As filed with the Securities and Exchange Commission on June 11, 1997
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. 2)
Filed by the Registrant[X]
Filed by a Party other than the Registrant[ ]
Check the appropriate box:
[ X] Preliminary Proxy Statement [ ] Confidential, for Use of the
[ ] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
.....................California Real Estate Investment Trust...................
(Name of Registrant as Specified In Its Charter)
...............................................................................
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
......................................................................
2) Aggregate number of securities to which transaction applies:
......................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
......................................................................
4) Proposed maximum aggregate value of transaction:
......................................................................
5) Total fee paid:
......................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11-(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
......................................................................
2) Form, Schedule or Registration Statement No.:
......................................................................
3) Filing Party:
......................................................................
4) Date Filed:
......................................................................
455009.26
<PAGE>
PRELIMINARY MATERIALS -- June 11, 1997
CALIFORNIA REAL ESTATE INVESTMENT TRUST
131 Steuart Street, Suite 200
San Francisco, California 94105
June 17, 1997
Dear Shareholder:
You are cordially invited to attend the 1997 annual meeting of shareholders
of California Real Estate Investment Trust, a California trust (the "Company")
to be held at the Pacific Stock Exchange, 301 Pine Street, San Francisco,
California 94104, on July , 1997 at 10:00 a.m., local time (the "Annual
Meeting").
In January 1997, a partnership controlled by Samuel Zell, CalREIT Investors
Limited Partnership ("CRIL"), acquired the 76% ownership interest held by the
Company's then parent, The Peregrine Real Estate Trust. Mr. Zell controls Equity
Group Investments, Inc. ("EGI"), a privately held investment company that is
engaged in the acquisition, ownership, management and financing of real estate
and corporations. EGI is one of the world's largest private owners of real
estate.
Prior to CRIL's purchase of the Company's common shares, EGI had developed
and presented to the Company's board of trustees a business plan for the Company
with Victor Capital Group L.P. ("Victor Capital"), a real estate investment
services firm headquartered in New York City, New York. Victor Capital's
business includes real estate investment banking, real estate advisory services
and real estate asset management services. Victor Capital is headed and owned
equally by Mr. Craig M. Hatkoff and Mr. John R. Klopp. Mr. Klopp and Mr. Hatkoff
founded Victor Capital in 1989. Prior to that time, they were the co-heads and
managing partners of Chemical Realty Corporation, the real estate investment
banking division of Chemical Bank Corporation.
In connection with securing the approval of the Company's board of trustees
for the transaction, EGI and Victor Capital presented a proposal that included
the proposed new business plan, a new management team for the Company and a
preferred equity investment in the Company of not less than $30 million. As part
of the new business plan and concurrently with the preferred equity investment,
the Company will acquire Victor Capital's real estate investment banking, real
estate advisory and real estate asset management businesses, including its
experienced management teams, for $5.0 million in promissory notes.
With the new management team and the preferred equity investment, the
Company will be positioned to execute the proposed business plan, which
contemplates creating a finance company designed primarily to take advantage of
opportunities to make high-yielding investments in commercial real estate,
including senior and junior commercial mortgage loans and preferred equity
investments.
At the Annual Meeting you will be asked to vote on six proposals. These
proposals are outlined in pages 3 and 4 of the accompanying proxy statement. The
proposals are: Proposal 1 - approval of the investment in the Company by an
entity controlled by Messrs. Zell, Klopp and Hatkoff; Proposal 2 - amendments to
the Company's declaration of trust; Proposal 3 - election of trustees; Proposal
4 - ratification of independent auditors; Proposal 5 approval of a long-term
incentive share plan; and Proposal 6 - approval of a trustee share plan.
Proposal 1 involves the issuance and sale of Class A cumulative,
convertible preferred shares (the "Class A Preferred Shares"). These shares are
to be priced at $2.69 per share. The Class A Preferred Shares will have a
dividend rate of 9.5%. The shares will be purchased by Veqtor Finance Company,
LLC ("Veqtor"). Veqtor is a newly formed company that will be controlled by
Messrs. Zell, Klopp and Hatkoff. This transaction is referred to as the
"Investment."
The terms and conditions of the Investment are governed by two documents
included in the accompanying proxy statement. These documents are: the Preferred
Share Purchase Agreement, dated June __, 1997 (the
455009.26
<PAGE>
"Investment Agreement"), and the "Certificate of Designation." The Investment
Agreement is an agreement between the Company and Veqtor. The Certificate of
Designation contains the preferences and rights of the Class A Preferred Shares.
The actual number of Class A Preferred Shares to be issued will be
determined by Veqtor, but will be no less than 11,895,911 shares nor more than
12,639,405 shares for a minimum aggregate purchase price of $32,000,000. The
Class A Preferred Shares will be convertible into common shares of the Company
at the rate of one common share for each Class A Preferred Share, subject to
adjustment to avoid dilution.
The Investment will provide the Company with a capital infusion with which
to implement the Company's new business plan. Detailed information concerning
the Investment Agreement, the Investment and the Company's new business plan is
set forth in the accompanying proxy statement, which we urge you to read
carefully.
Your board of trustees, after careful consideration, has unanimously
approved the Investment Agreement and determined that the Investment is fair to
and in the best interest of the shareholders of the Company and recommends that
you vote for approval of the Investment.
As part of Proposal 2, the Amended and Restated Declaration of Trust (found
in annex C to the accompanying proxy statement), among other things, eliminates
the provisions relating to the Company's qualification as a real estate
investment trust ("REIT") for Federal income tax purposes. Under the Company's
new business plan, the Company will no longer be operated as a REIT.
You will also be asked at the Annual Meeting to consider and vote upon
Proposals 3 through 6 which include the election of seven trustees to serve
until the next annual meeting of shareholders, the ratification of the
appointment of Ernst & Young LLP as the independent auditors of the Company for
the fiscal year 1997, the approval of a long-term incentive share plan and the
approval of a trustee share plan; and to transact such other business, if any,
as may properly come before the Annual Meeting or any adjournment or
postponement thereof.
YOUR BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF
EACH OF THE PROPOSALS.
CRIL, which owns 6,959,593 common shares of Company (approximately 76% of
the total number of outstanding shares), has advised the Company that it intends
to vote in favor of the Company's proposals. Accordingly, approval of the
Company's proposals is assured.
The accompanying proxy statement, which you are urged to read carefully,
provides detailed information concerning the proposals. It is important that
your shares be represented and voted at the Annual Meeting, whether or not you
plan to attend. Please sign, date and return the enclosed proxy card at your
earliest convenience to ensure that your vote on the important business matters
to be considered at the Annual Meeting will be recorded.
Your board of trustees and management look forward to greeting personally
those shareholders who are able to attend the Annual Meeting. Your continued
interest and participation in the affairs of the Company are greatly
appreciated.
Sincerely,
Frank A. Morrow
Chairman of the Board
455009.26
<PAGE>
PRELIMINARY MATERIALS -- June 11, 1997
CALIFORNIA REAL ESTATE INVESTMENT TRUST
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on July __, 1997
To the Shareholders of California Real Estate Investment Trust:
Notice is hereby given that the 1997 annual meeting of the holders of
common shares of beneficial interest, $1.00 par value (the "Common Shares"), in
California Real Estate Investment Trust, a California trust (the "Company"),
will be held at the Pacific Stock Exchange, 301 Pine Street, San Francisco,
California 94104, on July __, 1997 at 10:00 a.m., local time (the "Annual
Meeting"), for the following purposes:
1. To consider and vote upon a proposal to issue and sell at a price
of $2.69 per share a maximum of 12,639,405 shares and a minimum of
11,895,911 shares of the Company's class A 9.5% cumulative convertible
preferred shares, $1.00 par value, of beneficial interests in the Company
(the "Class A Preferred Shares") upon the terms and conditions set forth in
the preferred share purchase agreement, dated as of June , 1997, by and
between the Company and Veqtor Finance Company, LLC, a Delaware limited
liability company ("Veqtor"), attached to the accompanying Proxy Statement
as annex A, and in the 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 the Company, in
the form attached to the accompanying Proxy Statement as annex B;
2. To consider and vote upon proposals to:
(a) approve an amendment to the existing declaration of trust of
the Company (the "Existing Declaration") which reclassifies
the Common Shares as "Class A Common Shares" and creates
another class of common shares, "Class B Non-Voting Common
Shares";
(b) approve an amendment to the Existing Declaration which
revises certain restrictions upon transactions between the
Company and certain large shareholders and other affiliates;
(c) approve an amendment to the Existing Declaration which
eliminates certain provisions intended to assure the
Company's continued treatment as a "real estate investment
trust" for federal tax purposes; and
(d) approve other amendments to the Existing Declaration,
each of the foregoing amendments to be contained in an amended and restated
declaration of trust of the Company, in the form attached to the
accompanying Proxy Statement as annex C.
3. To consider and vote upon a proposal to elect seven trustees to
serve until the Company's next annual meeting of shareholders or until such
trustees' successors are elected and shall have qualified;
4. 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 1997;
455009.26
<PAGE>
5. To consider and vote upon a proposal to approve a long-term
incentive share plan, in the form attached to the accompanying Proxy
Statement as annex D;
6. To consider and vote upon a proposal to approve a non-employee
trustee share plan, in the form attached to the accompanying Proxy
Statement as annex E; and
7. The transaction of such other business as may properly come before
the Annual Meeting or at any adjournment or postponement thereof.
As of June 12, 1997, the Company had a total of 9,137,335 Common Shares
outstanding. The board of trustees of the Company has fixed the close of
business on June 12, 1997 as the record date for the Annual Meeting. Only
shareholders of record at that time are entitled to notice of, and to vote at,
the Annual Meeting and any adjournment or postponement thereof.
By order of the Board of Trustees,
Frank A. Morrow
Chairman of the Board
- -------------------------------------------------------------------------------
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING.
WHETHER OR NOT YOU INTEND TO BE PRESENT, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD IN THE STAMPED AND ADDRESSED ENVELOPE ENCLOSED FOR YOUR
CONVENIENCE. SHAREHOLDERS CAN HELP THE COMPANY AVOID UNNECESSARY EXPENSE AND
DELAY BY PROMPTLY RETURNING THE ENCLOSED PROXY CARD.
- -------------------------------------------------------------------------------
June 17, 1997
455009.26
<PAGE>
PRELIMINARY MATERIALS -- June 10, 1997
CALIFORNIA REAL ESTATE INVESTMENT TRUST
131 Steuart Street, Suite 200
San Francisco, California 94105
---------------------
PROXY STATEMENT
---------------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY __, 1997
---------------------
INTRODUCTION
This Proxy Statement (the "Proxy Statement") is being furnished to the
holders of common shares of beneficial interest, $1.00 par value (the "Common
Shares"), in California Real Estate Investment 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 annual
meeting of shareholders of the Company to be held at the Pacific Stock Exchange,
301 Pine Street, San Francisco 94104, on July __, 1997 at 10:00 a.m., local
time, and at any adjournment or postponement thereof (the "Annual Meeting").
At the Annual Meeting, the shareholders will consider and vote upon a
proposal to approve issuance and sale of a maximum of 12,639,405 shares and a
minimum of 11,895,911 shares of the Company's class A 9.5% cumulative
convertible preferred shares, $1.00 par value, of beneficial interest in the
Company (the "Class A Preferred Shares") for a maximum aggregate purchase price
of approximately $34 million and a minimum of approximately $32 million (the
"Investment") to Veqtor Finance Company, LLC ("Veqtor"), a newly formed Delaware
limited liability company controlled by Mr. Samuel Zell, Mr. John R. Klopp and
Mr. Craig M. Hatkoff. The terms and conditions of the Investment are governed by
the preferred share purchase agreement, dated as of June , 1997, by and between
the Company and Veqtor (the "Investment Agreement") and the 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 the Company (the "Certificate of Designation") ("Proposal
1"). The actual number of Class A Preferred Shares to be issued will be
determined by Veqtor, but will be no less than 11,895,911 Class A Preferred
Shares for a minimum aggregate purchase price of $32,000,000.
In January 1997, the Board of Trustees approved a proposal presented by
Equity Group Investments, Inc. ("EGI") and Victor Capital Group, L.P. ("Victor
Capital") to have the Company pursue a new business plan to be implemented by a
new management team following a preferred equity investment in the Company of
not less than $30 million. EGI, which is controlled by Samuel Zell, is an owner,
manager and financier of real estate properties and companies throughout the
United States. Victor Capital, which is controlled by John R. Klopp and Craig M.
Hatkoff, is a real estate financial services firm that will be acquired by the
Company concurrently with the Investment in exchange for $5.0 million in
promissory notes.
The Investment will provide the Company with an equity infusion to be used
in the implementation of the Company's new business plan. See "PROPOSAL 1 --
APPROVAL OF THE INVESTMENT -- Overview".
455009.26
<PAGE>
See "RISK FACTORS" beginning on page 8 for certain factors which should be
considered in evaluating the Investment and the Company's new business plan.
At the Annual Meeting, the shareholders will also consider and vote upon
(i) proposals to: (a) approve an amendment to the existing declaration of trust
of the Company (the "Existing Declaration") which reclassifies the Common Shares
as "Class A Common Shares" and creates another class of common shares, "Class B
Non-Voting Common Shares"; (b) approve an amendment to the Existing Declaration
which revises certain restrictions upon transactions between the Company and
certain large shareholders and other affiliates; (c) approve an amendment to the
Existing Declaration which eliminates certain provisions intended to assure the
Company's continued treatment as a "real estate investment trust" for federal
tax purposes; and (d) approve other amendments to the Existing Declaration (the
foregoing amendments, collectively, the "Amendments"), each of the foregoing
amendments to be contained in an amended and restated declaration of trust for
the Company, in the form attached hereto as annex C (the "Restated Declaration")
(collectively, "Proposal 2"), (ii) a proposal to elect the following nominees as
trustees of the Company to serve until the Company's next annual meeting of
shareholders or until such trustees' successors are elected and shall have
qualified: Martin L. Edelman, Gary R. Garrabrant, Craig M. Hatkoff, John R.
Klopp, Sheli Z. Rosenberg, Lynne B. Sagalyn and Samuel Zell (the "Nominees")
("Proposal 3"), (iii) a proposal to ratify the appointment of Ernst & Young LLP
as the independent auditors of the Company for fiscal year 1997 ("Proposal 4"),
(iv) a proposal to approve a long-term incentive share plan, in the form
attached hereto as annex D (the "Incentive Share Plan") ("Proposal 5"), and (v)
a proposal to approve a non-employee trustee share plan, in the form attached
hereto as annex E (the "Trustee Plan") ("Proposal 6"), and will transact such
other business as may properly come before the Annual Meeting or any adjournment
or postponement thereof. The above proposals are referred collectively herein as
the "Proposals."
A conformed copy of the Investment Agreement is included as annex A hereto,
the form of the Certificate of Designation is included as annex B hereto, the
form of proposed Restated Declaration is included as annex C hereto, the form of
Incentive Share Plan is included as annex D hereto and the form of Trustee Plan
is included as annex E hereto. The summaries of portions of the Investment
Agreement, the form of Certificate of Designation, the form of Restated
Declaration, the Incentive Share Plan and the Trustee Share Plan set forth in
this Proxy Statement do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the text of the Investment
Agreement, the Certificate of Designation, the Restated Declaration, the
Incentive Share Plan and the Trustee Share Plan.
Under California law, shareholders are not entitled to any dissenters'
appraisal rights in connection with the Investment.
YOUR VOTE IS IMPORTANT TO THE COMPANY. WHETHER OR NOT YOU PLAN TO ATTEND
THE ANNUAL MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF SHARES YOU OWN,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY IN THE
ENCLOSED PRE-ADDRESSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES. YOU MAY, OF COURSE, ATTEND THE ANNUAL MEETING, REVOKE YOUR PROXY AND
VOTE IN PERSON EVEN IF YOU HAVE ALREADY RETURNED YOUR PROXY CARD.
The Board of Trustees unanimously recommends a vote in favor of approval of
each of the Proposals that will be considered at the Annual Meeting.
THE BOARD OF TRUSTEES OF THE COMPANY, AFTER CAREFUL CONSIDERATION, HAS
UNANIMOUSLY APPROVED THE INVESTMENT AGREEMENT AND THE CERTIFICATE OF DESIGNATION
AND DETERMINED THAT THE INVESTMENT IS FAIR TO, AND IN THE BEST INTEREST OF, THE
SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE INVESTMENT.
The affirmative vote of holders of 662/3% of the outstanding shares is
required to approve the amendments contained in the Restated Declaration. The
approval of the Investment, the election of the Nominees, the ratification of
the appointment of the independent auditors, the approval of the Incentive Share
Plan and the approval of the Trustee Plan require a majority of the votes cast
by shareholders at the Annual Meeting. CalReit Investors Limited
455009.26
-ii-
<PAGE>
Partnership ("CRIL"), a partnership that is controlled by Mr. Zell, that owns
6,959,593 shares (approximately 76% of the total number of outstanding shares),
has advised the Company that it intends to vote in favor of the Proposals.
Accordingly, approval of the Investment, the Restated Declaration and the other
Proposals is assured.
All shares represented by properly executed proxies will be voted in
accordance with the specifications on the enclosed proxy. The enclosed proxy is
solicited on behalf of the Company's Board of Trustees. You may revoke or change
your proxy at any time prior to its use at the Annual Meeting by giving the
Company written direction to revoke your proxy, giving the Company a new proxy
or by attending the Annual Meeting and voting in person.
