as a managing director responsible
for real estate client management in which position he directed the origination
of loan and financing transactions, as well as investment banking and advisory
assignments for Chase's major real estate relationships.
Alvin J. Sarter, age 42, has been a managing director of the Company
since April 1, 1998. Prior to that time, Mr. Sarter was a partner in the law
firm of Battle Fowler, LLP since 1989, where he specialized in real estate law
representing a national client base in connection with the acquisition,
development, management, financing and securitization of real estate.
Edward L. Shugrue III, age 32, 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.
776420.4
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<PAGE>
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 $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
- --------------------------------------- -------------------------------------------------------------------------------------------
Securities
Underlying Other
Name and Principal Position Year Salary($)(1) Bonus($) Options(#) Compensation
<S> <C> <C> <C> <C> <C>
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.
(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
776420.4
34
<PAGE>
the Board of Trustees based on individual performance and the profitability of
the Company. Mr. Klopp and Mr. Hatkoff are also participants in the Original
Incentive 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 Stephen D.
Plavin which provides for a term of employment commencing as of August 15, 1998
and expiring on January 2, 2002. On the date of expiration of the initial term,
the employment agreement shall be automatically extended until December 31, 2002
unless, prior to April 7, 2001, either party shall have delivered to the other a
non-renewal notice. The employment agreement provides for a base annual salary
of $350,000, which will be increased each calendar year to reflect increases in
the cost of living and may otherwise be further increased in the discretion of
the Board of Trustees. The employment agreement also provides for annual
incentive cash bonuses for calender years 1999 through 2001 to be determined by
the Board of Trustees based on individual performance and the profitability of
the Company, provided that the minimum of each of said three annual incentive
bonuses shall be no less than $750,000. In addition to the base salary and
incentive bonus, Mr. Plavin will receive during calender year 1999 only, a
monthly special cash payment of $100,000. Mr. Plavin is entitled to participate
in employee benefit plans of the Company at levels determined by the Board of
Trustees and commensurate with his position and receives Company provided life
and disability insurance. In accordance with the agreement, Mr. Plavin was
granted pursuant to the Original Incentive Plan options to purchase 100,000
Class A Common Shares with an exercise price of $9.00 immediately vested and
exercisable as of the date of the agreement. The Company also agreed to grant
pursuant to the Original Incentive Plan fully vested Class A Common Shares,
50,000 shares on January 1, 1999 and 100,000 shares on each of the three
successive anniversaries thereof.
If the Company terminates Mr. Plavin's employment for other than for
cause or disability, as those terms are defined in the agreement, or Mr. Plavin
terminates employment with good reason (including following a change in
control), as those terms are defined in the agreement, he would be entitled to
(i) his base salary accrued and unpaid up to the termination date, (ii) a
severance payment equal to the greater of his base salary payable over the
remainder of the employment term and his base salary as of the termination date
for one full calender year, plus the minimum bonus to the extent not paid for
each of calender years 1999 through 2001, plus the minimum bonus to the extent
not paid for calender year 2002 unless the initial term expires without renewal,
(iii) any unpaid calender year 1999 special payments, (iv) medical insurance
coverage for him and his family for a period expiring on the earlier of the
second anniversary of the termination date or such time as he obtains employment
offering comparable or better medical insurance coverage, (v) receive a grant of
all of the Class A Common Shares not yet granted that the Company has agreed to
grant to him and (vi) exercise his share options for a period of one year from
the termination date. If Mr. Plavin terminates for special reason (i.e., he
shall not have been appointed chief executive officer when neither Messrs. Klopp
nor Hatkoff hold such position), Mr. Plavin would be entitled to the foregoing
compensation and benefits, except that, instead of the severance payment set
forth in clause (ii), he would be entitled to a severance payment equal his base
salary as of the termination date for one full calender year, plus $750,000 and
would not be entitled to any grant of New Class A Common Share as set forth in
clause (v). The employment agreement also specifies termination payments in the
event of voluntary termination by Mr. Plavin for other than special reason or
good reason and in the event of termination by the Company following death or
disability and for cause. The employment agreement provides for restrictions on
solicitation of employees and clients of the Company following termination by
the Company for cause or termination by Mr. Plavin for other than good reason or
special reason.
776420.4
35
<PAGE>
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
$150,000 at the end of 1997 and 1998, and for participation in the Original
Incentive Plan.
Incentive Share Option Plan
The following table sets forth share options issued in 1997 to the
executive officers named in the Summary Compensation Table. The table also sets
forth the hypothetical gains that would exist for the share options at the end
of their ten-year terms, assuming compound rates of appreciation of 5% and 10%.
The actual future value of the options will depend on the market value of the
Class A Common Shares.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term(2)
(a) (b) (c) (d) (e) (f) (g)
Number of
Securities % of Total
Underlying Option/SARs
Options/ Granted to
SARs Employees Exercise or Expira
Granted in Fiscal Base Price tion
Name (#)(1) Year ($/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 Commission 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.
776420.4
36
<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.
<TABLE>
<CAPTION>
Year End 1997 Option/SAR Values
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options/SARs at Year Money Options/SARs at
End # Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
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 Commission and the NYSE. Officers, trustees and greater than
ten percent shareholders are required by regulation of the Commission 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.
776420.4
37
<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.
776420.4
38
<PAGE>
as such, they provided an appropriate framework against which the committee
could evaluate the individual executive officers' 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
776420.4
39
<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., Finova 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 New Class A Common Share price performance shown on the graph is
not necessarily indicative of future price performance.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
Dec. 31, 1992 Dec. 31, 1993 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 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 $111.33 $173.90 $228.78
NAREIT Hybrid $100.00 $121.18 $126.03 $200.51 $200.51 $222.07
Peer Group Index $100.00 $129.33 $129.33 $142.51 $326.69 $404.44
</TABLE>
The foregoing price performance comparisons shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement/Prospectus 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.
776420.4
40
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of December 21, 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 Class A Common Shares.
<TABLE>
<CAPTION>
Class A Common Shares Class A Preferred Shares
------------------------- ----------------------------
Amount and Nature of Amount of 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> <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(6) 4,273,500(5) 19.0 -- -- 12.3
State Street Bank and Trust Company, 4,273,500(5) 19.0 -- -- 12.3
as Trustee for General Motors
Employes Global Group Pension Trust(7)
Vornado Realty, L.P.(8) 4,273,500(5) 19.0 -- -- 12.3
Jeffrey A. Altman 30,000 * -- -- *
Thomas E. Dobrowski -- (9) -- -- -- --
Martin L. Edelman 28,781(13) * -- -- *
Gary R. Garrabrant (12) 15,448(13) * -- -- *
Craig M. Hatkoff (3)(12) 7,035,927(14)(15) 38.5 12,267,658(14) 100 63.2
John R. Klopp (3)(12) 7,017,927(14)(15) 38.4 12,267,658(14) 100 63.1
Donald J. Meyer 37,500(16) * -- -- *
Stephen D. Plavin 100,000(16) * -- -- *
Sheli Z. Rosenberg (12) 3,781(13) * -- -- *
Steven Roth -- (10) -- -- -- --
Edward L. Shugrue III 65,334(16) * -- -- *
Lynne B. Sagalyn 12,114(13) * -- -- *
Samuel Zell (3)(12) 7,003,374(11)(13) 38.7 12,267,658(14) 100 63.1
(14)
All executive officers and trustees as a 7,431,000(14) 40.2% 12,267,658(14) 100% 64.0
group ((13) persons) (3)(12)
</TABLE>
* Represents less than 1%.
776420.4
41
<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. 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"),
State Street Bank and Trust Company, as trustee for General Motors
Employes Global Group Pension Trust (the "GM Trust") and Vornado Realty,
L.P. ("VNO").
(6) Beneficial ownership information is based on a statement filed pursuant to
Section 13(d) of the Exchange Act by EOP. The address of EOP is Two North
Riverside Plaza, Chicago, Illinois 60606.
(7) Beneficial ownership information is based on statements filed pursuant to
Section 13(d) of the Exchange Act by GMIMCO and the GM Trust as other
reporting person named therein. State Street Bank and Trust Company acts
as the trustee (the "Trustee") for the GM Trust, a trust under and for the
benefit of certain employee benefit plans of GM and its subsidiaries.
These shares may be deemed to be owned beneficially by GMIMCO, a wholly
owned subsidiary of GM. GMIMCO's principal business is providing
investment advice and investment management services with respect to the
assets of certain employee benefit plans of GM and its subsidiaries and
with respect to the assets of certain direct and indirect subsidiaries of
GM and associated entities. GMIMCO is serving as the Trust's investment
manager with respect to these shares and in that capacity it has sole
power to direct the Trustee as to the voting and disposition of these
shares. Because of the Trustee's limited role, beneficial ownership of the
shares by the Trustee is disclaimed. The address of GMIMCO is 767 Fifth
Avenue, New York 10153.
(8) Beneficial ownership is based on a statement filed pursuant to Section
13(d) of the Exchange Act filed by VNO. The address of VNO is c/o Vornado
Realty Trust, Park 80 West, Plaza II, Saddle Brook, New Jersey 07663.
(9) Does not include the shares that may be deemed beneficially owned by
GIMIMCO, as to which Mr. Dobrowski disclaims beneficial ownership.
(10) Does not include the shares that may be deemed beneficially owned by VNO,
as to which Mr. Roth disclaims beneficial ownership.
(11) Does not include the shares that may be deemed beneficially owned by EOP,
as to which Mr. Zell disclaims beneficial ownership.
(12) 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.
(13) Includes 3,781 shares which may be obtained upon conversion of vested
share units and, in the case of Mr. Edelman, Dr. Sagalyn, Mr. Garrabrant
and Mr. Zell, 25,000, 8,333, 11,664 and 40,000, respectively, shares
issuable upon the exercise of vested share options.
776420.4
42
<PAGE>
(14) 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.
(15) Includes 58,334 shares issuable upon the exercise of vested share options
held by each of Messrs. Hatkoff and Klopp.
(16) 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 43,333, 32,500 and 100,000
shares issuable upon the exercise of vested share options held by Mr.
Shugrue, Mr. Meyer and Mr. Plavin, respectively.
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.
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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 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.
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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
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.
776420.4
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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.
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, has an
interest.
Participation Transaction with EOP Operating Limited Partnership
In November 1997, the Company originated and funded a $50.3 million
second mortgage loan secured by the commercial office tower located at 1325
Avenue of the Americas in New York City (the "Property"). Concurrently with the
funding, the Company entered into participation agreement pursuant to which it
sold on a pari passu basis a 50% (or $25.15 million) participation interest in
the mortgage loan to EOP. Samuel Zell, chairman of the Board of Trustees, is the
chairman of the board of trustees of Equity Office Properties Trust, the
managing general partner of EOP. Subsequently, in December 1997, the Company
repurchased $20.15 million of the participation interest from EOP at face value.
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
776420.4
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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, VNO and
Mellon Bank N.A., as trustee for General Motors Hourly-Rate Employes Pension
Trust and General Motors Salaried Employes Pension Trust. The Trust Preferred
Securities acquired by the foregoing pension trusts were subsequently
transferred without consideration to State Street Bank and Trust Company, as
trustee for General Motors Employes Global Group Pension Trust. In connection
with the foregoing private placement transaction, the Company entered into a
Co-Investment Agreement, dated as of July 28, 1998, with EOP, VNO and 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. Following
consummation of the foregoing private placement transaction, upon formal
recommendation to the full Board of Trustees, Messrs. Roth and Dobrowski were
appointed trustees of the Company on August 13, 1998. See "PROPOSAL 3 - ELECTION
OF TRUSTEES - Compensation Committee Interlocks and Insider Participation."
The Company believes that the terms of the foregoing transactions are
no less favorable than could be obtained by the Company from unrelated parties
or an arms-length basis.
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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.
Description of Plan
The Company instituted the Original Incentive Plan in July 1997. 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
New 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 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 qualify 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 of Trustees 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
776420.4
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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
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 of Trustees 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 of Trustees 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 of Trustees 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 of Trustees 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 of Trustees 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 Amended and Restated Trustee Plan and the number of
shares made the subject of Awards under the 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
776420.4
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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 Amended and Restated Trustee Plan and the number of
shares made the subject of Awards under the Original Trustee 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 of Trustees 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 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 of Trustees 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 of Trustees 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 of Trustees 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 of Trustees 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 of Trustees or the Committee to grant Restricted Shares to individuals
with such Periods of Restriction as the Board of Trustees or the Committee may
designate. In the case of Covered Employees, the Board of Trustees 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 of
Trustees 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,
776420.4
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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 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 of Trustees 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 of Trustees or the Committee (a "Performance Period"). Prior to the grant
of Performance Units or Performance Shares, the Board of Trustees 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 of Trustees 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 of Trustees 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 of Trustees 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 of Trustees 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 of Trustees 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.
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<PAGE>
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 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 of Trustees 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 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
776420.4
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<PAGE>
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 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; Recommendation
Pursuant to the Current Declaration of Trust, the affirmative vote of a
majority of the 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 applicable NYSE rules and Section 422 and Section
162(m) of the Code with respect to the grant of ISOs. The Board of Trustees
unanimously recommends that shareholders vote FOR the approval of the Amended
and Restated Incentive Plan.
776420.4
53
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.
Description of Plan
The Company instituted the Original Trustee Plan in July 1997. 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 of
Trustees 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 of Trustees
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 of Trustees will also have the authority to construe
776420.4
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<PAGE>
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 of
Trustees will be final and binding.
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 of Trustees 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 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 of Trustees. Payment of a NQSO may be made with cash, with previously
owned Common Shares, by foregoing compensation in accordance with Board of
Trustees rules or by a combination of these.
Share Appreciation Rights. The Amended and Restated Trustee Plan
authorizes the Board of Trustees 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 of Trustees 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 of Trustees 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
776420.4
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<PAGE>
time as the Board of Trustees 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 of Trustees to grant Restricted Shares to individuals with such Periods of
Restriction as the Board of Trustees 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 granted and such other
provisions determined by the Board of Trustees. 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 of Trustees 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 of Trustees (a
"Performance Period"). Prior to the grant of Performance Units or Performance
Shares, the Board of Trustees 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 of Trustees 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 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 of Trustees.
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 of Trustees, 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 of Trustees's
discretion, be transferable 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.
776420.4
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<PAGE>
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 of the Board of Trustees 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 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
776420.4
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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. 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; Recommendation
Pursuant to the Current Declaration of Trust, the affirmative vote of a
majority of the votes cast at the Annual Meeting is required to approve the
Amended and Restated Trustee Plan. Such vote will also satisfy the shareholder
approval requirements of applicable NYSE rules. The Board of Trustees
unanimously recommends that shareholders vote FOR the approval of the Amended
and Restated Trustee Plan.
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PROPOSAL 6 -- APPROVAL OF EMPLOYEE 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 EMPLOYEE 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 EMPLOYEE SHARE PURCHASE PLAN.
Description of Plan
In April 1998, the Board of Trustees adopted the Employee Share
Purchase Plan. The Employee Share Purchase Plan will be effective upon
shareholder approval. The principal provisions of the Employee Share Purchase
Plan are summarized below.
Shares Authorization. The maximum number of Class A Common Shares that
may be issued under the Employee Share Purchase Plan is (a) 1,000,000 (b) minus
the number of Class A Common Shares subject to or issued under the Non-Employee
Share Purchase Plan.
Purpose of Plan. The Employee 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.
The Employee 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 Employee Share Purchase
Plan is also designed to encourage eligible employees to remain in the employ of
the Company. The Employee Share Purchase Plan provides eligible employees with
an opportunity to purchase Class A Common Shares through payroll deductions.
Offerings. The first Offering under the Employee 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 Employee
Share Purchase Plan or no additional shares of Common Shares are available for
purchase under the Employee Share Purchase Plan.
Eligible Employees. The Employee Share Purchase Plan provides that all
employees of the Company will be eligible to participate in the Employee 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
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will not be permitted to participate in the next Offering. As of October 30,
1998, approximately 31 employees would be eligible to participate in the
Employee Share Purchase Plan as of July 1, 1998.
Purchases. The Employee 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
Employee Share Purchase Plan of the Company 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 New 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 Employee 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 Employee 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 Employee Share Purchase Plan may be
terminated at any time by the Board of Trustees.
Federal Income Tax Consequences. The Employee 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 New 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 Employee 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
Employee 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
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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 Employee
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.
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; Recommendation
Pursuant to the Current Declaration of Trust, the affirmative vote of
the holders of a majority of the votes cast at the Annual Meeting is required to
approve the Employee Share Purchase Plan. Such vote will also satisfy the
shareholder approval requirements of applicable NYSE rules and Section 423 of
the Code. The Board of Trustees unanimously recommends that shareholders vote
FOR approval of the Employee Share Purchase Plan.
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PROPOSAL 7 -- APPROVAL OF NON-EMPLOYEE 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 NON-EMPLOYEE SHARE PURCHASE PLAN ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS ANNEX F. 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.
Description of Plan
In November 1998, the Board of Trustees adopted the Non-Employee Share
Purchase Plan. The Non-Employee Share Purchase Plan will be effective upon
shareholder approval. The principal provisions of the Non-Employee Share
Purchase Plan are summarized below.
Share Authorization. The maximum number of Class A Common Shares that
may be issued under the Non-Employee Share Purchase Plan is (a) 1,000,000 minus
(b) the number of Class A Common Shares subject to or issued under the Employee
Share Purchase Plan.
Purpose of Plan. The purpose of the Non-Employee Share Purchase Plan is
to provide eligible non-employees of the Company and certain of its subsidiaries
with opportunities to purchase Class A Common 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.
Eligible non-employees are able to purchase shares by making contributions into
an account held by the Company for their benefit.
Offerings. The first Offering under the Non-Employee Share Purchase
Plan will commence on the later of November 1, 1998 or the effective date of the
registration statement covering the shares issuable under the plan and terminate
on June 30, 1999. The second Offering will begin on July 1, 1999 and terminate
on December 31, 1999. Subsequent Offerings will commence on the successive
January 1 and July 1 dates until the Board of Trustees terminates the
Non-Employee Share Purchase Plan or no additional shares of Class A Common
Shares are available for purchase under the Non-Employee Share Purchase Plan.
Eligible Non-Employees. The Non-Employee Share Purchase Plan provides
that key consultants, other service providers and non-employee trustees of the
Company will be eligible to participate in the Non-Employee Share Purchase Plan.
To participate in the plan, each eligible non-employee must complete an Election
Form at least 30 days prior to the applicable Offering Commencement Date of an
Offering in which he or she desires to participate. An eligible non-employee
remains enrolled for subsequent Offerings, unless earlier terminated by the
non-employee under the terms of the plan. However, participation in one Offering
does not limit, or require, participation in any other Offering.
Purchases. The Non-Employee Share Purchase Plan authorizes the grant of
Options to purchase Class A Common Shares to eligible participating
non-employees on January 1 and July 1 of each year. The purchase price is
payable by the employee through contributions to an account held by the Company
for the benefit of such non-employee. The eligible participating non-employee
must deliver the full contribution amount noted on his or her Election Form to
the Company no later than 5 days prior to the last day of the Plan Period for
which such contribution is being made.
The purchase price for each Common Share subject to an Option granted
under the Non-Employee Share 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
non-employee who elects to participate in an Offering will receive an Option to
purchase the number of Class A Common Shares that he or she will
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be able to purchase with the contributions credited to his or her account during
such Plan Period, provided that the maximum number of shares that an eligible
non-employee may purchase under an Offering shall not exceed $12,500 divided by
the fair market value of a New Class A Common Share on the first business day of
the applicable Plan Period.
No Participant may be granted an Option which permits his or her rights
to purchase Class A 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 Class A 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.
Automatic Refunds. Any balance remaining in a participating
non-employee's account at the end of a Plan Period will be automatically
refunded to the non-employee, except that any balance which is less than the
purchase price of one New Class A Common Share will be carried forward into the
participating non-employee's account for the following Offering, unless the
non-employee elects not to participate in the following Offering under the
Non-Employee Share Purchase Plan, in which case such balance will be refunded.
The balance credited to the account of a participating non-employee trustee will
be automatically refunded in full, without interest, if his status as a member
of the Board of Trustees of the Company terminates for any reason during the
Plan Period.
Withdrawal; Changes in Contributions. Subject to certain limitations
set forth in the Non-Employee Share Purchase Plan, an eligible non-employee is
permitted to reduce or stop his contributions. If an eligible non-employee
elects to stop his contributions during the Plan Period, but does not elect to
withdraw his funds, such funds contributed prior to his election to stop
contributions will be applied to the purchase of Class A Common Shares on the
Exercise Date. An eligible non-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 his account and thereby withdraw
from participation in an Offering. Partial withdrawals are not permitted, and
the eligible non-employee may not begin participation again during the remainder
of the Plan Period.
Amendment and Termination. The Non-Employee Share Purchase Plan may be
amended from time to time by the Board of Trustees of the Company, and any such
amendment will be subject to the approval of the Company's shareholders to the
extent such approval is required under applicable laws or the rules of the NYSE.
The Non-Employee Share Purchase Plan may be terminated at any time by the Board
of Trustees.
Federal Income Tax Consequences. In general, a Participant who receives
a nonqualified stock option will recognize no income at the time of the grant of
the option. Upon exercise of a nonqualified stock option, a Participant will
recognize ordinary income in an amount equal to the excess of the fair market
value of the shares on the date of exercise over the exercise price of the
option. Special timing rules may apply to the Participant who is subject to
Section 16(a) of the Exchange Act.
The employer will be entitled to claim a federal income tax deduction
on account of the exercise of a nonqualified option. The amount of the deduction
will be equal to the ordinary income recognized by the Participant.
The foregoing is only a summary of certain provisions of the Code, and
Participants are urged to consult with their own tax advisors regarding these
matters.
Vote Required; Recommendation
Pursuant to the Current Declaration of Trust, the affirmative vote of
the holders of a majority of the votes cast at the Annual Meeting is required to
approve the Non-Employee Share Purchase Plan. Such vote will also satisfy the
shareholder approval requirements of applicable NYSE rules. The Board of
Trustees unanimously recommends that shareholders vote FOR approval of the
Non-Employee Share Purchase Plan.
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PROPOSAL 8 -- APPROVAL OF LOAN 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 LOAN PLAN ATTACHED TO THIS PROXY STATEMENT/ PROSPECTUS
AS ANNEX G. 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 LOAN PLAN.
Description of Plan
In November 1998, the Board of Trustees adopted the Share Purchase Loan
Plan (the "Loan Plan"). The Loan Plan will be effective upon shareholder
approval. The principal provisions of the Plan are summarized below.
Purpose of the Plan. The purpose of the Loan Plan is to provide
opportunities for Participants (as defined herein) to purchase Common Shares of
the Company with financing provided by the Company. Pursuant to the Loan Plan,
the Company may extend Plan Loans to Participants to finance purchases in the
secondary trading market of issued and outstanding shares or of authorized but
unissued shares directly from the Company.
The Loan Plan is intended to qualify as an "eligible plan" that
provides for the purchase of Common Shares, as "margin stock," with financing
provided by Plan Loans in accordance with applicable Federal Reserve Board
margin regulations.
Share Authorization. The maximum number of authorized but unissued
Common Shares that the Company may issue and sell to Participants with financing
provided by Plan Loans is 500,000. However, any shares issued to Participants
under the Loan Plan that are subsequently reacquired by the Company shall again
become Authorized Shares available for sale under the Loan Plan.
In the event that, as a result of any merger, reorganization,
consolidation, recapitalization, separation, liquidation, share dividend, share
split-up, share combination, or other change or in affecting the Common Shares,
(i) the number of Common Shares is increased or decreased or (ii) the Common
Shares are changed into or exchanged for a different number or kind of shares or
other securities of the Company or of another organizational entity, the Plan
Administrator shall make appropriate and equitable adjustment to the remaining
Authorized Shares available for issuance with financing under the Loan Plan. The
maximum number of authorized shares shall not be affected by any purchases of
issued and outstanding shares in the secondary trading market financed with Plan
Loans.
Participants. The Company may extend Plan Loans to any trustee or
officer, equal or senior in rank to Vice President, of the Company, or to any
consultant or service provider to the Company who, in the opinion of the Plan
Administrator, can contribute to the growth and profitability of the Company
(each a "Participant"). The Plan Administrator shall have the complete authority
to select the Participants eligible to participate in the Loan Plan.
Terms of the Loans. The Company may extend Plan Loans with a principal
amount equal to up to 100% of the purchase price of Common Shares purchased with
the Plan Loans. Subject to the foregoing, the principal amount of any Plan Loan
shall be determined by the Plan Administrator. The Plan Loans will bear interest
at an interest rate which is determined by the Plan Administrator, provided that
such rate is no less than the applicable Federal rate in effect pursuant to
Section 1274(d) of the Code and shall be compounded no less than semi-annually.
The Plan Administrator will have the discretion to determine other terms and
conditions of the Plan Loans extended under the Loan Plan, including but not
limited to, those relating to: maturity of the Plan Loans, the recourse or
non-recourse nature of the Plan Loans; the forgiveness of any or all of the
principal and/or interest due on the Plan Loans; conditions for forgiveness of
principal and/or interest, such as length of employment or service, change of
control events, performance measures or otherwise; the deferral of interest
payments; Company commitments to make tax gross up payments to cover taxes
incurred as a result of any forgiveness; or options to call or put the Common
Shares to satisfy the Plan Loans.
Each Participant who receives a Plan Loan from the Company will be
required to sign (i) a loan agreement (which sets forth the terms and conditions
of the Plan Loans), (ii) a secured promissory note and (iii) a pledge and
security agreement (which sets forth the terms and conditions for the pledge of
the Common Shares purchased with financing provided by the Plan Loan). The form
and terms and conditions of such Loan Documents will be determined by the Plan
Administrator.
Offer and Acceptance of Common Shares. Offers to sell Common Shares to
Participants with financing provided by Plan Loans will be made in writing. The
written offers will specify the number of shares to be offered to the
Participant, the portion of the purchase price to be financed with Plan Loans
and an outline of the terms thereof and the date by which the Offer must be
accepted. All such offers will be subject to the condition that the Purchase
Agreement (as defined herein) and the Loan Documents shall be executed and
delivered by the Participant.
A Participant may accept a Company offer to sell shares by delivering a
written acceptance to the Secretary of the Company. At the time of his/her
acceptance, such Participant will also execute a purchase agreement pursuant to
which the Participant agrees to purchase the Common Shares (the "Purchase
Agreement") and the related Loan Documents and will deliver to the Secretary of
the Company such documents along with payment of the portion of the aggregate
purchase price not financed with Plan Loans as specified in the Purchase
Agreement. Any offer to sell shares made pursuant to the Plan must be accepted
within the time specified in the offer, otherwise the offer will be deemed
withdrawn.
No offer or sale of Common Shares to Participants with financing
provided by Plan Loans will be made until the effective date of the Registration
Statement on Form S-8 covering the Authorized Shares available for issuance
under the Loan Plan or unless made pursuant to an exemption from registration
under the Securities Act of 1933, as amended.
Issuance of Shares. Upon execution of the Purchase Agreement and Loan
Documents and receipt by the Company of the purchase price for the Common Shares
in accordance with the Loan Plan, the shares will be deemed to be fully paid and
nonassessable Common Shares. Share certificates representing the Common Shares
will be registered in the Participants' names, but will be held in custody by
the Company for their account. Certificates representing Common Shares issued
pursuant to the Plan will bear such legends as the Company may deem appropriate.
Secondary Trading Market Purchases. Any secondary trading market
purchases of Common Shares financed with Plan Loans shall be made in compliance
with the Company's policy and procedures governing trading in shares of the
Company and applicable provisions of the Exchange Act and the regulations
promulgated thereunder.
Amendment or Termination. The Loan Plan may be amended by the Plan
Administrator from time to time to the extent that the Plan Administrator deems
it necessary or appropriate, and any such amendment will be subject to the
approval of the Company's shareholders to the extent such approval is required
under applicable laws or the rules of the exchange on which the Company is
listed. The Plan Administrator may also terminate the Loan Plan at any time.
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No amendment or termination of the Loan Plan shall adversely affect any Plan
Loan extended under the Loan Plan, without the written consent of the
Participant.
Federal Income Tax Consequences. Since Plan Loans under the Loan Plan
bear interest at no less than the applicable Federal rate, no interest will be
imputed to a Participant for federal income tax purposes as a consequence of a
Plan Loan. In the event that either principal or interest due on a Plan Loan is
forgiven by the Company, the amount forgiven will be treated as ordinary income
for federal income tax purposes to the Participant for the tax year of the
Participant in which the forgiveness occurs.
Vote Required; Recommendation
Pursuant to the Current Declaration of Trust, the affirmative vote of a
majority of the votes cast at the Annual Meeting is required to approve the Loan
Plan. Such vote will also satisfy the shareholder approval requirements of
applicable NYSE rules. The Board of Trustees unanimously recommends that
shareholders vote FOR approval of the Loan Plan.
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PROPOSAL 9 -- RATIFICATION OF INDEPENDENT AUDITORS
Description of Proposal
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.
Vote Required; Recommendation
Pursuant to the Current Declaration of Trust, the affirmative vote of a
majority of the votes cast at the Annual Meeting is required to ratify the
appointment of Ernst & Young as independent auditors. The Board of Trustees
unanimously recommends that shareholders vote FOR the ratification of Ernst &
Young as independent auditors.
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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.