The Company's principal executive office is located at 131 Steuart Street
#200, San Francisco, California 94105 and the telephone number at that address
is (415) 905-0288.
This Proxy Statement and the accompanying form of proxy are first being
mailed to shareholders on or about June 17 , 1997.
455009.26
-iii-
<PAGE>
------------------------
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement in connection with the
solicitation of proxies made hereby, and, if given or made, any such information
or representation should not be relied upon as having been authorized by the
Company or any other person. The delivery of this Proxy Statement shall not,
under any circumstances, create any implication that there has been no change in
the information set forth herein or in the affairs of the Company since the date
of this Proxy Statement.
------------------------
AVAILABLE INFORMATION
The Company is subject to the informational reporting 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 and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and may be available at the
following Regional Offices of the Commission: Midwest Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and Northeast Regional Office, 7 World Trade Center, 13th Floor,
New York, New York 10048. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material and
other information concerning the Company may also be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005 on which
the Common Shares are listed. In addition, the Commission maintains a site on
the World Wide Web portion of the Internet that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
455009.26
-iv-
<PAGE>
TABLE OF CONTENTS
Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS................-vii-
SUMMARY .....................................................................1
The Company..........................................................1
The Annual Meeting...................................................2
The Proposals........................................................3
Interests of the Principal Shareholder and Management
in the Investment and the Acquisition................................4
Recommendation of the Board of Trustees..............................4
Certain Tax Considerations...........................................5
Registration Rights..................................................5
No Appraisal Rights..................................................5
Ownership Structure of the Company...................................6
RISK FACTORS..................................................................8
Risk Factors Relating to the Investment..............................8
Risk Factors Relating to the Company's New Business Plan
and the Acquisition..................................................9
PRO FORMA CAPITALIZATION.....................................................16
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION OF THE COMPANY..........................................17
HISTORICAL MARKET PRICE AND DIVIDENDS DATA...................................23
Market Prices and Dividends.........................................23
Dividend Policy.....................................................23
BUSINESS OF THE COMPANY FOLLOWING
THE INVESTMENT AND THE ACQUISITION..................................24
Overview ...........................................................24
General ...........................................................24
Categories of Investment............................................25
Other Investments...................................................28
Portfolio Management................................................30
Certain Legal Aspects of Mortgage Loans and Real Property...........31
EXISTING BUSINESS OF THE COMPANY.............................................38
BUSINESS AND OTHER INFORMATION CONCERNING VICTOR CAPITAL.....................38
Description of Business.............................................39
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................41
THE ANNUAL MEETING...........................................................45
Introduction........................................................45
Matters to be Considered at the Annual Meeting......................45
Voting Rights and Vote Required.....................................45
Voting of Proxies; Solicitation.....................................46
No Appraisal Rights.................................................47
PROPOSAL 1 -- APPROVAL OF THE INVESTMENT.....................................48
Overview ...........................................................48
Background of and Reasons for the Proposal; Board
of Trustees' Recommendation.........................................48
455009.26
-v-
<PAGE>
Page
The Investment Agreement............................................52
Interests of the Principal Shareholder and
Management in the Investment........................................53
Use of Proceeds.....................................................54
PROPOSAL 2 -- APPROVAL OF RESTATED DECLARATION...............................54
PROPOSAL 3 -- ELECTION OF TRUSTEES...........................................71
Nominees for Election as Trustees...................................71
Board of Trustees...................................................73
Compensation of Trustees............................................73
Executive Officers..................................................73
Executive Compensation..............................................74
Employment and Consulting Agreement.................................75
Compliance with Section 16(a).......................................76
Report on Executive Compensation....................................77
Performance Graph...................................................78
Security Ownership of Certain Beneficial Owners and Management......79
Certain Relationships and Related Transactions......................80
PROPOSAL 4 -- RATIFICATION OF INDEPENDENT AUDITORS...........................82
PROPOSAL 5-- APPROVAL OF THE 1997 LONG-TERM INCENTIVE SHARE PLAN............83
PROPOSAL 6 --APPROVAL OF THE NON-EMPLOYEE TRUSTEE SHARE PLAN.................88
DESCRIPTION OF CAPITAL SHARES................................................92
FEDERAL INCOME TAX CONSIDERATIONS............................................96
SHAREHOLDER PROPOSALS........................................................98
INDEX TO FINANCIAL STATEMENTS...............................................F-1
ANNEXES
Annex A -- Investment Agreement
Annex B -- Form of Certificate of Designation
Annex C -- Form of Amended and Restated Declaration of Trust
Annex D -- Form of Incentive Share Plan
Annex E -- Form of Trustee Plan
Annex F -- Annual Report on Form 10-K, as amended
Annex G -- Quarterly Report on Form 10-Q
455009.26
-vi-
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "SUMMARY," "PROPOSAL 1 -- APPROVAL OF
THE INVESTMENT -- Background of and Reasons for the Proposal; Board of Trustees'
Recommendation" and "BUSINESS OF THE COMPANY FOLLOWING THE INVESTMENT AND THE
ACQUISITION" and elsewhere in this Proxy Statement constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. When used in this Proxy Statement, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance and achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, the following factors, as
well as those factors discussed elsewhere in the Company's filings with the
Commission: the successful implementation of the new business plan, changes in
the real estate market, prevailing interest rates and general economic
conditions, the level of competition confronting the Company and other factors
referred to in this Proxy Statement.
455009.26
-vii-
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and the annexes hereto. This summary is qualified in its
entirety by reference to the more detailed information and financial statements
contained or incorporated by reference in this Proxy Statement. Shareholders are
urged to read this Proxy Statement and the annexes hereto in their entirety.
The Company
Following the consummation of the Investment, the Company, through the
execution of its new business plan, will become a finance company designed
primarily to take advantage of opportunities to make high-yielding investments
in commercial real estate, including senior and junior commercial mortgage loans
and preferred equity investments (collectively "mezzanine investments"). The
Company believes that the recent significant recovery in commercial real estate
property values, coupled with the fundamental structural changes in the real
estate capital markets, has created increased demand for financing at the
mezzanine level, i.e., the position between senior lenders and controlling
equity owners. The Company believes that mezzanine investment opportunities --
if carefully underwritten, structured and monitored -- are attractive investment
opportunities that pose potentially less risk than direct equity ownership of
real property. In connection with the commencement of this new business plan,
concurrently with the consummation of the Investment, the Company will acquire
the business of Victor Capital and certain affiliates (the "Acquisition"),
including Victor Capital's existing management team for $5.0 million in
promissory notes. The Company believes that, by acquiring direct ownership of
Victor Capital's existing real estate investment banking, real estate advisory
and real estate asset management business and the services of Victor Capital's
experienced management and professional team, the Company will be better
positioned to implement the new business plan. In addition, the Acquisition will
eliminate conflicts of interest that might exist if Victor Capital remained an
affiliate of the Company under common control.
Under the new business plan, the Company will pursue investment and lending
opportunities intended to capitalize on inefficiencies in the real estate
capital and mortgage markets. Initially, the Company's investment program will
emphasize three general categories of real estate related assets.
o Mortgage Loans. The Company intends to pursue opportunities to provide
commercial mortgage loans ("Mortgage Loans") to real estate owners and
property developers who require interim financing until permanent
financing can be obtained. The Company's Mortgage Loans will generally
not be permanent in nature, but rather are intended to be of a
relatively short-term duration, with extension options as deemed
appropriate, and will typically require a balloon payment of principal
at maturity.
o Mezzanine Loans. The Company intends to originate higher-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 may take the form of
preferred equity investment in the borrower with the terms of the
preferred equity substantially the same as the loans described above
(collectively, "Mezzanine Loans").
o Subordinated Interests. The Company intends to pursue investments in
subordinated interests ("Subordinated Interests") in collateralized
commercial mortgage obligations and other commercial mortgage-backed
securities (collectively, "CMBS").
In furtherance of pursuing its business plan, the Company may acquire
mortgage loans originated by others, may originate other whole loans, including
construction loans, with the intent of selling the senior tranche of such loans
thereby creating a Subordinated Interest, may continue ownership of its existing
liquid mortgage-backed securities, may invest in other classes of mortgage
backed securities and may invest in an array of other similar secured or
unsecured debt or equity investments or products consistent with its business
plan.
455009.26
<PAGE>
The new business plan contemplates the continuation of Victor Capital's
real estate investment banking, real estate advisory and real estate asset
management businesses, which will be implemented by Victor Capital's experienced
management and professional teams. As a division of the Company, Victor Capital,
which will continue to operate under the name Victor Capital Group following the
Acquisition, will continue to provide services to real estate investors, owners
and developers and to financial institutions in connection with mortgage
financings, securitizations, joint ventures, debt and equity investments,
mergers and acquisitions, portfolio evaluations, restructurings and disposition
programs. The Company may acquire additional real estate financial services
businesses which are complementary to Victor Capital's business.
Concurrently with the consummation of the Investment, Veqtor will purchase
from CRIL the 6,959,592 Common Shares purchased by CRIL. Upon consummation of
such purchase from CRIL and the Investment, the Class A Preferred Shares
acquired by Veqtor, when added to Common Shares purchased by Veqtor, will
represent approximately 90% of the voting power of the Company (assuming
12,267,658 Class A Preferred Shares are purchased by Veqtor).
The Company has previously operated as a qualified real estate investment
trust ("REIT"), originating, acquiring, operating or holding income-producing
real property and mortgage related investments. In the early 1990s, the Company
experienced difficulties in its historical business and incurred significant
losses. Prior to the change in control following CRIL's purchase of the
6,959,593 Common Shares from The Peregrine Real Estate Trust (the "Former
Parent") in January 1997, the Company had been carrying out a plan to monetize
its remaining investments in real property and invest the proceeds in liquid
mortgage-backed securities which satisfy REIT asset qualification requirements
and mortgage loans in furtherance of its strategy of pursuing expansion
opportunities through mergers, asset acquisitions, joint ventures or other
business combinations or capital transactions. As of year end, the Company had
$14,115,000 invested in such mortgage-backed securities. The sale of the Former
Parent's 6,959,593 Common Shares to CRIL was consistent with the Board's plans
to expand the Company as approved by the Board of Trustees in accordance with
the Declaration of Trust.
Consummation of the Acquisition is subject to certain conditions including
approval of the Investment by the shareholders. For a description of the terms
and conditions of the Acquisition, please refer to the information under the
caption "PROPOSAL 3 -- ELECTION OF TRUSTEES -- Certain Relationship and Related
Transactions."
The Annual Meeting
Meeting Date and Record Date. The Annual Meeting will be held at 10:00
a.m., local time, on July __, 1997 at the Pacific Stock Exchange, 301 Pine
Street, San Francisco, California 94104. The close of business on June 12, 1997
has been fixed by the Board of Trustees as the record date for determining
shareholders entitled to notice of, and to vote at, the Annual Meeting (the
"Record Date"). Only holders of Common Shares as of the Record Date are entitled
to vote at the Annual Meeting and any adjournment or postponement thereof.
Matters to be Considered. At the Annual Meeting, the shareholders will
consider and vote upon the Investment, the Restated Declaration, the election of
the Nominees as trustees, the ratification of the appointment of the Company's
independent auditors, the Incentive Share Plan and the Trustee Plan and will
transact such 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 June 12, 1997, the Company has a total of 9,137,335
Common Shares outstanding, all of which are entitled to be voted on the
Proposals. Approval of the Amendments contained in the Restated Declaration
requires the affirmative vote of holders of 662/3% of the Common Shares.
Approval of the Investment, the election of each of the Nominees, the
ratification of the appointment of the Company's independent auditors, the
adoption of the Incentive Share Plan and the adoption of the Trustee Plan each
requires a majority of the votes cast by the shareholders at the Annual Meeting.
See "THE ANNUAL MEETING -- Voting Rights and Vote Required."
There is no requirement that any of the Proposals to be considered at the
Annual Meeting obtain a majority vote in favor of such Proposals from
shareholders not affiliated with CRIL in order for them to be implemented by the
Company. CRIL, which owns 6,959,593 Common Shares (approximately 76% of the
total number of outstanding
455009.26
2
<PAGE>
shares), has advised the Company that it intends to vote in favor of the
Proposals. Accordingly, with the vote of CRIL in favor of the Proposals, the
Investment, the Restated Declaration, Incentive Share Plan and the Trustee Plan
will be approved, the appointment of the Company's independent auditors will be
ratified and the Nominees will be elected trustees without the affirmative vote
of any other shareholders. See "THE ANNUAL MEETING -- Voting Rights and Vote
Required."
The Proposals
Proposal 1 -- Approval of the Investment. At the Annual Meeting, the
shareholders will be asked to approve the Investment, pursuant to which the
Company will issue and sell to Veqtor, upon the terms and conditions of the
Investment Agreement and the Certificate of Designation, approximately
12,267,658 Class A Preferred Shares for a purchase price of approximately $33
million.
The Investment will provide the Company with approximately $33 million in
new equity capital to be used in implementing the new business plan. The equity
capital to be provided by EGI and Victor Capital was a factor considered by the
Board of Trustees in approving the Former Parent's proposed sale to CRIL and the
new business plan. At that time, the Board of Trustees expressly approved the
preferred equity investment proposed by EGI and Victor Capital at a purchase
price of $2.69 per share (convertible at a rate of one Common Share for each
Class A Preferred Share).
The Investment, the Investment Agreement and the Certificate of Designation
are described more specifically herein under "PROPOSAL 1 -- APPROVAL OF THE
INVESTMENT" and "DESCRIPTION OF CAPITAL SHARES." A conformed copy of the
Investment Agreement is attached hereto as annex A and the form of Certificate
of Designation is attached hereto as annex B.
Proposal 2 -- Amendments to Declaration of Trust. At the Annual Meeting,
shareholders will be asked to approve the Amendments contained in the Restated
Declaration in the form attached hereto as annex C. The Restated Declaration
would amend the Existing Declaration, among other things, in the following
manner:
Capitalization. The Restated Declaration reclassifies the Common Shares as
"Class A Common Shares" and creates another class of common shares to be known
as "Class B Non-Voting Common Shares." See "DESCRIPTION OF CAPITAL SHARES."
Related Party Transactions. The Existing Declaration provides certain
restrictions upon transactions between the Company and certain large
shareholders and other affiliates. These provisions have been revised in the
Restated Declaration to indicate that no contract or transaction between a
Trustee, officer or shareholder and the Company shall be void or voidable solely
because of the interested party's relationship with the Company or the
interested party's presence at a meeting where such transaction was approved or
the interested party's votes were courted for such purpose if either (i) the
material facts as to the interested party's relationship or interest were
disclosed and the transaction was approved in good faith by either a majority of
the shareholders or a majority of the disinterested Trustees or (ii) the
contract or transaction is fair to the Company. In addition, Section 3.7 of the
Restated Declaration eliminates any "corporate opportunity" claims by the
Company or any shareholder with respect to any Trustee, officer or shareholder.
Change of Company Name. The Restated Declaration provides that the Company
will conduct its business under the name "Capital Trust."
Elimination of Provisions Relating to the Company's Qualification as a
REIT. Under the Company's new business plan, the Company will no longer be
operated as a "real estate investment trust." Several provisions of the Existing
Declaration provide limitations upon the conduct of the Company's business,
including providing investment policies intended to assure the Company's ability
to continue to be treated as a "real estate investment trust" for federal income
tax purposes. The Restated Declaration eliminates the provisions relating to the
Company's qualification as a real estate investment trust, including
restrictions on share ownership relating to continued real estate investment
trust qualification, restrictions upon investments permitted to be made by the
Company and the requirement that a majority of the members of the Board of
Trustees be independent.
455009.26
3
<PAGE>
Board of Trustees. The Restated Declaration increases the maximum
permissible size of the Board of Trustees from seven to 21 and provides that
Trustees will be elected at each annual meeting by a plurality of the shares
entitled to vote at such meeting. In addition, the requirement that a majority
of the members of the Board of Trustees be independent has been eliminated.
Shareholders will vote on the Amendments as separate sub-proposals. The
sub-proposals to approve the Amendments comprise a group of related and
interdependent matters for shareholder action. Implementation of each of the
Amendments is conditioned upon approval of the other Amendments. Therefore,
unless each of the Amendments receives the requisite vote in favor of approval,
none of the other Amendments will be implemented.
The Restated Declaration is described more specifically herein under
"PROPOSAL 2 -- APPROVAL OF THE RESTATED DECLARATION."
Proposal 3 -- Election of Trustees. At the Annual Meeting, the shareholders
will be asked to elect the Company's seven Nominees as trustees, each to serve
until the next annual meeting of shareholders of the Company or until their
successors have been elected and shall have qualified.
The Nominees are discussed more specifically herein under "PROPOSAL 3 --
ELECTION OF TRUSTEES."
Proposal 4 -- Ratification of Appointment of Independent Auditors. At the
Annual Meeting, the shareholders will be asked to ratify the appointment of
Ernst & Young LLP as the independent auditors of the Company for fiscal year
1997. The appointment of Ernst & Young LLP as independent auditors is discussed
more specifically herein under "PROPOSAL 4 -- RATIFICATION OF INDEPENDENT
AUDITORS."
Proposal 5 -- Approval of the 1997 Long-term Incentive Share Plan. At the
Annual Meeting, the shareholders will be asked to approve the adoption of the
Incentive Share Plan for the Company. The proposed Incentive Share Plan is
described more specifically herein under "PROPOSAL 5 -- APPROVAL OF THE 1997
LONG-TERM INCENTIVE SHARE PLAN."