The combined financial statements of the Company's subsidiary, Victor
Capital as of June 30, 1997 and December 31, 1996 and 1995 and for the six
months ended June 30, 1997 and 1996 and for each of the three years in the
period ended December 31, 1996, incorporated by reference into the Proxy
Statement/Prospectus and Registration Statement, have been reviewed or audited
by David Berdon & Co. LLP, independent auditors, as set forth in their reports
thereon and are included in reliance upon such reports, 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.
776420.4
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ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), is made as of
November __, 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 hereof), the
Surviving Limited
<PAGE>
Partnership 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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<PAGE>
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 Stock, par value $.01
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
Stephen D. Plavin Chief Operating Officer
Sheli Z. Rosenberg Director
Lynne B. Sagalyn Director
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<PAGE>
Name Office
- ---- ------
Donald J. Meyer Managing Director and Chief
Investment Officer
Edward L. Shugrue III Managing Director, Chief
Financial Officer and Assistant
Secretary
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 committees with the same names, memberships and functions and powers
delegated to them as the committees of the Board of Trustees of the Company in
existence at the Effective time as set forth in the minutes of the Board of
Trustees of the Company. 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.
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, par
value $.01 per share, of the New Company ("New Class A Common Stock"). 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, par value $.01 per share, of the New Company (the
"New Class A Preferred Stock"). 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.
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<PAGE>
(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, par value $.01
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 with the Common Certificate, the "Certificates") shall be deemed for
all purposes to represent ownership of an equal number of, shares of New 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 1997 Non-Employee 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.
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<PAGE>
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.
(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, 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
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<PAGE>
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 trustee or officer of the
Company or the Limited Partnership or its general partner or (ii) any individual
who, while a trustee 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 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-
<PAGE>
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. The resident agent in the State of Maryland is
Ballard Spahr Andrews & Ingersoll LLP, 300 Lombard Street, Baltimore, Maryland
21202, Attn: James J. Hanks, Jr.
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<PAGE>
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/ Edward L. Shugrue III
--------------------------------
Name: Edward L. Shugrue III
Title: Managing Director and
Chief Financial Officer
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<PAGE>
Exhibit A
to Annex 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.
697816.6
<PAGE>
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
697816.6
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<PAGE>
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,
serves or has
697816.6
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<PAGE>
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.
697816.6
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<PAGE>
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 record on all matters to be voted upon by stockholders and
the shares of Class B Stock shall not have voting
697816.6
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<PAGE>
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 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
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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. 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
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
697816.6
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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, (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
697816.6
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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.
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.
697816.6
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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.
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, par
value $.01 per share. The aggregate par value of all shares of capital stock
having par value was $10.
697816.6
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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, par
value $.01 per share, and 200,000,000 shares of Preferred Stock, par value $.01
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
__________, 199_.
ATTEST: CAPITAL TRUST, INC.
By: (SEAL)
- ------------------------ ------------------------------
Secretary Chief Executive Officer
697816.6
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Exhibit B
to Annex A
CAPITAL TRUST, INC.
-------------------
ARTICLES SUPPLEMENTARY
CLASS A 9.5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK
(par value $.01 per share)
FIRST: Capital Trust, Inc., a Maryland corporation (hereinafter called
the "Corporation"), does hereby certify to the State Department of Assessments
and Taxation of Maryland pursuant to Section 2-208 of the Maryland General
Corporation Law that, under a power contained in Section 6.3 of the charter of
the Corporation (the "Charter"), the Board of Directors of the Corporation (the
"Board of Directors"), by unanimous written consent dated November 11, 1998,
classified and designated 12,639,405 unissued and unclassified shares (the
"Shares") of Preferred Stock (as defined in the Charter) as shares of Class A
9.5% Cumulative Convertible Preferred Stock, par value $.01 per share, with the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications and terms
and conditions of redemption of shares as set forth herein, which upon any
restatement of the Charter may be made part of Article VI of the Charter, with
any necessary or appropriate changes to the enumeration or lettering of sections
or subsections thereof:
CLASS A 9.5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK
1 Designation and Amount. The class of Preferred Stock of the Corporation
created hereby shall be designated as Class A 9.5% Cumulative Convertible
Preferred Stock, and the number of shares constituting such class shall be
12,639,405, par value $.01 per share.
2 Definitions. As used in these Articles Supplementary, the following terms
shall have the following meanings:
(a) "Aggregate Consideration Receivable" by the Corporation in connection
with the issuance of any shares of Common Stock or any Common Stock
Equivalents means the sum of:
(i) the aggregate consideration paid to the Corporation for such
shares of Common Stock or Common Stock Equivalents and
(ii) the aggregate consideration or premiums, if any, stated in such
Common Stock Equivalents to be
747131.4
<PAGE>
payable for the Common Stock upon the exercise or conversion of
such Common Stock Equivalents,
calculated in each case in accordance with section 7(d)(vii) hereof.
In case all or any portion of the consideration to be received by the
Corporation may be paid in a form other than cash, the value of such
consideration shall be determined in good faith by the Board or a duly
authorized committee thereof (irrespective of the accounting treatment
thereof), and described in a resolution of the Board or such
committee.
(b) "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.
(c) "Annual Dividend Rate" has the meaning set forth in section 3(a)
hereof.
(d) "Bank Holding Company" means a bank holding company (as defined in
Section 1841 (a) of the Bank Holding Company Act of 1956, as amended)
or any affiliate (as defined in Section 1841 (k) of the Bank Holding
Company Act of 1956, as amended) of any bank holding company (as
defined in Section 1841 (a) of the Bank Holding Company Act of 1956,
as amended).
(e) "Board" means the Board of Directors of the Corporation.
(f) "Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in the City of New York, New York are
authorized or obligated by law or executive order to close.
(g) "Charter" means the charter, as defined in Section 1- 101(e) of the
Maryland General Corporation Law, of the Corporation.
(h) "Class A Articles Supplementary" means these Articles Supplementary
filed with and accepted for record by the State Department of
Assessment and Taxation of Maryland on or about ___________ __, 1998,
establishing the Class A Preferred Stock pursuant to Article VI of the
Charter, as the same may be amended, supplemented or modified from
time to time in accordance with the terms hereof and pursuant to
applicable law and upon any restatement of the Charter shall mean the
terms of the Class A Preferred Stock as set forth in Article VI of the
Charter.
(i) "Class A Common Stock" means the class A common stock, par value $.01
per share, of the Corporation, having the designations and rights,
qualifications, limitations and restrictions set forth in the Charter.
747131.4
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(j) "Class A Preferred Stock" means the Class A 9.5% Cumulative
Convertible Preferred Stock, par value $.01 per share, of the
Corporation established pursuant to these Articles Supplementary.
(k) "Class B Articles Supplementary" means Articles Supplementary filed
with and accepted for record by the State Department of Assessment and
Taxation of Maryland on or about ___________ __, 1998, establishing
the Class B Preferred Stock pursuant to Article [VI] of the Charter,
as the same may be amended, supplemented or modified from time to time
in accordance with the terms hereof and pursuant to applicable law and
upon any restatement of the Charter shall mean the terms of the Class
B Preferred Stock as set forth in Article [VI] of the Charter.
(l) "Class B Common Stock" means the class B common stock, par value $.01
per share, of the Corporation, having the designations and rights,
qualifications, limitations and restrictions set forth in the Charter.
(m) "Class B Preferred Stock" means the Class B 9.5% Cumulative
Convertible Non-Voting Preferred Stock, par value $.01 per share, of
the Corporation established pursuant to the Class B Articles
Supplementary.
(n) "Common Stock" means, collectively, the Class A Common Stock and the
Class B Common Stock.
(o) "Common Stock Equivalents" means, without double counting:
(i) Common Stock, where one share of Common Stock shall constitute
one Common Stock Equivalent,
(ii) Stock of the Corporation (including without limitation the
Preferred Stock) convertible into Common Stock, where any one
share of Stock of the Corporation shall constitute a number of
Common Stock Equivalents equal to the number of shares of Common
Stock issuable in respect of such Stock,
(iii) any rights, warrants, options and convertible, exchangeable or
exercisable securities entitling the holder thereof to subscribe
for or purchase any Common Stock, where any such rights,
warrants, options and convertible, exchangeable or exercisable
securities shall constitute a number of Common Share Equivalents
equal to the number of shares of Common Stock issuable in respect
of such rights, warrants, options or
747131.4
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<PAGE>
convertible, exchangeable or exercisable securities, and
(iv) any stock appreciation rights entitling the holders thereof to
any interest in an increase in value, however measured, of Common
Stock, where any such stock appreciation rights shall constitute
a number of Common Share Equivalents equal to the shares of
Common Stock, as nearly as it may be calculated, to such share
appreciation rights.
(p) "Conversion Date" has the meaning set forth in section 7(b) hereof.
(q) "Conversion Notice" has the meaning set forth in section 7(b) hereof.
(r) "Conversion Price" has the meaning set forth in section 7(a) hereof.
(s) "Corporation" means Capital Trust, Inc., a Maryland corporation.
(t) "D/E Ratio" means, as of the date of determination, the ratio of (i)
the sum of (x) the total Indebtedness of the Corporation and its
consolidated Subsidiaries as reflected on the Corporation's most
recent regularly prepared consolidated balance sheet, plus (y) all
Indebtedness issued by the Corporation and its consolidated
subsidiaries since the date of such consolidated balance sheet less
all Indebtedness retired or repurchased by the Corporation and its
subsidiaries since that date, plus (z) the Corporation's pro rata
share, based upon its percentage equity ownership interest therein, of
aggregate total Indebtedness of Equity Affiliates, to (ii) the excess
of total assets (including the Corporation's equity in its Equity
Affiliates) over total liabilities of the Corporation and its
consolidated subsidiaries, as reflected on the Corporation's most
recent regularly prepared consolidated balance sheet, in each case
determined in accordance with GAAP and after giving effect to the
incurrence of any proposed Indebtedness and the application of
proceeds of such Indebtedness.
(u) "Dividend Payment Date" has the meaning set forth in section 3(a)
hereof.
(v) "Dividend Period" has the meaning set forth in section 3(a) hereof.
747131.4
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(w) "Effective Purchase Price per Share" at which the Corporation issues
any shares of Common Stock or any Common Stock Equivalents means an
amount equal to:
(i) the Aggregate Consideration Receivable by the Corporation in
connection with the issuance of such shares of Common Stock or
Common Stock Equivalents divided by
(ii) the number of shares of Common Stock and Common Stock Equivalents
so issued.
(x) "Equity Affiliate" means any Person in which the Corporation or any of
its consolidated Subsidiaries has an equity interest which is or, in
accordance with GAAP, should be accounted for on the equity method in
the Corporation's consolidated financial statements.
(y) "Exempted Transaction" means each and any of the following:
(i) the issuance, from the Issuance Date through the date of the
Exempted Transaction, of Common Stock Equivalents to employees or
officers of the Corporation or any of its Subsidiaries, or to
consultants or service providers to the Corporation or any of its
Subsidiaries, or to directors of the Corporation or any of its
Subsidiaries, under an employee benefit plan or similar
arrangement adopted by the Corporation in an amount not to exceed
10% of the aggregate number of Common Stock Equivalents
outstanding on the date of such Exempted Transaction,
(ii) the issuance of any shares of Common Stock or Preferred Stock of
the Corporation upon the conversion of any shares of Common Stock
or Preferred Stock, and
(iii) the issuance of any Stock of the Corporation in exchange, in
whole or in part, for any acquisition by the Corporation of
shares of stock or other assets of any kind.
(z) "Fair Market Value" of a share of Common Stock means, as of any date,
the average of the closing prices of Class A Common Stock for the 20
consecutive Trading Days next preceding the date five days prior to
the date in question. The closing price for each day shall be:
(i) if the Class A Common Stock is listed or admitted for trading on
the New York Stock Exchange or any other national securities
exchange, the last sale price, or the closing bid price if no
sale
747131.4
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occurred, of one share of Class A Common Stock on the New York
Stock Exchange or, if not then listed on the New York Stock
Exchange, the principal securities exchange on which the Class A
Common Stock is listed or admitted for trading; or
(ii) if not listed or admitted for trading as described in clause (i)
of this section 2(z), the average of the closing sale price or,
in the absence of a closing sale price, the average of the
highest bid and lowest asked prices of one share of Class A
Common Stock quoted in the NASDAQ National Market System or any
similar system of automated dissemination of quotations of
securities prices then in common use, if so quoted; or
(iii) if not quoted as described in clause (ii) of this section 2(z),
the average of the highest bid and lowest offered quotations for
one share of Class A Common Stock as reported by the National
Quotation Bureau Incorporated if at least two securities dealers
have inserted both bid and offered quotations for shares of Class
A Common Stock on at least five of the 20 consecutive Trading
Days next preceding the date five days prior to the date in
question.
If none of the conditions set forth above is met, the closing price of
one share of Class A Common Stock on any day or the average of such
closing prices for any period shall be the fair market value of one
share of Common Stock for such day or period as determined in good
faith by the Board.
"Fair Market Value" of a share of Preferred Stock means the Fair
Market Value of a number of fully paid and nonassessable shares of
Class A Common Stock equal to the ratio of (a) the Liquidation
Preference for such Preferred Stock plus an amount equal to the
dividends per share accrued and unpaid thereon as of the date of such
determination to (b) the Conversion Price in effect as of the date of
such determination.
(aa) "GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the American Institute of
Certified Public Accountants acting through its Accounting Principles
Board or by the Financial Accounting Standards Board or through other
appropriate boards or committees thereof and which are consistently
applied for all periods after the date hereof so as to properly
reflect the financial condition, results of operations and changes in
financial position
747131.4
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<PAGE>
of any Person, except that any accounting principle or practice
required to be changed by such Accounting Principles Board or
Financial Accounting Standards Board (or other appropriate board or
committee of such Boards) in order to continue as a generally accepted
accounting principle or practice may be so changed.
(bb) "Holder" of a share of Class A Preferred Stock or a share of Class B
Preferred Stock means the Person in whose name such share of Class A
Preferred Stock or Class B Preferred Stock is registered on the books
of the Corporation.
"Holder" of a share of Class A Common Stock or a share of Class B
Common Stock means the Person in whose name such share of Class A
Common Stock or Class B Common Stock is registered on the books of the
Corporation.
(bb) "Incur" means to issue, assume, guarantee, incur or otherwise become
liable for.
(cc) "Indebtedness" means, with respect to any Person, without duplication,
any liability of such Person (i) for borrowed money, (ii) evidenced by
bonds, debentures, notes or other similar instruments, (iii)
constituting capitalized lease obligations, (iv) incurred or assumed
as the deferred purchase price of property, or pursuant to conditional
sale obligations and title retention agreements (but excluding trade
accounts payable arising in the ordinary course of business) and (v)
which are secured by any Lien on any property or asset of such first
referred to Person.
(dd) "Issuance Date" means, with respect to any Preferred Stock, the date
on which such Preferred Stock is issued by the Corporation.
(ee) "Junior Stock" means Common Stock and any other class or series of
Stock of the Corporation now or hereafter authorized, issued or
outstanding which is subject, under the terms of the Charter, 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 Preferred Stock shall have
been paid in full,
(ii) in the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the Holders of the
Preferred Stock shall be entitled to receive out of assets
747131.4
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<PAGE>
of the Corporation available for distribution to shareholders,
the amount specified in section 4 hereof, before any payment
shall be made or any assets distributed to the holders of such
other class or series of Stock of the Corporation, and
(iii) shares of such class or series may not be redeemed under any
circumstances, either at the option of the Corporation or of any
holder thereof, unless all of the outstanding Preferred Stock
have theretofore been redeemed or converted.
(ff) "Lien" means any lien, mortgage, deed of trust, pledge, charge or
other encumbrance of any kind, including, without limitation, any
conditional sale or other title retention agreement and any lease in
the nature thereof.
(gg) "Liquidation Preference" means, with respect to each share of
Preferred Stock, an amount equal to $2.69.
(hh) "Merger" means the simultaneous mergers of Capital Trust, a California
business trust, with and into Captrust Limited Partnership, a Maryland
limited partnership ("Captrust"), and of Captrust with and into the
Corporation.
(ii) "Person" means 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, any unincorporated organization or any other
entity.
(jj) "Preferred Stock" means, collectively, the Class A Preferred Stock and
the Class B Preferred Stock.
(kk) "Predecessor" means Capital Trust, a California business trust, as the
predecessor of the Corporation in the Merger.
(ll) "Restricted Payment" has the meaning set forth in section 3(c) hereof.
(mm) "Stock" means any shares of stock, rights, warrants or options to
purchase shares of stock, securities convertible into or exchangeable
or exercisable for shares of stock and participations in or other
equivalents of or interests (other than security interests) in shares
of stock, however designated and whether voting or nonvoting, of any
Person.
(nn) "Subsidiary" means:
747131.4
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(i) any corporation 50% or more of the Voting Stock of which is
owned, directly or indirectly, by the Corporation, or
(ii) any other Person whose accounts are required under GAAP to be
included in the Corporation's consolidated financial statements.
(oo) "Trading Day" means, with respect to the Class A Common Stock: (i) if
the Class A Common Stock is listed or admitted for trading on any
national securities exchange, days on which such national securities
exchange is open for business; (ii) if the Class A Common Stock is not
listed or admitted for trading on any national securities exchange,
but is quoted on the NASDAQ National Market System, any similar system
of automated dissemination of quotations of securities prices or the
National Quotation Bureau Incorporated, each day on which quotations
may be made on such system; or (iii) if the Class A Common Stock is
not quoted on any system or listed or admitted for trading on any
securities exchange, a Business Day.
(pp) "Voting Stock" means, with respect to the Corporation, all classes of
Stock of the Corporation then outstanding and normally entitled to
vote for the election of directors of the Corporation. Any reference
to a percentage of Voting Stock shall refer to the percentage of votes
eligible to be cast for the election of directors which are
attributable to the applicable Voting Stock.
3 Dividends.
(a) Payment of Dividends. The Holders of the Class A Preferred Stock shall
be entitled to receive, when, as and if declared by the Board, out of
funds legally available therefor, cash dividends per share at the rate
of 9.5% per annum on the Liquidation Preference (the "Annual Dividend
Rate"). Such dividends shall accrue (whether or not declared) from and
including the Issuance Date to and including the date on which the
Liquidation Preference is paid on such shares or on which such shares
are converted or redeemed and, to the extent not paid for any Dividend
Period, will be cumulative. Dividends on the Class A Preferred Stock
shall accrue on a daily basis whether or not the Corporation shall
have earnings or surplus at the time.
Semi-annual dividend periods (each a "Dividend Period") shall commence
on and include the sixteenth day of December and June of each year and
shall end on and include the fifteenth day of June and December,
respectively, of such or the following year; provided
747131.4
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<PAGE>
however, that, subject to the consummation of the Merger, the first
Dividend Period shall be deemed to commence on June 16, 1998 and shall
end on and include December 15, 1998. Dividends on the Class A
Preferred Stock shall be payable, when, as and if declared,
semi-annually, in arrears, no later than December 26 and June 25 of
each year commencing December 26, 1998 (each such date, a "Dividend
Payment Date"), except that if any such date is not a Business Day,
then such dividend shall be paid on the next succeeding Business Day.
Each such dividend shall be payable to Holders of Class A Preferred
Stock at the close of business on the record date established by the
Board, which record date shall be not more than 60 days prior to the
date fixed for payment thereof.
The amount of dividends payable per share of Class A Preferred Stock
for each full Dividend Period shall be computed by applying the Annual
Dividend Rate to the Liquidation Preference and dividing such amount
by two. The amount of dividends payable for any period shorter than a
full Dividend Period shall be computed on the basis of actual days
elapsed and a 360-day year consisting of twelve 30 day months.
The Corporation shall not declare or pay or set apart for payment any
dividends or make any other distributions on either class of Preferred
Stock unless the Corporation simultaneously declares or pays or sets
apart for payment dividends or makes distributions, at the same rate,
each share being treated equally, on the other class of Preferred
Stock.
(b) Distribution of Partial Dividend Payments. Except as otherwise
provided in these Articles Supplementary, if on any Dividend Payment
Date the Corporation pays less than the total amount of dividends then
accrued with respect to Preferred Stock, the amount so paid shall be
distributed ratably, each share being treated equally, among the
Holders of the Preferred Stock based upon the number shares of
Preferred Stock then held by each such Holder.
(c) Limitations on Certain Payments. Unless all accrued dividends and
other amounts then accrued through the end of the last Dividend Period
and unpaid with respect to the Preferred Stock shall have been paid in
full, the Corporation shall 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 Stock of the Corporation other than the Preferred
Stock (each, a "Restricted Payment"); provided, however, that a
"Restricted Payment" shall not include:
747131.4
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<PAGE>
(i) any dividend or distribution payable solely in Junior Stock, or
(ii) the acquisition of any Stock of the Corporation in exchange
solely for Junior Stock.
4 Liquidation Preference.
In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the Holders of Preferred
Stock shall be entitled to receive out of assets of the Corporation
available for distribution to stockholders, an amount per share equal to
the Liquidation Preference 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 Stock
of the Corporation.
If the assets and funds thus distributed among the Holders of Preferred
Stock shall be insufficient to permit the payment to such Holders of the
full preferential amount described above, then the entire assets and funds
of the Corporation legally available for distribution shall be distributed
ratably, each share being treated equally, among the Holders of Preferred
Stock based on the number of shares of Preferred Stock then held by each
such Holder.
In determining whether a distribution of any dividend or the redemption or
other acquisition of any Stock of the Corporation is permitted under
Maryland law, no effect shall be given to amounts, to the extent such
amounts would be needed, if the Corporation were to be liquidated,
dissolved or wound up at the time of such distribution, to satisfy the
preferential rights upon liquidation, dissolution or winding up of the
Corporation of Holders of the Class A Preferred Stock.
5 Consolidation, Merger and Sale of Assets, etc. Unless all of the
outstanding shares of Preferred Stock shall have been redeemed or converted
on or prior to the effective date of any consolidation, merger or transfer
referred to below involving the Corporation, without the approval of the
Holders of a majority of the outstanding shares of Preferred Stock, voting
together as a single class, but voting together as a separate class from
the Common Stock, the Corporation shall not consolidate with or merge into,
or transfer all or substantially all of its assets to, another Person
unless:
(a) in the case of a merger or consolidation, the Corporation is the
surviving entity, the rights and preferences of the Preferred Stock
are not modified, the Corporation, as the surviving entity, does not
have outstanding any shares of Stock that are not shares of Junior
Stock, and,
747131.4
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<PAGE>
immediately after the consummation of such merger or consolidation and
after giving effect thereto, the D/E Ratio of the Corporation shall
not exceed 5:1 or
(b) the surviving, resulting or acquiring Person is a Person organized
under the laws of the United States, any state thereof or the District
of Columbia, or a Person organized under the laws of a foreign
jurisdiction whose equity securities are listed on a national
securities exchange in the United States or authorized for quotation
on the NASDAQ National Market System, the Corporation shall make
effective provision such that, upon consummation of such transaction,
the Holders of Preferred Stock shall receive preferred shares of the
surviving entity having substantially identical terms as the Preferred
Stock surrendered by them, the surviving, resulting or acquiring
Person does not have outstanding any shares of Stock that are not
shares of Junior Stock and, immediately after the consummation of such
consolidation, merger or transfer, the D/E Ratio of such Person shall
not exceed 5:1.
6 Voting Rights of Preferred Stock.
(a) Voting Rights of the Class A Preferred Stock. In addition to the
voting rights described in sections 5 and 6(b) hereof, the holders of
the Class A Preferred Stock shall be entitled to vote together with
the holders of Class A Common Stock as a single class on all matters
submitted for a vote of stockholders, and shall be entitled to notice
of all stockholders' meetings and to act by written consent in the
same manner as the holders of Class A Common Stock. Each share of
Class A Preferred Stock shall entitle the Holder thereof to such
number of votes per share as shall equal the number of shares of Class
A Common Stock into which such share of Class A Preferred Stock is
then convertible.
(b) Preferred Stock Class Vote. The affirmative vote of the Board and the
Holders of a majority of the outstanding shares of Preferred Stock
voting together as a single class, but voting together as a separate
class from the Common Stock, shall be required in order:
(i) to amend, alter or repeal any of the provisions of these Articles
Supplementary or of the Class B Article Supplementary;
(ii) to authorize, create or issue any class or series of Stock of the
Corporation that are not Junior Stock; and
747131.4
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<PAGE>
(iii) for the Corporation to Incur any Indebtedness if the
Corporation's D/E Ratio would then exceed 5:1.
Any Preferred Stock owned, directly or indirectly, by the Corporation
or any of its Subsidiaries shall not have voting rights hereunder and
shall not be counted in determining the presence of a quorum.
7 Conversion Right.
(a) Right of Conversion. Each share of Class A Preferred Stock shall be
convertible at the option of the Holder thereof at any time and from
time to time in whole or in part into:
(i) a number of fully paid and nonassessable shares of Class A Common
Stock equal to the ratio of:
(x) the Liquidation Preference of such shares of Class A
Preferred Stock plus an amount equal to all dividends per
share accrued and unpaid thereon as of the Conversion Date
to
(y) the Conversion Price in effect on the Conversion Date, or
(ii) an equal number of fully paid and nonassessable shares of Class B
Preferred Stock,
or into such additional or other securities, cash or property and
at such other rates as required in accordance with the provisions
of this section 7.
For purposes of these Articles Supplementary, the "Conversion
Price" shall initially be $2.69 per share and shall be adjusted
from time to time in accordance with the provisions of this
section 7.
(b) Conversion Procedures. In order to exercise the conversion right, the
Holder of any shares of Class A Preferred Stock to be converted in
whole or in part shall surrender the certificate or certificates
representing such shares to the Corporation and shall give written
notice to the Corporation ("Conversion Notice") that the Holder elects
to convert such shares or the portion thereof specified in said notice
into shares of Class A Common Stock or Class B Preferred Stock, as
provided herein and as specified by the Holder in the Conversion
Notice. The Conversion Notice shall also state the name or names (with
address) in which the certificates for Class A Common Stock or Class B
Preferred Stock, as the case may be, shall be issued. Each certificate
representing Class A Preferred Stock surrendered for
747131.4
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<PAGE>
conversion shall, unless the shares issuable on conversion are to be
issued in the same name as the registration of such Class A Preferred
Stock, be duly endorsed by, or be accompanied by instruments of
transfer in form satisfactory to the Corporation duly executed by, the
Holder 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 Class A Preferred Stock relating thereto, the Corporation shall
issue and deliver to such Holder (or upon the written order of such
Holder) a certificate or certificates for the number of full shares of
Class A Common Stock, or Class B Preferred Stock, as specified in the
Conversion Notice, issuable upon the conversion of such Class A
Preferred Stock or portion thereof in accordance with the provisions
of this section 7, and a check or cash in respect of any fractional
shares issuable upon such conversion, as provided in section 7(c)
hereof. In the event that less than all the shares of Class A
Preferred 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 Class A
Preferred Stock so surrendered, without charge to such Holder, a new
certificate or certificates representing a number of shares of Class A
Preferred 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 shares of Class A Preferred Stock shall have been
surrendered to the Corporation or its transfer agent and a Conversion
Notice with respect to such shares shall have been received by the
Corporation, as described above. Any Person in whose name any
certificate or certificates for Class A Common Stock or Class B
Preferred Stock shall be issuable upon conversion shall be deemed to
have become the holder of record of the shares represented thereby on
the Conversion Date, provided, however, if the certificate or
certificates evidencing such Class A Preferred Stock are surrendered
on any date when the share transfer books of the Corporation shall be
closed, the Holder 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 share 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.
747131.4
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<PAGE>
Except as otherwise provided in this section 7, no payment or
adjustment will be made for dividends or other distributions with
respect to any Class A Common Stock or Class B Preferred Stock
issuable upon conversion of Class A Preferred Stock as provided
herein.
(c) Cash Payments in Lieu of Fractional Shares. No fractional shares or
scrip representing fractional shares shall be issued upon conversion
of Preferred Stock. If any fractional share, would, but for this
section 7(c), be issuable upon the conversion of any Class A Preferred
Stock, the Corporation shall make a payment therefor in cash on the
first Business Day immediately preceding the Conversion Date equal to
the Fair Market Value of such fractional share.
(d) Adjustment of Conversion Price for Conversion into Common Stock. The
Conversion Price with respect to the conversion of the Class A
Preferred Stock into Class A Common Stock shall be adjusted from time
to time by the Corporation as follows:
(i) in the event that the Corporation shall at any time after the
Issuance Date:
(A) declare a dividend or make a distribution on the shares of
Class A Common Stock in shares of Class A Common Stock,
(B) subdivide or reclassify the shares of Class A Common Stock
into a greater number of shares,
(C) combine the shares of Class A Common Stock into a smaller
number of shares,
(D) pay a dividend or make a distribution on the shares of Class
A Common Stock in any class of its Stock other than shares
of Class A Common Stock, or
(E) reclassify the shares of Class A Common Stock other than as
set forth in Section 7(d)(i)(B),
then the conversion right and the Conversion Price in effect
immediately prior thereto shall be adjusted so that the Holder of
any shares of Class A Preferred Stock thereafter surrendered for
conversion into shares of Class A Common Stock shall be entitled
to receive the number of shares of Class A Common Stock or other
Stock of the Corporation which such Holder would have owned or
have been entitled to receive after the
747131.4
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<PAGE>
happening of any of the events described above had such shares of
Class A Preferred Stock been converted into shares of Class A Common
Stock immediately prior to the happening of such event. An adjustment
made pursuant to this section 7(d)(i) shall become effective
immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the
effective date in the case of subdivision, combination or
reclassification. Such adjustment shall be made successively whenever
any event referred to above shall occur.
(ii) In the event that the Corporation shall at any time after the
Issuance Date issue any Common Stock or any Common Stock
Equivalents other than in an Exempted Transaction, at an
Effective Purchase Price per Share less than the Conversion Price
in effect immediately prior to the date of such issuance, then
such Conversion Price shall be adjusted to equal:
(A) the sum of:
(1) the product of:
(a) the number of shares of Common Stock and Common
Stock Equivalents outstanding immediately prior to
such issuance and
(b) the Conversion Price in effect immediately prior
to such issuance and
(2) the Aggregate Consideration Receivable by the
Corporation in connection with such issuance
divided by:
(B) the sum of:
(1) the number of shares of Common Stock and Common
Stock Equivalents outstanding immediately prior to
such issuance and
(2) the number of additional shares of Common Stock
and Common Stock Equivalents so issued.
For example, if on any given date the Corporation has 20,000,000
shares of Common Stock and Common
747131.4
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<PAGE>
Stock Equivalents outstanding, the Corporation issues warrants
exercisable at $1 per share to purchase an additional 1,000,000 shares
of Common Stock for a purchase price of $1 per warrant, and the
Conversion Price in effect on such date is $2.69, then the Conversion
Price shall be adjusted to equal $2.66, which is calculated as
follows:
$2.66 per share =
[(20,000,000shares x $2.69/share) + $2,000,000]/ (20,000,000
shares + 1,000,000 shares).
Such adjustment shall be made successively whenever any shares,
rights, warrants, options, convertible, exchangeable or
exercisable securities or share appreciation rights are issued at
an Effective Purchase Price per Share that is less than the
Conversion Price in effect on the date of such issuance. To the
extent that any right, option, warrant, convertible or
exercisable security or share appreciation right expires without
having been converted or exercised, the Conversion Price then in
effect shall be readjusted to the Conversion Price which then
would be in effect if such rights, options, warrants or
convertible, exchangeable or exercisable securities or share
appreciation rights had not been issued, but such readjustment
shall not affect the number of shares of Common Stock or other
Stock of the Corporation delivered upon any conversion prior to
the date such readjustment is made.
(iii) In the event that the Corporation shall distribute to all holders
of its Class A Common Stock any of its assets (other than cash
dividends payable on or after the date of consummation of the
Merger which together with all prior cash dividends of the
Corporation and the Predecessor paid on or after April 1, 1998,
do not exceed the amount of retained earnings of the Corporation
accrued on or after April 1, 1998 and on or prior to the date of
payment of such dividends) or debt securities, or rights,
options, warrants or convertible, exchangeable or exercisable
securities of the Corporation (including securities issued for
cash, but excluding distributions of Stock of the Corporation
referred to in section 7(d)(i) hereof, then in each such case,
the Conversion Price shall be adjusted to equal the Conversion
Price in effect immediately prior to such distribution less an
amount equal to the then fair market value (as reasonably
determined by
747131.4
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<PAGE>
the Board, in good faith and as described in a resolution of the
Board) of the portion of the assets or debt securities of the
Corporation so distributed or of such rights, options, warrants
or convertible, exchangeable or exercisable securities applicable
to one share of Class A Common Stock. Such adjustment shall
become effective immediately after the record date for the
determination of shares entitled to receive such distribution.
Notwithstanding the foregoing, no adjustment of the Conversion
Price shall be made upon the distribution to holders of Common
Stock of such rights, options, warrants or convertible,
exchangeable or exercisable securities, assets or debt securities
if the plan or arrangement under which such rights, options,
warrants or convertible, exchangeable or exercisable securities,
assets or debt securities are issued provides for their issuance
to Holders of Class A Preferred Stock in the same pro rata
amounts upon conversion thereof. Such adjustment shall be made
successively whenever any event listed above shall occur.
(iv) Anything in this section 7(d) to the contrary notwithstanding,
the Corporation shall be entitled to make such reductions in the
Conversion Price, in addition to those required by this section
7(d), as it in its reasonable discretion shall determine to be
advisable in order that any share dividends, subdivision of
shares, distribution of rights to purchase shares or securities,
or distribution of securities convertible into or exchangeable or
exercisable for shares hereafter made by the Corporation to its
stockholders, shall not be taxable.
(v) Whenever the Conversion Price is adjusted as provided in this
section 7(d), or the Class A Preferred Stock becomes convertible
into shares, securities, property or assets pursuant to section
7(e) hereof, or the Corporation reduces the Conversion Price
pursuant to section 7(f) hereof, the Corporation shall prepare a
notice of such adjustment of the Conversion Price setting forth
the adjusted Conversion Price (or describing such event, as the
case may be) and the date on which such adjustment (or event)
becomes effective, and setting forth in reasonable detail the
facts requiring such adjustment and the calculation of such
adjustment (or describing the shares, securities, property or
assets into which the Class A Preferred Stock shall become
convertible), and shall mail such
747131.4
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<PAGE>
notice of adjustment to all Holders of Class A Preferred Stock as
set forth in section 7(i) hereof.
(vi) In any case in which this section 7(d) provides that an
adjustment shall become effective immediately after a record date
for an event, the Corporation may defer until the occurrence of
such event:
(A) issuing to the Holder of any Class A Preferred Stock
converted after such record date and before the occurrence
of such event the additional shares of Class A Common Stock
issuable upon such conversion by reason of the adjustment
required by such event over and above the shares of Class A
Common Stock issuable upon such conversion before giving
effect to such adjustment, and
(B) paying to such Holder any amount in cash in lieu of any
fractional share of Class A Common Stock pursuant to section
7(c).
(vii) For purposes of any computations of Aggregate Consideration
Receivable or other consideration pursuant to this section 7(d),
the following shall apply:
(A) in the case of the issuance of Common Stock or Common Stock
Equivalents for cash, the consideration shall be the amount
of such cash, provided that in no case shall any deduction
be made for any commissions, discounts or other expenses
incurred by the Corporation for any underwriting of the
issue or otherwise in connection therewith; and
(B) in the case of the issuance of Common Stock or Common Stock
Equivalents for a consideration in whole or in part other
than cash, the consideration other than cash shall be deemed
to be the fair market value thereof as reasonably determined
in good faith by the Board or a duly authorized committee
thereof (irrespective of the accounting treatment thereof),
and described in a resolution of the Board or such
committee.
(viii) If, after an adjustment a Holder of Class A Preferred Stock may,
upon conversion of such security, receive two or more classes of
Stock of
747131.4
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<PAGE>
the Corporation, the Corporation shall determine on a fair basis
the allocation of the adjusted Conversion Price between such
classes of Stock. After such allocation, the conversion right and
the Conversion Price of each class of Stock of the Corporation
shall thereafter be subject to adjustment on terms comparable to
those applicable to Class A Common Stock in this section 7.
(e) Effect of Reclassification, Consolidation, Merger or Sale. Unless all
of the shares of Class A Preferred Stock shall have been redeemed or
converted on or prior to the effective date of any of the events
referred to in clauses (i), (ii) and (iii) of this section 7(e), if
any of the following events occur, namely:
(i) any reclassification or change of outstanding shares of Class A
Common Stock issuable upon conversion of the Class A Preferred
Stock (other than a change in par value, or from par value to no
par value, or from no par value to par value, or as a result of a
subdivision or combination),
(ii) any consolidation or merger of the Corporation with another
Person shall be effected as a result of which holders of Class A
Common Stock issuable upon conversion of the Class A Preferred
Stock shall be entitled to receive shares, securities or other
property or assets (including cash) with respect to or in
exchange for such Class A Common Stock, or
(iii) any sale or conveyance of the properties and assets of the
Corporation as, or substantially as, an entirety to any other
Person,
then the Corporation or such successor or purchasing Person, as
the case may be, shall make provisions in its constituent
documents to establish that each share of Class A Preferred Stock
then outstanding (or the successor shares referred to in section
5(b) hereof) shall be convertible into the kind and amount of
shares and other securities or property or assets (including
cash) receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the
number of shares of Class A Common Stock issuable upon conversion
of such Class A Preferred Stock immediately prior to such
reclassification, change, consolidation, merger, sale or
conveyance, each share of Class A Preferred Stock being treated
equally. Such provisions shall provide for adjustments which
747131.4
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<PAGE>
shall be as nearly equivalent as may be practicable to the
adjustments provided for in this section 7.
If this section 7(e) applies with respect to a transaction,
section 7(d) hereof shall not apply with respect to that
transaction. The above provisions of this section 7(e) shall
similarly apply to successive reclassifications, consolidations,
mergers and sales.
(f) Subdivision, Reclassification or Combination of Preferred Stock. The
Corporation shall not (i) subdivide or reclassify the Class A
Preferred Stock or (ii) combine the Class A Preferred Stock, unless
the Corporation simultaneously subdivides, reclassifies or combines,
at the same rate, each share being treated equally, all classes of
Preferred Stock.
(g) Taxes on Shares Issued. The issuance of share certificates upon
conversion of Class A Preferred Stock shall be made without charge to
the converting Holder for any tax in respect of the issuance thereof.
(h) Shares to be Fully Paid. The Corporation covenants that all shares of
Class A Common Stock or Class B Preferred Stock which may be issued
upon conversion of Class A Preferred 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.
(i) Notice to Holders Prior to Certain Actions.
(i) In the event:
(A) that the Corporation shall take any action that would
require an adjustment in the Conversion Price pursuant to
section 7(d)(i) or (iii) hereof;
(B) that any event described in section 7(e) hereof shall occur;
(C) the Corporation reduces the Conversion Price pursuant to
section 7(f) hereof; or
(D) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation;
the Corporation shall cause notice of such proposed action
or event to be mailed to each Holder of record of Class A
Preferred Stock at
747131.4
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<PAGE>
its address appearing on the share transfer books of the
Corporation, as promptly as possible but in any event no
later than the later of (x) the date 30 days prior to the
record date for such proposed action or the effective date
of such event or (y) the date on which the Corporation first
publicly announces such proposed action or event.
(ii) In the event that the Corporation shall take any action that
would require an adjustment in the Conversion Price, pursuant to
section 7(d)(ii) hereof, the Corporation shall cause notice of
such proposed action or event to be mailed to each Holder of
record of Class A Preferred Stock at its address appearing on the
share transfer books of the Corporation, as promptly as possible
but in no event later than the date that the Corporation provides
public notice of such proposed action or event.
(iii) In any event, such notice shall specify:
(A) the record date as of which the holders of record of Class A
Common Stock are to be determined, or
(B) the date on which such proposed event is expected to become
effective, and the date as of which it is expected that
holders of record of Class A Common Stock shall be entitled
to exchange their Class A Common Stock for securities or
other property deliverable upon such event.
Failure to give such notice, or any defect therein, shall not
affect the legality or validity of such action or event.
8 Reacquired Shares. Any shares of Class A Preferred Stock which are
converted, purchased, redeemed or otherwise acquired by the Corporation,
shall be retired and canceled by the Corporation promptly thereafter. No
such shares of Class A Preferred Stock shall upon their cancellation be
reissued.
9 Covenant regarding employee equity plans. For so long as any shares of
Class A Preferred Stock are outstanding, the Corporation will not:
(a) grant to any employees or officers of the Corporation or any of its
Subsidiaries, or to any consultants or service providers to the
Corporation or any of its Subsidiaries, or to any director of the
Corporation or any of its Subsidiaries, under an employee benefit plan
or similar
747131.4
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<PAGE>
arrangement adopted by the Corporation, any options to purchase Class
A Common Stock Equivalents having an exercise price per share less
than the fair market value of a Common Stock Equivalent on the date of
grant of such option as determined in good faith by any reasonable
method by the Board, or
(b) except through a stock purchase plan qualified under or with terms and
conditions substantially similar to a plan qualified under Section 423
of the Internal Revenue Code, issue or sell to any employees or
officers of the Corporation or any of its Subsidiaries, or to any
consultants or service providers to the Corporation or any of its
Subsidiaries, or to any director of the Corporation or any of its
Subsidiaries, or to any stockholder of the Corporation, any Common
Stock Equivalents at a price per share below the fair market value of
such Common Stock Equivalent on the date of such issuance or sale as
determined in good faith by any reasonable method by the Board.
10 Certain Restrictions on Transfer; Legend.
Holders shall not transfer shares of Class A Preferred Stock or Class A
Common Stock to any Bank Holding Company, unless, after giving effect to
such transfer, such Bank Holding Company:
(i) would, together with its Aggregated Transferors, own no more than
4.9% of any class of Voting Stock of the Corporation or
(ii) is not limited by the Bank Holding Company Act of 1956, as
amended, to holding not more than 4.9% of the Voting Stock of the
Corporation.
SECOND: The shares of Class A Preferred Stock have been classified and
designated by the Board of Directors under the authority contained in the
Charter.
THIRD: These Articles Supplementary have been approved by the Board of
Directors in the manner and by the vote required by law.
FOURTH: The undersigned President of the Corporation acknowledges
these Articles Supplementary to be the corporate act of the Corporation and, as
to all matters or facts required to be verified under oath, the undersigned
President 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
Supplementary to be executed under seal in its name and on
747131.4
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<PAGE>
its behalf by its
President and attested to by its Secretary on this ___ of _________, 1998.
ATTEST: CAPITAL TRUST, INC.
By: (SEAL)
- ----------------------------- ----------------------
, Secretary , President
- ------------------ -----------------
747131.4
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<PAGE>
Exhibit C
to Annex A
CAPITAL TRUST, INC.
ARTICLES SUPPLEMENTARY
CLASS B 9.5% CUMULATIVE CONVERTIBLE NON-VOTING
PREFERRED STOCK
(par value $.01 per share)
FIRST: Capital Trust, Inc., a Maryland corporation (hereinafter called
the "Corporation"), does hereby certify to the State Department of Assessments
and Taxation of Maryland pursuant to Section 2-208 of the Maryland General
Corporation Law that, under a power contained in Section 6.3 of the charter of
the Corporation (the "Charter"), the Board of Directors of the Corporation (the
"Board of Directors"), by unanimous written consent dated November 11, 1998,
classified and designated 12,639,405 unissued and unclassified shares (the
"Shares") of Preferred Stock (as defined in the Charter) as shares of Class B
9.5% Cumulative Convertible Non-Voting Preferred Stock, par value $.01 per
share, with the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption of shares as set forth
herein, which upon any restatement of the Charter may be made part of Article VI
of the Charter, with any necessary or appropriate changes to the enumeration or
lettering of sections or subsections thereof:
CLASS B 9.5% CUMULATIVE CONVERTIBLE NON-VOTING
PREFERRED STOCK
1 Designation and Amount. The class of Preferred Stock of the Corporation
created hereby shall be designated as Class B 9.5% Cumulative
Convertible Non-Voting Preferred Stock, and the number of shares
constituting such class shall be 12,639,405, par value $.01 per share.
2 Definitions. As used in these Articles Supplementary, the following
terms shall have the following meanings:
(a) "Aggregate Consideration Receivable" by the Corporation in
connection with the issuance of any shares of Common Stock or
any Common Stock Equivalents means the sum of:
(i) the aggregate consideration paid to the Corporation
for such shares of Common Stock or Common Stock
Equivalents and
(ii) the aggregate consideration or premiums, if any,
stated in such Common Stock Equivalents to be
753363.4
<PAGE>
payable for the Common Stock upon the exercise or
conversion of such Common Stock Equivalents,
calculated in each case in accordance with section 7(d)(vii)
hereof. In case all or any portion of the consideration to be
received by the Corporation may be paid in a form other than
cash, the value of such consideration shall be determined in
good faith by the Board or a duly authorized committee thereof
(irrespective of the accounting treatment thereof), and
described in a resolution of the Board or such committee.
(b) "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.
(c) "Annual Dividend Rate" has the meaning set forth in section
3(a) hereof.
(d) "Bank Holding Company" means a bank holding company (as
defined in Section 1841 (a) of the Bank Holding Company Act of
1956, as amended) or any affiliate (as defined in Section 1841
(k) of the Bank Holding Company Act of 1956, as amended) of
any bank holding company (as defined in Section 1841 (a) of
the Bank Holding Company Act of 1956, as amended).
(e) "Board" means the Board of Directors of the Corporation.
(f) "Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in the City of New
York, New York are authorized or obligated by law or executive
order to close.
(g) "Charter" means the charter, as defined in Section 1- 101(e)
of the Maryland General Corporation Law, of the Corporation.
(h) "Class A Articles Supplementary" means Articles Supplementary
filed with and accepted for record by the State Department of
Assessment and Taxation of Maryland on or about ___________
__, 1998, establishing the Class A Preferred Stock pursuant to
Article VI of the Charter, as the same may be amended,
supplemented or modified from time to time in accordance with
the terms hereof and pursuant to applicable law and upon any
restatement of the Charter shall mean the terms of the Class A
Preferred Stock as set forth in Article VI of the Charter.
(i) "Class A Common Stock" means the class A common stock, par
value $.01 per share, of the Corporation, having the
designations and rights, qualifications, limitations and
restrictions set forth in the Charter.
753363.4
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(j) "Class A Preferred Stock" means the Class A 9.5% Cumulative
Convertible Preferred Stock, par value $.01 per share, of the
Corporation, established pursuant to the Class A Articles
Supplementary.
(k) "Class B Articles Supplementary" means these Articles
Supplementary filed with and accepted for record by the State
Department of Assessment and Taxation of Maryland on or about
___________ __, 1998, establishing the Class B Preferred Stock
pursuant to Article VI of the Charter, as the same may be
amended, supplemented or modified from time to time in
accordance with the terms hereof and pursuant to applicable
law and upon any restatement of the Charter shall mean the
terms of the Class B Preferred Stock as set forth in Article
VI of the Charter.
(l) "Class B Common Stock" means the class B common stock, par
value $.01 per share, of the Corporation, having the
designations and rights, qualifications, limitations and
restrictions set forth in the Charter.
(m) "Class B Preferred Stock" means the Class B 9.5% Cumulative
Convertible Non-Voting Preferred Stock, par value $.01 per
share, of the Corporation, established pursuant to these
Articles Supplementary.
(n) "Common Stock" means, collectively, the Class A Common Stock
and the Class B Common Stock.
(o) "Common Stock Equivalents" means, without double counting:
(i) Common Stock, where one share of Common Stock
shall constitute one Common Stock Equivalent,
(ii) Stock of the Corporation (including without
limitation the Preferred Stock) convertible into
Common Stock, where any one share of Stock of the
Corporation shall constitute a number of Common
Stock Equlivants equal to the number of shares of
Common Stock issuable in respect of such Stock,
(iii) any rights, warrants, options and convertible,
exchangeable or exercisable securities entitling
the holder thereof to subscribe for or purchase
any Common Stock, where any such rights, warrants,
options and convertible, exchangeable or
exercisable securities shall constitute a number
of Common Share Equivalents equal to the number of
shares of Common Stock issuable in respect of such
rights, warrants, options or
753363.4
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convertible, exchangeable or exercisable
securities, and
(iv) any stock appreciation rights entitling the
holders thereof to any interest in an increase in
value, however measured, of Common Stock, where
any such stock appreciation rights shall
constitute a number of Common Share Equivalents
equal to the shares of Common Stock equivalent, as
nearly as it may be calculated, to such share
appreciation rights.
(p) "Conversion Date" has the meaning set forth in section 7(b)
hereof.
(q) "Conversion Notice" has the meaning set forth in section 7(b)
hereof.
(r) "Conversion Price" has the meaning set forth in section 7(a)
hereof.
(s) "Corporation" means Capital Trust, Inc., a Maryland
corporation.
(t) "D/E Ratio" means, as of the date of determination, the ratio
of (i) the sum of (x) the total Indebtedness of the
Corporation and its consolidated Subsidiaries as reflected on
the Corporation's most recent regularly prepared consolidated
balance sheet, plus (y) all Indebtedness issued by the
Corporation and its consolidated subsidiaries since the date
of such consolidated balance sheet less all Indebtedness
retired or repurchased by the Corporation and its subsidiaries
since that date, plus (z) the Corporation's pro rata share,
based upon its percentage equity ownership interest therein,
of aggregate total Indebtedness of Equity Affiliates, to (ii)
the excess of total assets (including the Corporation's equity
in its Equity Affiliates) over total liabilities of the
Corporation and its subsidiaries, as reflected on the
Corporation's most recent regularly prepared consolidated
balance sheet, in each case determined in accordance with GAAP
and after giving effect to the incurrence of any proposed
Indebtedness and the application of proceeds of such
Indebtedness.
(u) "Dividend Payment Date" has the meaning set forth in section
3(a) hereof.
(v) "Dividend Period" has the meaning set forth in section 3(a)
hereof.
753363.4
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<PAGE>
(w) "Effective Purchase Price per Share" at which the Corporation
issues any shares of Common Stock or any Common Stock
Equivalents means an amount equal to:
(i) the Aggregate Consideration Receivable by the
Corporation in connection with the issuance of such
shares of Common Stock or Common Stock Equivalents
divided by
(ii) the number of shares of Common Stock and Common Stock
Equivalents so issued.
(x) "Equity Affiliate" means any Person in which the Corporation
or any of its consolidated Subsidiaries has an equity interest
which is or, in accordance with GAAP, should be accounted for
on the equity method in the Corporation's consolidated
financial statements.
(y) "Exempted Transaction" means each and any of the following:
(i) the issuance, from the Issuance Date through the
date of the Exempted Transaction, of Common Stock
Equivalents to employees or officers of the
Corporation or any of its Subsidiaries, or to
consultants or service providers to the Corporation
or any of its Subsidiaries, or to directors of the
Corporation or any of its Subsidiaries, under an
employee benefit plan or similar arrangement
adopted by the Corporation in an amount not to
exceed 10% of the aggregate number of Common Stock
Equivalents outstanding on the date of such
Exempted Transaction,
(ii) the issuance of any shares of Common Stock or
Preferred Stock of the Corporation upon the
conversion of any shares of Common Stock or
Preferred Stock, and
(iii) the issuance of any Stock of the Corporation in
exchange, in whole or in part, for any acquisition
by the Corporation of shares of stock or other
assets of any kind.
(z) "Fair Market Value" of a share of Common Stock means, as of
any date, the average of the closing prices of Class A Common
Stock for the 20 consecutive Trading Days next preceding the
date five days prior to the date in question. The closing
price for each day shall be:
(i) if the Class A Common Stock is listed or admitted
for trading on the New York Stock Exchange or any
other national securities exchange, the last sale
price, or the closing bid price if no sale
753363.4
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<PAGE>
occurred, of one share of Class A Common Stock on
the New York Stock Exchange or, if not then listed
on the New York Stock Exchange, the principal
securities exchange on which the Class A Common
Stock is listed or admitted for trading; or
(ii) if not listed or admitted for trading as described
in clause (i) of this section 2(z), the average of
the closing sale price or, in the absence of a
closing sale price, the average of the highest bid
and lowest asked prices of one share of Class A
Common Stock quoted in the NASDAQ National Market
System or any similar system of automated
dissemination of quotations of securities prices
then in common use, if so quoted; or
(iii) if not quoted as described in clause (ii) of this
section 2(z), the average of the highest bid and
lowest offered quotations for one share of Class
A Common Stock as reported by the National
Quotation Bureau Incorporated if at least two
securities dealers have inserted both bid and
offered quotations for shares of Class A Common
Stock on at least five of the 20 consecutive
Trading Days next preceding the date five days
prior to the date in question.
If none of the conditions set forth above is met, the closing
price of one share of Class A Common Stock on any day or the
average of such closing prices for any period shall be the
fair market value of one share of Common Stock for such day or
period as determined in good faith by the Board.
"Fair Market Value" of a share of Preferred Stock means the
Fair Market Value of a number of fully paid and nonassessable
shares of Class A Common Stock equal to the ratio of (a) the
Liquidation Preference for such Preferred Stock plus an amount
equal to the dividends per share accrued and unpaid thereon as
of the date of such determination to (b) the Conversion Price
in effect as of the date of such determination.
(aa) "GAAP" means those generally accepted accounting principles
and practices which are recognized as such by the American
Institute of Certified Public Accountants acting through its
Accounting Principles Board or by the Financial Accounting
Standards Board or through other appropriate boards or
committees thereof and which are consistently applied for all
periods after the date hereof so as to properly reflect the
financial condition, results of operations and changes in
financial position
753363.4
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<PAGE>
of any Person, except that any accounting principle or
practice required to be changed by such Accounting Principles
Board or Financial Accounting Standards Board (or other
appropriate board or committee of such Boards) in order to
continue as a generally accepted accounting principle or
practice may be so changed.
(bb) "Holder" of a share of Class A Preferred Stock or a share of
Class B Preferred Stock means the Person in whose name such
share of Class A Preferred Stock or Class B Preferred Stock is
registered on the books of the Corporation.
"Holder" of a share of Class A Common Stock or a share of
Class B Common Stock means the Person in whose name such share
of Class A Common Stock or Class B Common Stock is registered
on the books of the Corporation.
(bb) "Incur" means to issue, assume, guarantee, incur or otherwise
become liable for.
(cc) "Indebtedness" means, with respect to any Person, without
duplication, any liability of such Person (i) for borrowed
money, (ii) evidenced by bonds, debentures, notes or other
similar instruments, (iii) constituting capitalized lease
obligations, (iv) incurred or assumed as the deferred purchase
price of property, or pursuant to conditional sale obligations
and title retention agreements (but excluding trade accounts
payable arising in the ordinary course of business) and (v)
which are secured by any Lien on any property or asset of such
first referred to Person.
(dd) "Issuance Date" means, with respect to any Preferred Stock,
the date on which such Preferred Stock is issued by the
Corporation.
(ee) "Junior Stock" means Common Stock and any other class or
series of Stock of the Corporation now or hereafter
authorized, issued or outstanding which is subject, under the
terms of the Charter, 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 Preferred Stock shall have been paid
in full,
(ii) in the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or
involuntary, the Holders of the Preferred Stock
shall be entitled to receive out of assets
753363.4
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<PAGE>
of the Corporation available for distribution to
shareholders, the amount specified in section 4
hereof, before any payment shall be made or any
assets distributed to the holders of such other
class or series of Stock of the Corporation, and
(iii) shares of such class or series may not be redeemed
under any circumstances, either at the option of
the Corporation or of any holder thereof, unless
all of the outstanding Preferred Stock have
theretofore been redeemed or converted.
(ff) "Lien" means any lien, mortgage, deed of trust, pledge, charge
or other encumbrance of any kind, including, without
limitation, any conditional sale or other title retention
agreement and any lease in the nature thereof.
(gg) "Liquidation Preference" means, with respect to each share of
Preferred Stock, an amount equal to $2.69.
(hh) "Merger" means the simultaneous mergers of Capital Trust, a
California business trust, with and into Captrust Limited
Partnership, a Maryland limited partnership ("Captrust"), and
of Captrust with and into the Corporation.
(ii) "Person" means 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, any unincorporated
organization or any other entity.
(jj) "Preferred Stock" means, collectively, the Class A Preferred
Stock and the Class B Preferred Stock.
(kk) "Predecessor" means Capital Trust, a California business
trust, as the predecessor of the Corporation in the Merger.
(ll) "Restricted Payment" has the meaning set forth in section 3(c)
hereof.
(mm) "Stock" means any shares of stock, rights, warrants or options
to purchase shares of stock, securities convertible into or
exchangeable or exercisable for shares of stock and
participations in or other equivalents of or interests (other
than security interests) in shares of stock, however
designated and whether voting or nonvoting, of any Person.
(nn) "Subsidiary" means:
753363.4
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<PAGE>
(i) any corporation 50% or more of the Voting Stock of
which is owned, directly or indirectly, by the
Corporation, or
(ii) any other Person whose accounts are required under
GAAP to be included in the Corporation's consolidated
financial statements.
(oo) "Trading Day" means, with respect to the Class A Common Stock:
(i) if the Class A Common Stock is listed or admitted for
trading on any national securities exchange, days on which
such national securities exchange is open for business; (ii)
if the Class A Common Stock is not listed or admitted for
trading on any national securities exchange, but quoted on the
NASDAQ National Market System, any similar system of automated
dissemination of quotations of securities prices or the
National Quotation Bureau Incorporated, each day on which
quotations may be made on such system; or (iii) if the Class A
Common Stock is not quoted on any system or listed or admitted
for trading on any securities exchange, a Business Day.
(pp) "Voting Stock" means, with respect to the Corporation, all
classes of Stock of the Corporation then outstanding and
normally entitled to vote for the election of directors of the
Corporation. Any reference to a percentage of Voting Stock
shall refer to the percentage of votes eligible to be cast for
the election of directors which are attributable to the
applicable Voting Stock.
3 Dividends.
(a) Payment of Dividends. The Holders of the Class B Preferred
Stock shall be entitled to receive, when, as and if declared
by the Board, out of funds legally available therefor, cash
dividends per share at the rate of 9.5% per annum on the
Liquidation Preference (the "Annual Dividend Rate"). Such
dividends shall accrue (whether or not declared) from and
including the Issuance Date to and including the date on which
the Liquidation Preference is paid on such shares or on which
such shares are converted or redeemed and, to the extent not
paid for any Dividend Period, will be cumulative. Dividends on
the Class B Preferred Stock shall accrue on a daily basis
whether or not the Corporation shall have earnings or surplus
at the time.