Proposal 6 -- Approval of The Non-Employee Trustee Share Plan. At the
Annual Meeting, the shareholders will be asked to approve the adoption of the
Trustee Plan for the Company. The proposed Trustee Plan is described more
specifically herein under "PROPOSAL 6 -- APPROVAL OF THE NON-EMPLOYEE TRUSTEE
SHARE PLAN.."
Interests of the Principal Shareholder and Management in the Investment and
the Acquisition
In considering the recommendation of the Company's Board of Trustees with
respect to the Investment, shareholders should be aware that the Company's
largest shareholder, CRIL, and certain trustees of the Company have certain
interests in the Investment that are in addition to the interests of the Company
and the shareholders generally. Mr. Zell, who may be deemed to be the beneficial
owner of the Common Shares held by CRIL, Mr. Garrabrant and Mr. Klopp, trustees
of the Company, will beneficially own an aggregate of 63.8% of the ownership
interests in Veqtor which will acquire the Class A Preferred Shares pursuant to
the Investment. Messrs. Zell, Garrabrant and Klopp will own approximately 34.3%,
4.5% and 25% of the interests in Veqtor. Upon consummation of the Investment,
the Company will acquire Victor Capital and certain affiliates, approximately
50% of which are owned directly or indirectly by Mr. Klopp. To the extent
Messrs. Zell, Garrabrant and Klopp derive benefits from the Investment and
Acquisition, their interests conflict with shareholders generally, since
shareholders will not derive similar benefits from consummation of such
transactions. See "PROPOSAL 1 -- APPROVAL OF THE INVESTMENT--Interests of the
Principal Shareholder and Management in the Investment and the Acquisition."
Recommendation of the Board of Trustees
The Board of Trustees has unanimously determined to recommend a vote in
favor of approval of each of the Proposals. The Board of Trustees believes that
the Investment is fair to, and in the best interest of, the shareholders of the
Company. For a discussion of the factors considered by the Board of Trustees in
reaching its decision to
455009.26
4
<PAGE>
recommend approval of the Investment, see "PROPOSAL 1 -- APPROVAL OF THE
INVESTMENT--Background of and Reasons for the Proposal; Board of Trustees'
Recommendation."
Certain Tax Considerations
The shareholders will not recognize gain or loss for federal income tax
purposes as a result of the Investment or the adoption of the Restated
Declaration. In addition, the Company does not anticipate incurring any federal
income tax liability as a result of the Investment. However, after consummation
of the Investment, the Company intends to conduct its business in a manner that
will cause it to be ineligible to be treated as a real estate investment trust
for federal income tax purposes. See "FEDERAL INCOME TAX CONSIDERATIONS."
Registration Rights
The Investment Agreement provides that Veqtor may request registration
under the Securities Act of all or any portion of the shares of the Company held
by Veqtor on three occasions. All costs of such registration (other than
underwriting discounts and selling commissions and fees and expenses of Veqtor's
legal counsel) are to be paid by the Company. See "PROPOSAL 1 -- APPROVAL OF THE
INVESTMENT--The Investment Agreement."
No Appraisal Rights
Under California law, shareholders are not entitled to any dissenters'
appraisal rights in connection with the Investment. See "RISK FACTORS--Risk
Factors Relating to the Investment--No Appraisal Rights."
455009.26
5
<PAGE>
Ownership Structure of the Company
The following diagrams depict the ownership of the Company before and after
the Investment:
Before the Investment
[GRAPHIC OMITTED]
455009.26
6
<PAGE>
After the Investment
[GRAPHIC OMITTED]
455009.26
7
<PAGE>
RISK FACTORS
While the Board of Trustees recommends approval of the Investment and is of
the opinion that the Investment proposal is fair to, and in the best interest
of, the Company and its shareholders, the Company's shareholders should
carefully consider the following factors in determining whether to approve the
Investment and the other proposals set forth in this Proxy Statement.
Risk Factors Relating to the Investment
Dilution of Shareholders' Ownership Interest. The Investment will increase
the number of outstanding shares of the Company by approximately 138% and
significantly reduce the ownership interest percentage of the existing public
shareholders from approximately 24% to approximately 10%. After giving effect to
the Investment and Acquisition as of January 1, 1996, the Company's 1996
earnings per share on a pro forma basis would have changed from $(.05) to $(.08)
per share and the Company's first quarter 1997 earnings per share on a pro forma
basis would have changed from $(.06) to $(.09) per share.
Impact on Market Price. The Common Shares are currently publicly traded.
The market price of the Common Shares may be affected by Veqtor's acquisition
following consummation of the Investment whereby the Company will issue up to
12,639,405 Class A Preferred Shares that are convertible into Class A Common
Shares at a rate of one Common Share for each Class A Preferred Share, subject
to adjustment to avoid dilution. The NYSE listing maintenance requirements
require listed companies have at least average net income of $600,000 for a
three-year period and a market value of outstanding common stock of at least $8
million. The Company does not meet the net income requirement which would
provide the NYSE a basis for commencing de-listing proceedings. In the event the
Class A Common Shares were de-listed, the trading liquidity in the Class A
Common Shares would be adversely affected and shareholders would have a
difficult time selling their Class A Common Shares in the trading market.
Reduction of Voting Power. Upon consummation of the Investment, the
existing public shareholders will have their voting power significantly reduced
as a result of the reduction in their proportionate ownership of voting shares
from approximately 24% to approximately 10%.
No Appraisal Rights. Holders of Common Shares will not have any statutory
appraisal rights under California law to elect to have the fair value of their
Common Shares judicially appraised and paid to them in cash in connection with
or as a result of the Investment to be acted upon at the Annual Meeting.
Effect of Restrictive Covenants. The Investment Agreement and the
Certificate of Designation each contain certain covenants by the Company which
are protective of the Class A Preferred Shares, including limitations on the
Company's ability to amend the Restated Declaration, issue additional shares,
declare or pay any dividend on other classes of shares, incur indebtedness, or
merge, consolidate or sell the Company's assets. The Company has also agreed to
redeem the Class A Preferred Shares for cash in the event of a "change in
control" as defined in the Certificate of Designation. Such covenants will
restrict the Company from engaging in any significant financing or major
transaction without Veqtor's consent. See "PROPOSAL 1 -- APPROVAL OF THE
INVESTMENT -- The Investment Agreement" and "DESCRIPTION OF CAPITAL SHARES."
No Assurance of Use of Loss Carry-forward. The acquisition in January 1997
by CRIL of a 76% interest in the Company resulted in a change in ownership of
the Company under Section 382 of the Code, and the Investment is expected to
result in another change in ownership of the Company, for purposes of
limitations on the use of the Company's net operating loss and capital loss
Carry-forward ("Loss Carry-forward"). The changes in ownership are expected to
result in a limitation on the amount of Loss Carry-forward that may be used to
offset the taxable income of the Company, if any, in an amount equal to
approximately $1.5 million per year. The actual amount of this limitation may
vary, depending upon the actual data used in the foregoing calculations, which
will be made as of the effective date of the change in the Company's ownership.
In addition to this limitation, if the Company does not continue its business
enterprise at all times during the two-year period beginning on the date of the
Closing, the amount of Loss Carry-forward that may be used to offset taxable
income will be, subject to certain exceptions,
455009.26
8
<PAGE>
reduced to zero. The net operating loss limitation may also be reduced if the
Company has substantial non-business assets. Although the Company anticipates
that it will comply with the requirements of Section 382, there can be no
assurance that it will be able to do so and that the expected Loss
Carry-forwards will be used to offset taxable income.
Control by Veqtor. Upon consummation of the Investment and the purchase of
6,959,593 Common Shares from CRIL, Veqtor will beneficially own, in the
aggregate, up to 19,598,998 or 90% of the outstanding voting shares of the
Company after giving effect to the Investment. As a result, Veqtor will have the
ability to control the election of trustees of the Company and the vote on
actions requiring shareholder approval including (i) amendments to the Restated
Declaration of Trust and (ii) mergers or sales of all or substantially all of
the assets of the Company, and will otherwise be a position to control the
policies and affairs of the Company.
Anti-Takeover Effect. Veqtor's controlling ownership of the Company's
outstanding shares upon completion of the Investment will have the effect of
precluding the acquisition of the Company by a third party without Veqtor's
consent.
Risk Factors Relating to the Company's New Business Plan and the Acquisition
Recent Operating Losses. The Company has incurred significant net losses
since 1992. The Company had net losses for the five years ended 1992, 1993,
1994, 1995 and 1996 and for the period ending March 31, 1997 of approximately
($10.2 million), ($8.1 million), ($36,000), ($2.8 million), ($414,000) and
($508,000), respectively. Such losses were caused by the deterioration in the
performance of the Company's income producing property resulting from reduced
and low levels of occupancy and from valuation write-downs and the sale of
certain properties at a loss. Assuming consummation of the Investment and the
Acquisition, the Company had pro forma net income of approximately $1.5 million
for the year ended 1996 and a pro forma net loss of approximately ($46,000) for
the three months ended March 31, 1997. There can be no assurance that the
Company will not incur operating losses in the future following implementation
of the proposed new business plan.
No Assurance of Successful Implementation of New Business Plan. The Company
will be subject to the risks generally associated with the development and
implementation of a new business plan and will need to successfully develop
operating policies and strategies in connection therewith for which there can be
no assurance. The Company will be dependent upon the experience and expertise of
its new management team in administering the new business plan. Certain officers
and employees of Victor Capital who will assume similar positions with the
Company have significant experience in managing real estate assets, including
Mortgage Loans and Mezzanine Loans, and otherwise have analyzed and bid on
Subordinated Interest investment opportunities. However, such officers and
employees have never managed a finance company as is contemplated in the new
business plan, nor have they closed on any Subordinated Interest investment
transaction. There can be no assurance that the Company will not encounter
significant difficulties in integrating Victor Capital's existing operations
with those proposed for the Company. There can be no assurance that the Company
will be able to implement successfully the strategies that the Company intends
to pursue and achieve profitable operations.
Termination of REIT Status. Following implementation of the proposed new
business plan (and the reinvestment of earnings contemplated thereby), the
Company's status as a REIT will terminate since it will be unable to comply with
the requirement that it distribute at least 95% of its REIT taxable income. Once
the Company's status as a REIT terminates, it will no longer be required to
distribute at least 95% of its REIT taxable income to shareholders. As a
consequence of termination of its REIT status, the Company will be subject to
corporate level taxation and will no longer be entitled to a deduction for any
dividends paid to shareholders. See "FEDERAL INCOME TAX CONSIDERATIONS."
Growth Dependent on Leverage; Risks from Use of Leverage. The success of
the Company's new 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 significantly leverage its portfolio through secured and unsecured
borrowings, generally through the use of bank credit facilities, warehouse lines
of credit on pools of real estate and mortgage loans, mortgage loans on real
estate, reverse repurchase agreements and other borrowings. The Company's
ability to obtain the leverage necessary for execution of its business plan will
ultimately depend upon its ability to maintain interest coverage ratios meeting
market underwriting standards which will vary according to lenders' assessment
of the creditworthiness of
455009.26
9
<PAGE>
the Company and the terms of the borrowings. The percentage of leverage used
will vary depending on the Company's estimate of the stability of the
portfolio's cash flow. To the extent that changes in market conditions cause the
cost of such financing to increase relative to the income that can be derived
from the assets acquired, the Company may reduce the amount of leverage it
utilizes. In leveraging its portfolio, the Company plans not to exceed a debt to
equity ratio of 5:1. The Company has agreed in the Investment Agreement that,
without the prior written consent of the holders of a majority of the
outstanding Class A Preferred Shares, it shall not incur any indebtedness if the
Company's debt-to-equity ratio would exceed 5:1.
Leverage creates an opportunity for increased net income, but at the same
time creates risks. For example, leveraging magnifies changes in the net worth
of the Company. The Company will leverage assets only when there is an
expectation that it will enhance returns, although there can be no assurance
that the Company's use of leverage will prove to be beneficial. Moreover, there
can be no assurance that the Company will be able to meet its debt service
obligations and, to the extent that it cannot, 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.
Dependence on Available Investments. The results of the Company's future
operations under the new business plan will be dependent upon the availability
of investment opportunities for the acquisition of investment assets. It may
take considerable time for the Company to find and consummate appropriate
investments. In general, the availability of desirable investment opportunities
and the results of the Company's operations will be affected by the level and
volatility of interest rates, by conditions in the housing and financial
markets, and general economic conditions. No assurances can be given that the
Company will be successful in acquiring economically desirable assets or that
the assets, once acquired, will maintain their economic desirability.
Risks Associated with Use of Proceeds. A substantial portion of the net
proceeds of the Investment will be producing little income immediately after the
Closing. The Company intends temporarily to invest the net proceeds of the
Investment in readily marketable, interest-bearing securities until the Company
finds appropriate opportunities to make Mortgage Loans and Mezzanine Loans to
property owners or developers or Subordinated Interests in which to invest.
There can be no assurance, however, that the Company will locate borrowers that
meet its lending or investment criteria or identify Subordinated Interests or
that any such assets will produce a return on the Company's investment.
General Risks of Investing in Real Estate. The ultimate performance of the
Company's proposed investments under the New Business Plan and its existing
portfolio of mortgage-backed securities will be subject to the varying degrees
of risk generally incident to the ownership and operation of the underlying real
property. The ultimate value of the Company's security in the underlying real
property depends upon the owners' ability to operate the real properties in a
manner sufficient to maintain or increase revenues in excess of operating
expenses and debt service or, in the case of real property leased to a single
lessee, the ability of the lessee to make rental payments. Revenues may be
adversely affected by adverse changes in national economic conditions, adverse
changes in local market conditions due to changes in general or local economic
conditions and neighborhood characteristics, competition from other properties
offering the same or similar services, changes in interest rates and in the
availability, cost and terms of mortgage funds, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements (particularly in older structures), changes in
real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of God, including
earthquakes, hurricanes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors which are beyond the control of the real property owners and the
Company. In the event that any of the properties underlying the Company's
investments experience any of the foregoing events or occurrences, the value and
return on such investments would be negatively impacted.
Illiquidity of Real Estate. Real estate investments are relatively
illiquid. The ability of the Company to vary its portfolio of proposed and
current investments in response to changes in economic and other conditions will
be limited. No assurances can be given that the fair market value of any of the
real property serving as security will not decrease in the future leaving the
Company under-collateralized. It would be difficult to sell an
under-collateralized investment, and if the Company needed to do so, it is
likely that such investment would be sold at a loss.
455009.26
10
<PAGE>
Risks Associated with Losses Not Covered by Insurance. The Company intends
to ensure that its borrowers maintain comprehensive insurance on their
properties, including liability and fire and extended coverage, in amounts
sufficient to permit the replacement of the properties in the event of a total
loss, subject to applicable deductibles. There are certain types of losses,
however, generally of a catastrophic nature, such as earthquakes, floods and
hurricanes, that may be uninsurable or not economically insurable. Inflation,
changes in building codes and ordinances, environmental considerations, and
other factors also might make it infeasible to use insurance proceeds to replace
a property if it is damaged or destroyed. Under such circumstances, the
insurance proceeds received by the property owner might not be adequate to
restore its economic position with respect to the affected property which would
reduce the property owner's economic incentive to avoid a default on its loan
obligation to the Company or to preserve the value of the property in which the
Company has a preferred equity interest, as the case may be.
Risk from Multifamily Residential, Commercial and Construction Lending
Activities. The Company may originate or acquire loans secured by existing
commercial real estate or multifamily residential real estate, including loans
that are subordinate to first liens on such real estate. Loans that are
subordinate to first liens on real estate are subject to greater risks of loss
than first lien mortgage loans. An overall decline in the real estate market
could adversely affect the value of the property securing the loans such that
the aggregate outstanding balance of the loan made by the Company and the
balance of the more senior loan on the property exceed the value of the
property. The Company may, in some cases, address this risk by providing a
Mezzanine Loan to the partnership that owns property, secured by a partnership
interest in such owner, so that, in the event of a default, the Company can take
over the management of the property and seek to reduce the amount of losses.
There can be no assurance, however, that it will be able to do so.
Alternatively, the Mezzanine Loans could take the form of a non-voting preferred
equity investment in a single purpose entity with terms substantially the same
as described above.
Yield Assessment Risk. Before making any investments, the Company will
consider the expected yield of the investment and the factors that may influence
the yield actually obtained on such investment. These considerations will affect
the Company's decision whether to purchase such an investment and the price
offered for such an investment. Despite new management's experience in
evaluating potential investments, no assurances can be given that the Company
can make an accurate assessment of the yield to be produced by an investment.
Many factors beyond the control of the Company are likely to influence the yield
on the Company's investments, including, but not limited to, competitive
conditions in the local real estate market, local and general economic
conditions and the quality of management of the underlying property.
Taxable Income Without Economic Income. The Company intends to acquire
Subordinated Interests which may have significant original issue discounts
("OIDs") as well as residual interests which may generate taxable income which
may exceed the actual economic income which is generated from these investments.
Interest Rate Risk. The value of mortgage loans and investments, including
Subordinated Interests and other mortgage-backed securities, is affected
substantially by prepayment rates on the mortgage loans or underlying mortgage
collateral. Prepayment rates are influenced by changes in current interest rates
and a variety of economic, geographic and other factors and cannot be predicted
with certainty. In periods of declining mortgage interest rates, prepayments
generally increase. If general interest rates also decline, the amounts
available for reinvestment by the Company during such periods are likely to be
reinvested at lower interest rates than the Company was earning on prepaid
mortgage loans or investments. Mortgage loans and investments may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed-income securities from declining interest rates because of the risk of
prepayment. In general, changes in both prepayment rates and interest rates will
change the total return on mortgage loans and investments.