Semi-annual dividend periods (each a "Dividend Period") shall
commence on and include the sixteenth day of December and June
of each year and shall end on and include the fifteenth day of
June and December, respectively, of such or the following
year; provided
753363.4
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<PAGE>
however, that, subject to the consummation of the Merger, the
first Dividend Period shall be deemed to commence on June 16,
1998 and shall end on and include December 15, 1998. Dividends
on the Class B Preferred Stock shall be payable, when, as and
if declared, semi-annually, in arrears, no later than December
26 and June 25 of each year commencing December 26, 1998 (each
such date, a "Dividend Payment Date"), except that if any such
date is not a Business Day, then such dividend shall be paid
on the next succeeding Business Day. Each such dividend shall
be payable to Holders of Class B Preferred Stock at the close
of business on the record date established by the Board, which
record date shall be not more than 60 days prior to the date
fixed for payment thereof.
The amount of dividends payable per share of Class B Preferred
Stock for each full Dividend Period shall be computed by
applying the Annual Dividend Rate to the Liquidation
Preference and dividing such amount by two. The amount of
dividends payable for any period shorter than a full Dividend
Period shall be computed on the basis of actual days elapsed
and a 360-day year consisting of twelve 30 day months.
The Corporation shall not declare or pay or set apart for
payment any dividends or make any other distributions on
either class of Preferred Stock unless the Corporation
simultaneously declares or pays or sets apart for payment
dividends or makes distributions, at the same rate, each share
being treated equally, on the other class of Preferred Stock.
(b) Distribution of Partial Dividend Payments. Except as otherwise
provided in these Articles Supplementary, if on any Dividend
Payment Date the Corporation pays less than the total amount
of dividends then accrued with respect to Preferred Stock, the
amount so paid shall be distributed ratably, each share being
treated equally, among the Holders of the Preferred Stock
based upon the number shares of Preferred Stock then held by
each such Holder.
(c) Limitations on Certain Payments. Unless all accrued dividends
and other amounts then accrued through the end of the last
Dividend Period and unpaid with respect to the Preferred Stock
shall have been paid in full, the Corporation shall 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
Stock of the Corporation other than the Preferred Stock (each,
a "Restricted Payment"); provided, however, that a "Restricted
Payment" shall not include:
753363.4
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<PAGE>
(i) any dividend or distribution payable solely in Junior
Stock, or
(ii) the acquisition of any Stock of the Corporation in
exchange solely for Junior Stock.
4 Liquidation Preference.
In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the Holders of Preferred
Stock shall be entitled to receive out of assets of the Corporation
available for distribution to stockholders, an amount per share equal
to the Liquidation Preference 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 Stock of the Corporation.
If the assets and funds thus distributed among the Holders of Preferred
Stock shall be insufficient to permit the payment to such Holders of
the full preferential amount described above, then the entire assets
and funds of the Corporation legally available for distribution shall
be distributed ratably, each share being treated equally, among the
Holders of Preferred Stock based on the number of shares of Preferred
Stock then held by each such Holder.
In determining whether a distribution of any dividend or the redemption
or other acquisition of Stock of the Corporation is permitted under
Maryland law, no effect shall be given to amounts, to the extent such
amounts would be needed, if the Corporation were to be liquidated,
dissolved or wound up at the time of such distribution, to satisfy the
preferential rights upon liquidation, dissolution or winding up of the
Corporation of Holders of the Class B Preferred Stock.
5 Consolidation, Merger and Sale of Assets, etc. Unless all of the
outstanding shares of Preferred Stock shall have been redeemed or
converted on or prior to the effective date of any consolidation,
merger or transfer referred to below involving the Corporation, without
the approval of the Holders of a majority of the outstanding shares of
Preferred Stock, voting together as a single class, but voting together
as a separate class from the Common Stock, the Corporation shall not
consolidate with or merge into, or transfer all or substantially all of
its assets to, another Person unless:
(a) in the case of a merger or consolidation, the Corporation is
the surviving entity, the rights and preferences of the
Preferred Stock are not modified, the Corporation, as the
surviving entity, does not have outstanding any shares of
Stock that are not shares of Junior Stock, and, immediately
after the consummation of such merger or
753363.4
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<PAGE>
consolidation and after giving effect thereto, the D/E Ratio
of the Corporation shall not exceed 5:1, or
(b) the surviving, resulting or acquiring Person is a Person
organized under the laws of the United States, any state
thereof or the District of Columbia, or a Person organized
under the laws of a foreign jurisdiction whose equity
securities are listed on a national securities exchange in the
United States or authorized for quotation on the NASDAQ
National Market System, the Corporation shall make effective
provision such that, upon consummation of such transaction,
the Holders of Preferred Stock shall receive preferred shares
of the surviving entity having substantially identical terms
as the Preferred Stock surrendered by them, the surviving,
resulting or acquiring Person does not have outstanding any
shares of Stock that are not shares of Junior Stock and,
immediately after the consummation of such consolidation,
merger or transfer, the D/E Ratio of such Person shall not
exceed 5:1.
6 Voting Rights of Preferred Stock.
(a) Voting Rights of the Class B Preferred Stock. Except for the
voting rights described in sections 5 and 6(b) hereof, the
Class B Preferred Stock shall not have voting rights and shall
not be counted in determining the presence of a quorum.
(b) Preferred Stock Class Vote. The affirmative vote of the Board
and the Holders of a majority of the outstanding shares of
Preferred Stock voting together as a single class, but voting
together as a separate class from the Common Stock, shall be
required in order:
(i) to amend, alter or repeal any of the provisions of
these Articles Supplementary or of the Class A
Article Supplementary;
(ii) to authorize, create or issue any class or series
of Stock of the Corporation that are not Junior
Stock; and
(iii) for the Corporation to Incur any Indebtedness if
the Corporation's D/E Ratio would then exceed 5:1.
Any Preferred Stock owned, directly or indirectly, by the
Corporation or any of its Subsidiaries shall not have voting
rights hereunder and shall not be counted in determining the
presence of a quorum.
7 Conversion Right.
753363.4
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<PAGE>
(a) Right of Conversion. Each share of Class B Preferred Stock
shall be convertible at the option of the Holder thereof at
any time and from time to time in whole or in part into:
(i) a number of fully paid and nonassessable shares of
Class B Common Stock equal to the ratio of:
(x) the Liquidation Preference of such Class B
Preferred Stock plus an amount equal to all
dividends per share accrued and unpaid
thereon as of the Conversion Date to
(y) the Conversion Price in effect on the
Conversion Date, or
(ii) an equal number of fully paid and nonassessable
shares of Class A Preferred Stock, if the Holder (a)
would not, together with such Holder's Aggregated
Transferors, upon the issuance of such Class A
Preferred Stock, own more than 4.9% of any class of
Voting Stock 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 of Voting
Stock of the Corporation,
or into such additional or other securities, cash or property
and at such other rates as required in accordance with the
provisions of this section 7.
For purposes of these Articles Supplementary, the "Conversion
Price" shall initially be $2.69 per share and shall be
adjusted from time to time in accordance with the provisions
of this section 7.
(b) Conversion Procedures. In order to exercise the conversion
right, the Holder of any shares of Class B Preferred Stock to
be converted in whole or in part shall surrender the
certificate or certificates representing such shares to the
Corporation and shall give written notice to the Corporation
("Conversion Notice") that the Holder elects to convert such
shares or the portion thereof specified in said notice into
shares of Class B Common Stock or Class A Preferred Stock, as
provided herein and as specified by the Holder in the
Conversion Notice. The Conversion Notice shall also (i) state
the name or names (with address) in which the certificates for
Class B Common Stock or Class A Preferred Stock, as the case
may be, shall be issued and (ii) if Class B Preferred Stock is
to be converted into Class A Preferred Stock, contain a
certification by the Holder that the Holder either (a) will
not, together with such Holder's Aggregated Transferors, upon
the issuance of such Class A Preferred Stock, own more than
4.9% of any class of Voting Stock 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 of
753363.4
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<PAGE>
Voting Stock of the Corporation. Each certificate representing
Class B Preferred Stock surrendered for conversion shall,
unless the shares issuable on conversion are to be issued in
the same name as the registration of such Class B Preferred
Stock, be duly endorsed by, or be accompanied by instruments
of transfer in form satisfactory to the Corporation duly
executed by, the Holder 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 Class B Preferred Stock relating
thereto, the Corporation shall issue and deliver to such
Holder (or upon the written order of such Holder) a
certificate or certificates for the number of full shares of
Class B Common Stock, or Class A Preferred Stock, as specified
in the Conversion Notice, issuable upon the conversion of such
Class B Preferred Stock or portion thereof in accordance with
the provisions of this section 7, and a check or cash in
respect of any fractional shares issuable upon such
conversion, as provided in section 7(c) hereof. In the event
that less than all the shares of Class B Preferred 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
Class B Preferred Stock so surrendered, without charge to such
Holder, a new certificate or certificates representing a
number of shares of Class B Preferred 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 shares of Class B Preferred
Stock shall have been surrendered to the Corporation or its
transfer agent and a Conversion Notice with respect to such
shares shall have been received by the Corporation, as
described above. Any Person in whose name any certificate or
certificates for Class B Common Stock or Class A Preferred
Stock shall be issuable upon conversion shall be deemed to
have become the holder of record of the shares represented
thereby on the Conversion Date, provided, however, if the
certificate or certificates evidencing such Class B Preferred
Stock are surrendered on any date when the share transfer
books of the Corporation shall be closed, the Holder 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 share transfer books are
open, but such conversion shall
753363.4
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<PAGE>
be at the Conversion Price in effect on the date on which such
certificate or certificates shall have been surrendered.
Except as otherwise provided in this section 7, no payment or
adjustment will be made for dividends or other distributions
with respect to any Class B Common Stock or Class A Preferred
Stock issuable upon conversion of Class B Preferred Stock as
provided herein.
(c) Cash Payments in Lieu of Fractional Shares. No fractional
shares or scrip representing fractional shares shall be issued
upon conversion of Preferred Stock. If any fractional share,
would, but for this section 7(c), be issuable upon the
conversion of any Class B Preferred Stock, the Corporation
shall make a payment therefor in cash on the first Business
Day immediately preceding the
Conversion Date equal to the Fair Market Value of such
fractional share.
(d) Adjustment of Conversion Price for Conversion into Common
Stock. The Conversion Price with respect to the conversion of
the Class B Preferred Stock into Class B Common Stock shall be
adjusted from time to time by the Corporation as follows:
(i) in the event that the Corporation shall at any
time after the Issuance Date:
(A) declare a dividend or make a distribution on
the shares of Class B Common Stock in shares
of Class B Common Stock,
(B) subdivide or reclassify the shares of Class
B Common Stock into a greater number of
shares,
(C) combine the shares of Class B Common Stock
into a smaller number of shares,
(D) pay a dividend or make a distribution on the
shares of Class B Common Stock in any class
of its Stock other than shares of Class B
Common Stock, or
(E) reclassify the shares of Class B Common
Stock other than as set forth in section
7(d)(i)(B),
then the conversion right and the Conversion Price
in effect immediately prior thereto shall be
adjusted so that the Holder of any shares of Class
B Preferred Stock thereafter surrendered for
conversion into shares of Class B Common
753363.4
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<PAGE>
Stock shall be entitled to receive the number of
shares of Class B Common Stock or other Stock of
the Corporation which such Holder would have owned
or have been entitled to receive after the
happening of any of the events described above had
such shares of Class B Preferred Stock been
converted into shares of Class B Common Stock
immediately prior to the happening of such event.
An adjustment made pursuant to this section
7(d)(i) shall become effective immediately after
the record date in the case of a dividend or
distribution and shall become effective
immediately after the effective date in the case
of subdivision, combination or reclassification.
Such adjustment shall be made successively
whenever any event referred to above shall occur.
(ii) In the event that the Corporation shall at any
time after the Issuance Date issue any Common
Stock or any Common Stock Equivalents other than
in an Exempted Transaction, at an Effective
Purchase Price per Share less than the Conversion
Price in effect immediately prior to the date of
such issuance, then such Conversion Price shall be
adjusted to equal:
(A) the sum of:
(1) the product of:
(a) the number of shares of Common Stock
and Common Stock Equivalents
outstanding immediately prior to
such issuance and
(b) the Conversion Price in effect
immediately prior to such issuance
and
(2) the Aggregate Consideration Receivable by
the Corporation in connection with such
issuance
divided by:
(B) the sum of:
(1) the number of shares of Common Stock and
Common Stock Equivalents outstanding
immediately prior to such issuance and
753363.4
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<PAGE>
(2) the number of additional shares of Common
Stock and Common Stock Equivalents so
issued.
For example, if on any given date the Corporation
has 20,000,000 shares of Common Stock and Common
Stock Equivalents outstanding, the Corporation
issues warrants exercisable at $1 per share to
purchase an additional 1,000,000 shares of Common
Stock for a purchase price of $1 per warrant, and
the Conversion Price in effect on such date is
$2.69, then the Conversion Price shall be adjusted
to equal $2.66, which is calculated as follows:
$2.66 per share =
[(20,000,000shares x $2.69/share) + $2,000,000]/ (20,000,000
shares + 1,000,000 shares).
Such adjustment shall be made successively
whenever any shares, rights, warrants, options,
convertible, exchangeable or exercisable
securities or share appreciation rights are issued
at an Effective Purchase Price per Share that is
less than the Conversion Price in effect on the
date of such issuance. To the extent that any
right, option, warrant, convertible or exercisable
security or share appreciation right expires
without having been converted or exercised, the
Conversion Price then in effect shall be
readjusted to the Conversion Price which then
would be in effect if such rights, options,
warrants or convertible, exchangeable or
exercisable securities or share appreciation
rights had not been issued, but such readjustment
shall not affect the number of shares of Common
Stock or other Stock of the Corporation delivered
upon any conversion prior to the date such
readjustment is made.
(iii) In the event that the Corporation shall distribute
to all holders of its Class B Common Stock any of
its assets (other than cash dividends payable on
or after the date of consummation of the Merger
which together with all prior cash dividends of
the Corporation and the Predecessor paid on or
after April 1, 1998, do not exceed the amount of
retained earnings of the Corporation accrued on or
after April 1, 1998 and on or prior to the date of
payment of such dividends) or debt securities, or
rights, options, warrants or convertible,
exchangeable or exercisable securities of the
Corporation (including securities issued for cash,
but excluding distributions of Stock of the
753363.4
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<PAGE>
Corporation referred to in section 7(d)(i) hereof,
then in each such case, the Conversion Price shall
be adjusted to equal the Conversion Price in
effect immediately prior to such distribution less
an amount equal to the then fair market value (as
reasonably determined by the Board, in good faith
and as described in a resolution of the Board) of
the portion of the assets or debt securities of
the Corporation so distributed or of such rights,
options, warrants or convertible, exchangeable or
exercisable securities applicable to one share of
Class B Common Stock. Such adjustment shall become
effective immediately after the record date for
the determination of shares entitled to receive
such distribution. Notwithstanding the foregoing,
no adjustment of the Conversion Price shall be
made upon the distribution to holders of Common
Stock of such rights, options, warrants or
convertible, exchangeable or exercisable
securities, assets or debt securities if the plan
or arrangement under which such rights, options,
warrants or convertible, exchangeable or
exercisable securities, assets or debt securities
are issued provides for their issuance to Holders
of Class B Preferred Stock in the same pro rata
amounts upon conversion thereof. Such adjustment
shall be made successively whenever any event
listed above shall occur.
(iv) Anything in this section 7(d) to the contrary
notwithstanding, the Corporation shall be entitled
to make such reductions in the Conversion Price,
in addition to those required by this section
7(d), as it in its reasonable discretion shall
determine to be advisable in order that any share
dividends, subdivision of shares, distribution of
rights to purchase shares or securities, or
distribution of securities convertible into or
exchangeable for shares hereafter made by the
Corporation to its stockholders, shall not be
taxable.
(v) Whenever the Conversion Price is adjusted as
provided in this section 7(d), or the Class B
Preferred Stock becomes convertible into shares,
securities, property or assets pursuant to section
7(e) hereof, or the Corporation reduces the
Conversion Price pursuant to section 7(f) hereof,
the Corporation shall prepare a notice of such
adjustment of the Conversion Price setting forth
the adjusted Conversion Price (or describing such
event, as the case may be) and the date on which
such adjustment (or event)
753363.4
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<PAGE>
becomes effective, and setting forth in reasonable
detail the facts requiring such adjustment and the
calculation of such adjustment (or describing the
shares, securities, property or assets into which
the Class B Preferred Stock shall become
convertible), and shall mail such notice of
adjustment to all Holders of Class B Preferred
Stock as set forth in section 7(i) hereof.
(vi) In any case in which this section 7(d) provides
that an adjustment shall become effective
immediately after a record date for an event, the
Corporation may defer until the occurrence of such
event:
(A) issuing to the Holder of any Class B
Preferred Stock converted after such record
date and before the occurrence of such event
the additional shares of Class B Common
Stock issuable upon such conversion by
reason of the adjustment required by such
event over and above the shares of Class B
Common Stock issuable upon such conversion
before giving effect to such adjustment, and
(B) paying to such Holder any amount in cash in
lieu of any fractional share of Class B
Common Stock pursuant to section 7(c).
(vii) For purposes of any computations of Aggregate
Consideration Receivable or other consideration
pursuant to this section 7(d), the following shall
apply:
(A) in the case of the issuance of Common Stock
or Common Stock Equivalents for cash, the
consideration shall be the amount of such
cash, provided that in no case shall any
deduction be made for any commissions,
discounts or other expenses incurred by the
Corporation for any underwriting of the
issue or otherwise in connection therewith;
and
(B) in the case of the issuance of Common Stock
or Common Stock Equivalents for a
consideration in whole or in part other than
cash, the consideration other than cash
shall be deemed to be the fair market value
thereof as reasonably determined in good
faith by the Board or a duly authorized
committee thereof (irrespective of the
accounting treatment
753363.4
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<PAGE>
thereof), and described in a resolution of the
Board or such committee.
(viii) If, after an adjustment a Holder of Class B
Preferred Stock may, upon conversion of such
security, receive two or more classes of Stock of
the Corporation, the Corporation shall determine
on a fair basis the allocation of the adjusted
Conversion Price between such classes of Stock of
the Corporation. After such allocation, the
conversion right and the Conversion Price of each
class of Stock shall thereafter be subject to
adjustment on terms comparable to those applicable
to Class B Common Stock in this section 7.
(e) Effect of Reclassification, Consolidation, Merger or Sale.
Unless all of the shares of Class B Preferred Stock shall have
been redeemed or converted on or prior to the effective date
of any of the events referred to in clauses (i), (ii) and
(iii) of this section 7(e), if any of the following events
occur, namely:
(i) any reclassification or change of outstanding
shares of Class B Common Stock issuable upon
conversion of the Class B Preferred Stock (other
than a change in par value, or from par value to no
par value, or from no par value to par value, or as
a result of a subdivision or combination),
(ii) any consolidation or merger of the Corporation with
another Person shall be effected as a result of
which holders of Class B Common Stock issuable upon
conversion of the Class B Preferred Stock shall be
entitled to receive shares, securities or other
property or assets (including cash) with respect to
or in exchange for such Class B Common Stock, or
(iii) any sale or conveyance of the properties and assets
of the Corporation as, or substantially as, an
entirety to any other Person,
then the Corporation or such successor or
purchasing Person, as the case may be, shall make
provisions in its constituent documents to
establish that each share of Class B Preferred
Stock then outstanding (or the successor shares
referred to in section 5(b) hereof) shall be
convertible into the kind and amount of shares and
other securities or property or assets (including
cash) receivable upon such reclassification,
change, consolidation, merger, sale or conveyance
by a holder of the number of shares of Class B
753363.4
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<PAGE>
Common Stock issuable upon conversion of such Class
B Preferred Stock immediately prior to such
reclassification, change, consolidation, merger,
sale or conveyance, each share of Class B Preferred
Stock being treated equally. Such provisions shall
provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments
provided for in this section 7.
If this section 7(e) applies with respect to a
transaction, section 7(d) hereof shall not apply with
respect to that transaction. The above provisions of
this section 7(e) shall similarly apply to successive
reclassifications, consolidations, mergers and sales.
(f) Subdivision, Reclassification or Combination of Preferred
Stock. The Corporation shall not (i) subdivide or reclassify
the Class B Preferred Stock or (ii) combine the Class B
Preferred Stock, unless the Corporation simultaneously
subdivides, reclassifies or combines, at the same rate, each
share being treated equally, all classes of Preferred Stock.
(g) Taxes on Shares Issued. The issuance of share certificates
upon conversion of Class B Preferred Stock shall be made
without charge to the converting Holder for any tax in respect
of the issuance thereof.
(h) Shares to be Fully Paid. The Corporation covenants that all
shares of Class B Common Stock or Class A Preferred Stock
which may be issued upon conversion of Class B Preferred 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.
(i) Notice to Holders Prior to Certain Actions.
(i) In the event:
(A) that the Corporation shall take any action
that would require an adjustment in the
Conversion Price pursuant to section 7(d)(i)
or (iii) hereof;
(B) that any event described in section 7(e)
hereof shall occur;
(C) the Corporation reduces the Conversion Price
pursuant to section 7(f) hereof; or
753363.4
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<PAGE>
(D) of the voluntary or involuntary dissolution,
liquidation or winding-up of the
Corporation;
the Corporation shall cause notice of such
proposed action or event to be mailed to each
Holder of record of Class B Preferred Stock at its
address appearing on the share transfer books of
the Corporation, as promptly as possible but in
any event no later than the later of (x) the date
30 days prior to the record date for such proposed
action or the effective date of such event or (y)
the date on which the Corporation first publicly
announces such proposed action or event.
(ii) In the event that the Corporation shall take any
action that would require an adjustment in the
Conversion Price, pursuant to section 7(d)(ii)
hereof, the Corporation shall cause notice of such
proposed action or event to be mailed to each
Holder of record of Class B Preferred Stock at its
address appearing on the share transfer books of
the Corporation, as promptly as possible but in no
event later than the date that the Corporation
provides public notice of such proposed action or
event.
(iii) In any event, such notice shall specify:
(A) the record date as of which the holders of
record of Class B Common Stock are to be
determined, or
(B) the date on which such proposed event is
expected to become effective, and the date
as of which it is expected that holders of
record of Class B Common Stock shall be
entitled to exchange their Class B Common
Stock for securities or other property
deliverable upon such event.
Failure to give such notice, or any defect
therein, shall not affect the legality or validity
of such action or event.
8 Reacquired Shares. Any shares of Class B Preferred Stock which are
converted, purchased, redeemed or otherwise acquired by the
Corporation, shall be retired and canceled by the Corporation promptly
thereafter. No such shares of Class B Preferred Stock shall upon their
cancellation be reissued.
753363.4
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<PAGE>
9 Covenant regarding employee equity plans. For so long as any shares of
Class B Preferred Stock are outstanding, the Corporation will not:
(a) grant to any employees or officers of the Corporation or any
of its Subsidiaries, or to any consultants or service
providers to the Corporation or any of its Subsidiaries, or to
any director of the Corporation or any of its Subsidiaries,
under an employee benefit plan or similar arrangement adopted
by the Corporation, any options to purchase Class B Common
Stock Equivalents having an exercise price per share less than
the fair market value of a Common Stock Equivalent on the date
of grant of such option as determined in good faith by any
reasonable method by the Board, or
(b) except through a stock purchase plan qualified under or with
terms and conditions substantially similar to a plan qualified
under Section 423 of the Internal Revenue Code, issue or sell
to any employees or officers of the Corporation or any of its
Subsidiaries, or to any consultants or service providers to
the Corporation or any of its Subsidiaries, or to any director
of the Corporation or any of its Subsidiaries, or to any
stockholder of the Corporation, any Common Stock Equivalents
at a price per share below the fair market value of such
Common Stock Equivalent on the date of such issuance or sale
as determined in good faith by any reasonable method by the
Board.
10 Certain Restrictions on Transfer; Legend.
(a) The Class B Preferred Stock and the Class B Common Stock may
be transferred by a Bank Holding Company only:
(i) in accordance with applicable federal and state
securities laws and
(ii) unless the Corporation shall have received an opinion
of counsel stating that the restriction in this
section 10(a)(ii) is not applicable under the
circumstances:
(A) in a widely dispersed offering in which no
more than 2% of the outstanding Class B
Common Stock and Stock of the Corporation
convertible into Class B Common Stock are
transferred to any one holder, or
(B) to a transferee who has agreed in writing
acceptable to the Corporation to be bound by
the restrictions set forth in this section
10.
753363.4
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<PAGE>
(b) Holder agrees that substantially the following legend shall be
placed on the certificates representing any Class B Preferred
Stock and Class B Common Stock;
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE LIMITATIONS UPON TRANSFER AND CONVERSION CONTAINED IN THE
ARTICLES SUPPLEMENTARY CREATING THE CLASS B 9.5% CUMULATIVE
CONVERTIBLE NON-VOTING PREFERRED STOCK AND THE BY-LAWS OF THE
CORPORATION (COPIES OF WHICH ARE ON FILE AT THE OFFICE OF THE
CORPORATION)."
SECOND: The shares of Class B Preferred Stock have been classified and
designated by the Board of Directors under the authority contained in the
Charter.
THIRD: These Articles Supplementary have been approved by the Board of
Directors in the manner and by the vote required by law.
FOURTH: The undersigned President of the Corporation acknowledges
these Articles Supplementary to be the corporate act of the Corporation and, as
to all matters or facts required to be verified under oath, the undersigned
President 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
Supplementary to be executed under seal in its name and on its behalf by its
President and attested to by its Secretary on this ___ of _________, 1998.
ATTEST: CAPITAL TRUST, INC.
_____________________________ By:_______________________ (SEAL)
__________________, Secretary _________________, President
753363.4
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<PAGE>
Exhibit D
to Annex A
CAPITAL TRUST, INC.
AMENDED AND RESTATED
BYLAWS
<PAGE>
TABLE OF CONTENTS
-----------------
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
-15-
<PAGE>
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.
-16-
<PAGE>
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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<PAGE>
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, a provision for the payment
of cash in lieu of the issuance of fractional trust interests,
partnership
<PAGE>
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 __________, 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 May 11, 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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<PAGE>
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
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.
-3-
<PAGE>
(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.
(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.
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<PAGE>
(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.
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
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<PAGE>
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. SHARES 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
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
-6-
<PAGE>
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.
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.
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ARTICLE 6. SHARE 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.
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.
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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.
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;
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(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
(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.
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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:
"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.
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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 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 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
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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
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,
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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.
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.
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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.
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.
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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:
_______ __, 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 May 11, 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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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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<PAGE>
(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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<PAGE>
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. SHARES 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 under the Plan through the
last day of the immediately preceding calendar year (the "Year End Date"),
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<PAGE>
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.
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
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<PAGE>
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 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
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<PAGE>
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).
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
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<PAGE>
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.
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
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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 percentage to, the value of Performance Units or number of
Performance Shares to determine the payout to be received by the Participant.
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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
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
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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.
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
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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.
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.
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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:
________ __, 1998
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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.
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"Offerings" shall be defined in Section 5.
"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. The maximum number of Common Shares that may
be issued under the Plan is (a) 1,000,000 (b) minus the number of Common Shares
subject to or issued under the Company's 1998 Non-Employee Share Purchase 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
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or (ii) the Plan shall have been sooner terminated in accordance with Section
22. The initial Offering will begin upon the later of (i) January 1, 1999 or
(ii) the effective date of the Form Registration Statement on Form S-8 covering
the Common Shares issuable under the Plan, and will end on June 30, 1999. The
second Offering will begin on July 1, 1999 and end on December 31, 1999.
Subsequent Offerings will begin on the successive January 1 or July 1 (each, an
"Offering Commencement Date"). Each Offering Commencement Date will begin a six
(6) month period (a "Plan Period") during which payroll 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.
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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 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.
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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.
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
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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.
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.
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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 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.
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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.
703524.6
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ANNEX F
CAPITAL TRUST
1998 NON-EMPLOYEE SHARE PURCHASE PLAN
1. Purpose
The purpose of this Plan is to provide eligible non-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").
2. Definitions
2.1 "Account" shall mean the separate bookkeeping account established and
maintained by the Committee or the Board, as the case may be, for each
Participant for each Plan Period to record the contributions made on his or her
behalf to purchase Common Shares under this Plan.
2.2 "Beneficiary" shall mean the person designated as such in accordance
with Section 11 hereof.
2.3 "Board" shall mean the Board of Trustees of the Company.
2.4 "Committee" shall mean the Committee of the Board, if any, appointed to
administer the Plan.
2.5 "Common Shares" shall have the meaning set forth in the Preamble
hereof.
2.6 "Company" shall have the meaning set forth in the Preamble hereof.
2.7 "Continuity of Control" shall have the meaning set forth in Section 13
hereof.
2.8 "Election Form" shall mean the form which an Eligible Non-Employee
shall be required to properly complete in writing and timely file at least
thirty (30) days prior to the applicable Offering Commencement Date in order to
make any of the elections available to an Eligible Non-Employee under this Plan.
2.9 "Eligible Non-Employee" shall mean key consultants, other service
providers and non-employee trustees of the Company or certain of its
subsidiaries.
2.10 "Exercise Date" shall have the meaning set forth in Section 8 hereof.
2.11 "Offering(s)" shall mean the series of successive offerings through
which Common Shares shall be offered for purchase under the Plan.
760131.7
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2.12 "Offering Commencement Date" shall have the meaning set forth in
Section 5 hereof.
2.13 "Option" shall have the meaning set forth in Section 8 hereof.
2.14 "Option Price" shall mean the purchase price for each Common Share
which is 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. 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.
2.15 "Participant" shall mean (a) for each Plan Period an Eligible
Non-Employee who has elected to purchase Common Shares in accordance with
Section 6 hereof in such Plan Period and (b) any person for whom a Common Share
is held pending delivery under Section 9 hereof.
2.16 "Plan" shall mean this Capital Trust 1998 Non-Employee Share Purchase
Plan.
2.17 "Plan Period" shall mean the six (6) month period, beginning on each
Offering Commencement Date, during which the Participant may make contributions
to his or her Account.
2.18 "Rule 16b-3" shall mean Rule 16b-3 promulgated under Section 16(b) of
the Securities Exchange Act of 1934, as amended, or any successor to such rule.
3. Share Authorization
The maximum number of Common Shares that may be issued under the Plan shall
be equal to (i) 1,000,000 minus (ii) the number of Common Shares remaining
subject to or issued under the Company's 1998 Employee Share Purchase Plan.
4. Administration
The Plan will be administered by either the Committee or by the Board. The
Committee or the Board, as the case may be, has the 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.
760131.7
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5. Offerings
Common Shares shall be offered through Offerings until such time as (i) the
maximum number of Common 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 5 hereof. The
initial Offering will begin upon the later of (i) January 1, 1999 or (ii) the
effective date of the Registration Statement on Form S-8 covering the Common
Shares issuable under the Plan, and will end on June 30, 1999. The second
Offering will begin on July 1, 1999 and end on December 31, 1999. Subsequent
Offerings will begin on the successive January 1 or July 1 (each an "Offering
Commencement Date"). Each Offering Commencement Date will begin a 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
Each person who is an Eligible Non-Employee shall be a Participant in this
Plan for the related Plan Period if he or she properly completes and timely
files an Election Form with the Committee or the Board, as the case may be, to
elect to participate in this Plan. An Election Form may require an Eligible
Non-Employee to provide such information and to agree to take such action (in
addition to the action required under Section 7 hereof) as the Committee or the
Board, as the case may be, deems necessary or appropriate in light of the
purpose of this Plan or for the orderly administration of this Plan.
7. Contributions
(a) In General. Each Participant's Election Form under Section 6 hereof
shall specify the contributions that he or she proposes to make for the related
Plan Period. Such contributions shall be expressed as a specific dollar amount
that the Participant proposes to contribute in cash, subject to the restrictions
noted in Section 8(a) hereof. The Participant shall have delivered to the
Committee or the Board, as the case may be, either in installments or in a lump
sum, the full contribution amount, as noted on the applicable Election Form, no
later than five (5) days prior to the last day of the Plan Period for which such
contribution is being made.
No Participant may be granted an Option which permits his or her
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.
(b) Changes in Contributions and Withdrawals. (i) A Participant shall have
the right to amend his or her Election Form once during any Plan Period to
reduce or to stop his or her contributions, and such election shall be effective
immediately for cash contributions and as soon as practicable after the
Committee or the Board, as the case may be, actually receives such
760131.7
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amended Election Form. If a Participant elects to stop his or her contributions
during a Plan Period, but does not elect to withdraw his or her funds pursuant
to this Section, funds contributed prior to his or her election to stop
contributions will be applied to the purchase of Common Shares on the Exercise
Date. A Participant 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 Participant's Account and thereby withdraw from
participation in an Offering. Partial withdrawals are not permitted. The
Participant may not begin participation again during the remainder of the Plan
Period. The Participant may participate in any subsequent Offering in accordance
with the terms and conditions established by the Committee or the Board, as the
case may be.
(ii) A Participant 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 or her 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 Participant's Account for less than
one year, the Participant shall not be permitted to participate in the Offering
that commences immediately after such certificate is issued.
(iii) Each certificate withdrawn by a Participant may be registered
only in the name of the Participant, or if the Participant so directs, the names
of the Participant 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 the street name of a brokerage firm, bank or other nominee
holder designated by the Participant to the extent and in the manner permitted
by applicable law.
(c) Account Credits, General Assets and Taxes. All contributions made by a
Participant under this Plan shall be held by the Company. 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. No interest shall be paid or accrued
on any such contributions, except to the extent that the Committee or the Board,
in its sole discretion, elects to credit the Accounts of Participants with
interest at such per annum rate as it may from time to time determine. Each
Participant's right to the contributions credited to his or her Account shall be
that of a general and unsecured creditor of the Company.
(d) Automatic Refunds. Any balance remaining in a Participant's Account at
the end of a Plan Period will be automatically refunded to the Participant,
except that any balance which is less than the purchase price of one Common
Share will be carried forward into the Participant's Account for the following
Offering, unless the Participant elects not to participate in the following
Offering under the Plan, in which case the balance in the Participant's Account
shall be refunded. The balance credited to the Account of a Participant who is a
non-employee trustee automatically shall be refunded in full (without interest)
if his or her status as a member of the Board terminates for any reason
whatsoever during a Plan Period. Such refunds shall be made as soon as
practicable after the Committee or the Board, as the case may be, has actual
notice of any such
760131.7
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termination.
8. Purchase of Shares
(a) Option Exercise. (i) On the Offering Commencement Date of each Plan
Period, the Company will grant each Participant an 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 contributed by the Participant during the Plan
Period for which such Option is outstanding, together with any amount carried
over from the preceding Plan Period pursuant to Section 7(d) hereof, 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.
(ii) Each Eligible Non-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 or her accumulated contributions 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 7(b) hereof.
(b) 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 Committee or the
Board, as the case may be, will allot the Common Shares then available on a pro
rata basis.
9. Issuance of Shares
Common 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. 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.
760131.7
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<PAGE>
10. Participant's Rights as a Shareholder
(a) In General. No Participant shall have any rights as a shareholder with
respect to Common Shares under the Plan until the Common Shares have been
purchased in accordance with Section 8 hereof. Neither the granting of an Option
to a Participant nor the contributions made by such Participant into his or her
Account shall constitute such Participant a shareholder of the shares of Common
Shares covered by an Option under this Plan until such shares have been
purchased by such Participant.
(b) Dividends. All cash dividends paid with respect to Common Shares in an
Account shall, unless otherwise directed by the Committee or the Board, as the
case may be, be used to purchase additional Common Shares on the next date
shares are eligible to be purchased pursuant to Section 5 hereof, but subject to
the limitations of Section 8(a) hereof. Such Common Shares shall be added to the
Participant's Account.
(c) Voting. Each Participant shall be entitled to direct the Company's or
its designated agent, as to the voting of any Common Shares held in the
Participant's Account.
11. Designation of Beneficiary
A Participant may designate on his or her Election Form a Beneficiary (a)
who shall receive the balance credited to his or her Account if the Participant
dies before the end of a Plan Period and (b) who shall receive the Common
Shares, if any, purchased for the Participant under this Plan if the Participant
dies after the end of a Plan Period but before either the certificate
representing such Shares has been delivered to the Participant or before such
Shares have been credited to a brokerage account maintained for the Participant.
Such designation may be revised in writing at any time by the Participant by
filing an amended Election Form, and his or her revised designation shall be
effective at such time as the Committee or the Board, as the case may be,
receives such amended Election Form. If a deceased Participant fails to
designate a Beneficiary or, if no person so designated survives a Participant
or, if after checking his or her last known mailing address, the whereabouts of
the person so designated are unknown, then the Participant's estate shall be
treated as his or her designated Beneficiary under this Section 11.
12. Transferability
Neither the balance credited to a Participant's Account nor any rights to
exercise any Option under this Plan may be assigned, encumbered, alienated,
transferred, pledged, or otherwise disposed of in any way by a Participant
during his or her lifetime or by his or her Beneficiary or by any other person
during his or her lifetime, and such right and interest shall not be liable for,
or subject to, the debts, contracts, or liabilities of the Participant or any
Beneficiary. If any action is taken by the Participant, 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
760131.7
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treated as an election to withdraw in accordance with Section 7(b) hereof.
13. Adjustment in Case of Changes Affecting Common Shares; Merger
(a) Adjustment. 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 8(a) hereof, shall be
increased proportionately, and such other adjustment shall be made as may be
deemed equitable by the Committee or the Board, as the case may be. In the event
of any other change affecting the Common Shares such adjustment shall be made as
may be deemed equitable by the Committee or the Board, as the case may be, to
give proper effect to such event.
(b) Merger. (i) 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 or the Board, as the case may be, shall take such
steps in connection with such merger as the Committee shall deem necessary to
assure that the provisions of subsection (a) above 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.
(ii) 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, (x) subject to the provisions of
clauses (y) and (z), 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 (y) all outstanding Options may be canceled by the Committee or the Board, as
the case may be, as of a date prior to the effective date of any such
transaction and all contributions shall be paid out to the Participants; or (z)
all outstanding Options may be canceled by the Committee or the Board, as the
case may be, 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 contributions then credited to his or her Account as of a date determined by
the Committee or the Board, as the case may be, which date shall not be less
than ten (10) days preceding the effective date of such transaction.
760131.7
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14. Compliance with Rule 16b-3
The Plan is intended to constitute a "Stock Purchase Plan" within the
meaning of Rule 16-3(b)(5) promulgated under the Securities Exchange Act of
1934, as amended.
15. Amendment or Termination
This Plan may be amended by the Board from time to time to the extent that
the Board deems necessary or appropriate, and any such amendment shall be
subject to the approval of the Company's shareholders to the extent such
approval is required under applicable laws or the rules of an exchange on which
the Company is listed; provided, however, no amendment shall be retroactive
unless the Board in its discretion determines that such amendment is in the best
interest of the Company or such amendment is required by applicable law to be
retroactive. The Committee or the Board, as the case may be, may also terminate
this Plan at any time. This 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 Accounts of Participants shall be promptly refunded.
16. Headings, References and Construction
The headings to sections in this Plan have been included for convenience of
reference only. This Plan shall be interpreted and construed in accordance with
the laws of the State of New York, without regard to the conflict of law
principles of such state.
17. Effective Date and Approval of Shareholders
The Plan shall become effective as of November 1, 1998, subject to approval
of the Company's shareholders on or before November 1, 1999. If the Plan is not
so approved, the Plan shall not become effective.
760131.7
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ANNEX G
CAPITAL TRUST
SHARE PURCHASE LOAN PLAN
1. Purpose
The purpose of the Capital Trust Share Purchase Loan Plan (the "Plan")
is to promote the interests of Capital Trust and its shareholders by providing
opportunities for Participants (as defined herein) to purchase class A common
shares of beneficial interest, par value $1.00 per share (the "Common Shares"),
in Capital Trust, a California business trust (the "Company"), with financing
provided by the Company, thereby aligning their personal interests to the
long-term financial success of the Company and growth in shareholder value.
Pursuant to the Plan, the Company may extend loans ("Plan Loans") to
Participants to finance purchases of issued and outstanding shares in the
secondary trading market or of authorized but unissued shares directly from the
Company.
The Plan is intended to qualify as an "eligible plan" that provides for
the purchase of Common Shares, as "margin stock," with financing provided by
Plan Loans in accordance with section 221.4 of Regulation U (12 CFR 221.4)
promulgated by the Federal Reserve Board.
2. Share Authorization
(a) The maximum number of authorized but unissued Common
Shares that the Company may issue and sell to Participants with financing
provided by Plan Loans shall be 500,000 ("Authorized Shares"); provided,
however, that any shares issued to Participants under the Plan and subsequently
reacquired by the Company shall again become Authorized Shares available for
sale under the Plan.
(b) In the event that, as a result of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, share
dividend, share split-up, share combination, or other change or in affecting the
Common Shares, (i) the number of Common Shares is increased or decreased or (ii)
the Common Shares are changed into or exchanged for a different number or kind
of shares or other securities of the Company or of another organizational
entity, the Plan Administrator shall make appropriate and equitable adjustment
to the remaining Authorized Shares available for issuance with financing under
the Plan.
(c) The maximum number of Authorized Shares shall not be
affected by purchases of any issued and outstanding shares in the secondary
trading market financed with Plan Loans.
762190.6
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3. Participants
The Company may extend Plan Loans to any trustee or officer, equal or
senior in rank to Vice President, of the Company, or to any consultant or
service provider to the Company who, in the opinion of the Plan Administrator,
can contribute to the growth and profitability of the Company (each a
"Participant"). The Plan Administrator shall have the complete authority to
select the Participants eligible to participate in the Plan.
4. Administration
The Plan will be administered by either a committee appointed by the
board of trustees of the Company to administer the Plan, or by the board of
trustees itself (the "Plan Administrator"). The Plan Administrator has the
authority to extend Plan Loans and authorize the sale of Authorized Shares to be
purchased with financing provided by Plan Loans, from time to time, as
determined by the Plan Administrator. The Plan Administrator has the 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.
5. Terms of Plan Loans
(a) The Company may extend Plan Loans with a principal amount
equal to up to 100% of the purchase price of Common Shares purchased with the
Plan Loans. Subject to the foregoing, the principal amount of any Plan Loan
shall be determined by the Plan Administrator.
(b) Plan Loans shall bear interest at an interest rate which
shall be determined by the Plan Administrator, provided that such interest rate
shall be no less than the applicable Federal rate in effect pursuant to Section
1274(d) of the Internal Revenue Code of 1986, as amended, and shall be
compounded no less than semi-annually.
(c) The Plan Administrator shall have the discretion to
determine other terms and conditions of Plan Loans extended under the Plan,
including but not limited to, those relating to: maturity of the Plan Loans; the
recourse or non-recourse nature of the Plan Loans; the forgiveness of any or all
of the principal and/or interest due on the Plan Loans; conditions for
forgiveness of principal and/or interest, such as length of employment or
service, change of control events, performance measures or otherwise; the
deferral of interest payments; Company commitments to make tax gross up payments
to cover taxes incurred as a result of any forgiveness; or options to call or
put the Common Shares to satisfy the Plan Loans.
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6. Loan Documents
Each Participant who receives a Plan Loan from the Company shall be
required to sign (i) a loan agreement (which sets forth the terms and conditions
of the Plan Loans), (ii) a secured promissory note and (iii) a pledge and
security agreement (which sets forth the terms and conditions for the pledge of
the Common Shares purchased with financing provided by the Plan Loan)
(collectively the "Loan Documents"). The form and terms and conditions of the
Loan Documents shall be determined by the Plan Administrator.
7. Offer and Acceptance of Common Shares
(a) Offers to sell Common Shares to Participants with
financing provided by Plan Loans shall be made in writing. The written offers
shall specify the number of shares to be offered to the Participant, the portion
of the purchase price to be financed with Plan Loans and an outline of the terms
thereof and the date by which the offer must be accepted. All offers shall be
subject to the condition that the Purchase Agreement (as defined herein) and the
Loan Documents shall be executed and delivered by the Participant.
(b) A Participant may accept a Company offer to sell shares by
delivering a written acceptance to the Secretary of the Company. At the time of
his/her acceptance, such Participant shall also execute a purchase agreement
pursuant to which the Participant agrees to purchase the Common Shares (the
"Purchase Agreement") and the related Loan Documents and shall deliver to the
Secretary of the Company such documents along with payment of the portion of the
aggregate purchase price not financed with Plan Loans as specified in the
Purchase Agreement.
(c) Any offer to sell shares made pursuant to the Plan must be
accepted within the time specified in the offer. If acceptance does not occur
within the specified time, the offer shall be deemed withdrawn.
(d) No offer or sale of Common Shares to Participants with
financing provided by Plan Loans shall be made until the effective date of the
Registration Statement on Form S-8 covering the Authorized Shares available for
issuance under the Plan or unless made pursuant to an exemption from
registration under the Securities Act of 1933, as amended.
8. Issuance of Shares
(a) Upon execution of the Purchase Agreement and Loan
Documents and receipt by the Company of the purchase price for the Common Shares
in accordance with Section 7, the shares will be deemed to be fully paid and
nonassessable Common Shares. Share certificates representing the Common Shares
shall be registered in the Participants' names, but shall be held in custody by
the Company for their account.
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(b) Certificates representing Common Shares issued pursuant to
the Plan shall bear such legends as the Company may deem appropriate.
9. Secondary Trading Market Purchases
Any secondary trading market purchases of Common Shares
financed with Plan Loans shall be made in compliance with the Company's policy
and procedures governing trading in shares of the Company and applicable
provisions of the Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder.
10. Amendment or Termination
This Plan may be amended by the Plan Administrator from time to time to
the extent that the Plan Administrator deems it necessary or appropriate, and
any such amendment shall be subject to the approval of the Company's
shareholders to the extent such approval is required under applicable laws or
the rules of the exchange on which the Company is listed. The Plan Administrator
may also terminate this Plan at any time. No amendment or termination of the
Plan shall adversely affect any Plan Loan extended under the Plan, without the
written consent of the Participant.
11. Headings, References and Construction
The headings to sections in this Plan have been included for
convenience of reference only. This Plan shall be interpreted and construed in
accordance with the laws of the State of New York, without regard to the
conflict of law principles of such state.
12. Effective Date and Approval of Shareholders
The Plan shall become effective as of November 1, 1998, subject to
approval of the Company's shareholders on or before November 1, 1999. If the
Plan is not so approved, the Plan shall not become effective.
762190.6
-4-
<PAGE>
ANNEX H
As filed with the Securities and Exchange Commission on December 11, 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>
- ------------------------------------------------------------------------------
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 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 21
- ------------------------------------------------------------------------------
Signatures 26
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/A 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/A OR OTHERWISE
ACCOMPANY THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-K/A. IN
ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, READERS ARE URGED TO READ
CAREFULLY ALL CAUTIONARY STATEMENTS CONTAINED IN THIS FORM 10-K/A.
-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, certificated mezzanine
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>
As of December 31, 1997, the Company's portfolio of financial assets
consisted of five Mortgage Loans, four Mezzanine Loans, one Certificated
Mezzanine Investment, and three Other Loans originated prior to the commencement
of the new business plan (collectively the "Loan Portfolio") and one CMBS
Subordinated Interest. There were no delinquencies or losses on such assets as
of December 31, 1997 and for the year then ended. The table set forth below
details the composition of the Loan Portfolio at December 31, 1997.
<TABLE>
<CAPTION>
Underlying
Property Number Outstanding Unfunded
Type of Loan Type of Loans Commitment Balance Commitment Maturity Interest Rate
- ------------- ---------- -------- ---------- ------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Senior Mortgage Office 2 $ 69,977,000 $ 54,642,000 $ 15,335,000 1998 to Fixed: 11.00%
Loans 2000 Variable: LIBOR +
3.75%
Subordinate Office 3 81,300,000 69,707,000 11,561,000 1999 to Variable: LIBOR +
Mortgage Loans 2000 5.00% to LIBOR +
8.66%
Mezzanine Office / 4 54,395,000 54,375,000 -- 2000 to Fixed: 11.62% to
Loans Assisted 2007 12.00%
Living
Certificated Office 1 22,000,000 21,998,000 2000 Variable: LIBOR +
Mezzanine 5.5%
Investment
Other Loans Retail 3 2,550,000 2,062,000 -- 1999 to Fixed: 8.50% to 9.50%
2017
--- ------------ ------------ ------------
Total $230,222,000 $202,784,000 $ 26,896,000
============ ============ ============
- ---------------------
</TABLE>
The Company's portfolio of financial assets as of December 31, 1997 also
included an entire junior subordinated class of CMBS, known as the Class B Owner
Trust Certificates, that provides for both interest and principal repayments.
The CMBS investment consists of a security 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. At the time of acquisition,
the investment was subordinated to approximately $351.3 million of senior
securities. At December 31, 1997, the CMBS investment (including interest
receivable) was $49.5 million and had a yield of 8.96%.
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
2
<PAGE>
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.
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 Certificated Mezzanine Investments. The Company purchases high-yielding
investments that are subordinate to senior secured loans on commercial
real estate. Such investments represent interests in debt service from
loans or property cash flow and are isssued in certificate form. These
certificated investments carry substantially similar terms and risks as
the Company's Mezzanine Loans.
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.
3
<PAGE>
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-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). 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
4
<PAGE>
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.
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.
Certificated Mezzanine Investments. Certificated Mezzanine Investments have
substantially similar terms and risks as the Company's Mezzanine Loans but are
evidenced by certificates representing interests in property debt service or
cash flow rather than by a note. Typically in a Certificated Mezzanine
Investment, the Company obtains, as security for the mezzanine capital provided,
an interest in the debt service provided by the loans that are secured by the
property or in the cash flows generated by the property (held through a trust
and evidenced by trust certificates) that is subject to the senior lien or liens
encumbering the underlying property. This structure provides the Company with a
subordinate investment position typically subject to an inter-creditor agreement
with the senior creditor. By borrowing through such a mezzanine structure
against the additional value in its assets, the property owner obtains, with the
proceeds of the Certificated Mezzanine Investment, an additional level of
liquidity to apply to property improvements or alternative uses. Certificated
Mezzanine Investments generally provide the Company with the right to receive a
stated rate of return on its investment basis plus various commitment, extension
and/or other fees. Generally the terms and conditions on these investments are
the same as those on a Mezzanine Loan.
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-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,
5
<PAGE>
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 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
6
<PAGE>
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").
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.
7
<PAGE>
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 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
8
<PAGE>
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.
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.
9
<PAGE>
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
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.
10
<PAGE>
PART II
- ------------------------------------------------------------------------------
Item 5. Market for the Registrant's Common Equity and Related
Security Holder Matters
- ------------------------------------------------------------------------------
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, $1.00 par value (the "Old Common
Shares"), which were reclassified as the Class A Common Shares on July 15, 1997
in connection with the adoption of the Company's Amended and Restated
Declaration of Trust (the "Restated Declaration"), as reported on the NYSE based
on published financial sources.
High Low
---- ---
1995
First Quarter......................................$ 17/8.......$ 15/8
Second Quarter........................................17/8..........11/2
Third Quarter.........................................17/8..........11/2
Fourth Quarter........................................15/8..........11/8
1996
First Quarter.........................................11/2..........11/8
Second Quarter........................................17/8..........13/8
Third Quarter.........................................23/4..........15/8
Fourth Quarter........................................27/8..........17/8
1997
First Quarter.........................................67/8..........25/8
Second Quarter........................................61/8..........41/2
Third Quarter........................................113/8..........53/4
Fourth Quarter.......................................151/8........913/16
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)
STATEMENT OF OPERATIONS DATA:
REVENUES:
<S> <C> <C> <C> <C> <C>
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
============ =========== ======================== ===========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ------------------------ -----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
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, certificated mezzanine investment and investment
in commercial mortgage-backed securities transactions, including six Mortgage
Loans totaling $169.7 million (including unfunded commitments of $26.9 million
which remain outstanding), four Mezzanine Loans totaling $53.0 million, one
Certificated Mezzanine Investment for $22.0 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,
Certificated Mezzanine Investment and investments in commercial mortgage-backed
securities 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.
The Company's assets are subject to various risks that can affect results,
including the level and volatility of prevailing interest rates, adverse changes
in general economic conditions and real estate markets, the deterioration of
credit quality of borrowers and the risks associated with the ownership and
operation of real estate. Any significant compression of the spreads of the
interest rates earned on interest-earning assets over the interest rates paid on
interest-bearing liabilities could have a material adverse effect on the
Company's operating results. Adverse changes in national and regional economic
conditions can have an effect on real estate values increasing the risk of
undercollateralization to the extent that the fair
14
<PAGE>
market value of properties serving as collateral security for the Company's
assets are reduced. Numerous factors, such as adverse changes in local market
conditions, competition, increases in operating expenses and uninsured losses,
can affect a property owner's ability to maintain or increase revenues to cover
operating expenses and the debt service on the property's financing and,
consequently, lead to a deterioration in credit quality or a loan default and
reduce the value of the Company's asset. In addition, the yield to maturity on
the Company's CMBS assets are subject to the default and loss experience on the
underlying mortgage loans, as well as by the rate and timing of payments of
principal. If there are realized losses on the underlying loans, the Company may
not recover the full amount, or possibly, any of its initial investment in the
affected CMBS asset. To the extent there are prepayments on the underlying
mortgage loans as a result of refinancing at lower rates, the Company's CMBS
assets may be retired substantially earlier than their stated maturities leading
to reinvestment in lower yielding assets. There can be no assurance that the
Company's assets will not experience any of the foregoing risks or that, as a
result of any such experience, the Company will not suffer a reduced return on
investment or an investment loss.
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.
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 averaged approximately 6.22% at December 31, 1997 and 6.55%
for the year then ended, for floating rate instruments equal to the London
Interbank Offered Rate ("LIBOR") which averaged approximately 5.94% at December
31, 1997 and 5.72% for the year then ended. 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 11.25% 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 (which are banks whose securities are rated investment grade)
to the interest rate swap and cap agreements, although it does not anticipate
such non-performance. The counterparties would bear the interest rate risk of
such transactions as market interest rates increase. If an interest rate swap or
interest rate cap is sold or terminated and cash is received or paid, the gain
or loss is deferred and recognized when the hedged asset is sold or matures.
During the period from July 15, 1997 to December 31, 1997, significant
advisory income collected, as a result of the Company's acquisition of Victor
Capital was applied as a reduction of accounts receivable and thereby not
reflected as revenue.
15
<PAGE>
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.
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
16
<PAGE>
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
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,
17
<PAGE>
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. These credit losses were the result of a diminution in value of the
collateral underlying the Company's assets as a result of adverse economic
factors, particularly overbuilt real estate markets which caused a decline in
lease renewal rates.
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.
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.
18
<PAGE>
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.
19
<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-29. See accompanying Index to the Consolidated Financial Statements on page
F-1. The supplementary financial data required by Item 302 of Regulation S-K
appears in Note 19 to the consolidated financial statements.
20
<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").
21
<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.
December 11, 1998 /s/ John R. Klopp
- ---------------- -----------------
Date John R. Klopp
Vice Chairman and Chief Executive Officer
22
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
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
</TABLE>
Coopers & Lybrand L.P., is a member of Coopers & Lybrand International, a Swiss
limited liability association.
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>
Capital Trust and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands)
<TABLE>
1997 1996
------------------ ------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 49,268 $ 4,698
Other available-for-sale securities, at fair value 11,975 14,115
Commercial mortgage-backed securities 49,490 -
Certificated mezzanine investment available-for-sale, at fair value 21,998 -
Loans receivable, net of $462 and $0 reserve for possible credit losses
in 1997 and 1996, respectively 180,324 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 Convertible 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 December 31, 1996; (liquidation preference of $33,000) 12,268 -
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>
Capital Trust and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands, except per share data)
<TABLE>
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Income from loans and other investments:
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 (4,557) (414) (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>
Capital Trust and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Class A Class A
Preferred Shares Common Shares Additional
------------------------------------------------ Paid-In Unrealized Accumulated
Number Amount Number Amount Capital Gain Deficit Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 - $ - 9,157 $ 9,157 $ 55,098 $ - $ (36,570) $ 27,685
Net Loss - - - - - - (2,778) (2,778)
----------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - - 9,157 9,157 55,098 - (39,348) 24,907
Change in unrealized gain on
available-for-sale securities - - - - - (22) - (22)
Net Loss - - - - - - (414) (414)
----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - - 9,157 9,157 55,098 (22) (39,762) 24,471
Change in unrealized gain on
available-for-sale securities - - - - - 409 - 409
Issuance of preferred shares 12,268 12,268 - - 20,602 - - 32,870
Issuance of common shares - - 9,000 9,000 82,437 - - 91,437
Class A Preferred Share dividend - - - - - - (1,341) (1,341)
Net loss - - - - - - (4,557) (4,557)
----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 12,268 $ 12,268 18,157 $ 18,157 $ 158,137 $ 387 $ (45,660) $ 143,289
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
<TABLE>
<CAPTION>
---------------- ----------------- -----------------
Cash flows from operating activities:
<S> <C> <C> <C>
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:
Purchase of commercial mortgage-backed security (49,524) - -
Principal collections on commercial mortgage-backed
security 34 - -
Purchase of certificated mezzanine investment (21,998) - -
Origination and purchase of loans receivable (189,711) - -
Principal collections on loans receivable 9,935 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
acquired (4,066) - -
---------------- ----------------- -----------------
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.
See Note 13. 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 14.
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.
During the period from July 15, 1997 to December 31, 1997, significant advisory
income collected as a result of the Company's acquisition of Victor Capital was
applied as a reduction of current accounts receivable and thereby not reflected
as revenue.
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.
Other Available-for-Sale Securities
Other 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
Certificated Mezzanine Investments
Certificated Mezzanine Investments available-for-sale are reported on the
consolidated balance sheet at fair 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 8.
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 $42.4 million with two investment grade financial institution
counterparties whereby the Company swapped fixed rate instruments, which
averaged approximately 6.22% at December 31, 1997 and 6.55% for the year then
ended, for floating rate instruments equal to the London Interbank Offered Rate
("LIBOR") which averaged approximately 5.94% at December 31, 1997 and 72% for
the year then ended. 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 11.25% 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 (which are banks whose securities are rated investment grade) to
the interest rate swap and cap agreements, although it does not anticipate such
non-performance. The counterparties would bear the interest rate risk of such
transactions as market interest rates increase.
If an interest rate swap or interest rate cap is sold or terminated and cash is
received or paid, the gain or loss is deferred and recognized when the hedged
asset is sold or matures.
5. Other Available-for-Sale Securities
At December 31, 1997, the Company's other 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. Other Available-for-Sale Securities, continued
At December 31, 1996, the Company's other 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. Commercial Mortgage-Backed Securities
The Company pursues rated and unrated investments in public and private
subordinated interests ("Subordinated Interests") in commercial mortgage-backed
securities ("CMBS").