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 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.
455009.26
11
<PAGE>
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
may employ various hedging strategies to limit the effects of changes in
interest rates on its operations, including engaging in interest rate swaps,
caps, floors and other interest rate exchange contracts. There can be no
assurance that the profitability of the Company will not be adversely affected
during any period as a result of changing interest rates. In addition, hedging
transactions involve certain additional risks such as counter-party credit risk,
legal enforceability of hedging contracts and the risk that unanticipated and
significant changes in interest will cause a significant loss of basis in the
contract. With regard to the loss of basis in a hedging contract, indices upon
which such contracts are priced may be more or less variable than the indices
upon which the hedged loans are priced, thereby making the hedge less effective.
There can be no assurance that the Company will be able to adequately protect
against the foregoing risks and that the Company will ultimately realize an
economic benefit from any hedging contract it enters into.
Effect of Changes in Economic Conditions. The Company's success is
dependent upon the general economic conditions in the geographic areas in which
a substantial number of its investments are located. While the Company has no
plans to concentrate its investment activity in any particular geographic areas,
there will be no limitations on the Company's ability to do so. Adverse changes
in national economic conditions or in the economic conditions of the regions in
which the Company conducts substantial business likely would have an adverse
effect on real estate values, interest rates and, accordingly, the Company's
investments.
Competition. The Company intends to engage in a highly competitive
business. The acquisition of Mortgage and Mezzanine Loans and Subordinated
Interests is often based on competitive bidding. In addition, the Company's
competitors may seek to establish relationships with the financial institutions
and other firms from whom the Company intends to purchase such assets. Many of
the Company's anticipated competitors are significantly larger than the Company,
have established operating histories and procedures, may have access to greater
capital and other resources, and may have other advantages over the Company in
conducting certain businesses and providing certain services. Separately, Victor
Capital competes with national, regional, and local firms, many of which possess
greater financial, marketing and other resources than Victor Capital. While many
of these firms do not currently provide all of the services which Victor Capital
provides, there can be no assurance that other firms will not engage in such
activities in the future.
Consequences of Not Qualifying for Investment Company Act Exemption. The
Company intends to invest in Subordinated Interests that may not constitute
Qualifying Interests (as defined herein) within the meaning of the Investment
Company Act of 1940 (the "Investment Company Act"). The Company intends to limit
the amount of such investments in Subordinated Interests that do not constitute
Qualifying Interests ("Non-Qualifying Investments") so as to maintain the
availability of an exemption from required registration as an investment company
under the Investment Company Act. If the Company does not limit the amount of
Non-Qualifying Investments so as to maintain the availability of the foregoing
exemption, or Subordinated Interests believed by the Company to be Qualifying
Interests are determined by the Commission or its Staff to be Non-Qualifying
Investments (and the Non-Qualifying Investments exceed prescribed limitations),
the Company could, among other things, be required either (a) to change the
manner in which it conducts its operations to avoid being required to register
as an investment company or (b) to register as an investment company, either of
which could have a material adverse effect on the Company and the market price
for the shares. Registration as an investment company would result in, among
other things, a significantly reduced ability to utilize leverage in the
Company's business and significantly increased operating expenses. See "BUSINESS
OF THE COMPANY FOLLOWING THE INVESTMENT AND THE ACQUISITION--Categories of
Investment."
Limited Trading Market. While the Company's Common Shares are traded on the
New York Stock Exchange ("NYSE") and the Pacific Stock Exchange ("PSE"), trading
volume is limited and sporadic. There can be no assurance that an active and
liquid trading market will develop following implementation of the Company's new
business plan. There can be no assurance that the Company will continue to meet
the maintenance criteria for continued listing on the NYSE or PSE.
455009.26
12
<PAGE>
Risk from Ownership of Subordinated Interests in Pools of Commercial
Mortgage Loans. The Company intends to acquire a significant amount of
Subordinated Interests, including "first loss" unrated, credit support
Subordinated Interests. A first loss security is the most subordinated class of
a multi-class issuance of pass-through or debt securities and is the first to
bear the loss upon a default on the underlying collateral. Such classes are
subject to special risks, including a substantially greater risk of loss of
principal and non-payment of interest than more senior, rated classes. While the
market values of most Subordinated Interest classes tend to react less to
fluctuations in interest rate levels than more senior, rated classes, the market
values of Subordinated Interests classes tend to be more sensitive to changes in
economic conditions than more senior, rated classes. The ratings assigned to
securities by a nationally-recognized rating agency reflect such agency's
assessment of the ability of the issuer to make timely payments of principal and
interest and the nature and quality of the collateral underlying the
obligations. As a result of these and other factors, Subordinated Interests
generally are not actively traded and may not provide holders thereof with
liquidity of investment.
The yield to maturity on Subordinated Interests of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying mortgage loans and the timing of any such defaults
or losses. Because the Subordinated Interests of the type the Company intends to
acquire generally have no credit support, to the extent there are realized
losses on the mortgage loans comprising the mortgage collateral for such
classes, the Company may not recover the full amount or, indeed, any of its
initial investment in such Subordinated Interests. The Company may acquire
non-performing (i.e. defaulted) Subordinated Interests. Such investments involve
risks that the value of the mortgage collateral will decline below the amount
necessary to provide full recovery to senior classes, in which event the
Company's entire investment would be lost.
When the Company acquires a Subordinated Interest, it may not acquire the
right to service the underlying mortgage loans, even those that become
defaulted, although the Company may seek to obtain Special Servicing Rights (as
defined herein) (i.e. rights that permit the Company to make certain
loss-minimizing decisions with respect to defaulted mortgages such as decisions
with respect to the prosecution of foreclosure proceedings, the workout or
modification of the loan provisions and the preservation of the value of the
collateral generally, including property management and maintenance decisions)
with respect to such loans. The servicer of the mortgage loans is responsible to
holders of the senior classes of CMBS, whose interests may not be the same as
those of the holder of the Subordinated Interest. Accordingly, the underlying
mortgage loans may not be serviced in the same manner as they would be serviced
by the Company or in a manner that is most advantageous to the Company as the
holder of the Subordinated Interest. While Victor Capital has performed many of
the functions of a special servicer, neither Victor Capital nor the Company is
currently a rated special servicer. Although the Company plans to seek to become
rated as a rated special servicer, or acquire a rated special servicer, there
can be no assurance as to when the Company will be able to accomplish the
foregoing. Until the Company can act as a rated special servicer, it is unlikely
that it will be able to obtain Special Servicing Rights with respect to mortgage
loans underlying a significant number of Subordinated Interests investments. See
"BUSINESS OF THE COMPANY FOLLOWING THE INVESTMENT AND THE
ACQUISITION--Categories of Investment."
The subordination of Subordinated Interests to more senior classes may
adversely affect the yield on the Subordinated Interests even if realized losses
are not ultimately allocated to such classes. On any payment date, interest and
principal are paid on the more senior classes before interest and principal are
paid with respect to the unrated or non-investment grade credit support classes.
Typically, interest deferred on these credit support classes is payable on
subsequent payment dates to the extent funds are available, but such deferral
may not itself bear interest. Such deferral of interest will affect adversely
the yield on the Subordinated Interests.
The yield of the Subordinated Interests also will be affected by the rate
and timing of payments of principal (including prepayments, repurchase, defaults
and liquidations) on the mortgage loans underlying a series of CMBS. The rate of
principal payments may vary significantly over time depending on a variety of
factors such as the level of prevailing mortgage loan interest rates and
economic, demographic, tax, legal and other factors. Prepayments on the mortgage
loans underlying a series of mortgage-back securities ("MBS") are generally
allocated to the more senior classes of CMBS until those classes are paid in
full or until the end of a lock-out period, typically of five years or more.
Generally, prepayments of principal from the mortgage loans are not received by
the Subordinated Interest holders for a period of at least five years. As a
result, the weighted-average lives of the Subordinated Interests may be longer
than would otherwise be the case. To the extent that the holder of Subordinated
Interests is not paid compensating interest on interest shortfalls due to
prepayments, liquidations or otherwise, the yield on the Subordinated Interests
may be affected adversely.
455009.26
13
<PAGE>
Risk of Holding Existing Mortgage-Backed Securities. The Company may
continue to hold its existing portfolio of mortgage-backed securities. The
Company's return on such investments will be subject to the prepayment rates of
the underlying mortgage collateral. Mortgage prepayment notes vary depending on
such factors as mortgage interest rates, conditions on the housing and financial
markets and general economic conditions. In a period of extremely rapid
prepayments, the Company may be repaid its principal earlier than expected in
which event the return on investment would be commensurately reduced.
Real Estate Advisory Services Revenues Which are Transactional in Nature. A
significant component of Victor Capital's revenue is transactional in nature and
is subject to the real estate markets generally. See "-- General Risks of
Investing in Real Estate." Revenues generated from individual transactions are
generally non-recurring and are earned from period to period as transactions
close. The Company's results of operations will be subject to inter-period
variations in the number of transactions closed. Although Victor Capital has
been successful in generating revenues in adverse and unfavorable real estate
markets, there can be no assurance that the Company's investment banking, real
estate advisory and real estate asset management services businesses will be
able to adapt as Victor Capital has in the past for changes in the real estate
markets. For the pro forma year ended 1996 and the pro forma three months ended
March 31, 1997, the proportion of the Company's revenues attributable to Victor
Capital was 63% and 73%, respectively.
Concentration of Revenues from Real Estate Advisory Services. Although
Victor Capital has a significant client roster that has continually expanded
since its organization, historically, Victor Capital has earned a significant
percentage of its total revenues from a small number of clients. In order to
diversify its credit and concentration risk, Victor Capital has focused on
expanding its client base and its real estate asset management business to
create longer-term, and hence more stable, recurring fee income. Although Victor
Capital has been successful in implementing the aforementioned expansion
strategies, there can be no assurance that the Company will continue to be
successful in this regard.
Reliance on Senior Management. Senior members of Victor Capital are
expected to play a significant role in the start-up and on-going business of the
Company under its new business plan. These endeavors will likely require
significant time and attention thereby distracting management from Victor
Capital's historical core business. While Victor Capital's professional
management team will be dedicated to the Company's on-going investment banking,
real estate advisory and real estate asset management business, the Company may
need to retain additional employees to continue to service its existing client
base and to continue to grow such business. In addition, Victor Capital's
management team has never managed a finance company, nor have they closed on any
Subordinated Interest investment transactions. See "-- No Assurance of
Successful Implementation of New Business Plan."
Risks Associated with Unspecified Acquisitions. While the Company has no
current plans with respect to the following, the Company may acquire
complementary businesses in furtherance of executing its new business plan. Any
decision to pursue acquisition opportunities will be in the discretion of the
Company's management and may be consummated without prior notice or shareholder
approval. In such instances, shareholders will be relying the Company's
management to assess the relative benefits and risks associated with any such
acquisition.
Management Discretion with Investment Policy. Under the new business plan,
the Company will emphasize investments in Mortgage Loans, Mezzanine Loans and
Subordinated Interests. The Company will not have any policy and will not be
subject to any restrictions limiting the percentage of total investments that
may be invested in any particular category of investment other than the
limitations discussed under "-- Consequences of Not Qualifying for Investment
Company Act Exemption." Subject to the foregoing, the Company's management will
have complete discretion as to the relative percentages of the Company's
investments that are invested in any investment category. Shareholders will be
relying on management to determine the optimum mix of the Company's investments.
Effect of Environmental Compliance Costs. Operating costs and the value of
a borrower's property may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations, as well
as the cost of future legislation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic
455009.26
14
<PAGE>
substances. Therefore, an environmental liability could have a material adverse
effect on the underlying value of the borrower's real property.
When commercially practicable, the Company intends to obtain Phase I
environmental assessments on all properties owned by prospective borrowers prior
to making any loan or investment. The purpose of Phase I environmental
assessments is to identify potential environmental contamination that is made
apparent from historical reviews of the properties, reviews of certain public
records, preliminary investigations of the sites and surrounding properties, and
screening for the presence of hazardous substances, toxic substances and
underground storage tanks. It is possible, however, that these reports will not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware.
Risk from Ownership of Real Properties with Known Environmental Problems.
The Company may invest in mortgage loans secured by real estate with known
environmental problems that materially impair the value of the real estate. If
so, the Company will take certain steps to limit its liability for such
environmental problems, such as establishing guidelines based on the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
observance of which will reduce the risk that the Company would be held
responsible for remediating environmental conditions on such property. Despite
these steps, there are risks associated with such an investment. The Company
intends to limit its investments in environmentally distressed real property.
Risk from Ownership of REMIC Residual Interests. The Company also may
invest in certain classes of MBS that are designated as the residual interest in
the related real estate mortgage conduit ("REMIC") as defined in section 860D of
the Code ("REMIC Residual Interests") and that receive principal and interest
payments in excess of amounts needed to make payments on other classes of
securities or to fund a reserve account. Principal and interest amounts
otherwise allocable to such REMIC Residual Interests are used to protect the
senior classes of securities from credit losses on the underlying Mortgage Loan.
Moreover, in any given year, the taxable income produced by a REMIC Residual
Interest may exceed its cash flow. Such investments are subject to the risk of
defaults on the underlying mortgages, the risk of substantial prepayments of the
underlying mortgages as a result of changes in interest rates and other real
estate risks associated with the Company's proposed investments.
No Opportunity To Co-Invest. With regard to Victor Capital's real estate
asset management business, senior employees of Victor Capital are from
time-to-time invited to co-invest with the firm's real estate asset management
clients. All of these investments are made by the employees out of their own
personal funds, are purchased on the same terms as made available to the client,
are subject to Victor Capital's fees, and are encouraged by Victor Capital's
clients in an effort to align Victor Capital's employees' interests with the
client's interests. While the Company and its employees will not be precluded
from co-investing with its clients or making similar equity investments in other
circumstances as opportunities arise in the course of the Company's asset
management business, shareholders will not be afforded the opportunity to
co-invest with Victor Capital's asset management clients. Any profits made by
the Company's employees from this co-investing activity will not be shared with
the Company or its shareholders.
Risk of Taxation as a Personal Holding Company. Following the Investment,
the Company may be deemed a personal holding company for federal tax purposes
under the Code and thereby subject to additional tax on its undistributed
personal holding company income. Such undistributed personal holding company
income is taxed at a rate of 39.6% The Company will seek to avail itself of an
exception for a lending or finance company that meet certain tests specified in
the Code. Although the Company will endeavor to meet the requirements for
qualification as a lending or finance company, there can be no assurance that it
be able to do so. In the event the Company is subject to the foregoing
additional taxes, its after tax income will be correspondingly reduced. See
"FEDERAL INCOME TAX CONSIDERATIONS."
455009.26
15
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth certain combined short-term obligations and
the combined capitalization of the Company as of March 31, 1997 as adjusted to
give pro forma effect to the Investment, the Acquisition and related
transactions. The information set forth in the table below should be read in
conjunction with the Unaudited Pro Forma Condensed Combined Financial Statements
and related notes included elsewhere herein.
<TABLE>
<CAPTION>
As of March 31, 1997
Historical Pro Forma
--------------------------------------
(In Thousands)
<S> <C> <C>
Short-Term Debt:(1)
Current maturities of long-term notes payable...................... $ - $ 640
Total short-term debt.............................................. $ - $ 640
----------------- -----------------
Long-Term Debt(2)
Long-term notes payable............................................ $ 880 $ 4,140
----------------- -----------------
Total long-term debt............................................... 880 4,140
Shareholders' Equity(3)(4)
Preferred Shares, $1 par value; 12,267,658 Class A 9.5% Cumulative
Convertible Preferred Shares authorized, issued and outstanding on a
pro forma basis.................................................... - 12,268
Common Shares, $1 par value; 9,137,335 Class A Common Shares
authorized, issued and outstanding................................. 9,137 9,137
Additional paid-in capital......................................... 55,145 74,877
Unrealized holding income on marketable securities................. 19 19
Accumulated deficit................................................ (40,270) (40,270)
----------------- -----------------
Total Shareholders' Equity......................................... 24,031 56,031
----------------- -----------------
Total Capitalization (5)............................................... $ 24,911 $ 60,811
================= =================
</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, to be issued in connection with the Acquisition (the "Acquisition
Notes"), net of an unamortized discount of $360,000. See "PROPOSAL 3 --
ELECTION OF TRUSTEES -- Certain Relationships and Related Transactions."
(2) Included on a pro forma basis is the long-term portion of the Acquisition
Notes, net of an unamortized discount of $740,000.
(3) Assumes 12,267,658 Class A Preferred Shares are purchased by Veqtor for
approximately $33 million. Gives effect to the change in the Company's
capitalization to include the Class A Preferred Shares. $1 million in
transaction costs is reflected as a reduction to additional paid-in capital
on a pro forma basis. Does not include Class A Common Shares and Class B
Common Shares which may be issued upon conversion of Preferred Shares or
potential conversion of Class A Preferred Shares into Class B Preferred
Shares. See "PROPOSAL 2 -- APPROVAL OF RESTATED DECLARATION."
(4) The Declaration and Restated Declaration both provide that the total number
of Common Shares and Preferred Shares which may be issued by the Board of
trustees is not limited.
(5) Total Capitalization includes short-term and long-term debt and
shareholders' equity.
455009.26
16
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION OF THE COMPANY
The following unaudited pro forma condensed combined financial statements
assume completion of the Investment and the Acquisition and related transactions
by the Company. The pro forma condensed combined financial statements are based
on and should be read in conjunction with the historical consolidated financial
statements of the Company, which are incorporated in this Proxy Statement and
the historical consolidated financial statements of Victor Capital, which are
included elsewhere in this Proxy Statement for the year ended December 31, 1996
and the three months ended March 31, 1997.
The following pro forma condensed combined balance sheet as of March 31,
1997 assumes the Investment and the Acquisition and related transactions
occurred on March 31, 1997. The following pro forma condensed combined
statements of income for the year ended December 31, 1996 and the three months
ended March 31, 1997 assumes the Investment and the Acquisition and related
transactions occurred on January 1, 1996. The following pro forma condensed
combined financial statements are presented for illustrative purposes only and
are not necessarily indicative of the combined operating results or combined
financial position that would have occurred if the Investment and the
Acquisition had been consummated on the dates indicated, nor is it indicative of
future combined operating results or combined financial position.
455009.26
17
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Combined Balance Sheet
March 31, 1997
(Unaudited)
(000s)
Victor Pro Forma Pro Forma
The Company Capital Adjustments Notes Combined
----------------- ------------------ ------------------ -------------- ------------------
Assets
Current Assets:
<S> <C> <C> <C> <C> <C>
Notes receivable, net $ 2,658 $ - $ - $ 2,658
Cash and cash equivalents 8,330 1,150 (872) (1) 8,608
Marketable securities 13,141 8 33,000 (2) 46,149
Accounts receivable, net 687 574 - 1,261
--------- --------- --------- --------
Total current assets 24,816 1,732 32,128 58,676
Property and equipment, net - 100 - 100
Other assets, net 208 3 - 211
Excess of purchase price over
net tangible assets acquired - - 3,900 (1) 3,900
--------- --------- --------- --------
Total Assets $25,024 $1,835 $36,028 $62,887
========= ========= ========= ========
Liabilities and Shareholders' Equity
Liabilities:
Current maturities of long-term
notes payable, net $ - $ - $ 640 (1) $ 640
Long-term notes payable, net 880 - 3,260 (1) 4,140
Accounts payable and accrued
expenses 113 218 1,000 (3) 1,331
Due to partner - 725 - 725
Other liabilities - 20 - 20
--------- -------- -------- --------
Total Liabilities 993 963 4,900 6,856
--------- -------- -------- --------
Shareholders' equity:
Class A Preferred Shares - - 12,268 (2) 12,268
Class A Common Shares 9,137 - - 9,137
Additional paid-in capital 55,145 - 19,732 (2),(3) 74,877
Unrealized holding income on
marketable securities 19 - - 19
Accumulated earnings (deficit) (40,270) 872 (872) (1) (40,270)
--------- -------- -------- --------
Total Shareholders' Equity 24,031 872 31,128 56,031
--------- -------- -------- --------
Total Liabilities and Shareholders'
Equity $25,024 $1,835 $36,028 $62,887
========= ======== ======== ========
</TABLE>
The Accompanying Notes are an Integral Part of These Pro Forma
Condensed Combined Financial Statements.
455009.26
18
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Combined Statement of Income
For the Three Months Ended
March 31, 1997
(Unaudited)
(In thousands, except per share data)
Victor Pro Forma Pro Forma
The Company Capital Adjustments Notes Combined
--------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income $236 $ - $ - $236
Real estate advisory fees - 1,624 - 1,624
Interest and investment income 377 5 - 382
--------- -------- ------- -------
Total Revenues 613 1,629 - 2,242
Expenses
Operating expenses 123 - - 123
Payroll - 461 250 (1) 711
Victor Capital management fee - 219 (219) (1) -
Property management 14 - - 14
General and administrative 432 302 - 734
Interest 99 - 78 (2) 177
Depreciation and amortization 21 11 65 (2) 97
Net loss on sale of investments 432 - - 432
--------- -------- ------- -------
Total Expense 1,121 993 174 2,288
--------- -------- ------- -------
Operating Income (Loss) Before
Provision For Income Taxes (508) 636 (174) (46)
Provision for income taxes - - - (3) -
--------- -------- ------- -------
Net Income (Loss) $(508) $636 $(174) $(46)
========= ======== ======= =======
Preferred dividends - - 784 (4) 784
--------- -------- ------- -------
Net Income (Loss) - Common Shares $(508) $636 $(958) $(830)
========= ======== ======= =======
Net Income (loss) per Common Share
Primary $(0.06) NA NA $(0.09)
Fully diluted $(0.06) NA NA $(0.04)
Weighted average Common Shares
outstanding
Primary 9,137 - - 9,137
Fully diluted 9,137 - 12,268 (5) 21,405
</TABLE>
The Accompanying Notes are an Integral Part of These Pro Forma
Condensed Combined Financial Statements.
455009.26
19
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Combined Statement of Income
Year Ended December 31, 1996
(Unaudited)
(In thousands, except per share data)
Victor Pro Forma Pro Forma
The Company Capital Adjustments Notes Combined
--------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income $2,019 $ - $ - $2,019
Real estate advisory fees - 6,940 - 6,940
Interest and investment income 1,136 70 - 1,206
Net gain on sale 1,069 263 - 1,332
--------------- ---------------- ---------------- -----------------
Total Revenues 4,224 7,273 - 11,497
Expenses
Operating expenses 685 - - 685
Payroll - 2,833 1,000 (1) 3,833
Victor Capital management fee - 861 (861) (1) -
Property management 96 - - 96
General and administrative 1,503 892 2,395
Interest 547 - 360 (2) 907
Depreciation and amortization 64 44 260 (2) 368
Valuation reserves 1,743 - - 1,743
--------------- ---------------- ---------------- -----------------
Total Expenses 4,638 4,630 759 10,027
--------------- ---------------- ---------------- -----------------
Operating Income (414) 2,643 (759) 1,470
--------------- ---------------- ---------------- -----------------
Operating Income (Loss) Before
Provision For Income Taxes (414) 2,643 (759) 1,470
Provision for income taxes - - - (3) -
--------------- ---------------- ---------------- -----------------
Net Income (Loss) $(414) $2,643 $(759) $1,470
=============== ================ ================ =================
Preferred dividends - - 3,135 (4) 3,135
Net Income (Loss) - Common Shares $(414) $2,643 $(3,894) $(1,665)
=============== ================ ================ =================
Net Income (loss) per Common Share
Primary $(0.05) NA NA $(0.18)
Fully diluted $(0.05) NA NA $(0.08)
Weighted average Common Shares
outstanding
Primary 9,137 - - 9,137
Fully diluted 9,137 - 12,268 (5) 21,405
</TABLE>
The Accompanying Notes are an Integral Part of These Pro Forma
Condensed Combined Financial Statements.
455009.26
20
<PAGE>
Notes to Pro Forma Condensed Combined
Financial Information
(Unaudited)
Balance Sheet
1. Acquisition of Victor Capital
Reflects the Acquisition in exchange for the Acquisition Notes. See "PROPOSAL 3
- -- ELECTION OF TRUSTEES -- Certain Relationships and Related Transactions." The
Acquisition Notes has been discounted to $3.9 million based on an imputed
interest rate of 9.5%. Pursuant to the interest purchase agreement, Victor
Capital's assets will approximate its liabilities at the time of Acquisition.
These events are reflected in the Pro Forma Condensed Combined Balance Sheet as
follows (in thousands):
Adjustment of Victor Capital net assets to zero:
Cash and cash equivalents $ (872)
==========
Accumulated earnings (deficit) $ (872)
==========
Acquisition in exchange for a non-interest bearing note
discounted at an imputed interest rate of 9.5%:
Excess of purchase price over net tangible assets acquired $ 3,900
=======
Current maturities of long-term notes payable, net $ 640
Long-term notes payable, net $ 3,260
-------
$ 3,900
2. Class A Preferred Shares
Represents $33 million in gross proceeds from the issuance of 12,267,658 Class A
Preferred Shares which is assumed to be immediately invested into marketable
securities. See "PROPOSAL 1 -- APPROVAL OF THE INVESTMENT."
3. Transaction Costs
The Company expects to incur approximately $1 million for direct transaction
costs, such as attorneys, accountants, printing and other related fees. This
estimated amount is reflected as a reduction to paid-in-capital and an increase
to accrued expenses in the unaudited pro forma condensed combined balance sheet
as of March 31, 1997. The estimated charge is not reflected in the unaudited pro
forma combined condensed consolidated statements of income. The amount of this
charge is a preliminary estimate and is therefore subject to change.
Statements of Income
1. Employment
Prior to the Acquisition, Victor Capital's owners were compensated pursuant to a
management agreement with Victor Capital's general partner. Contemporaneous with
the Acquisition, the owners of Victor Capital will enter into employment
agreements with the Company and the management agreement will be terminated. See
"PROPOSAL 3 -- ELECTION OF TRUSTEES -- Employment and Consulting Agreements."
2. Amortization of Victor Capital Acquisition
The discounted cost of the Acquisition, $3.9 million, will be amortized over a
fifteen year period. Interest has been imputed on the non-interest bearing note
issued by the Company to acquire Victor Capital at a rate of 9.5% per annum.
455009.26
21
<PAGE>
3. Corporate Taxes
Due to the anticipated termination of the Company's REIT status and the
Company's resulting status as a taxable corporate entity, the Company's income
will be taxed at a federal corporate rate of 35% 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. For the year
ended December 31, 1996 and the three months ended March 31, 1997, the Company's
pro forma income, if any, would have been offset by available net operating
losses and, accordingly, there would have been no provision for income taxes.
4. Class A Preferred Convertible Shares
Pursuant to the terms of the Certificate of Designations establishing the Class
A Preferred Shares, a semi-annual dividend of approximately $0.13 per share
(approximately $0.26 per share on an annual basis) is payable based on a
dividend rate of 9.5%. The dividend payable on the 12,267,658 Class A Preferred
Shares outstanding on a pro forma basis for the year ended December 31, 1996 and
the three months ended March 31, 1997 has been presented. See "PROPOSAL 1 --
APPROVAL OF THE INVESTMENT."
5. Dilution of Common Shares
Pursuant to the terms of the Certificate of Designations establishing the Class
A Preferred Shares, the holders of the 12,267,658 Class A Preferred Shares
outstanding on a pro forma basis 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 Share for each Class A Preferred
Share, subject to adjustment to avoid dilution. See "PROPOSAL 1 -- APPROVAL OF
THE INVESTMENT."
455009.26
22
<PAGE>
HISTORICAL MARKET PRICE AND DIVIDENDS DATA
Market Prices and Dividends
The Common Shares are listed for trading on the New York and Pacific Stock
Exchanges under the symbol "CT." The table below sets forth, for the calendar
quarters indicated, the reported high and low sale prices of Common Shares as
quoted on the New York Stock Exchange based on published financial sources. No
dividends were paid in 1995 and 1996. As of April 1, 1997, the Company had 1,677
holders of record of its Common Shares. The closing market price for the Common
Shares on January 2, 1997, the day prior to the announcement of the Former
Parent's sale of its Common Shares to CRIL, was $2 3/4.
High Low
1995
First Quarter............................... 1-5/8 1-5/8
Second Quarter.............................. 1-7/8 1-3/4
Third Quarter............................... 1-5/8 1-1/2
Fourth Quarter.............................. 1-1/2 1-3/8
1996
First Quarter............................... 1-1/2 1-1/8
Second Quarter.............................. 1-7/8 1-3/8
Third Quarter............................... 2-3/4 1-5/8
Fourth Quarter.............................. 2-7/8 1-7/8
Dividend Policy
The Company does not currently expect to declare or pay dividends on its
Class A Common Shares or Class B Common Shares in the foreseeable future. The
policy of the Board of Trustees will be to reinvest earnings 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 policy
of reinvesting earnings, among other things, will cause the Company's REIT
status to terminate. See "FEDERAL INCOME TAX CONSIDERATIONS."
455009.26
23
<PAGE>
BUSINESS OF THE COMPANY FOLLOWING
THE INVESTMENT AND THE ACQUISITION
Overview
The Company, through the execution of its new business plan, intends to
create a finance company designed primarily to take advantage of opportunities
to make high-yielding investments in commercial real estate including senior and
junior commercial mortgage loans and preferred equity investments. The recent
significant recovery in commercial real estate property values, coupled with the
fundamental structural changes in the real estate capital markets, have created
increased demand for financing at the mezzanine level, i.e., the position
between senior lenders and equity owners. The Company believes that mezzanine
investment opportunities -- if carefully underwritten, structured and monitored
- -- are attractive investment opportunities that pose potentially less risk than
direct equity ownership of real property.
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 $30 billion per annum, the terms and conditions of securitized debt
are significantly driven 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
which 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 capital, representing the level between 65% and 90% of
property value, has grown significantly. The Company, through its new business
plan, intends to capitalize on this market opportunity.
Following the Investment and the Acquisition, Victor Capital will be a
division of the Company and Victor Capital's management and professional team
will assume comparable positions with the Company. While certain Victor Capital
officers and employees have significant experience in managing real estate
assets, including Mortgage Loans and Mezzanine Loans, and have analyzed and bid
on Subordinated Interest investment opportunities, such officers and employees
have never managed a finance company as is contemplated in the new business
plan, nor have they closed on any Subordinated Interest transactions. See "RISK
FACTORS--Risk Factors Relating to the Company's New Business Plan and the
Acquisition--No Assurance of Successful Implementation of New Business Plan."
General
In connection with the new business plan, the Company will seek to generate
returns primarily from investments in (i) Mortgage Loans; (ii) Mezzanine Loans
in the form of subordinated loans and preferred equity investments; (iii)
Subordinated Interests in CMBS; and, (iv) the on-going real estate advisory
business of Victor Capital. There can be no assurances that the Company will be
able to acquire such assets, that the terms or results of such investments will
be beneficial to the Company, or that the Company will achieve its objectives.
See "RISK FACTORS".
Other than restrictions which result from the Company's intent to avoid
regulation under the Investment Company Act, the Company will not be subject to
any restrictions on the particular percentage of its portfolio invested in any
of the above referenced asset classes. See "RISK FACTORS--Risk Factors Relating
to the Company's New Business Plan and the Acquisition--Consequences of Not
Qualifying for Investment Company Act Exemptions." The Company will have no
predetermined limitations or targets for concentration of property type or
geographic location. Instead, the Company plans to make acquisition decisions
through asset and collateral analysis, evaluating investment risks on a
case-by-case basis. Until appropriate investments are made, the net proceeds of
the Investment may be invested in readily marketable securities or in interest
bearing deposit accounts.
To the extent that the Company's assets become concentrated in a few states
or a particular region, the return on an investment in the Company's shares will
become more dependent on the economy of such states or region. The Company
intends to seek to maximize yield through the use of leverage, consistent with
maintaining an acceptable
455009.26
24
<PAGE>
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 initially intend
to leverage its equity by more than five-times.
Victor Capital's management and professional team has substantial
experience in originating, underwriting, structuring, monitoring, managing, and
collecting on various types of commercial real estate debt and equity
investments. The Company believes that this experience will position the Company
to immediately execute its business plan and will be a major resource in the
successful implementation of the plan. However, there can be no assurance of the
Company's success in implementing its business plan.
Categories of Investment
The discussion below describes the principal categories of assets that the
Company initially intends to acquire.
Mortgage Loans. The Company intends to actively pursue opportunities to
provide Mortgage Loans to real estate owners and property developers who need
interim financing until permanent financing can be obtained. The Company's
Mortgage Loans will generally not be "permanent" in nature, but rather, are
intended to be of a relatively short-term duration, with extension options as
deemed appropriate, and will generally require a balloon payment of principal
and interest 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 such an instance, the Company's loan would be secured by a
Mortgage Loan. The Company may also originate traditional mortgage loans and in
connection therewith would compete with traditional commercial mortgage lenders.
In pursuing such a strategy, the Company would generally intend to sell or
refinance the senior portion of the Mortgage Loan, individually or in a pool,
and retain a Subordinated Interest.
The legal aspects of the mortgage loans that will be made or acquired by
the Company or will underlie the Subordinated Interests to be acquired by the
Company affect the value of those assets. For a discussion of certain legal
aspects of mortgage loans, see "-- Certain Legal Aspects of Mortgage Loans and
Real Property."
Mezzanine Loans. The Company intends 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 may take
the form of subordinated loans, commonly known as second mortgages, or, in the
case of loans originated for securitization, partnership loans or preferred
equity investments. For example, on a commercial property subject to a first
lien mortgage loan with a principal balance equal to 70% of the value of the
property, the Company could lend the owner of the property (typically a
partnership) an additional 15% to 20% of the value of the property. The Company
believes that as a result of the significant changes in the lending practices of
traditional commercial real estate lenders, primarily relating to more
conservative loan-to-value ratios, and that as a result of the significant
increase in securitized lending with strict loan-to-value ratios imposed by the
rating agencies, there will be increasing demand for mezzanine capital by
property owners.
Typically, in a Mezzanine Loan, the owner would pledge to the Company, as
security for its debt 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 the 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 would 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 will negotiate to receive a
455009.26
25
<PAGE>
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 otherwise
would allow the Company to charge an interest rate that would provide an
attractive risk-adjusted return. Alternatively, the Mezzanine Loans could take
the form of a non-voting preferred equity investment in a single purpose entity
borrower with the terms of the preferred equity substantially the same as
described above.