On June 30, 1997, the Company completed an investment for the entire junior
subordinated class of CMBS, known as the Class B Owner Trust Certificates, that
provides for both interest and principal repayments. The CMBS investment
consists of a security 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. At the time of acquisition, the
investment was subordinated to approximately $351.3 million of senior
securities. At December 31, 1997, the CMBS investment (including interest
receivable) was $49.5 million and had a yield of 8.96%.
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.
8. Certificated Mezzanine Investment
The Company purchases high-yielding investments that are subordinate to senior
secured loans on commercial real estate. Such investments represent interests in
debt service from loans or property cash flow and are issued in certificate
form. These certificated investments carry substantially similar terms and risks
as the Company's Mezzanine Loans.
On December 31, 1997, the Company completed a $22.0 million certificated
mezzanine investment that took the form of a customized interest in the limited
liability company that owns an office/retail property in Santa Monica,
California. The certificated mezzanine investment, which is held through a trust
and evidenced by a trust certificate, has a remaining term of 34 months and pays
distributions at a specified rate over LIBOR until redemption (11.4% at December
11, 1997). Early redemption of the certificated mezzanine investment is not
permitted during the first four months following the closing of the acquisition
transaction. The certificated mezzanine 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 dte. The investment is recorded at
cost, which was the same as fair value, as the transaction was consummated on
the balance sheet date.
9. Loans Receivable
The Company currently pursues lending opportunities designed to capitalize on
inefficiencies in the real estate capital, mortgage and finance markets. The
Company has classified its loans receivable 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 financings can take the form of a customized
preferred equity interest in the property owning limited liability
company or partnership entity 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.
F-16
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
9. Loans, continued
At December 31, 1997 and 1996, the Company's loans receivable consisted of the
following (in thousands):
1997 1996
---------------- ----------------
(1) Mortgage Loans $ 124,349 $ -
(2) Mezzanine Loans 54,375 -
(3) Other mortgage loans receivable 2,062 1,576
---------------- ----------------
180,786 1,576
Less: reserve for possible credit losses (462) -
================ ================
Total loans $ 180,324 $ 1,576
================ ================
The weighted average interest rate at December 31, 1997 of the Company's loans
receivable was as follows:
(1) Mortgage Loans 11.47%
(2) Mezzanine Loans 11.43%
(3) Other mortgage loans receivable 8.41%
At December 31, 1997, $118.4 million of the aforementioned loans 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 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 11.42%.
(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.
F-17
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Loans, continued
(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
(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.
F-18
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Loans, continued
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 four 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.
(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.
(3) 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.
F-19
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Loans, continued
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 receivable 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>
10. Risk Factors
The Company's assets are subject to various risks that can affect results,
including the level and volatility of prevailing interest rates, adverse changes
in general economic conditions and real estate markets, the deterioration of
credit quality of borrowers and the risks associated with the ownership and
operation of real estate. Any significant compression of the spreads of the
interest rates earned on interest-earning assets over the interest rates paid on
interest-bearing liabilities could have a material adverse effect on the
Company's operating results. Adverse changes in national and regional economic
conditions can have an effect on real estate values increasing the risk of
undercollateralization to the extent that the fair market value of properties
serving as collateral security for the Company's assets are reduced. Numerous
factors, such as adverse changes in local market conditions, competition,
increases in operating expenses and uninsured losses, can affect a property
owner's ability to maintain or increase revenues to cover operating expenses and
the debt service on the property's financing and, consequently, lead to a
deterioration in credit quality or a loan default and reduce the value of the
Company's asset. In addition, the yield to maturity on the Company's CMBS assets
are subject to the default and loss experience on the underlying mortgage loans,
as well as by the rate and timing of payments of principal. If there are
realized losses on the underlying loans, the company may not recover the full
amount, or possibly, any of its initial investment in the affected CMBS asset.
To the extent there are prepayments on the underlying mortgage loans as a result
of refinancing at lower rates, the Company's CMBS assets may be retired
substantially earlier than their stated maturities leading to reinvestment in
lower yielding assets. There can be no assurance that the Company's assets will
not experience any of the foregoing risks or that, as a result of any such
experience, the Company will not suffer a reduced return on investment or an
investment loss.
F-20
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Equipment and Leasehold Improvements
At December 31, 1997 and 1996, equipment and leasehold improvements, net, are
summarized as follows (in thousands):
<TABLE>
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.
12. 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-21
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. 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 CMBS investment, a certificated mezzanine investment and a
mezzanine loan, each described in Notes 7, 8 and 9, respectively. 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-22
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. 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-23
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. 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.
15. General and Administrative Expenses
General and administrative expenses for the years ended December 31, 1997, 1996
and 1995 consist of (in thousands):
<TABLE>
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-24
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. 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):
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%
====================
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-25
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. 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
F-26
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Employee Benefit Plans, continued
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 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-27
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. 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.
Other available-for-sale securities: The fair value was determined based
upon the market value of the securities.
Commercial mortgage-backed security: The fair value was obtained by
obtaining a quote for the sale of the security. The fair value of the
commercial mortgage-backed security was $49.5 million at December 31, 1997.
Certificated mezzanine investment: The certificated mezzanine investment
was entered into on December 31, 1997 at floating rates of return, and
therefore, the carrying value is a reasonable estimate of fair value.
Loans receivable, net: The fair values were estimated by using current
institutional purchaser yield requirements. The fair value of the investing
and lending transactions totaled $181.2 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-28
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. 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:
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
=============
Interest paid on the Company's outstanding debt for 1997, 1996 and 1995 was
$1,877,000, $550,000 and $730,000, respectively.
20. 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-29
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
21. 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-30
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
22. 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
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
1997
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-31
<PAGE>
ANNEX I
As filed with the Securities and Exchange Commission on December 11, 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 September 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 November 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>
Part I. Financial Information
<S> <C> <C>
Item 1: Financial Statements 1
Consolidated Balance Sheets - September 30, 1998
(unaudited) and December 31, 1997 (audited) 1
Consolidated Statements of Operations - Three and Nine
Months Ended September 30, 1998 (unaudited) and Three
and Nine Months Ended September 30, 1997 (unaudited
and audited, respectively) 2
Consolidated Statements of Changes in Shareholders' Equity
- Nine Months Ended September 30, 1998 (unaudited)
and Nine Months Ended September 30, 1997 (audited) 3
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 (unaudited) and Nine Months Ended
September 30, 1997 (audited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Signatures 23
</TABLE>
<PAGE>
Capital Trust and Subsidiaries
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- --------------------
(unaudited) (audited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 16,420 $ 49,268
Other available-for-sale securities, at market value 5,497 11,975
Commercial mortgage-backed securities, available-for-sale and recorded at
market value at September 30, 1998, held to maturity and recorded at
amortized cost at December 31, 1998 33,974 49,490
Certificated mezzanine investments available-for-sale, at market value 43,253 21,998
Loans receivable, net of $2,821 (unaudited) and $462 reserve for possible
credit losses at September 30, 1998 and December 31, 1997, respectively 627,324 180,324
Excess of purchase price over net tangible assets acquired, net 314 331
Deposits and other receivables 331 284
Accrued interest receivable 8,249 818
Prepaid and other assets 7,164 2,878
-------------------- --------------------
Total assets $ 742,526 $ 317,366
==================== ====================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 7,781 $ 5,718
Notes payable 4,181 4,953
Credit facilities 348,780 79,864
Repurchase obligations 80,420 82,173
Deferred origination fees and other revenue 6,054 1,369
-------------------- --------------------
Total liabilities 447,216 174,077
-------------------- --------------------
Company-obligated, mandatorily redeemable, convertible preferred securities of
CT Convertible Trust I, holding solely 8.25% junior subordinated debentures
of Capital Trust ("Convertible Trust Preferred Securities") 145,334 -
-------------------- --------------------
Shareholders' equity:
Class A Convertible 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,
18,159 and 18,157 shares issued and outstanding at September 30, 1998
and December 31, 1997, respectively 18,159 18,157
Restricted Class A Common Shares, $1.00 par value, 55 shares issued and
outstanding at September 30, 1998 55 -
Additional paid-in capital 158,641 158,137
Unearned compensation (454) -
Accumulated other comprehensive income (2,306) 387
Accumulated deficit (36,387) (45,660)
-------------------- --------------------
Total shareholders' equity 149,976 143,289
-------------------- --------------------
Total liabilities and shareholders' equity $ 742,526 $ 317,366
==================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-1-
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
------------------------------------ -----------------------------------
1998 1997 1998 1997
---------------- ----------------- --------------- -----------------
(unaudited) (unaudited) (unaudited) (audited)
<S> <C> <C> <C> <C>
Income from loans and other investments:
Interest and related income $ 20,782 $ 1,787 $ 42,825 $ 1,863
Less: interest and related expenses 8,714 790 18,311 790
---------------- ----------------- ---------------- -----------------
Net income from loans and other investments 12,068 997 24,514 1,073
---------------- ----------------- ---------------- ------------------
Other revenues:
Advisory and investment banking fees 829 529 9,479 529
Rental income - 8 - 313
Other interest income 261 405 941 1,008
Loss on sale of rental properties - - - (432)
---------------- ---------------- ----------------- ---------------
Total other revenues 1,090 942 10,420 1,418
---------------- ----------------- ----------------- ---------------
Other expenses:
General and administrative 4,482 3,328 11,743 4,470
Other interest expense 98 21 309 144
Rental property expenses - - - 123
Depreciation and amortization 63 28 171 52
Provision for possible credit losses 1,119 155 2,359 155
---------------- ----------------- ----------------- ---------------
Total other expenses 5,762 3,532 14,582 4,944
---------------- ----------------- ---------------- ----------------
Net income (loss) before income taxes and
distributions and amortization on Convertible
Trust Preferred Securities 7,396 (1,593) 20,352 (2,453)
Provision for income taxes 3,053 - 8,312 -
---------------- ----------------- ----------------- ---------------
Net income (loss) before distributions and
amortization on Convertible Trust Preferred
Securities 4,343 (1,593) 12,040 (2,453)
Distributions and amortization on Convertible
Trust Preferred Securities, net of income tax
benefit of $1,069 1,199 - 1,199 -
---------------- ----------------- ----------------- ---------------
Net income (loss) $ 3,144 $ (1,593) $ 10,841 $ (2,453)
Less: Class A Preferred Share dividend and
dividend requirement 783 679 2,351 679
---------------- ----------------- ----------------- ---------------
Net income (loss) allocable to Class A Common
Shares $ 2,361 $ (2,272) $ 8,490 $ (3,132)
================ ================= ================= ===============
Per share information:
Net income (loss) per Class A Common Share:
Basic $ 0.13 $ (0.25) $ 0.47 $ (0.34)
================ ================= ================= ===============
Diluted $ 0.10 $ (0.25) $ 0.35 $ (0.34)
================ ================= ================= ===============
Weighted average Class A Common Shares
outstanding:
Basic 18,217,186 9,157,150 18,218,279 9,157,150
================ ================= ================= ===============
Diluted 30,612,406 9,157,150 30,705,867 9,157,150
================ ================= ================= ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 1998 (unaudited) and Nine Months
Ended September 30, 1997 (audited)
(in thousands)
<TABLE>
<CAPTION>
Class A Class A
Comprehensive Preferred Common
Income (Loss) Shares Shares
----------------- -----------------------------
<S> <C> <C> <C>
Nine months ended September 30, 1997
- ------------------------------------
Balance at December 31, 1996 $ - $ - $ 9,157
Net loss (2,453) - -
Change in unrealized gain (loss) on 481 - -
available-for-sale securities
Issuance of Class A Preferred Shares - 12,268 -
----------------- -----------------------------
Balance at September 30, 1997 $ (1,972) $ 12,268 $ 9,157
================= =============================
Nine months ended September 30, 1998
- ------------------------------------
Balance at December 31, 1997 $ - $ 12,268 $ 18,157
Net income 10,841 - -
Change in unrealized gain (loss) on
available-for-sale securities (2,693) - -
Issuance of Class A Common Shares
under stock option plan - - 2
Issuance of restricted Class A Common
Shares - - -
Cancellation of previously issued - - -
restricted Class A Common Shares
Restricted Class A Common Shares
earned - - -
Class A Preferred Share Dividend - - -
----------------- -----------------------------
Balance at September 30, 1998 $ 8,148 $ 12,268 $ 18,159
================= =============================
</TABLE>
<TABLE>
<CAPTION>
Restricted Accumulated
Class A Additional Other
Common Paid-In Unearned Comprehensive Accumulated
Shares Capital Compensation Income Deficit Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended September 30, 1997
- ------------------------------------
Balance at December 31, 1996 $ - $ 55,098 $ - $ (22) $ (39,762) $ 24,471
Net loss - - - - (2,453) (2,453)
Change in unrealized gain (loss) on - - - 481 - 481
available-for-sale securities
Issuance of Class A Preferred Shares - 20,602 - - - 32,870
------------------------------------------------------------------------------------
Balance at September 30, 1997 $ - $ 75,700 $ - $ 459 $ (42,215) $ 55,369
====================================================================================
Nine months ended September 30, 1998
- ------------------------------------
Balance at December 31, 1997 $ - $158,137 $ - $ 387 $ (45,660) $ 143,289
Net income - - - - 10,841 10,841
Change in unrealized gain (loss) on
available-for-sale securities - - - (2,693) - (2,693)
Issuance of Class A Common Shares
under stock option plan - 8 - - - 10
Issuance of restricted Class A Common
Shares 72 653 (725) - - -
Cancellation of previously issued
restricted Class A Common Shares (17) (157) 156 - - (18)
Restricted Class A Common Shares
earned - - 115 - - 115
Class A Preferred Share Dividend - - - - (1,568) (1,568)
------------------------------------------------------------------------------------
Balance at September 30, 1998 $ 55 $158,641 $ (454) $ (2,306) $ (36,387) $ 149,976
====================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-3-
<PAGE>
Capital Trust and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---------------- ------------------
(unaudited) (audited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 10,841 $ (2,453)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 171 52
Restricted Class A Common Shares earned 115 -
Net amortization of premiums and accretion of discounts on loans and other
investments 1,025 -
Net accretion of discounts and fees on Convertible Trust Preferred Securities 137 -
(Gain) loss on sale of investments and properties (100) 432
Expenses reversed on cancellation of restricted shares previously issued (18) -
Provision for possible credit losses 2,359 155
Changes in assets and liabilities net of effects from subsidiaries purchased:
Deposits and receivables (47) (804)
Accrued interest receivable (7,431) (334)
Prepaid and other assets (4,095) (2,512)
Deferred revenue 4,685 725
Accounts payable and accrued expenses 2,063 2,877
Other liabilities - (64)
--------------- ------------------
Net cash provided by (used in) operating activities 9,705 (1,926)
--------------- ------------------
Cash flows from investing activities:
Purchases of commercial mortgage-backed securities (36,335) (49,524)
Principal collections and proceeds from sale of commercial mortgage-backed
securities 49,591 33
Purchase of certificated mezzanine investments (21,583) -
Principal collections of certificated mezzanine investments (328) -
Origination and purchases of loans receivable (500,981) (38,102)
Principal collections of loans receivable 50,901 90
Purchases of equipment and leasehold improvements (345) (421)
Improvements to rental properties - -
Proceeds from sale of rental properties - 8,153
Principal collections on available-for-sale securities 5,841 3,964
Acquisition of Victor Capital Group, L.P., net of cash acquired - (4,066)
--------------- ------------------
Net cash used in investing activities (452,583) (79,873)
--------------- ------------------
Cash flows from financing activities:
Proceeds from repurchase obligations 41,837 54,166
Repayment of repurchase obligations (43,590) (17,285)
Proceeds from credit facilities 564,646 11,715
Repayment of credit facilities (295,730) -
Proceeds from notes payable 10,000 4,001
Repayment of notes payable (10,772) (4,303)
Net proceeds from issuance of Convertible Trust Preferred Securities 145,197 -
Dividends paid on Class A Preferred Shares (1,568) -
Net proceeds from issuance of Class A Common Shares under stock option plan 10 -
Net proceeds from issuance of Class A Preferred Shares - 32,870
--------------- -----------------
Net cash provided by financing activities 410,030 81,164
--------------- -----------------
Net decrease in cash and cash equivalents (32,848) (635)
Cash and cash equivalents at beginning of period 49,268 4,698
--------------- ------------------
Cash and cash equivalents at end of period $ 16,420 $ 4,063
=============== ==================
Supplemental disclosure of cash flow information
Interest paid during the period $ 18,007 $ 858
=============== ==================
Taxes paid during the period $ 7,741 $ -
=============== ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements
September 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 nine months ended
September 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 September 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.
<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 September 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 September 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 $893,000 and $(1,269,000) for the
three months ended September 30, 1998 and 1997, respectively, and $8,148,000 and
$(1,972,000) for the nine months ended September 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-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
5. Commercial Mortgage-Backed Securities
During the nine months ended September 30, 1998, the Company purchased interests
in three subordinated commercial mortgage-backed securities issued by a
financial asset securitization investment trust for $36.3 million.
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
commercial mortgage-backed 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 a gain of approximately $100,000. Because of
this decision to sell a held-to-maturity security, the Company has transferred
all of its investments in commercial mortgage-backed securities from
held-to-maturity securities to available-for-sale.
As of September 30, 1998, the remaining securities, consisting of three
subordinated commercial mortgage-backed securities issued by a financial asset
securitization investment trust, had an amortized cost of $36.4 million and a
market value of $34.0 million. These securities bear interest at floating rates,
for which the weighted average interest rate in effect at September 30, 1998 is
10.68%.
6. Certificated Mezzanine Investments
During the nine months ended September 30, 1998, the Company purchased a
certificated mezzanine investment committing a total of $32.5 million of capital
of which $21.6 million was funded through September 30, 1998. The certificated
mezzanine investment has a remaining term of 8 months with 36 months of
additional extensions and pays distributions at a specified rate over LIBOR
until redemption. The weighted average rate in effect for all certificated
mezzanine investments is 10.13% at September 30, 1998.
7. Loans Receivable
At September 30, 1998, the amount and weighted average interest rate of the
Company's loans receivable by category was as follows (in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Amount Interest Rate
------------------- -------------------
<S> <C> <C>
Mortgage Loans $ 291,407 10.99%
Mezzanine Loans 336,709 11.55%
Other mortgage loans receivable 2,029 8.41%
-------------------
Total loans and other investments 630,324 11.28%
Less: Reserve for possible credit losses (2,821)
-------------------
Net loans and other investments $ 627,324
===================
</TABLE>
At September 30, 1998, $466.9 million of the aforementioned loans bear interest
at floating rates ranging from LIBOR plus 320 basis points to LIBOR plus 700
basis points before amortization
-7-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
of fees, premiums and discounts. The remaining $163.2 million of loans were
originated or purchased with fixed rates ranging from 8.50% to 12.00% at
September 30, 1998. All of the loans with fixed rates were the subject of
interest rate swaps to provide a floating rate. The weighted average interest
rate in effect at September 30, 1998, including interest rate swaps and
amortization of fees, premiums and discounts, was 11.28%.
During the nine months ended September 30, 1998, the Company completed nineteen
new loan transactions totaling approximately $513.9 million and provided $7.5
million of additional fundings on two loans originated in the prior year. The
Company funded $493.5 million of the foregoing loans receivable originated
during the nine months ended September 30, 1998 and has outstanding commitments
at September 30, 1998 totaling $32.2 million.
8. 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 and
$355 million effective July 23, 1998. An additional commitment fee was paid when
the Company's borrowings exceeded $250 million and will be paid when borrowings
exceed $300 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 December 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 7.25% for the
-8-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
borrowings outstanding at September 30, 1998) which rates vary according to the
credit quality of the Funded Portfolio Assets and the advance rate.
On September 30, 1998, the unused amounts available under the Credit Facilities
were $306.2 million.
Repurchase Obligations
During the nine months ended September 30, 1998, the Company entered into four
new repurchase agreements.
In February 1998, the Company entered into a repurchase agreement in connection
with the purchase of a subordinated participation in a note. At September 30,
1998, the Company had sold such assets totaling $10.0 million and had a
liability to repurchase these assets for $7.5 million. The liability bears
interest at specified rates over LIBOR (reflecting a total borrowing rate of
6.74% at September 30, 1998) and had an original maturity in February 1999 which
was extended to August 1999.
In March 1998, the Company entered into a repurchase agreement in connection
with the purchase of a subordinated participation in a first mortgage loan. At
September 30, 1998, the Company had sold such assets totaling $14.0 million and
had a liability to repurchase these assets for $10.5 million. The liability
bears interest at specified rates over LIBOR (reflecting a total borrowing rate
of 7.29% at September 30, 1998) and matures in March 1999.
In March 1998, the Company entered into a repurchase agreement in conjunction
with the purchase of a class of subordinated commercial mortgage-backed
securities issued by a financial asset securitization investment trust. At
September 30, 1998, the Company had sold such securities with a book value
totaling $10.0 million and had a liability to repurchase these assets for $8.0
million. The liability bears interest at specified rates over LIBOR (reflecting
a total borrowing rate of 6.58% at September 30, 1998) and matures in March
1999.
In May 1998, the Company entered into a repurchase agreement in connection with
the purchase of a certificated mezzanine investment. At September 30, 1998,
the Company had sold such assets totaling $21.4 million and had 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 7.14% at
September 30, 1998) and matures in May 1999.
At September 30, 1998, the Company had sold, in total, 106.6 million of assets
and had a liability to repurchase these assets for $80.4 million. These
liabilities bear interest at specified rates over LIBOR reflecting a total
borrowing rate that averaged 6.74% at September 30, 1998.
-9-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
9. Junior Subordinated Debt
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"). The Convertible Trust Preferred Securities represent an undivided
beneficial interest in the assets of the Trust which consist solely of the
Company's Convertible Debentures (as hereafter defined). 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 used to pay down the
Company's Credit Facilities. The Convertible Trust Preferred Securities are
convertible into class A common shares of beneficial interest, $1.00 par value,
of the Company, at the direction of the holders of the Convertible Trust
Preferred Securities to the conversion agent to exchange such Convertible Trust
Preferred Securities for a portion of the Convertible Debentures held by the
Trust on the basis of one security per $1,000 principal amount of Convertible
Debentures, and immediately convert such amount of Convertible Debentures into
Class A Common Shares at an initial rate of 85.47 Class A Common Shares per
$1,000 principal amount of the Convertible Debentures (which is equivalent to a
conversion price of $11.70 per Class A Common Share). 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 for each annual period thereafter. The 3% ($4.5 million)
discount on the issuance will be amortized over the expected life of the
Convertible Trust Preferred Securities.
For financial reporting purposes, the Trust is treated as a subsidiary of the
Company and, accordingly, the accounts of the Trust are included in the
consolidated financial statements of the Company. Intercompany transactions
between the Trust and the Company, including the Junior Subordinated Debentures,
are eliminated in the consolidated financial statements of the Company. The
Convertible Trust Preferred Securities are presented as a separate caption
between liabilities and shareholders' equity in the consolidated balance sheet
of the Company as "Company-obligated, mandatorily redeemable, convertible
preferred securities of CT Convertible Trust I, holding solely 8.25% junior
subordinated debentures of Capital Trust ("Convertible Trust Preferred
Securities")". Distributions on the Convertible Trust Preferred Securities are
recorded,
-10-
<PAGE>
Capital Trust and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
net of the tax benefit, in a separate caption immediately following the
provision for income taxes in the Consolidated Statement of Operations of the
Company.
10. 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 nine
months ended September 30, 1998 is comprised of the following (in thousands):
Current
Federal $ 4,516
State 1,995
Local 1,801
Deferred
Federal -
State -
Local -
--------------
Provision for income taxes $ 8,312
==============
The Company has federal net operating loss carryforwards ("NOLs") as of
September 30, 1998 of approximately $16.5 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 nine months ended September 30, 1998 is
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Federal income tax at statutory rate $ 6,920 34.0%
State and local taxes, net of federal tax benefit 2,505 12.3
Tax benefit of utilization of net operating loss carryforward (1,275) (6.5)
Other 162 0.8
------------------------------
$ 8,312 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.
-11-
<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
September 30, 1998 are as follows (in thousands):
Net operating loss carryforward $ 7,815
Reserves on other assets and for possible credit losses 4,664
Deferred revenue 616
Reserve for uncollectible accounts 208
-----------------
Deferred tax assets $ 13,303
Valuation allowance (13,303)
-----------------
$ -
=================
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.
11. 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 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 three months ended September 30, 1998, the Company issued an
aggregate of 105,000 options to acquire Class A Common Shares with an exercise
price of between $9.00 and $10.00 per share (which were issued at or above the
Class A Common Share price on the date of the grant).
-12-
<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 nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Options Exercise Price
Outstanding per Share
-------------------------- --------------------------
<S> <C> <C>
Outstanding at January 1, 1998 607,000 $6.00
Granted 1,112,250 $9.00 - $11.38
Exercised (1,666) $6.00
Canceled (156,501) $6.00 - $10.00
-------------------------- --------------------------
Outstanding at September 30, 1998 1,561,083 $6.00 - $11.38
========================== ==========================
</TABLE>
-13-
<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
-14-
<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 by
Veqtor on the earliest possible date, July 16, 1999). The common members of
Veqtor and Veqtor previously, in December 1997, agreed with the Company 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, $300 million as of June 22, 1998 and $355 million as of July
23, 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
-15-
<PAGE>
were used to pay down the Company's Credit Facilities (as defined below). 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 for
each annual period thereafter. The 3% ($4.5 million) discount and $0.3 million
of transaction costs on the issuance will be amortized over the expected life of
the Convertible Trust Preferred Securities.
In light of the significant volatility in the global capital markets
experienced during the period, the Company has strategically reduced its loan
origination pace. Likewise, the Company's advisory business has also been
affected as fee producing activity related to real estate acquisitions,
dispositions and financings by its clients has slowed in reaction to market
conditions. In the short term, the Company believes that its asset growth will
be slower and that its advisory fee revenues will be less, as compared to the
first three fiscal quarters of 1998, although there can be no assurance as to
when market conditions will improve. The Company has significant liquidity and
believes it is positioned to take advantage of portfolio growth opportunities
that meet its risk/yield profile which it expects will develop as overall market
conditions improve.
Overview of Financial Condition
- -------------------------------
The significant infusion of cash from the public offering of Class A
Common Shares in December 1997, the issuance of the Convertible Trust Preferred
Securities in July 1998 and borrowings under the Credit Facilities allowed the
Company to expand its specialty finance company operations. During the nine
months ended September 30, 1998, the Company completed twenty-two new loan,
certificated mezzanine investment and investment in commercial mortgage-backed
securities transactions totaling approximately $582.7 million and provided $7.5
million of additional fundings on two loans originated in the prior year. The
Company funded $551.4 million of the foregoing loans and investments through
September 30, 1998 with the foregoing sources of cash, which enabled the Company
to grow its total assets from $317.4 million at December 31, 1997 to $742.5
million at September 30, 1998.
Since December 31, 1997, the Company has identified, negotiated and
committed to fund or acquire twenty-two loan, certificated mezzanine investment
and commercial mortgage-backed securities transactions. These include ten
Mortgage Loan transactions totaling $220.5 million (of which $20.4 million
remains unfunded at September 30, 1998), nine Mezzanine Loan transactions
totaling $293.4 million, one certificated mezzanine investment for $32.5 million
(of which $10.9 million remains unfunded at September 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 $7.5 million of commitments under two loans originated in the prior year.
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
-16-
<PAGE>
that correspond with the level of risk perceived by the Company to be inherent
in such investments. At September 30, 1998, the Company had outstanding loans,
certificated mezzanine investments and investments in commercial mortgage-backed
securities totaling in excess of $709 million and additional commitments for
fundings on outstanding loans and certificated mezzanine investments of
approximately $43.1 million.
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 nine months ended September 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 and $355 million effective July 23, 1998. An additional commitment
fee was paid when the Company's borrowings exceeded $250 million and an
additional commitment fee will be paid when the Company's borrowings exceed $300
million. The Credit Facility provides 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 December 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 September 30, 1998, the Company had $348.8 million of outstanding
borrowings under the Credit Facilities.
As of September 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
$119.9 million with financial institution counterparties whereby the Company
swapped fixed rate instruments, which averages approximately 5.96%, for floating
rate
-17-
<PAGE>
instruments at the London Interbank Offered Rate ("LIBOR"). The agreements
mature at varying times from December 1999 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 of 1997, these two commercial properties were sold. The proceeds
from these sales were invested in mortgage loans and in liquid mortgage-backed
securities.
Comparison of the Nine and Three Months Ended September 30, 1998 to the
- -----------------------------------------------------------------------
Nine and Three Months Ended September 30, 1997
----------------------------------------------
The Company reported net income allocable to Class A Common Shares of
$8,490,000 for the nine months ended September 30, 1998, an increase of
$11,622,000 from the net loss allocable to Class A Common Shares of $3,132,000
for the nine months ended September 30, 1997. The Company reported net income
allocable to Class A Common Shares of $2,361,000 for the three months ended
September 30, 1998, an increase of $4,633,000, from the net loss allocable to
Class A Common Shares of $2,272,000 for the three months ended September 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 amounted to $24,514,000 for
the nine months ended September 30, 1998, an increase of $23,441,000 over the
$1,073,000 for the nine months ended September 30, 1997. This increase was
primarily due to the increase in the average interest earning assets from
approximately $24.4 million earning 10.2% for the nine months ended September
30, 1997 to approximately $468.8 million earning 12.2% for the nine months ended
September 30, 1998. This was partially offset by an increase in the average
interest bearing liabilities from approximately $13.9 million at an average rate
of 7.6% for the nine months ended September 30, 1997 to approximately $299.8
million at an average rate of 8.2% for the nine months ended September 30, 1998.