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. While the Company intends to seek such alliances, there can be no
assurance that the Company will be successful in this regard nor that if the
Company creates such an alliance or alliances, that such alliances will be
successful.
Subordinated Interests. The Company intends to acquire Subordinated
Interests in commercial mortgage-backed securities. CMBS typically are divided
into two or more classes, sometimes called "tranches." The senior classes are
higher "rated" securities, which would be rated from low investment grade "BBB"
to higher investment grade "AA" or "AAA." The junior, subordinated classes
typically would include a lower rated, non-investment grade "BB" and "B" class,
and an unrated, higher-yielding, credit support class (which generally is
required to absorb the first losses on the underlying mortgage loans). The
Company intends to pursue the acquisition of performing and non-performing
(i.e., defaulted) Subordinated Interests.
CMBS generally are issued either as collateralized mortgage obligations
("CMOs" or "CMO Bonds") or pass-through certificates ("Pass-Through
Certificates"). CMO Bonds are debt obligations of special purpose corporations,
owner trusts or other special purpose entities secured by commercial mortgage
loans or CMBS. Pass-Through Certificates evidence interests in trusts, the
primary assets of which are mortgage loans. CMO Bonds and Pass-Through
Certificates may be issued or sponsored by private originators of, or investors
in, mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and other entities. CMBS are not guaranteed
by an entity having the credit status of a governmental agency or
instrumentality and generally are structured with one or more of the types of
credit enhancement described below. In addition, CMBS may be illiquid. See "RISK
FACTORS -- Risk Factors Relating to the Company's New Business and the
Acquisition -- Risk From Ownership of Subordinated Interests in Pools of
Commercial Mortgage Loans."
In most commercial mortgage loan securitizations, a series of CMBS is
issued in multiple classes in order to obtain investment-grade ratings for the
senior classes and thus increase their marketability. Each class of CMBS may be
issued with a specific fixed or variable coupon rate and has a stated maturity
or final scheduled distribution date. Principal prepayments on the mortgage
loans comprising the mortgage collateral (i.e. mortgage pass-through securities
or pools of whole loans securing or backing a series of CMBS) ("Mortgage
Collateral") may cause the CMBS to be retired substantially earlier than their
stated maturities or final scheduled distribution dates, although, with respect
to commercial mortgage loans, there generally are penalties for or limitations
on the ability of the borrower to prepay the loan. Interest is paid or accrued
on CMBS on a periodic basis, typically monthly.
The credit quality of CMBS depends on the credit quality of the underlying
Mortgage Collateral. 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.
Among the factors determining the credit quality of the underlying mortgage
loans will be the ratio of the mortgage loan balances to the value of the
properties securing the mortgage loans, the purpose of the mortgage loans (e.g.,
refinancing or new purchase), the amount of the mortgage loans, their terms and
the geographic diversification of the location of the properties, and the
credit-worthiness of tenants. Moreover, the principal of and interest on the
underlying mortgage loans may be allocated among the several classes of a CMBS
in many ways, and the credit quality of a particular class results primarily
from the order and timing of the receipt of cash flow generated from the
underlying mortgage loans. Subordinated Interests carry significant credit
risks. Typically, in a "senior-subordinated"
455009.26
26
<PAGE>
structure, the Subordinated Interests provide credit protection to the senior
classes by absorbing losses from loan defaults or foreclosures before such
losses are allocated to senior classes. Moreover, typically, as long as the more
senior tranches of securities are outstanding, all prepayments on the mortgage
loans generally are paid to those senior tranches, at least until the end of a
lock-out period, which typically is five years or more. In some instances,
particularly with respect to Subordinated Interests in commercial
securitizations, the holders of Subordinated Interests are not entitled to
receive scheduled payments of principal until the more senior tranches are paid
in full or until the end of a lock-out period. Because of this structuring of
the cash flows from the underlying mortgage loans, Subordinated Interests in a
typical securitization are subject to a substantially greater risk of
non-payment than are those more senior tranches. Accordingly, the Subordinated
Interests are assigned lower credit ratings, or no ratings at all. Neither the
Subordinated Interests nor the underlying mortgage loans are guaranteed by
agencies or instrumentalities of the U.S. government or by other governmental
entities and accordingly are subject, among other things, to credit risks. See
"RISK FACTORS -- Risk Factors Relating to the Company's New Business Plan and
the Acquisition -- Risk from Ownership of Subordinated Interests in Pools of
Commercial Mortgage Loans."
Before acquiring Subordinated Interests, the Company intends to perform
certain credit underwriting and stress testing to attempt to evaluate future
performance of the Mortgage Collateral supporting such CMBS, which may include
(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, as well as
selected site visits.
Many of the Subordinated Interests intended to be acquired by the Company
may not have been registered under the Securities Act, but instead initially
were sold in private placements. Because Subordinated Interests acquired in
private placements have not been registered under the Securities Act, they will
be subject to certain restrictions on resale and, accordingly, will have more
limited marketability and liquidity. Although there are some exceptions, most
issuers of multi-class CMBS elect to be treated, for federal income tax
purposes, as REMICS. The Company intends to acquire not only Subordinated
Interests that are treated as regular interests in REMICS, but also those that
are designated as REMIC Residual Interests. Unlike regular interests in REMICS,
REMIC Residual Interests typically generate Excess Inclusion or other forms of
"phantom income" that bear no relationship to the actual economic income that is
generated by a REMIC. See "RISK FACTORS -- Risk Factors Relating to the
Company's New Business Plan and the Acquisition -- Risk from Ownership of REMIC
Residual Interests."
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 intends to attempt 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 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. No
assurances can be made, however, that the Company will be able to acquire such
rights to cure, Special Servicing Rights or other similar arrangements or that
losses on the mortgage loans will not exceed the Company's expectations. While
Victor Capital has performed many of the functions of a special servicer,
neither Victor Capital nor the Company is currently a rated special servicer.
The Company plans to 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 is unlikely that it will be able 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. See "RISK
FACTORS--Risk Factors Relating to the Company's New Business Plan and the
Acquisition--Risk of Ownership of Subordinated Interests in Pools of Commercial
Mortgage Loans."
455009.26
27
<PAGE>
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 guidance contained in published no-action letters
issued to other parties 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. The Commission has stated that no-action
letters may be relied upon as binding on its Staff only by the parties to whom
such letters are issued and therefore do not represent precedent that would be
binding on the Commission or its Staff with respect to other parties, including
the Company. The Company has, however, determined that it is advisable to adhere
to the no-action letter guidance, and therefore, the assets that may be acquired
and held at any time by the Company will be limited by investment parameters
contained in such no-action letter guidance. 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 Qualified Interests that differs
from the position taken by the Company could have a material adverse affect on
the Company. See "RISK FACTORS--Risk Factors Relating to the Company's New
Business Plan and the Acquisition--Consequences of Not Qualifying for Investment
Company Act Exemption."
Real Estate Advisory Business. In addition to drawing on the origination,
underwriting, structuring, monitoring, management and collection expertise of
Victor Capital's professionals with regard to lending activities, the Company
intends to continue the investment banking, real estate advisory, and real
estate asset management services previously provided by Victor Capital.
Additionally, the Company believes that Victor Capital's business, in the
ordinary course may add important synergies to the Company's loan origination
efforts. For a description of Victor Capital, see "BUSINESS AND OTHER
INFORMATION CONCERNING VICTOR CAPITAL -- Description of Business."
Other Investments
The Company has a portfolio of existing liquid mortgage-backed securities
which it may continue to own following implementation of the new business plan.
While the Company has no current plans with respect to the following, the
Company may also pursue a variety of complementary businesses and investments in
furtherance of executing its new business plan. Such activities may include, but
would not be limited to, investments in other classes of mortgage-backed
securities, distressed investing in non-performing and sub-performing loans and
fee owned commercial real property, whole loan acquisition programs, note
financings, environmentally hazardous lending, operating company
investing/lending, construction and rehabilitation lending. 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. See "RISK FACTORS -- Risk Factors
Relating to the Company's New Business Plan and the Acquisition." It will seek
to maximize yield by managing credit risk through credit underwriting, although
there can be no assurances that the Company will be successful in this regard.
The Company may decide in the future to pursue other available acquisition
opportunities it deems suitable for the Company's portfolio. See "RISK FACTORS
- -- Risk Factors Relating to the Company's New Business Plan and the
Acquisition--Risks Associated with Unspecified Acquisitions."
455009.26
28
<PAGE>
Distressed Loans and Real Properties. The Company believes that under
appropriate circumstances, the acquisition of underperforming and otherwise
distressed commercial and multifamily real estate, or the sub-performing or
non-performing loans secured thereby (collectively, "Distressed Investments"),
may present meaningful opportunities for the origination of new mortgage loans,
in connection with the sale of the Distressed Investments, and the creation of
Subordinated Interests thereby. After the acquisition of the Distressed
Investments, the Company's goal will be to improve cash flow or debt service.
After the Company maximizes the value of the Distressed Investments in its
portfolio, it will enjoy the improved cash flow and begin to seek an opportunity
to sell the asset with the intention of making a loan to facilitate such a sale.
Although the period during which the Company will hold Distressed Investments
will vary considerably from asset to asset, the Company believes that most such
investments will be held in its portfolio no more than four years.
Performing Mortgage Loans for Securitization. The Company may purchase
multifamily residential and commercial performing mortgage loans, pool such
loans in a special purpose entity and issue CMBS secured by such mortgage loans.
The Company would expect to retain the equity ownership interest in the Mortgage
Loans, subject to the CMBS debt, thereby creating the economic equivalent of a
Subordinated Interest.
Note Financings. The Company may also elect to provide loans secured not by
real property, but rather by pledges of mortgage loans ("Note Financings"),
whether performing or non-performing. Typically Note Financings are made in
connection with the acquisition of whole loans, or portfolios of loans, which
are being sold on an opportunistic basis to a third party investor or to the
borrower of such loans. Loan-to-value ratios for Note Financings are typically
more conservative than traditional Mortgage Loans, due to, amongst other things,
the greater risk in being removed one-step from the collateral (i.e., the
Company's security would be a loan which is, in turn, secured by the underlying
real property).
Foreign Real Properties. The Company may acquire or originate Mortgage
Loans secured by real estate located outside of the United States or purchase
such real estate. Investing in real estate located in foreign countries creates
risks associated with the uncertainty of foreign laws and markets and risks
related to currency conversion. Although the Company, through its management
team acquired from Victor Capital, has limited experience in investing in
foreign real estate, the Company believes that such professionals' experience
with distressed assets will be helpful in the management of such assets. The
Company may be subject to foreign income tax with respect to its investments in
foreign real estate. However, any foreign tax credit that otherwise would be
available to the Company for U.S. federal income tax purposes will not flow
through to the Company's shareholders.
Real Property with Identified Environmental Problems. The Company may
acquire or originate mortgage loans secured by real estate with identified
environmental problems that may materially impair the value of the property or
purchase such real estate. If so, the Company will take certain steps to limit
its liability for such environmental problems, but there are risks associated
with such an investment. Although the Company has limited experience in
investing in real estate with known environmental risks, the Company believes
that the experience of its management team acquired from Victor Capital with
distressed assets will be helpful to the management of such assets.
Operating Company Investing/Lending. The Company may, from time-to-time,
make strategic investments, including preferred or common equity, and/or loans,
including deeply subordinate and convertible loans, in operating companies which
are engaged in similar or competitive businesses to the Company. Such
investments and loans could be made in companies that may have little or no
public disclosure or liquidity. Such investments and loans would likely be made
to enhance the Company's business plan and could include, but not be limited to,
such companies as special loan servicers, mortgage bankers, and conduit lenders.
Construction and Rehabilitation Lending. The Company may take advantage of
opportunities to provide construction or rehabilitation financing on commercial
property, lending generally 85% to 90% of total project costs, and taking a
first lien mortgage to secure the debt ("Construction Loans"). Alternatively,
the Company may make Mezzanine Loans and/or Subordinated Interests investments
in such Construction Loan opportunities. Construction Loans generally would
provide the Company with fees and interest income and potentially a percentage
of net operating income or gross revenues from the property, payable to the
Company on an ongoing basis, and a percentage
455009.26
29
<PAGE>
of any increase in value of the property, payable upon maturity or refinancing
of the loan, or otherwise would allow the Company to charge an interest rate
that would provide an attractive risk-adjusted return.
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 new 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, secured and unsecured
borrowings, reverse 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 new 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 agreed in the
Investment Agreement that, without the prior written consent of the holders of a
majority of the outstanding Class A Preferred Shares, it shall not incur any
indebtedness if the Company's debt-to-equity ratio would exceed 5:1.
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 expenses for the Company which 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. See "RISK FACTORS -- Risk Factors Relating to the
Company's New Business Plan and the Acquisition -- Growth Dependent on Leverage;
Risks from Use of Leverage."
Bank Credit Facilities. The Company intends to borrow money through various
bank credit facilities, which will have varying interest rates, which may be
fixed or adjustable, and which may have varying maturities. Additionally, the
Company intends to obtain secured and unsecured facilities.
Reverse Repurchase Agreements. The Company may enter into reverse
repurchase agreements, which are 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. Reverse 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.
Interest Rate Management Techniques. The Company may 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 investment in real estate related assets. Such techniques may include
puts and calls on securities or indices of securities, Eurodollar futures
contracts and options on such contracts, interest rate swaps (the exchange of
fixed-rate payments for floating-rate payments) or other such transactions.
455009.26
30
<PAGE>
Certain Legal Aspects of Mortgage Loans and Real Property
The Company's new business plan contemplates investments in short-term
first mortgage loans, subordinated loans to or preferred equity investments in
first mortgage encumbered property or investments representing interests in
pools of mortgage loans. Given that the Company intends to invest in such
mortgage loans and mortgage related investments and may acquire underlying real
property in the event of a foreclosure, the following discussion provides a
general summary of certain legal aspects of loans secured by real property and
the acquisition of real property. Because such legal aspects are governed by
applicable state law (which laws vary from state to state), the summary does not
purport to be complete, to reflect the laws of any particular state or to
encompass the laws of all states. Accordingly, the summary is qualified in its
entirety by reference to the applicable laws of the states where the property is
located.
General
A mortgage loan is generally evidenced by a note or bond and secured by an
instrument granting a security interest in real property and the appurtenant
personal property, which may be a mortgage, deed of trust or a deed to secure
debt, depending upon the prevailing practice and law in the state in which the
related mortgaged property is located. Mortgages, deeds of trust and deeds to
secure debt are herein collectively referred to as "mortgages." A mortgage
creates a lien upon, or grants a title interest in, the real property covered
thereby, and represents the security for the repayment of the indebtedness
customarily evidenced by a promissory note. The priority of the lien created or
interest granted will depend on the terms of the mortgage and, in some cases, on
the terms of separate subordination agreements or inter-creditor agreements with
others that hold interests in the real property, the knowledge of the parties to
the mortgage and, generally, the order of recordation of the mortgage in the
appropriate public recording office. However, the lien of a recorded mortgage
will generally be subordinate to later-arising liens for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor or grantor (the
equivalent of a borrower), a trustee to whom the real property is conveyed, and
a beneficiary or grantee (the lender) for whose benefit the conveyance is made.
Under a deed of trust, the trustor grants the property, irrevocably until the
debt is paid, in trust for the benefit of the beneficiary and generally with a
power of sale, to the trustee for the benefit of the beneficiary to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. The grantor (the borrower) conveys title to the
real property to the grantee (the lender), generally with a power of sale, until
such time as the debt is repaid. The mortgagee's authority under a mortgage and
the trustee's authority under a deed of trust and the grantee's authority under
a deed to secure debt are governed by the express provisions of the related
instrument, the law of the state in which the real property is located, certain
federal laws and, in some deed of trust transactions, the directions of the
beneficiary.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease or
license to occupy space and the income derived therefrom, while (unless rents
are to be paid directly to the lender) retaining a revocable license to collect
the rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
The potential payments from a property may be less than the periodic
payments due under the mortgage. For example, the net income that would
otherwise be generated from the property may be less than the amount that would
be needed to service the debt if the leases on the property are at below-market
rents, the market rents have fallen since the original financing, vacancies have
increased or as a result of excessive or increased maintenance, repair or other
obligations to which a lender succeeds as landlord.
455009.26
31
<PAGE>
Condemnation and Insurance
The form of the mortgage or deed of trust used by many lenders confers on
the mortgagee or beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgage or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under the senior
mortgage or deed of trust will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior mortgage indebtedness will, in most cases, be applied to the
indebtedness of a junior mortgage or deed of trust to the extent the junior
mortgage or deed of trust so provides. The laws of certain states may limit the
ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance
and partial condemnation awards to the secured indebtedness. In such states, the
mortgagor or trustor must be allowed to use the proceeds of hazard insurance to
repair the damage unless the security of the mortgagee or beneficiary has been
impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled
to the award for a partial condemnation of the real property security only to
the extent that its security is impaired.
Foreclosure
General. Foreclosure is a legal procedure that allows the lender to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the lender has the right to institute foreclosure
proceedings to sell the real property at public auction to satisfy the
indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, such as
strict foreclosure, but they are either infrequently used or available only in
limited circumstances.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court of equity having jurisdiction over the mortgaged property. Generally, the
action is initiated by the service of legal pleadings upon the borrower or
mortgagor and all parties having a subordinate interest of record in the real
property and all parties in possession of the property, under leases or
otherwise, whose interests are subordinate to the mortgage. Tenants under leases
may or may not be named in the suit depending upon state law and market
conditions. A foreclosure action is subject to most of the delays and expenses
of other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes requires several years to complete. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Non-Judicial Foreclosure Power of Sale. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so permits.
A power of sale under a deed of trust allows a non-judicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable state
law. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without regard to the acceleration of the
indebtedness), plus the lender's expenses incurred in enforcing the obligation.
In other states, the borrower or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, state law governs the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time periods.
455009.26
32
<PAGE>
Equitable Limitations on Enforceability of Certain Provisions. United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter the
specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the lender
to undertake affirmative actions to determine the cause of the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose in the
case of a non-monetary default, such as a failure to deliver financial
information, adequately maintain the mortgaged property or an impermissible
further encumbrance of the mortgaged property.
Even if the lender is successful in the foreclosure action and is able to
take possession of the property, the costs of operating and maintaining a
commercial or multifamily property may be significant and may be greater than
the income derived from that property. The costs of management and operation of
those mortgaged properties which are hotels, motels, restaurants, nursing homes,
convalescent homes or hospitals may be particularly significant because of the
expertise, knowledge and with respect to nursing or convalescent homes,
regulatory compliance, required to run such operations and the effect which
foreclosure and a change in ownership may have with respect to consent
requirements and on the public's and the industry's (including franchisors')
perception of the quality of such operations. The lender also will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale or lease of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Moreover, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on a mortgage loan even if the mortgaged property
is sold at foreclosure, or resold after it is acquired through foreclosure, for
an amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
Post-Sale Redemption. In a majority of states, after sale pursuant to a
deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property. In some
states, statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be permitted if the former borrower pays
only a portion of the sums due. In some states, the borrower retains possession
of the property during the statutory redemption period. The effect of a
statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
Anti-Deficiency Legislation. Any commercial or multi-family residential
mortgage loans acquired by the Company are likely to be nonrecourse loans, as to
which recourse in the case of default will be limited to the property and such
other assets, if any, that were pledged to secure the mortgage loan. However,
even if a mortgage loan by its terms provides for recourse to the borrower's
other assets, a lender's ability to realize upon those assets may be limited by
state law. For example, in some states a lender cannot obtain a deficiency
judgment against the borrower following foreclosure or sale under a deed of
trust or by non-judicial means. Other statutes may require the lender to exhaust
the security afforded under a mortgage before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of those states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists may choose to proceed
first
455009.26
33
<PAGE>
against the security. Finally, other statutory provisions, designed to protect
borrowers from exposure to large deficiency judgments that might result from
bidding at below-market values at the foreclosure sale, limit any deficiency
judgment to the excess of the outstanding debt over the fair market value of the
property at the time of the sale.
Cooperatives. Mortgage loans may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases appurtenant
thereto (or cooperative contract rights), allocable to cooperative dwelling
units that may be vacant or occupied by non-owner tenants. Such loans are
subject to certain risks not associated with mortgage loans secured by a lien on
the fee estate of a borrower in real property. Such a loan typically is
subordinate to the mortgage, if any, on the cooperative's building which, if
foreclosed, could extinguish the equity in the building and the proprietary
leases of the dwelling units derived from ownership of the shares of the
cooperative. Further, transfer of shares in a cooperative are subject to various
regulations as well as to restrictions (including transfer restrictions) under
the governing documents of the cooperative, and the shares may be canceled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease but such recognition agreements may not
have been obtained in the case of all the mortgage loans secured by cooperative
shares (or contract rights).
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given to the debtor
and the method, manner, time, place and terms of the sale. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally provides
that the lender's right to reimbursement is subject to the right of the
cooperative to receive sums due under the proprietary leases.
Bankruptcy Laws
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lien or may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. In addition, the
Bankruptcy Code has been amended to provide that a lender's perfected
pre-petition security interest in leases, rents and hotel revenues continues in
the post-petition leases, rents and hotel revenues, unless a bankruptcy court
orders to the contrary "based on the equities of the case."
455009.26
34
<PAGE>
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the owner of such mortgage loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may have
the power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Moreover, the laws
of certain states also give priority to certain tax liens over the lien of a
mortgage or deed of trust. Under the Bankruptcy Code, if the court finds that
actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
The Company's acquisition of real property, particularly real-estate owned
("REO") property, may be affected by many of the considerations applicable to
mortgage loan lending. For example, the Company's acquisition of certain
property at foreclosure sale could be affected by a borrower's post-sale right
of redemption. In addition, the Company's ability to derive income from real
property will generally be dependent on its receipt of rent payments under
leases of the related property. The ability to collect rents may be impaired by
the commencement of a bankruptcy proceeding relating to a lessee under such
lease. Under the Bankruptcy Code, the filing of a petition in bankruptcy by or
on behalf of a lessee results in a stay in bankruptcy against the commencement
or continuation of any state court proceeding for past due rent, for accelerated
rent, for damages or for a summary eviction order with respect to a default
under the lease that occurred prior to the filing of the lessee's petition. In
addition, the Bankruptcy Code generally provides that a trustee or
debtor-in-possession may, subject to approval of the court, (i) assume the lease
and retain it or assign it to a third party or (ii) reject the lease. If the
lease is assumed, the trustee or debtor-in-possession (or assignee, if
applicable) must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time
455009.26
35
<PAGE>
of execution of the mortgage, "reasonably without cause to believe" that the
property was used in, or purchased with the proceeds of, illegal drug or RICO
activities.
Environmental Risks
General. The Company will be subject to environmental risks when taking a
security interest in real property, as well as when it acquires any real
property. Of particular concern may be properties that are or have been used for
industrial, manufacturing, military or disposal activity. Such environmental
risks include the risk of the diminution of the value of a contaminated property
or, as discussed below, liability for the costs of compliance with environmental
regulatory requirements or the costs of clean-up or other remedial actions.
These compliance or clean-up costs could exceed the value of the property or the
amount of the lender's loan. In certain circumstances, a lender could determine
to abandon a contaminated mortgaged property as collateral for its loan rather
than foreclose and risk liability for compliance or clean-up costs.
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
become sufficiently involved in the management of such mortgaged property or the
operations of the borrower. Such liability may exist even if the lender did not
cause or contribute to the contamination and regardless of whether the lender
has actually taken possession of a mortgaged property through foreclosure, deed
in lieu of foreclosure or otherwise. The magnitude of the CERCLA liability at
any given contaminated site is a function of the actions required to address
adequately the risks to human health and the environment posed by the particular
conditions at the site. As a result, such liability is not constrained by the
value of the property or the amount of the original or unamortized principal
balance of any loans secured by the property. Moreover, under certain
circumstances, liability under CERCLA may be joint and several -- i.e., any
liable party may be obligated to pay the entire cleanup costs regardless of its
relative contribution to the contamination.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "1996 Lender Liability Act") provides for a safe harbor for secured lenders
from CERCLA liability even though the lender forecloses and sells the real
estate securing the loan, provided the secured lender sells "at the earliest
practicable, commercially reasonable time, at commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements."
Although the 1996 Lender Liability Act provides significant protection to
secured lenders, it has not been construed by the courts and there are
circumstances in which actions taken could expose a secured lender to CERCLA
liability. And, the transferee from the secured lender is not entitled to the
protections enjoyed by a secured lender. Hence, the marketability of any
contaminated real estate continues to be suspect.
Certain Other Federal and State Laws. Many states have environmental
clean-up statutes similar to CERCLA, and not all those statutes provide for a
secured creditor exemption. In addition, underground storage tanks are commonly
found on a wide variety of commercial and industrial properties. Federal and
state laws impose liability on the owners and operators of underground storage
tanks for any cleanup that may be required as a result of releases from such
tanks. These laws also impose certain compliance obligations on the tank owners
and operators, such as regular monitoring for leaks and upgrading of older
tanks. The Company may become a tank owner or operator, and subject to
compliance obligations and potential cleanup liabilities, either as a result of
becoming involved in the management of a site at which a tank is located or,
more commonly, by taking title to such a property. Federal and state laws also
obligate property owners and operators to maintain and, under some
circumstances, to remove asbestos-containing building materials and lead-based
paint. As a result, the presence of these materials can increase the cost of
operating a property and thus diminish its value. In a few states, transfers of
some types of properties are conditioned upon cleanup of contamination prior to
transfer. In these cases, a lender that becomes the owner of a property through
foreclosure, deed in lieu of foreclosure or otherwise, may be required to clean
up the contamination before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury or damage to property) related to hazardous environmental
conditions on a property.
455009.26
36
<PAGE>
Superlien Laws. Under the laws of many states, contamination of a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien."
Additional Considerations. The cost of remediating environmental
contamination at a property can be substantial. To reduce the likelihood of
exposure to such losses, the Company will not acquire title to a Mortgaged
Property or take over its operation unless, based on an environmental site
assessment prepared by a qualified environmental consultant, it has made the
determination that it is appropriate to do so. The Company expects that it will
organize a special purpose subsidiary to acquire any environmentally
contaminated real property.
Environmental Site Assessments. In addition to possibly allowing a lender
to qualify for the innocent landowner defense (see discussion under
"--Environmental Risks --CERCLA" above), environmental site assessments can be a
valuable tool in anticipating, managing and minimizing environmental risk. They
are commonly performed in many commercial real estate transactions.
Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems because
an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial real
estate (including multifamily properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
Americans With Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
455009.26
37
<PAGE>
EXISTING BUSINESS OF THE COMPANY
The Company was organized under the laws of the State of California
pursuant to its Declaration of Trust, dated September 15, 1966. Prior to 1990,
the Company was primarily engaged in making investments in income-producing real
property and, to a lesser extent, mortgages and mortgage-backed securities. The
Company has generated revenues from income produced on its portfolio of property
interests, interest earnings on certain investments, including mortgage loans,
and sales of certain investments of the Company.
The Company has heretofore elected to be taxed as a real estate investment
trust under the Code (a "REIT"). As long as the Company qualifies as a REIT,
dividends paid to shareholders will be allowed as a deduction for purposes of
determining income subject to federal corporate income tax. As a result, as long
as the Company qualifies as a REIT, the Company will not be subject to federal
income tax on the portion of its net income that is distributed to shareholders.
However, following consummation of the Investment and the Acquisition the
Company anticipates that its status as a REIT will terminate and it will become
subject to income and franchise taxes on its income to the extent that it cannot
offset such income with net operating losses or capital loss Carry-forward. See
"FEDERAL INCOME TAX CONSIDERATIONS."
Since November 1990, the Company has not made new investments in
income-producing real property, largely as a result of significant operating
losses that occurred during fiscal years 1991 through 1993. Such losses were
caused by the deterioration in the performance of the Company's income producing
property resulting from reduced and low levels of occupancy and from valuation
write-downs and the sale of certain non-performing properties at a loss. During
this period, the Company originated new mortgage loans in connection with the
disposition of property owned.
In April 1994, the Company's Former Parent voted its Common Shares to
replace the Board of Trustees then in place as a necessary step to preserve
shareholder value in the Company. Thereafter, the newly elected Board of
Trustees appointed new officers and terminated existing contracts with the
Company's then outside advisor and property manager. Under the direction of the
new management team, the Company took steps to stabilize its portfolio of
investments and retained a new property manager to supervise the day-to-day
operations of its income-producing properties. The Company also developed an
expansion strategy pursuant to which it would pursue growth opportunities
through acquisitions, joint venture arrangements and a possible infusion of new
capital and concentrate on one asset class. In late 1994 and 1995, after
pursuing opportunities to grow and improve the profitability of its real
property and mortgage portfolio (including acquiring the hotel assets of the
Company's Former Parent), the Board of Trustees determined that the Company
should redeploy its current asset portfolio into better performing assets. The
Company pursued the foregoing, and by the end of March 1997, the Company had
sold or disposed of all of its income-producing properties and had invested the
proceeds in liquid mortgage-backed securities which satisfy REIT-asset
qualification requirements and mortgage loans. As of March 31, 1997, the Company
had $13,141,000 invested in such mortgage-backed securities and $2,658,000 in
mortgage loans.
In 1996, the Company continued to investigate and explore alternative
opportunities to maximize shareholder value, including potential transactions
involving hotels, apartments, mortgage investments, mobile home parks and a
variety of other proposals were reviewed and potential merger candidates were
reviewed.
In connection with the Board of Trustees' approval of the Former Parent's
transfer of Common Shares to CRIL, the Board of Trustees approved the Company's
new business plan. See "PROPOSAL 1 -- APPROVAL OF THE INVESTMENT -- Background
of and Reasons for the Proposal; Board of Trustees' Recommendation."
Further information regarding the Company, including the audited historical
financial statements of the Company and its subsidiaries, supplementary
financial information and management's discussion and analysis of the Company's
financial condition and results of operations, is contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as
amended, and the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997, which reports are attached hereto as annex F and annex G,
respectively.
455009.26
38
<PAGE>
BUSINESS AND OTHER INFORMATION CONCERNING VICTOR CAPITAL
Description of Business
General
Victor Capital was organized in 1989 as a private real estate financial
services firm providing real estate, investment banking, real estate advisory
and real estate asset management services. Victor Capital has served an
extensive roster of institutional investors, financial institutions and owners
and developers of property in connection with the acquisition, financing,
securitization, ownership, management, evaluation and disposition of public and
private commercial real estate. Victor Capital's senior professionals average
13-years of experience in the real estate financial services industry.
The executive offices of Victor Capital are located at 885 Third Avenue,
12th floor, New York, New York 10022 and the telephone number of Victor Capital
is (212) 593-5400.
Investment Banking and Real Estate Advisory Services
Victor Capital provides an array of investment banking and real estate
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% - 3.0% 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 will negotiate for the right to
receive a portion of its compensation in-kind; an example would be the receipt
of stock in a publicly traded company. Listed below are examples of typical
investment banking and real estate advisory assignments.
Selected Investment Banking Assignments
Mergers and Acquisitions. Victor Capital acted as the financial advisor in
arranging the merger which created a publicly-traded REIT with a 4.5 million
square foot portfolio of suburban office buildings located throughout the
southeast. The merger combined a public real estate investment company with a
privately held suburban office portfolio owned by affiliates of an investment
management fund. Victor Capital valued both portfolios, assisted in the
structuring and negotiation of the merger, and delivered fairness opinions
regarding the valuation of various service companies.
Initial Public Offering. Victor Capital has acted as the exclusive
financial advisor to a significant owner/operator of Central Business District
office properties seeking to become a publicly traded REIT via an initial public
offering ("IPO"). This assignment included analyzing the company's portfolio and
operating history and positioning the company's assets, preparing a private
offering memorandum and arranging for a strategic partner to recapitalize the
company pre-IPO. The assignment also involved securing a mezzanine line, placing
a pre-IPO acquisition debt facility and a post-IPO line of credit, identifying
and securing a critical mass of acquisitions pre-IPO, negotiating with and
retaining the underwriter, accounting firm and issuer's counsel, and managing
the overall IPO process.
Corporate Restructuring. Victor Capital was retained by the board of
directors of a $10 billion public company with interests in real estate and
retailing. The company's founder and chairman had been terminated and the board
was facing a corporate restructuring while initiating a search for a new CEO.
Victor Capital's role included the following: (i) assisting the board with
overall financial issues during the transition in management, (ii) advising the
new chairman during his acclimation period on strategic and operational issues,
including the processing and sequencing of property dispositions, (iii)
investigating, analyzing and valuing each of the company's real estate assets,
which included in excess of 30 properties, (iv) advising the company on all
aspects of a corporate recapitalization plan including the restructuring of
project-specific, pool-secured and unsecured debt, convertible and subordinated
455009.26
39
<PAGE>
public debentures, and preferred and common equity, and (v) counseling the
company with respect to its investments in several entities operating under
protection of the U.S. Bankruptcy Court.
Selected Real Estate Advisory Assignments
Project Development. Victor Capital was retained as the exclusive advisor
to a major publicly traded international entertainment company to create and
establish the Company's flag-ship United States entertainment destination. In
connection with this assignment, Victor Capital identified the company's site in
New York City, negotiated a financial incentives package with the New York State
and New York City development agencies, identified and selected a developer to
build the project, and negotiated a long-term lease on behalf of the Company.
Commencement of project construction is scheduled for Spring 1997.
Portfolio Dispositions and Management. Victor Capital was retained as the
real estate advisor to a $33 billion financial institution to assist management
with its portfolio of troubled real estate assets. The financial institution's
aggregate real estate exposure totaled $4.4 billion, of which $1.2 billion was
classified as non-performing. During the course of a 15-month assignment, Victor
Capital's responsibilities included, among other things: (i) initiating and
managing a bulk disposition program intended to sell large packages of
non-performing assets, (ii) assisting in the due diligence process for a
valuation of an in-market acquisition from the FDIC, (iii) assisting the
chairman and president in setting priorities, determining organizational
structure and staffing the real estate lending and recovery units, (iv)
designing and implementing a portfolio information system for enhanced internal
management and external communication with shareholders and rating agencies, (v)
establishing the systems, controls and procedures for an early warning system to
identify potential problem assets, and (vi) assisting real estate senior
management in developing a work-out and resolution strategy for all major
non-accrual loans and OREO assets.
Creditor Committee Advisor. Victor Capital acted as the financial advisor
to the ad hoc committee representing the noteholders of a $970 million
securitized note issue. The notes were secured by mortgages on three signature
office buildings located in Manhattan and comprising in excess of 4.6 million
square feet. Victor Capital negotiated a consensual settlement in bankruptcy on
behalf of the noteholders in which one of the buildings was sold and a newly
formed private REIT owned by the noteholders acquired title to the two remaining
properties. The new REIT recently closed on a $420 million mortgage financing
arranged by Victor Capital. Victor Capital continues to serve as the asset
manager for the REIT and is advising the company on a variety of growth
strategies.