Net income from loans and other investments amounted to $12,068,000 for
the three months ended September 30, 1998, an increase of $11,071,000 over the
$997,000 for the three months ended September 30, 1997. This increase was
primarily due to the increase in the average interest earning assets from
approximately $65.7 million earning 10.8% for the three months ended September
30, 1997 to approximately $659.0 million earning 12.5% for the three months
ended September 30, 1998. This was partially offset by an increase in the
average interest bearing liabilities from approximately $41.4 million at an
average rate of 7.6% for the three months ended September 30, 1997 to
approximately $417.8 million at an average rate of 8.3% for the three months
ended September 30, 1998.
During the nine months ended September 30, 1998, other revenues totaled
$10,420,000, an increase of $9,002,000 over the same nine month period in 1997.
The increase during the three months ended September 30, 1998 over the same
three month period in 1997 was $148,000 to $1,090,000. The increase for the nine
months ended September 30, 1998 was primarily due to an additional of $8,950,000
of advisory and investment banking fees generated by Victor Capital
-18-
<PAGE>
and its related subsidiaries over the amount of such fees generated in the prior
year, which was partially offset by a $313,000 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 September 30, 1998
was primarily due to the addition of $300,000 of advisory and investment banking
fees generated by Victor Capital and its related subsidiaries offset by a
$144,000 decrease in other interest income.
Other expenses increased from $4,944,000 for the nine months ended
September 30, 1997 to $14,582,000 for nine months ended September 30, 1998 and
from $3,532,000 for the three months ended September 30, 1997 to $5,762,000 for
the three months ended September 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 components of such expenses are employee salaries and related costs and
the provision for possible credit losses. As of September 30, 1998, the Company
had 44 full time employees as compared to 27 at September 30, 1997. The
provision for possible credit losses was $2,359,000 for the nine months ended
September 30, 1998 and was $1,119,000 for the three months ended September 30,
1998 as the Company provided reserves on its loan and investment portfolio
pursuant to its reserve policy. The significant increase from the $155,000
provision for possible credit loss for the quarter and nine months ended
September 30, 1997 was due to the increase in average earning assets as
previously described.
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 nine and three months ended September
30, 1998, the Company accrued $8,312,000 and 3,053,000, respectively, of income
tax expense for federal, state and local income taxes. For federal purposes, the
Company utilized three-quarters of the expected net operating loss carryforward
to be utilized in 1998 in calculating the accrual for the nine months ended
September 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 September 30, 1998.
As previously discussed, the Company issued $150,000,000 of Convertible Trust
Preferred Securities on July 28, 1998. The Company recognized $1,199,000 of net
expenses related to these securities during the quarter ended September 30,
1998. This amount consisted of distributions to the holders totaling $2,131,000
and amortization of discount and origination costs totaling $137,000. This was
partially offset by a tax benefit of $1,069,000.
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.
-19-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, the Company had $16,420,000 in cash. The primary
sources of liquidity for the Company for the remainder of 1998, which the
Company believes will adequately meet future operating liquidity and capital
resource requirements, will be cash on hand, cash generated from operations,
interest payments received on its investments, loans and securities and
additional borrowings under the Company's Credit Facilities. 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 $32,848,000 for the
nine months ended September 30, 1998, compared to the net decrease of $635,000
for the nine months ended September 30, 1997. This use of cash was primarily due
to the utilization of the proceeds of the Class A Common Share offering
completed in the fourth quarter of 1997 and the utilization of the proceeds of
the Convertible Trust Preferred Securities issuance completed in July 1998 in
making loans and other investments during the first nine months of 1998 offset
by additional borrowings. Cash provided by operating activities during the nine
months ended September 30, 1998 increased by $11,631,000 to $9,705,000, from
cash used in operating activities of $1,926,000 during the same period of 1997.
For the nine months ended September 30, 1998, cash used in investing activities
was $452,583,000, an increase of $372,710,000 from $79,873,000 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 $328,866,000 to $410,030,000 from $81,164,000, was due primarily
to the proceeds of repurchase obligations and net borrowings under the Credit
Facilities.
At September 30, 1998, the Company has two outstanding notes payable
totaling $4,181,000, outstanding borrowings on the Credit Facilities of
$348,780,000 and outstanding repurchase obligations of $80,420,000. At September
30, 1998, the Company had $306,220,000 of borrowing capacity available under its
Credit Facilities.
General Description of the Year 2000 Issue and the Nature and Effects of the
- --------------------------------------------------------------------------------
Year 2000 on Information Technology (IT) and Non-IT Systems
- -----------------------------------------------------------
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar business
activities.
Based upon recent assessments, the Company determined that it was
required to replace certain of its software and certain hardware so that those
systems will properly utilize dates beyond December 31, 1999. The Company
believes that with the replacement of the previously existing software and
certain hardware, the Year 2000 Issue can be mitigated. However, if certain
replacements are not made, or not completed timely, the Year 2000 Issue could
have a material impact on the operations of the Company.
-20-
<PAGE>
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing and implementation. To
date, the Company has completed its assessment of all its in-house systems that
could be significantly affected by the Year 2000. The completed assessment
indicated that all of the Company's accounting software could be affected,
particularly the general ledger and accounts payable systems. That assessment
also included the software included in modeling and evaluating opportunities for
new business and the equipment supporting such applications. In addition, the
Company will gather information about the Year 2000 compliance status of its
significant service providers to monitor their compliance.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
- --------------------------------------------------------------------------------
Completion of Each Remaining Phase
- ----------------------------------
For its information technology exposures, to date the Company believes
it is 100% complete on the remediation phase of its in-house IT systems (both
software and hardware). Implementation had been completed and the Company plans
to begin testing of all the software and hardware systems in November 1998.
Completion of the testing phase is expected to be completed by March 31, 1999,
with 100% completion targeted for September 30, 1999.
Nature and Level of Importance of Third Parties and their Exposure to the Year
- --------------------------------------------------------------------------------
2000
- ----
The Company's loan servicing function is performed by an independent
third party. This service includes the calculation of interest and principal for
the Company's loans receivable, the processing of bills to the Company's
customers and the maintenance of lock boxes and escrow accounts on behalf of
borrowers. The vendor has advised the Company that they will be Year 2000
compliant by the end of 1999.
The Company will query its significant service providers that do not
share information systems with the Company (external agents). To date, the
Company is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that any external
agents used by the Company will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely manner could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
Costs of Year 2000 Compliance
The Company will utilize both internal and external resources to
replace, test, and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is $250,000 and is being
funded through operating cash flows. To date, the Company has incurred
approximately $175,000 ($5,000 expensed and $170,000 capitalized for new systems
and equipment), related to all phases of the Year 2000 project. Of the remaining
project costs, approximately $75,000 is attributable to the testing of equipment
and software.
-21-
<PAGE>
Risks of Year 2000
- ------------------
The Company believes that it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all the necessary phases of the Year 2000 program. In the
event that the Company does not complete any additional phases, the Company is
not certain that the systems would operate correctly, as the systems have not
been adequately tested. In addition, disruptions in the economy generally
resulting from Year 2000 issues could materially adversely affect the Company.
The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
The Company currently has no contingency plans in the event it does not
complete all phases of the Year 2000 program. The Company plans to evaluate the
status of completion in March 1999 and determine whether such a plan is
necessary.
Explanatory Note for the Use of Forward-Looking Statements
- ----------------------------------------------------------
Certain statements in this quarterly report may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements, which are not statements of
historical fact, may contain estimates, assumptions, projections and/or
expectations regarding the Company's financial position, results of operations,
market position, growth opportunities and growth rates and other similar
statements of expectation. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "will," "may," "estimates," and "should," and
variations of these words and similar expressions, are intended to identify
these forward-looking statements. Such forward-looking statements are not
guarantees of future performance. They involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Representative examples of such factors are
discussed in more detail in the Company's Annual Report on Form 10-K, as
amended, and include, among other things, the availability of desirable loan and
investment opportunities, the ability to obtain and maintain targeted levels of
leverage and borrowing costs, changes in interest rates, continued loan
performance and repayment and the maintenance of loan loss allowance levels. The
Company disclaims any intention or obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
-22-
<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
December 11, 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
-23-
ANNEX J
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997 assume the Acquisition and related transactions occurred on
January 1, 1996. The following unaudited pro forma condensed combined statements
of operations are presented for illustrative purposes only and are not
necessarily indicative of the combined operating results that would have
occurred if the Acquisition had been consummated on the date indicated, nor are
they indicative of future combined operating results. The unaudited pro forma
condensed combined statements of operations are based on and should be read in
conjunction with the historical consolidated statements of operations of the
Company for the year ended December 31, 1996 and the nine months ended September
30, 1997 and the historical combined statements of include Victor Capital for
the year ended December 31, 1996 and the six months ended June 30, 1997, which
are included elsewhere in this Prospectus.
A pro forma condensed combined balance sheet has not been presented as
of September 30, 1997, since the Acquisition had occurred as of such date, and
is presented in the historical condensed balance sheet as of September 30, 1997.
Were the Offering to have been completed on September 30, 1997 at the assumed
offering price, marketable securities would have increased by $80,145,000, the
Credit Facility would have been reduced by $11,715,000, Class A Common Shares
would have increased by $9,000,000 and additional paid in capital would have
increased by $82,860,000. See "Summary Pro Forma Financial Information."
778959.1
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1997
(unaudited)
(in thousands, except per share data and share amounts)
<TABLE>
<CAPTION>
The Victor Pro Forma Pro Forma
Company Capital Adjustments Notes Combined
<S> <C> <C> <C> <C>
Income from investment and lending transactions:
Interest and related income $ 1,863 $ -- $ -- $ 1,863
Interest and related expenses 790 -- (31) (1) 759
Net income from investment and lending
transactions 1,073 -- 31 1,104
Other revenues:
Advisory and asset management fees 529 2,722 -- 3,251
Rental income 313 -- -- 313
Interest and investment income 1,008 37 -- 1,045
Total other revenues 1,850 2,759 -- 4,609
Other expenses:
General and administrative 4,470 1,975 61 (2) 6,506
Other interest expense 144 -- 147 (3) 291
Rental property expenses 123 -- -- 123
Depreciation and amortization 52 19 12 (3) 83
Total other expenses 4,789 1,994 220 7,003
(Loss) income before loss on sale of rental
properties, provision for possible credit losses
and income taxes (1,866) 765 (189) (1,290)
Loss on sale of rental properties (432) -- -- (432)
Provision for possible credit losses (155) -- -- (155)
(Loss income before income taxes (2,453) 765 (189) (1,877)
Provision for income taxes -- -- -- (4) --
Net (loss) income (2,453) 765 (189) (1,877)
Less: Preferred Share dividend retirement (679) -- -- (5) --
Net (loss) income allocable to Class A Common
Shares $ (3,132) $ 765 $ (189) $ (2,556)
Per share information:
Net loss per Class A Common Share
Primary and fully diluted $ (0.34) NA NA (6) $ (0.14)
Weighted average Class A Common Shares
outstanding
Primary and fully diluted 9,138,325 -- -- (1)(6) 18,138,325
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combined financial statements
-2-
778959.1
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
(unaudited)
(in thousands, except per share data and share amounts)
<TABLE>
<CAPTION>
The Victor Pro Forma Pro Forma
Company Capital Adjustments Notes Combined
<S> <C> <C> <C> <C>
Income from investment and lending transactions:
Interest and related income $ 100 $ -- $ -- $ 100
Interest and related expenses 86 -- -- (1) 86
Net income from investment and lending
transactions 14 -- -- 14
Other revenues:
Advisory and asset management fees -- 6,940 -- 6,940
Rental income 2,019 -- -- 2,019
Interest and investment income 1,036 333 -- 1,369
Total other revenues 3,055 7,273 -- 10,328
Other expenses:
General and administrative 1,599 4,586 139 (2) 6,324
Other interest expense 461 -- 360 (3) 821
Rental property expenses 685 -- -- 685
Depreciation and amortization 64 44 23 (3) 131
522
Total other expenses 2,809 4,630 7,961
(Loss) income before loss on sale of rental
properties, provision for possible credit losses
and income taxes 260 2,643 (522) 2,381
Gain on sale or foreclosure of rental properties 1,069 -- -- 1,069
Provision for possible credit losses (1,743) -- -- (1,743)
(Loss income before income taxes (414) 2,643 (522) 1,707
Provision for income taxes -- -- (96) (4) (96)
Net (loss) income (414) $ 2,643 $ (618) $ 1,611
Per share information:
Net loss per Class A Common Share
Primary and fully diluted $ (0.05) NA NA (6) $ (0.09)
Weighted average Class A Common Shares
outstanding
Primary and fully diluted 9,138,325 -- -- (1)(6) 18,138,325
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combined financial statements
-3-
778959.1
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(unaudited)
Statements of Operations
1. The Investment and the Offering
Information for the Company for the nine months ended September 30,
1997 includes (i) the Preferred Share dividend requirement for the Class A
Preferred Shares since their issuance on July 15, 1997 ($679,000) pursuant to
the Investment and (ii) income derived from the re-investment of the proceeds
therefrom. Had the Class A Preferred Shares been outstanding for the entire
nine-month period, the Preferred Share dividend requirement would have been
$2,351,000 (equivalent to $3,135,000 per annum). In addition, an adjustment has
been made to reflect the sale of 9,000,000 Class A Common Shares in the Offering
and the use of proceeds therefrom to eliminate the $11.7 million borrowed under
the Credit Facility. Interest expense thereon for the nine months ended
September 30, 1997 was reduced by $31,000.
2. Employment
Prior to the Acquisition, Victor Capital's owners were compensated
pursuant to a management agreement with Victor Capital's general partner. In
connection with the Acquisition, the owners of Victor Capital entered into
employment agreements with the Company and the management agreement was
terminated. See "Management--Employment Agreements." The Pro Forma adjustments
are as follows (in thousands):
9/30/97 12/31/97
Compensation per employment agreement $ 500 $1,000
Fees per management agreement (439) (861)
$ 61 $ 139
3. Acquisition of Victor Capital
Other interest expense was computed based on the $3.9 million of
non-interest bearing notes issued by the Company to finance the Acquisition
which is amortized based upon semi-annual payments of $500,000 which are paid by
the Company in accordance with the terms of the notes. Interest has been imputed
on the notes at a rate of 9.5% per annum.
The discounted cost of the Acquisition in excess of net tangible assets
acquired, $342,000, is being amortized over a fifteen-year period.
4. Corporate Taxes
Due to the termination of the Company's REIT status and the Company's
resulting status as a taxable corporate entity, the Company's income is taxed at
a combined federal and state corporate rate of 46.6% after giving effect to the
Company's estimated available net operating losses of $1.5 million per annum,
which have been adjusted for the change in the Company's ownership.
-4-
778959.1
<PAGE>
5. Class A Preferred Shares
Pursuant to the terms of the Certificate of Designation establishing
the Class A Preferred Shares. a semi-annual dividend of $0.1278 per share is
payable based on a dividend rate of 9.5%. The dividend requirement on the
12,267,658 Class A Preferred Shares has been presented for the period from the
date of issuance, July 15, 1997, to September 30, 1997.
6. Dilution of Class A Common Shares
Pursuant to the terms of the Certificate of Designation establishing
the Class A Preferred Shares, the holders of the 12,267,658 Class A Preferred
Shares outstanding have the right to convert their shares into Class A Common
Shares and Class B Common Shares of the Company at the rate of one Class A
Common Share or Class B Common Shares for each Class A Preferred Share, subject
to adjustment to avoid dilution.
The Class A Preferred Shares were not considered common share
equivalents for purposes of calculating fully diluted earnings per share as they
were antidilutive for the nine months ended September 30, 1997 and were not
outstanding during the year ended December 31, 1996.
-5-
778959.1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners and Members of
Victor Capital Group, L.P.
(A Delaware Limited Partnership)
and Affiliates
We have audited the accompanying combined balance sheets of Victor
Capital Group, L.P. (A Delaware Limited Partnership) and Affiliates as of
December 31, 1996 and 1995, and the related combined statements of income,
changes in partners' and members' capital (deficiency), and stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 1996. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined financial statements referred to above
present fairly, in all material respects, the financial position of Victor
Capital Group, L.P. (A Delaware Limited Partnership) and Affiliates as of
December 31, 1996 and 1995, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
David Berdon & Co. LLP
Certified Public Accountants
New York, New York
March 10, 1997
778959.1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Partners and Members of
Victor Capital Group, L.P.
(A Delaware Limited Partnership)
and Affiliates
We have reviewed the accompanying combined balance sheet of Victor
Capital Group, L.P. (A Delaware Limited Partnership) and Affiliates as of June
30, 1997 and the related combined statements of income, changes in partners' and
members' capital (deficiency), and stockholder's equity, and cash flows for the
six months then ended, and the combined statements of income and cash flows for
the six months ended June 30, 1996. These combined financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the accompanying combined financial statements for them
to be in conformity with generally accepted accounting principles.
David Berdon & Co. LLP
Certified Public Accountants
New York, New York
July 16, 1997
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------
ASSETS 1996 1995 1997
------
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2(c))............................................... $ 1,056,048 $ 1,258,429 $ 955,785
Investment in available for sale securities (Note 2(d))............................. 8,400 8,400 17,719
Investment in unregistered securities (Note 2(e))................................... -- 124,250 --
Accounts receivable (Note 2(i))..................................................... 563,602 900,000 115,884
Prepaid local business taxes........................................................ -- -- 18,361
Expense reimbursement receivable.................................................... 30,294 85,727 52,580
Deposits............................................................................ -- -- 100,000
Due from partner (Note 4)........................................................... 24,000 159,000 --
Sundry.............................................................................. 16,701 5,405 35,575
------------- ------------- -------------
TOTAL CURRENT ASSETS............................................................. 1,699,045 2,541,211 1,295,904
DEFERRED COSTS (Note 2(j))............................................................. 106,110 -- --
PROPERTY AND EQUIPMENT-- NET (Notes 2(g) and 3)........................................ 90,071 107,840 93,529
SECURITY DEPOSITS...................................................................... 3,220 3,110 640
------------- ------------- -------------
TOTAL ASSETS..................................................................... $ 1,898,446 $ 2,652,161 $ 1,390,073
============= ============= =============
LIABILITIES AND PARTNERS' AND MEMBERS' CAPITAL
(DEFICIENCY), AND STOCKHOLDER'S EQUITY (NOTE 11)
============= =============
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Note 8)................................... $ 173,511 $ 78,979 $ 350,393
Bonuses payable-- discretionary (Note 5)............................................ 1,441,500 1,206,000 --
Accrued local business taxes........................................................ 27,845 48,869 14,912
Unearned revenue (Note 2(b))........................................................ 19,739 -- 5,942
Due to partners (Note 6)............................................................ -- -- 400,000
------------- ------------- -------------
TOTAL CURRENT LIABILITIES........................................................ 1,662,595 1,333,848 771,247
COMMITMENTS AND CONTINGENCIES (Note 9)
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY), AND
STOCKHOLDER'S EQUITY................................................................ 235,851 1,318,313 618,826
------------- ------------- -------------
TOTAL LIABILITIES AND PARTNERS' AND MEMBERS' $ 1,898,446 $ 2,652,161 $ 1,390,073
CAPITAL (DEFICIENCY), AND STOCKHOLDER'S EQUITY......................................
============= ============= =============
</TABLE>
The accompanying notes to combined financial statements are an
integral part of these statements.
-1-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------------------------- ----------------------------
1996 1995 1994 1997 1996
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
INCOME:
Fees earned (Notes 2(b), (c), (e) and 8)............... $ 6,940,036 $ 5,981,219 $ 5,159,157 $ 2,722,217 $ 2,649,621
Investment income...................................... 70,126 23,627 31,174 15,253 22,491
Gain on sale of securities............................. -- 518 3,263 21,532 --
Sublease income (Note 9)............................... -- 24,030 41,167 -- --
Gain on surrender of unregistered
securities (Note 2(e)).............................. 262,585 -- -- -- --
Gain (loss) on disposal of
property and equipment.............................. -- 2,521 (2,884) -- --
------------- ------------- ------------- ------------- -------------
TOTAL INCOME...................................... 7,272,747 6,031,915 5,231,877 2,759,002 2,672,112
EXPENSES:
Employee salaries...................................... $ 1,164,897 $ 1,294,416 $ 1,265,384 $ 761,820 $ 577,057
Discretionary employee bonuses (Note 5)................ 1,441,500 1,206,000 1,247,000 -- --
Payroll taxes.......................................... 103,504 101,013 100,122 70,098 57,715
Employee benefits...................................... 123,146 112,420 96,004 77,253 60,169
Management fees (Note 8)............................... 860,573 836,560 821,000 438,943 430,286
Rent expense (Note 9).................................. 292,309 261,917 125,143 131,871 132,891
Telephone.............................................. 61,439 62,139 39,259 32,857 31,708
Insurance.............................................. 15,828 30,927 36,594 12,723 18,275
Stationery, printing and supplies...................... 31,483 46,960 26,663 27,438 14,269
Local travel and transportation........................ 7,531 8,532 12,711 3,296 3,637
Postage................................................ 7,702 7,775 3,317 5,571 4,632
Travel and entertainment............................... 49,147 76,364 51,535 28,907 31,639
Messenger/courier...................................... 2,909 2,987 2,764 2,784 1,899
Payments to subcontractors............................. 40,450 168,553 325,434 28,296 16,153
Public relations....................................... 24,010 25,236 25,122 12,013 12,000
Dues and subscriptions................................. 10,623 11,814 12,257 4,556 6,498
Education.............................................. -- -- -- 13,185 --
Miscellaneous.......................................... 33,614 34,785 29,343 41,748 22,478
Contributions.......................................... 29,315 8,545 6,575 16,100 1,525
Professional fees...................................... 67,804 79,647 119,259 181,104 23,907
Local business taxes................................... 143,642 97,620 21,462 47,531 63,280
Recruiting............................................. -- -- -- 34,000 --
Advertising............................................ 52,076 33,151 9,117 -- 3,218
Bad debt expense....................................... -- -- 8,581 -- --
Information system expense............................. 22,299 31,832 16,189 3,205 9,154
Depreciation........................................... 44,004 49,638 43,529 19,047 27,000
Interest expense (Note 7).............................. -- 30,852 64,459 -- --
------------- ------------- ------------- ------------- -------------
TOTAL EXPENSES.................................... 4,629,805 4,619,683 4,508,823 1,994,346 1,549,390
------------- ------------- ------------- ------------- -------------
NET INCOME BEFORE
EXTRAORDINARY ITEM..................................... 2,642,942 1,412,232 723,054 764,656 1,122,722
EXTRAORDINARY ITEM--
Gain on extinguishment of debt (Note 7)................ -- 181,319 -- -- --
------------- ------------- ------------- ------------- -------------
NET INCOME................................................ $ 2,642,942 $ 1,593,551 $ 723,054 $ 764,656 $ 1,122,722
============= ============= ============= ============= =============
</TABLE>
The accompanying notes to combined financial statements are an
integral part of these statements.
-2-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' AND MEMBERS' CAPITAL
(DEFICIENCY), AND STOCKHOLDER'S EQUITY
For the Years Ended December 31, 1996, 1995 and 1994 and
the Six Months Ended June 30, 1997
<TABLE>
<S> <C>
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY), AND STOCKHOLDER'S
EQUITY-- JANUARY 1, 1994........................................................................ $888,172
Net income for the year ended December 31, 1994.................................................... 723,054
Distributions to partners and members during 1994.................................................. (1,833,309)
----------------
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY), AND STOCKHOLDER'S
EQUITY-- DECEMBER 31, 1994...................................................................... (222,083)
Capital contributions during 1995.................................................................. 282,883
Net income for the year ended December 31, 1995 ................................................... 1,593,551
Distributions to partners and members during 1995 (Note 1)......................................... (336,038)
----------------
PARTNERS' AND MEMBERS' CAPITAL, AND STOCKHOLDER'S EQUITY--
DECEMBER 31, 1995............................................................................... 1,318,313
Net income for the year ended December 31, 1996.................................................... 2,642,942
Distributions to partners and members during 1996 (Notes 1 and 2(e))............................... (3,725,404)
----------------
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY), AND STOCKHOLDER'S
EQUITY-- DECEMBER 31, 1996...................................................................... 235,851
Net income for the six months ended June 30, 1997 (Unaudited)..................................... 764,656
Distributions to partners and members during the six months ended June 30, 1997 (Unaudited)........ (391,000)
Unrealized gain on available for sale securities (Unaudited)....................................... 9,319
----------------
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY), AND STOCKHOLDER'S
EQUITY-- JUNE 30, 1997 (UNAUDITED).............................................................. $618,826
================
</TABLE>
The accompanying notes to combined financial statements are an integral
part of these statements.
-3-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------------------------ -----------------------------
1996 1995 1994 1997 1996
----------- ----------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 264,294 $ 1,593,551 $ 723,054 $ 764,656 $ 1,122,722
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
(Gain) on sale of securities.................... -- (518) (3,263) -- --
Extraordinary (gain) on extinguishment of
debt......................................... -- (181,319) -- -- --
(Gain) on disposition of security............... (262,585) -- -- -- --
(Gain) loss on disposal of property and
equipment.................................... -- (2,521) 2,884 -- --
Deferred rent................................... -- -- (114,381) -- --
Bad debt expense................................ -- -- 8,581 -- --
Depreciation.................................... 44,004 49,638 43,529 19,047 27,000
Unregistered securities received for services
rendered..................................... (750,000) (124,250) -- -- --
Proceeds from the sale of trading securities.... -- 60,920 11,463 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable............................... 336,398 (333,000) (199,625) 447,718 755,000
Expense reimbursement receivable.................. 55,433 21,884 (50,538) (22,286) 48,831
Deposits.......................................... -- -- -- (100,000) --
Prepaid local business taxes...................... -- 12,691 (12,691) (18,361) --
Sundry............................................ (11,296) (5,405) 1,103 (18,874) 953
Security deposits................................. (110) 11,590 (12,313) 2,580 (110)
(Decrease) increase in:
Accounts payable and accrued liabilities.......... 94,532 8,372 (1,681) 176,882 178,186
Bonuses payable - discretionary................... 235,500 284,000 92,200 (1,441,500) (1,206,000)
Accrued local business taxes...................... (21,024) 48,869 -- (12,933) (37,186)
Unearned revenue.................................. 19,739 -- -- (13,797) --
Accrued interest due to affiliate................. -- 30,852 4,402 -- --
---------- ----------- ----------- ----------- -----------
Total adjustments............................... (259,409) (118,197) 609,403 (981,524) (233,326)
---------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN ) OPERATING
ACTIVITIES........................................... 2,383,533 1,475,354 1,332,457 (216,868) 889,396
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Employee loans receivable......................... -- 30,000 (30,000) -- --
Due from partner.................................. 135,000 (159,000) 24,000 156,500
Deferred costs.................................... (106,110) -- -- 106,110 --
Purchase of property and equipment................ (26,235) (42,365) (77,524) (22,505) (13,681)
Proceeds from the sale of securities.............. 386,835 -- -- -- --
Proceeds from disposal of property
and equipment................................... -- 4,256 -- -- --
----------- ----------- ----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES........................................... 389,490 (167,109) (107,524) 107,605 142,819
------------ ----------- ----------- ----------- ------------
Subtotal (carried forward).............................. 2,773,023 1,308,245 1,224,933 (109,263) 1,032,215
</TABLE>
-4-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS -- (Continued)
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------------------------- ---------------------------
1996 1995 1994 1997 1996
------------- ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Subtotal (brought forward)............................. $ 2,773,023 $ 1,308,245 $ 1,224,933 $ (109,263) $1,032,215
-------------- ------------- ------------- ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Contributions from partners...................... -- 282,883 -- -- --
Distributions to partners and members............ (2,975,404) (336,038) (1,833,309) (391,000) (1,459,126)
Payment of note payable due affiliate............ -- (500,000) -- -- --
Increase in note payable due affiliate........... -- -- 60,057 -- --
Due to partners.................................. -- -- -- 400,000 --
-------------- ------------- ------------- ------------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (2,975,404) (553,155) (1,773,252) 9,000 (1,459,126)
-------------- ------------- ------------- ------------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (202,381) 755,090 (548,319) (100,263) (426,911)
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 1,258,429 503,339 1,051,658 1,056,048 1,258,429
-------------- ------------- ------------- ------------- ----------
CASH AND CASH EQUIVALENTS - 1,056,048 1,258,429 503,339 955,785 831,518
END OF PERIOD ============== ============= ============= ============= ==========
NONCASH FINANCING ACTIVITIES: 750,000 -- -- -- --
Unregistered securities distributed to partners ============== ============= ============= ============= ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for $ -- $ 2,214 $ -- $ -- $ --
interest ============== ============= ============= ============= ==========
</TABLE>
The accompanying notes to combined financial statements are an
integral part of these statements.
-5-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1997 and 1996 is Unaudited)
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information at June 30, 1997 and 1996 is Unaudited)
NOTE 1--ORGANIZATION
Victor Capital Group, L.P. (the "Partnership") was organized as a
Delaware Limited Partnership on February 17, 1989. The purposes of the
Partnership are, among other things, to earn fee income from services rendered
in connection with equity and debt investments in real property and interests
therein, to invest in real estate partnerships, and to acquire, hold and
otherwise deal with equity and debt investments in real property of all kinds.
The sole general partner of the Partnership is Valentine Wildove & Company, Inc.
("Valentine Wildove"), which currently has a 15% ownership interest. The limited
partners are John R. Klopp and Craig M. Hatkoff, who presently have ownership
interests of 42.5% each.
In June 1995, the Partnership entered into an agreement with a former
limited partner, Windsor Investors Corporation ("Windsor Investors"), whereby
Valentine Wildove was assigned Windsor Investors' 4.9% limited partnership
interest and all related rights thereto, in exchange for the Partnership's
payment in respect of a $500,000 promissory note (the "Note") due to Windsor
Investors (see Note 7).
The allocations among the partners of profits and losses are governed
by the Partnership Agreement. The Partnership Agreement provides, among other
things, that any losses of the Partnership are allocated to the partners in
accordance with the partners' percentage interests, provided the allocation
would not cause a negative balance in the partners' capital account. In this
case, losses are allocated to those partners with positive capital account
balances in proportion to such balances. If no partner has a positive capital
account balance, all losses are allocated to the general partner. Net profits of
the Partnership are to be allocated: first, pro rata among the partners in
proportion to the amount of cumulative net losses allocated to each partner
since the amendment and restatement of the Partnership Agreement, until such
losses have been reduced to zero; second, pro rata among the partners in
proportion to the amount that cumulative cash distributions (as defined) exceed
cumulative net profits; and third, to the extent cumulative net profits exceed
cumulative cash distributions, to the partners in the same manner as
distributable cash (as defined).
Commencing June 14, 1995, Partnership profits were allocated on a pro
rata basis in accordance with the current partner percentage interests described
above due to the termination of Windsor Investors limited partnership interest
as of June 13, 1995.
As of December 1, 1995, the partners entered into an agreement which
provides for the payment of additional distributions to the general partner,
Valentine Wildove & Company, Inc. For 1996 and 1995, distributions made in
accordance with this agreement amounted to $1,011,014 and $53,155, respectively.
For the six months (unaudited) ended June 30, 1997, the Partnership did not make
any additional distributions to Valentine Wildove & Company, Inc.
VCG Montreal Management Inc. is owned entirely by the Partnership.
Victor Asset Management Partners, L.L.C., VP Metropolis Services, L.L.C. and 970
Management, LLC are related to Victor Capital Group, L.P. through common
ownership as members John R. Klopp and Craig M. Hatkoff each own a fifty-percent
interest in all three limited liability companies. All of these entities and VCG
Montreal Management, Inc. are collectively referred to herein as the
"Affiliates." Each affiliate was organized for the purpose of providing asset
management and advisory services relating to various mortgage pools and/or real
estate properties. VCG Montreal Management, Inc. was also organized to hold a
marginal interest in a Canadian real estate venture. Victor Asset Management
Partners, L.L.C. was organized under New York State law in 1995. VP Metropolis
Services, L.L.C. was organized in 1994 in the State of New Jersey, 970
Management, LLC was organized in New York State during 1996 and VCG Montreal
Management, Inc. was organized in New York State during 1997.
Profits, losses and distributions relating to each of the limited
liability companies are allocated to each of the owners on a pro rata basis in
accordance with their ownership percentage.
-6-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1997 and 1996 is Unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Combination
The accompanying combined financial statements include the accounts of
Victor Capital Group, L.P. (A Delaware Limited Partnership), its wholly-owned
subsidiary VCG Montreal Management, Inc., Victor Asset Management Partners,
L.L.C., VP Metropolis Services, L.L.C. and 970 Management, LLC, all of which are
related through common ownership. All significant intercompany accounts and
transactions have been eliminated.
(b) Revenue Recognition
Fees from professional advisory services are recorded as services are
rendered and exclude expenses incurred on behalf of and charged to clients. Fees
from mortgage placement services and asset management and advisory services are
recognized when earned.
(c) Credit Risk and Concentrations
The Partnership and Affiliates have a significant amount of cash on
deposit in two financial institutions.
In 1996, the Partnership and Affiliates conducted 30 engagements on
behalf of 23 clients. Revenue earned during 1996 included approximately
$2,823,000 from a multi-phase assignment on behalf of two related clients which
comprised approximately 41% of the total annual revenue. In 1995, the
Partnership and Affiliates conducted approximately 40 engagements on behalf of
19 clients. Revenue earned during 1995 included approximately $1,174,000 from
one client, which comprised approximately 20% of revenues earned during the year
ended December 31, 1995. In 1994, the Partnership and Affiliates conducted
approximately 26 engagements on behalf of 16 clients. Revenue earned during the
year ended December 31, 1994 included approximately $3,115,000 from two clients
and accounted for approximately 60% of annual revenues earned.
Revenue earned during the six months (unaudited) ended June 30, 1997
included approximately $1,535,000 from four clients and accounted for
approximately 56% of total revenue for the period. Revenue earned during the six
months (unaudited) ended June 30, 1996 included approximately $702,000 from two
clients and accounted for approximately 26% of total revenue for the period.
(d) Investment in Available for Sale Securities
As of December 31, 1996 and 1995, respectively, investments in
available for sale securities are stated at their market values. As of June 30,
1997 (unaudited), the securities continue to be carried at their market values.
(e) Investment in Unregistered Securities
During 1995, the Partnership received cash and unregistered securities
in connection with an engagement to provide financial advisory services. At the
time the services were rendered the fair market value of the securities was
determined to be $124,250. The combined financial statements for 1995 reflect
this amount as investment in unregistered securities and fees earned. During
1996, pursuant to a plan of merger between the issuer of the unregistered
securities and other parties, the securities were surrendered in exchange for
cash of $386,835 resulting in a gain of $262,585.
-7-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1997 and 1996 is Unaudited)
In 1996, the Partnership also received unregistered securities and cash
in exchange for services rendered. These securities were unrelated to those
received in 1995. All of the shares received by the Partnership were distributed
simultaneously to the partners. The fair market value of these securities was
determined to be $750,000 and accordingly, the combined financial statements for
1996 reflect this amount as distributions to partners and fee income.
(f) Income Taxes
The Partnership and those affiliates which are limited liability
companies are not subject to federal or state income taxes. No provision has
been made in the accompanying combined financial statements for such taxes,
which may be payable by the individual partners. The Partnership and certain
limited liability companies affiliates are subject to New York City
Unincorporated Business taxes which taxes are reflected in local business taxes
on the combined statements of income.
VCG Montreal Management, Inc. is subject to federal and state corporate
taxes. For the six months (unaudited) ended June 30, 1997, the corporation did
not incur any tax liabilities and, therefore, no provision for such taxes has
been made in the accompanying combined statements of income.
(g) Property and Equipment
Property and equipment are stated at cost and are being depreciated
under the straight-line method over the estimated useful lives of the assets,
which range from 5 to 7 years.
(h) Cash Equivalents
All liquid assets with a maturity of three months or less are
considered cash equivalents.
(i) Accounts Receivable
The entities have written off all accounts deemed to be uncollectible
at December 31, 1996 and 1995 and do not anticipate any additional losses.
Accounts receivable deemed uncollectible at June 30, 1997 (unaudited) were also
written off.
(j) Deferred Costs
As of December 31, 1996, the Partnership was involved in negotiations
relating to a new business venture. During 1996, the Partnership capitalized
$106,110 of various professional and consulting expenses relating to the
venture. As of December 31, 1996, these costs remain unamortized. In April 1997,
pursuant to an agreement among the parties, $53,647 has been determined to be an
expense of the Partnership and, accordingly, is reflected as professional fees
in the combined statement of income for the six months (unaudited) ended June
30, 1997. The remaining balance of $52,463, which was accrued as of December 31,
1996, is to be paid by various parties of the venture, and accordingly, has been
transferred to the respective parties at June 30, 1997.
-8-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1997 and 1996 is Unaudited)
(k) Use of Estimates in Financial Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1996 and 1995,
and June 30, 1997 and the reported amounts of income and expenses during the
three years ended December 31, 1996 and the six months ended June 30, 1997 and
1996. Actual results could differ from those estimates.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment--cost, consists of the following at December 31,
1996 and 1995 and June 30, 1997:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------
1996 1995 1997
------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
Furniture and fixtures.........................$ 80,328 $ 79,630 $ 80,328
Office, telephone and computer equipment....... 236,961 211,424 259,466
------------- ------------- ------------
Total................................. 317,289 291,054 339,794
Less, accumulated depreciation................. (227,218) (183,214) (246,265)
------------- ------------- ------------
$ 90,071 $ 107,840 $ 93,529
============= ============= ============
</TABLE>
NOTE 4--DUE FROM PARTNER
Due from partner represents amounts due from Valentine Wildove &
Company, Inc. relating to short term noninterest-bearing advances made by the
Partnership.
NOTE 5--BONUSES PAYABLE--DISCRETIONARY
Bonuses payable as of December 31, 1996 and 1995 represent additional
year end compensation for Partnership employees. These amounts were determined
by the management of the Partnership and were authorized at management's
discretion.
NOTE 6--DUE TO PARTNERS
As of June 30, 1997 (unaudited), $400,000 was due to partners. The
entire amount represents short-term noninterest-bearing loans made to the
Partnership. In July 1997, this balance was repaid.
NOTE 7--NOTE PAYABLE
Pursuant to the terms of the Partnership Agreement, a $500,000
promissory note was issued on May 1, 1991 to Windsor Investors in settlement of
a reduction in its ownership interest in the Partnership (see Note 1).
-9-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1997 and 1996 is Unaudited)
The note, which was due and payable on May 1, 2001, was considered
fully repaid in June 1995, pursuant to a Stipulation of Settlement Agreement
executed in the State of New York, which required the Partnership to make a
$500,000 payment. Interest accrued at a rate of 11% per annum, and was due
annually on May 1 for the preceding calendar year. Interest payments and
principal prepayments were payable only to the extent of 12.5% of net cash flow,
as defined, and 100% of net cash from capital events, as defined. For 1995 and
1994, interest expense attributable to the note amounted to $30,852 and $64,459,
respectively. Unpaid accrued interest had been added to the principal balance of
the note in accordance with the note agreement and amounted to $181,319 as of
the settlement date. At the time of extinguishment of this debt the Partnership
recognized an extraordinary gain of $181,319 which is reflected in the
accompanying combined financial statements.
NOTE 8--RELATED PARTY TRANSACTIONS
The Partnership is managed by its general partner, Valentine Wildove, a
corporation owned entirely by John R. Klopp and Craig M. Hatkoff. In accordance
with the Partnership Agreement, management fees charged by Valentine Wildove for
1996, 1995 and 1994 amounted to $860,573, $836,560 and $821,000, respectively.
Management fees charged for the six months (unaudited) ended June 30, 1997 and
1996 amounted to $438,943 and $430,286, respectively, of which $214,943 remains
unpaid at June 30, 1997 and is included in accounts payable and accrued
liabilities on the combined balance sheet.
Fees earned in 1996, 1995 and 1994, respectively, include $737,350,
$373,523 and $28,272 from affiliates of certain partners. Fees earned for the
six months (unaudited) ended June 30, 1997 and 1996, respectively, include
$660,930 and $329,365 from these affiliates for asset management services
rendered to businesses in which certain partners of Victor Capital Group, L.P.
have minimal ownership interests.
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Partnership is committed under an operating lease for office space
with an affiliate of Windsor Investors expiring on December 31, 1997. The lease
requires annual fixed minimum lease payments, plus additional amounts for real
estate taxes, operating expenses and electricity. Charges for rent for 1996,
1995 and 1994 amounted to approximately $216,000, $209,000 and $216,000,
respectively. Charges for rent for the six months (unaudited) ended June 30,
1997 and 1996 amounted to approximately $108,000 for each period.
Effective January 1994, the Partnership exercised its option to
terminate an amended office lease with the affiliate of Windsor Investors. The
amended lease provided for a rent abatement and for the forgiveness of deferred
rent incurred by the Partnership under a prior lease agreement. As of the date
the amended lease was terminated, the deferred rent and rent abatements were
being amortized on a straight-line basis through the life of the amended lease.
As of the termination date of this lease, the remaining unamortized balances
relating to deferred rent and rent abatements amounted to $43,229 and $71,152,
respectively, which were recognized as a reduction of rent expense in 1994.
The Partnership entered into an agreement to sublease a portion of its
office space to a nonaffiliated company. The sublease commenced in April 1994
and terminated on April 30, 1995. The agreement provided for annual fixed rent
in the amount of $54,000 payable in equal monthly installments plus additional
monthly charges for certain services provided by the sublessor. Sublease income
earned by the Partnership for 1995 and 1994 amounted to $24,030 and $41,167,
respectively.
VP Metropolis Services, L.L.C. manages and administers an asset
portfolio in which certain partners of the Partnership have less than a 1%
collective interest. As part of its fee arrangement, VP Metropolis Services,
L.L.C. is entitled to a resolution fee which is contingent upon the occurrence
of specified events as defined in the agreement. Management contends that the
possibility of the occurrence of the specified events is more likely not
-10-
778959.1
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1997 and 1996 is Unaudited)
to occur based upon their knowledge of the asset portfolio and its history and
accordingly have not recognized these fees as income, $11,450 in 1996, $311,000
in 1995, $37,000 in 1994 and $4,950 for the six months (unaudited) ended June
30, 1996. For the six months (unaudited) ended June 30, 1997 and 1996, VP
Metropolis Services, L.L.C. was not entitled to any resolution fees.
In connection with the sale of the members' interest in VP Metropolis
Services, L.L.C. (See Note 11), the rights to the contingent resolution fees
noted above were assigned to an affiliated entity owned by John R. Klopp and
Craig M. Hatkoff.
Management is committed to a key employee, which will allow the
individual to share in a percentage of certain future contingent revenues that
the Partnership may earn upon the successful outcome of certain specified
projects.
As of December 31, 1996, the Partnership has guaranteed to an employee
a minimum bonus amounting to $100,000 relating to the 1997 calendar year. As of
June 30, 1997 (unaudited), $50,000 has been paid.
NOTE 10--EMPLOYEE PENSION PLAN
The Partnership maintains a Salary Reduction Simplified Employee
Pension Plan (SARSEP) which is considered a qualified defined contribution plan
under Section 408 of the Internal Revenue Code. The plan was adopted during 1995
and is available to all employees of the Partnership who meet certain defined
eligibility requirements. Contributions to the plan are made entirely by the
employees through annual salary reductions. Employee contributions for each
participating employee in the plan are limited to a percentage of annual
compensation paid by the Partnership not to exceed $9,500 for tax years 1996 and
1997. For the years ended December 31, 1996 and 1995 and for the six months
(unaudited) ended June 30, 1997 and 1996, the Partnership did not incur any
administrative costs directly associated with the plan.
NOTE 11--SALE OF INTEREST
On July 15, 1997, John R. Klopp, Craig M. Hatkoff and Valentine Wildove
& Company, Inc. sold their entire ownership interests in the Partnership and its
Affiliates to Capital Trust (f/k/a California Real Estate Investment Trust) for
a total purchase price of $5,000,000, evidenced by notes payable.
778959.1
-11-
<PAGE>
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 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 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.
776420.4
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 November 12, 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 D 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 B 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 C 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).
776420.4
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 Employes
Pension Trust, and Mellon Bank N.A., as trustee for
General Motors Salaried Employes 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).
776420.4
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(a) 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
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).
*10.9(b) Second Amendment to Amended and Restated Credit
Agreement, dated as of July 23, 1998, between Capital
Trust and GACC.
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).
776420.4
II-4
<PAGE>
*10.15 Employment Agreement, dated as of August 15, 1998, by and
between Capital Trust and Stephen D. Plavin.
**15.1 Acknowledgment of David Berdon & Co. LLP.
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
(included in Exhibit 5.1).
**23.4 Consent of David Berdon & Co. LLP.
**23.5 Consent of Battle Fowler LLP (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.
(b) Financial Statement Schedules
All schedules are omitted as inapplicable.
776420.4
II-5
<PAGE>
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, 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
776420.4
II-6
<PAGE>
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 ofappropriate 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.
(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.
776420.4
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 December 16, 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 December 16, 1998
- ---------------------------
John R. Klopp executive officer)
/s/ Edward L. Shugrue III Treasurer and Director (principal December 16, 1998
- -------------------------
Edward L. Shugrue III financial officer)
</TABLE>
776420.4
II-8
<PAGE>
Exhibit 5.1
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP]
December 14, 1998
Capital Trust, Inc.
605 Third Avenue
26th Floor
New York, New York 10016
Re: Capital Trust, Inc.
Registration Statement on Form S-4
(Registration No. 333-52619)
Ladies and Gentlemen:
We have served as Maryland counsel to Capital Trust, Inc., a Maryland
corporation (the "Company"), in connection with certain matters of Maryland law
arising out of the registration of up to 18,229,650 shares (the "Shares") of
Class A Common Stock, par value $.01 per share, of the Company ("Common Stock"),
and up to 12,267,658 shares (the "Preferred Shares") of Class A 9.5% Cumulative
Convertible Preferred Stock, par value $.01 per share, of the Company (the
"Preferred Stock"), covered by the above-referenced Registration Statement and
all amendments thereto (the "Registration Statement"), as filed by the Company
under the Securities Act of 1933, as amended (the "1933 Act"). The Shares and
Preferred Shares are to be issued in connection with the proposed merger (the
"Merger") of Captrust Limited Partnership, a Maryland limited partnership (the
"LP"), and the Company pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") dated as of November 12, 1998 among the Company, the LP and Capital
Trust, a California business trust, substantially in the form filed as Annex A
to the proxy statement/prospectus ("Proxy Statement/Prospectus") included in the
Registration Statement. Capitalized terms used but not defined herein shall have
the meanings assigned to them in the Registration Statement.
In connection with our representation of the Company, and as a basis
for the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our
780703.2
<PAGE>
Capital Trust, Inc.
December 14, 1998
Page 2
satisfaction, of the following documents (collectively, the "Documents"):
1. The Registration Statement, including the Proxy Statement/Prospectus
included therein, in the form in which it was transmitted by the Company to the
Securities and Exchange Commission (the "Commission") under the 1933 Act;
2. The Articles of Incorporation of the Company (the "Articles of
Incorporation"), certified as of a recent date by the State Department of
Assessments and Taxation of Maryland (the "SDAT");
3. The Bylaws of the Company (the "Bylaws"), certified as of the date
hereof by an officer of the Company;
4. Resolutions adopted by the Board of Directors of the Company
relating to the approval of the Merger Agreement and the issuance and
registration of the Shares and Preferred Shares, certified as of the date hereof
by an officer of the Company (the "Directors' Resolutions");
5. Resolutions adopted by the sole Stockholder of the Company approving
the Merger, the Merger Agreement and the transactions contemplated thereby (the
"Stockholder Resolutions");
6. A certificate of the SDAT, as of a recent date, as to the good
standing of the Company;
7. A certificate executed by John R. Klopp, the President of the
Company, dated as of the date hereof;
8. An unexecuted Articles of Amendment and Restatement of the Company
authorizing, among other things, 100,000,000 shares of Common Stock (the
"Articles of Amendment and Restatement"), in the form attached as Exhibit A to
Annex A to the Proxy Statement/Prospectus;
9. An unexecuted Articles Supplementary classifying and designating
12,639,405 shares of Preferred Stock of the Company (the "Articles
Supplementary"), in the form attached as Exhibit B to Annex A to the Proxy
Statement/Prospectus;
10. The Amended and Restated Bylaws of the Company (the "Amended
Bylaws") in the form attached as Exhibit D to Annex A to the Proxy
Statement/Prospectus;
11. The Merger Agreement, in the form attached as Annex A to the Proxy
Statement/Prospectus; and
12. Such other documents and matters as we have deemed necessary or
appropriate to express the opinion set forth in this
780703.2
<PAGE>
Capital Trust, Inc.
December 14, 1998
Page 3
letter, subject to the assumptions, limitations and qualifica tions stated
herein.
In expressing the opinion set forth below, we have assumed, and so far
as is known to us there are no facts inconsistent with, the following:
1. Each individual executing any of the Documents, whether on behalf of
such individual or any other person, is legally competent to do so.
2. Each individual executing any of the Documents on behalf of a party
(other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding and are enforceable in accordance with all stated
terms.
4. Any Documents submitted to us as originals are authentic. The form
and content of any Documents submitted to us as unexecuted drafts do not differ
in any respect relevant to this opinion from the form and content of such
Documents as executed and delivered. Any Documents submitted to us as certified
or photostatic copies conform to the original documents. All signatures on all
Documents are genuine. All public records reviewed or relied upon by us or on
our behalf are true and complete. All statements and information contained in
the Documents are true and complete. There has been no oral or written
modification of or amendment to any of the Documents, and there has been no
waiver of any provision of any of the Documents, by action or omission of the
parties or otherwise.
5. All actions taken in connection with the Directors' Resolutions or
the Stockholder Resolutions were taken at a duly called meeting at which a
quorum was present and acting throughout or by unanimous written consent of the
directors or stockholder, as the case may be.
6. The Articles Supplementary will be filed with and accepted for
record by the SDAT prior to the issuance of the Preferred Shares.
7. The Articles of Amendment and Restatement will be filed with and
accepted for record by the SDAT prior to the issuance of any of the Shares.
8. Articles of Merger in the form contemplated by the Merger Agreement
will be filed and accepted for record by SDAT prior to the issuance of the
Shares and Preferred Shares (with such
<PAGE>
Capital Trust, Inc.
December 14, 1998
Page 4
filing and acceptance for record by the SDAT of the Articles Supplementary, the
Articles of Amendment and Restatement and the Articles of Merger collectively
referred to herein as the "Corporate Proceedings").
9. The form of certificate representing a Share and the form of
certificate representing a Preferred Share, each when issued, will comply with
the Maryland General Corporation Law.
10. Upon issuance of the Shares and Preferred Shares, the total number
of shares of Common Stock and the total number of shares of Preferred Stock
issued and outstanding will not exceed the total number of shares of Common
Stock or Preferred Stock, as the case may be, that the Company is then
authorized to issue.
11. All certificates and affidavits submitted to us are true, correct
and complete, both when made and as of the date hereof.
The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based upon the foregoing, and subject to the assumptions, limitations
and qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and existing under
and by virtue of the laws of the State of Maryland and is in good standing with
the SDAT.
2. Upon completion of the Corporate Proceedings, the Shares will be
duly authorized and, upon issuance in accordance with the Articles of Amendment
and Restatement, the Articles of Merger, the Proxy Statement/Prospectus, and the
Directors' Resolutions, will be validly issued, fully paid and nonassessable.
3. Upon completion of the Corporate Proceedings, the Preferred Shares
will be duly authorized and, upon issuance in accordance with the Articles of
Amendment and Restatement, the Articles of Merger, the Proxy
Statement/Prospectus, and the Directors' Resolutions, will be validly issued,
fully paid and nonassessable.
The foregoing opinion is limited to the substantive laws of the State
of Maryland and we do not express any opinion herein concerning any other law.
We express no opinion as to the applicability or effect of any federal or state
securities laws, including the securities laws of the State of Maryland, any
federal or state laws regarding fraudulent transfers, or any real estate
syndication laws of the State of Maryland. To the extent that any
780703.2
<PAGE>
Capital Trust, Inc.
December 14, 1998
Page 5
matter as to which our opinion is expressed herein would be governed by any
jurisdiction other than the State of Maryland, we do not express any opinion on
such matter.
We assume no obligation to supplement this opinion if any applicable
law changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm in the section
entitled "Legal Matters" in the Proxy Statement/Prospectus. In giving this
consent, we do not admit that we are within the category of persons whose
consent is required by Section 7 of the 1933 Act.
Very truly yours,
/s/ Ballard Spahr Andrews &
Ingersoll, LLP
780703.2
Exhibit 8.1
BATTLE FOWLER LLP
A LIMITED LIABILITY PARTNERSHIP
75 East 55th Street
New York, New York 10022
(212) 856-7000
(212) 856-7060
(212) 856-7810
December 16, 1998
Capital Trust
Capital Trust, Inc.
605 Third Avenue
26th Floor
New York, NY 10016
Re: Reorganization as Maryland Corporation
Ladies and Gentlemen:
You have asked us to advise you concerning the federal income tax
consequences of the proposed reorganization of Capital Trust, a California
business trust (the "Company") as a Maryland corporation by means of two
simultaneous mergers pursuant to which (a) the Company will be merged with and
into a newly formed, indirect wholly-owned limited partnership subsidiary of the
Company (the "Partnership"), and (b) the Partnership will be merged with and
into Capital Trust, Inc., a newly formed Maryland corporation and wholly-owned
subsidiary of the Company ("Newco"). The Partnership will elect pursuant to
Treas. Reg. ss. 301.7701-3 to be treated as a corporation for federal income tax
purposes. Newco's capital structure will be substantially identical to that of
the Company, and Newco will continue substantially the same business as that
currently being conducted by the Company. Pursuant to the merger agreement,
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 of Newco.
For purposes of rendering this Opinion, we have examined the originals,
certified copies or copies otherwise identified to our satisfaction as being
true copies of the originals of the Agreement and Plan of Merger, dated November
12, 1998, by and among the Company, the Partnership and Newco (the "Agreement
and Plan of Merger"), and such other documents relating to the proposed
reincorporation as we deemed necessary or appropriate. We have assumed that all
of the foregoing
703225.3
<PAGE>
2
Capital Trust December 16, 1998
Capital Trust, Inc.
documents have been duly executed and delivered and that those executing the
documents have due authority to bind the entity on behalf of which they are
signing.
Based on the foregoing, it is our opinion that the transactions
occurring pursuant to the Agreement and Plan of Merger will constitute a
reorganization within the meaning of ss. 368(a)(1)(F) of the Internal Revenue
Code of 1986, as amended. 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 stock of Newco will be the same as their basis in
their shares of the Company; and, for those shareholders who hold shares of the
Company as capital assets, their holding period for the shares of stock of Newco
received in the reorganization will include their holding period for their
shares of the Company. Newco's basis and holding period for the assets of the
Company acquired upon the consummation of the reorganization will be the same as
the basis and holding period of such assets in the hands of the Company.
This Opinion does not address the possible state, local or foreign tax
consequences of the proposed reincorporation or any federal income tax
consequences of that transaction other than those specifically set forth herein.
It also does not address any tax consequences to shareholders in particular
circumstances, such as shareholders who are dealers in securities, who are
subject to the alternative minimum tax provisions, who are foreign persons or
who acquired their shares in connection with stock options or stock purchase
plans or other compensatory transactions. It may be relied on only by Capital
Trust, the Partnership, Newco and the shareholders of Capital Trust and Newco.
Please note that this Opinion represents only our best judgment as to
the federal income tax consequences of the proposed reincorporation; it is not
binding on the Internal Revenue Service or the courts. Our conclusions are based
on statutory provisions, administrative regulations, published rulings, and
existing judicial decisions, all as in effect on the date hereof. It is possible
that future legislative, judicial or administrative changes could change the law
applicable to the proposed reincorporation. Please also note that our giving of
the advice set forth in this Opinion does not imply an undertaking on our part
to advise you of any new developments in the application or interpretation of
the federal income tax laws.
Very truly yours,
/s/ Battle Fowler LLP
703225.3
Exhibit 15.1
December 11, 1998
Capital Trust, Inc.
605 Third Avenue
26th Floor
New York, NY 10016
Ladies and Gentlemen:
We hereby acknowledge that we are aware of the use in the proxy
statement/prospectus filed as part of Amendment No. 3 to the Registration
Statement on Form S-4 (No. 333-52619) of Capital Trust, Inc. of our report on
the unaudited financial statements of Victor Capital Group, L.P., a Delaware
limited partnership, for the six months ended June 30, 1997 and 1996 which
pursuant to Rule 436(c) under the Securities Act of 1933, as amended (the
"Securities Act"), is not considered part of a registration statement prepared
or certified by an accountant or a report prepared or certified by an accountant
within the meaning of sections 7 and 11 of the Securities Act.
/s/ David Berdon & Co. LLP
Certified Public Accountants
781647.1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Amendment No. 3 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. 3 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
December 14, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in Amendment
No. 3 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. 3
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 statement of operations,
shareholders' equity and cash flows for the year ended December 31, 1997.
/s/ Ernst & Young LLP
New York, New York
December 14, 1998
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the reference to our Firm under the caption "EXPERTS"
appearing in the Prospectus forming part of the Form S-4 Registration Statement
of Capital Trust, Inc. and the incorporation by reference of our reports, dated
March 10, 1997 and July 16, 1997, on the financial statements of Victor Capital
Group, L.P. (a Delaware Limited Partnership) and Affiliates, as of June 30,
1997, December 31, 1996 and 1995, and for the six months ended June 30, 1997 and
1996, and for each of the three years in the period ended December 31, 1996.
/s/ David Berdon & Co. LLP
DAVID BERDON & CO. LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
December 11, 1998
769355.1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>THIS SCHEDULE CONTAINS SUMMARY FINANCIAL EXTRACTED FROM THE FINANCIAL
STATEMENTS OF CAPITAL TRUST FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,420
<SECURITIES> 39,471
<RECEIVABLES> 673,398
<ALLOWANCES> 2,821
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<CURRENT-ASSETS> 15,511
<PP&E> 795
<DEPRECIATION> 248
<TOTAL-ASSETS> 742,526
<CURRENT-LIABILITIES> 7,781
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157,602
0
<COMMON> 18,214
<OTHER-SE> 119,494
<TOTAL-LIABILITY-AND-EQUITY> 742,526
<SALES> 0
<TOTAL-REVENUES> 53,245
<CGS> 0
<TOTAL-COSTS> 31,733
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,359
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,153
<INCOME-TAX> 8,312
<INCOME-CONTINUING> 10,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,841
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.35
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