Due Diligence. Victor Capital has been retained by various asset buyers to
analyze and perform due diligence on potential portfolio acquisitions. In these
assignments, Victor Capital typically performs site inspections and prepares
cash flow budgets, resolution plans, valuations, market surveys, and bidding
strategies. Through the ordinary course, these engagements have led to residual
assignments, including financings, dispositions and asset management.
Real Estate Asset Management
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 March 31, 1997, Victor Capital had seven such assignments
representing an asset value of approximately $900 million and total square
footage of approximately 6.9 million.
Victor Capital typically receives an annual real estate asset management
fee, payable monthly, which is typically 1.0% of the acquisition cost of the
assets managed. In some cases, Victor Capital also receives acquisition,
disposition and/or financing fees for assets under management; such fees are at
customary market levels. In many instances, Victor Capital receives an incentive
fee subject to a pre-arranged return on capital to the investor; such a fee is
realized out of the asset's sales proceeds. Victor Capital believes that such
incentive fees serve to align its interests with the interests of its client.
The term of Victor Capital's real estate asset management advisory agreements
vary with the form and nature of the investment. Generally, these assignments
have a duration of one to three years with a stipulated intention of selling the
asset under management as soon as practicable.
455009.26
40
<PAGE>
From time-to-time, senior employees of Victor Capital are invited to
co-invest in the aforementioned investment opportunities on an equal basis with
the real estate asset management client. The investment allocation to Victor
Capital's employees is not material in relation to the size of the client's
investment, and typically does not exceed 3.0% of the total investment. These
investments are made by Victor Capital's employees out of their own personal
funds, are purchased at terms no more or less favorable than the client, and are
subject to Victor Capital's fees. Victor Capital's clients encourage such
investments in an effort to align a Victor Capital's interests with those of its
client. See "RISK FACTORS -- Risk Factors Relating to the Company's New Business
Plan and the Acquisition -- No Opportunity to Co-Invest."
The foregoing co-investments are done as an accommodation to Victor
Capital's clients and, after consummation of the Acquisition, the Company will
not be precluded from co-investing with its clients or making similar equity
investments in other circumstances.
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 firms. While many of these
firms do not currently provide all of the services which Victor Capital
provides, there can be no assurance that such firms will not engage in such
activities in the future.
Property
Victor Capital's executive and administrative offices are located in
approximately 9,300 square feet of office space leased in the New York City
commercial building. Victor Capital believes that this office space is suitable
for its current operations for the foreseeable future. Victor Capital's lease
will terminate at the end of December 1997 with no stipulated renewal
provisions; as a consequence, Victor Capital is currently analyzing other
similar lease alternatives.
Employees
As of March 31, 1997, Victor Capital employed sixteen professional and five
other full-time employees. All of such employees, excepting one employee who
maintains an independent office in Boston, Massachusetts, are employed in its
executive offices. Victor Capital considers the relationship with its employees
to be good.
Legal Proceedings
Victor Capital is not a party to any material legal proceedings.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with
Victor Capital's historical audited combined financial statements and notes
thereto included elsewhere in this Proxy Statement.
General. Since its organization in 1989, Victor Capital has continued its
strategy of solidifying its position as a leading fully-integrated real estate
advisory company. The growth reflected in Victor Capital's financial statements
is the result principally of internal growth from new assignments from existing
and first time clients. Following is a discussion and analysis of the operations
and financial results of 1996 compared with the operations and financial results
of 1995 and 1994.
Victor Capital's revenue is derived primarily from real estate advisory
services provided from its three primary lines of business: (i) investment
banking, (ii) real estate advisory, and (iii) real estate asset management. See
"-- DESCRIPTION OF BUSINESS." A significant component of Victor Capital's
revenue is transactional in nature and is subject to the real estate markets
generally. Although Victor Capital has been successful in generating revenues in
adverse as well as favorable real estate markets, there can be no assurance that
the real estate financial services segment of the Company's business will be
able to adapt as Victor Capital has in the past for changing real
455009.26
41
<PAGE>
estate markets. See "RISK FACTORS -- Risk Factors Relating to the Company's New
Business Plan and the Acquisition -- Real Estate Advisory Services Revenues
Which are Transactional in Nature."
Victor Capital's expenses relate primarily to its salaries and
discretionary bonuses. For the last three years, approximately 80% of all of
Victor Capital's expenses related to salaries (including management fees payable
to its general partner), discretionary bonuses and other employee benefits.
Other expenses related primarily to general business overhead including such
items as rent, telephone, insurance and local business taxes. Historically,
revenue growth has out-paced increases in personnel and overhead costs. This
relationship has mitigated the effect to Victor Capital of price competition
within the industry, enabling Victor Capital to operate more competitively.
Results of Operations for the Three Months (Unaudited) Ended March 31, 1997
and 1996. Total revenues were $1,628,936 for the three months ended March 31,
1997, down 2% from $1,661,944 for the same period in 1996. Revenues earned from
ten engagements during the three months ended March 31, 1997 included
approximately $1,157,000 from three clients and accounted for approximately 71%
of quarterly revenues earned. Revenues earned from eleven engagements during the
three months ended March 31, 1996 included approximately $1,186,000 from five
clients and accounted for approximately 72% of quarterly revenues earned.
Total expenses were $992,606 for the three months ended March 31, 1997, up
26% from $786,486 for the same period in 1996. Of the total increase of
$206,120, 94,286 (46%) related to salaries and other employee benefits and
$53,647 (26%) related to expenses associated with the transaction. Rent expense
increased by $6,645 from the same period in 1996; the increase was primarily
attributable to an increased base rental rate and increased expense
reimbursements pursuant to Victor Capital's lease. Payments to subcontractors
increased by $19,485 from the same period in 1996; the increase was primarily
due to executive recruiting fees and included fees to a subcontractor who has
completed his assignment with Victor Capital. Local business taxes decreased by
$7,800 from the same period in 1996; this decrease is directly related to the
revenues of Victor Capital.
Victor Capital pays management fees to its general partner, Valentine
Wildove & Company, Inc., a corporation owned entirely by John R. Klopp and Craig
M. Hatkoff. In accordance with Victor Capital's partnership agreement,
management fees charged by Valentine Wildove & Company, Inc. for the three
months ended March 31, 1997 and 1996 amounted to $218,913 and $215,143,
respectively. After consummation of the Investment, Messrs. Klopp and Hatkoff
will be employed by the Company pursuant to employment agreements. See "PROPOSAL
3--ELECTION OF TRUSTEES--Employment and Consulting Agreements."
A change in interest rates is not expected to have a significant effect on
Victor Capital's operations in 1997 as the firm has no outstanding third-party
debt. While interest rate fluctuations may affect the real estate markets
generally, no material changes with regard to fee income are anticipated in
1997. In the future, significant increases in interest rates may impact the real
estate market and may therefore require the Company to modify its business plan
with regard to the types of real estate advisory assignments which Victor
Capital currently pursues.
Liquidity and Capital Resources. Victor Capital's primary liquidity and
capital resources include its cash, marketable securities and fees generated
from its real estate advisory business. For the periods ended March 31, 1997 and
1996, Victor Capital generated net income of $636,330 and $875,458,
respectively. Victor Capital's unrestricted cash totaled $1.15 million on March
31, 1997.
Victor Capital had no third-party debt outstanding as of March 31, 1997. As
of March 31, 1997, $725,000 was due to partners. This amount represents
short-term non-interest bearing loans made to the Partnership, of which $225,000
was repaid in April 1997.
Following the Acquisition, cash requirements related to Victor Capital's
business will be met from cash sources available to the Company, including the
proceeds from the Investment.
Results of Operations for the Years Ended December 31, 1996, 1995 and 1994.
Total revenues were $7,272,747 in 1996 up 21% from $6,031,915 in 1995, which
were up 15% from $5,231,877 in 1994. The increases reported in 1996 and 1995
were primarily attributable to new assignments from existing and first-time
clients.
455009.26
42
<PAGE>
Additionally, as Victor Capital continues to expand its real estate asset
management business, the resulting fees have a cumulative effect on revenues.
Victor Capital's revenues in 1996 were also assisted by a favorable commercial
real estate market which continues to recover and grow at a rate which is
greater than the inflation rate. Due, in part, to the favorable commercial real
estate market, the number of transactions completed on a nationwide basis has
increased and has resulted in more assignments for Victor Capital. Although
there is no assurance that the commercial real estate markets will continue to
improve, Victor Capital has been able to compete effectively as a real estate
advisor and in adverse as well as in favorable real estate markets.
Victor Capital's primary source of revenue is fee income derived from its
investment banking, real estate advisory and real estate asset management
businesses. In the three years ended December 31, 1996, fee income accounted for
in excess of 95% of all of Victor Capital's revenues. Other income during this
period was primarily attributable to investment income, sub-lease income (1995
and 1994 only) and in 1996, a gain on the sale of unregistered securities in the
amount of $262,585 which Victor Capital received in-kind as partial compensation
on a real estate advisory assignment. Victor Capital believes that its revenues
will continue to consist primarily of fee income.
Although Victor Capital has a significant client roster that it has
expanded since its organization, historically Victor Capital has earned
significant percentages of its total revenues from a small number of its
clients. In 1996, Victor Capital 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, Victor Capital 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, Victor
Capital 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.
In order to diversify its credit and concentration risk, Victor Capital has
focused on expanding its client base and its real estate asset management
business which creates longer-term, and hence more stable, recurring fee income.
Although Victor Capital has been successful in implementing the aforementioned
expansion strategies there can be no assurance that Victor Capital will continue
to be successful in this regard.
Total expenses were $4,629,805 in 1996 up 0.2% from $4,619,683 in 1995. In
1995, total expenses were up 2.5% from total expenses of $4,508,823 in 1994.
Victor Capital was successful in keeping its expenses effectively flat during
the last three years. Rent expense increased by $30,392 in 1996 from 1995 and
increased by $136,774 in 1995 from 1994. Those increases were primarily due to
sub-lease income of $24,030 and $41,167 in 1995 and 1994, respectively and the
recognition of unamortized deferred rent and rent abatements relating to the
termination of an office lease amounting to $114,381 in 1994. Other changes
related to base rental rates and expense reimbursements pursuant to Victor
Capital's lease. Payments to subcontractors decreased by $128,103 in 1996 from
1995 and decreased by $156,881 in 1995 from 1994. Those decreases are
attributable to a decreased utilization of outside independent contractors and
an increased utilization of full-time employees for various assignments. Local
business taxes increased by $46,022 in 1996 from 1995 and increased by $76,158
in 1995 from 1994. In 1996, the increase was solely related to increased net
income of Victor Capital. In 1995, the increase was related to increased
revenues and a credit in 1994 due to prior overaccruals. Senior members of
Victor Capital are expected to play a significant role in the start-up and
on-going business of the Company under its new business plan. These endeavors
will likely require significant time and attention thereby distracting
management from the Company's business segment previously conducted by Victor
Capital. While the Company will acquire Victor Capital's professional management
team, the Company may need to retain additional employees to continue to service
Victor Capital's existing client base and to continue to grow its business.
Victor Capital pays management fees to its general partner, Valentine
Wildove & Company, Inc., a corporation owned entirely by John R. Klopp and Craig
M. Hatkoff. In accordance with Victor Capital's partnership agreement,
management fees charged by Valentine Wildove & Company, Inc. for 1996, 1995 and
1994 amounted to $860,573, $836,560 and $821,000, respectively. After the
Investment, Messrs. Klopp and Hatkoff will be employed by the Company pursuant
to employment agreements. See PROPOSAL 3 -- ELECTION OF TRUSTEES -- Employment
and Consulting Agreements.
455009.26
43
<PAGE>
Victor Capital reported one extraordinary item of $181,319 in 1995,
representing the gain due to the extinguishment of debt at a favorable discount
for Victor Capital.
A change in interest rates is not expected to have a significant effect on
Victor Capital's operations in 1997 as the firm has no outstanding debt. While
interest rate fluctuations may effect the real estate market generally, no
material changes with regard to fee income are anticipated in 1997. In the
future, significant increases in interest rates may impact the real estate
market and may therefore require the Company to modify its business plan with
regard to the types of real estate advisory assignments which Victor Capital
currently pursues.
Liquidity and Capital Resources. Victor Capital's primary liquidity and
capital resources include its cash, marketable securities and fees generated
from its real estate advisory business. In 1996 and 1995, Victor Capital
generated net income of $2.6 million and $1.6 million, respectively. Victor
Capital's unrestricted cash totaled $1.1 million on December 31, 1996, down
slightly from $1.3 million on December 31, 1995; discretionary bonuses, if any,
are typically paid at year end and are funded from these amounts.
Victor Capital had no debt outstanding for the years ended December 31,
1996 and 1995. Debt service paid during 1995 and 1994 related to a $500,000
promissory note which was extinguished in June 1995.
Following the Acquisition, cash requirements related to the Victor Capital
business will be met from cash sources available to the Company, including the
proceeds from the Investment.
455009.26
44
<PAGE>
THE ANNUAL MEETING
Introduction
This Proxy Statement is being furnished to the shareholders as of the
Record Date in connection with the Annual Meeting to be held on July __, 1997 at
10:00 a.m., local time, at the Pacific Stock Exchange, 301 Pine Street, San
Francisco, California 94104, 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 issue and sell at
a price of $2.69 per share a maximum of 12,639,405 shares and a
minimum of 11,895,911 shares of the Company's Class A Preferred Shares
on the terms and conditions set forth in the Investment Agreement and
the Certificate of Designations.
o Proposal 2: To consider and vote upon proposals to:
(a) approve an Amendment which reclassifies the Common
Shares as "Class A Common Shares" and creates another
class of common shares, "Class B Non-Voting Common
Shares;"
(b) approve an Amendment which revises certain restrictions
upon transactions between the Company and certain large
shareholders and other affiliates;
(c) approve an Amendment which eliminates certain
provisions intended to assure the Company's continued
treatment as a "real estate investment trust" for
federal tax purposes; and
(d) approve other Amendments to the Existing Declaration.
o Proposal 3: To consider and vote upon a proposal to elect the seven
Nominees as trustees.
o Proposal 4: 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 1997.
o Proposal 5: To consider and vote upon a proposal to approve the
Incentive Share Plan.
o Proposal 6: To consider and vote upon a proposal to approve the
Trustee Plan.
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 Common 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 9,137,335 Common Shares issued and outstanding held by approximately
1,680 holders of record.
455009.26
45
<PAGE>
Holders of record of Common 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 Common Shares entitled to vote at the meeting is
necessary to constitute a quorum to transact business at the Annual Meeting.
Shareholders voting or abstaining from voting on any issue will be counted as
present for purposes of constituting a quorum. If a quorum is not present at the
Annual Meeting, the holders of a majority of the Common 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 Common Shares owned by
CRIL will be represented at the Annual Meeting, a quorum will be present, even
if no other Common Shares are represented, and approval of the Proposals is
assured without the affirmative vote of any other shareholders.
Because the Investment contemplates the issuance to Veqtor of Class A
Preferred Shares which may be converted into a number of Class A Common Shares
exceeding 20% of the current issued and outstanding Common Shares, the rules of
the New York Stock Exchange (the "NYSE"), on which the Common Shares are listed,
require that shareholder approval of such issuance be obtained. Approval of the
Investment will constitute approval of such issuance. According to the
applicable NYSE rules, approval of the Investment requires a majority of the
votes cast by the shareholders at the Annual Meeting. Pursuant to the
Declaration of Trust, the affirmative vote of the holders of 662/3% of the
outstanding Common Shares is required to approve the Restated Declaration.
Pursuant to the Declaration of Trust, the election of each of the Nominees as
trustees and the ratification of the appointment of the Company's independent
auditors and approval of the Share Option Plan requires a majority of the votes
cast by the shareholders at the Annual Meeting.
Under the rules of the principal stock exchanges, brokers who hold Common
Shares in street name for customers will not have authority to vote such Common
Shares on the proposals to approve the Investment and the Restated Declaration
unless they have received written instructions from beneficial owners.
Abstentions and broker "non-votes" will be considered in determining the
presence of quorum at the Annual Meeting, but will not be counted as votes cast
on any matter presented for a vote at the meeting. Because the Investment and
the Restated Declaration each require the approval of a specified affirmative
vote of the holders of the Common 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 ratification of the appointment
of Ernst & Young LLP and the election of trustees require a majority of the
votes cast at the Annual Meeting at which a quorum is present, abstentions and
broker "non-votes" will be excluded from the vote on such matters.
CRIL owns 6,959,593 Common Shares, representing approximately 76% of the
outstanding Common Shares. CRIL has advised the Company that it intends to vote
in favor of the Proposals. Accordingly, with the vote of CRIL in favor of the
Proposals, the Investment and the Restated Declaration will be approved, the
vote of appointment of Ernst & Young LLP will be ratified, the Nominees will be
elected, the Incentive Share Plan and the Trustee Plan approved without the
affirmative vote of any other shareholders.
Voting of Proxies; Solicitation
All Common 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. 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 have discretion to vote on such matters in accordance with their
best judgment. The Declaration of Trust provides that the Annual Meeting may be
adjourned by an affirmative vote of a majority of the Common 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.
455009.26
46
<PAGE>
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Company at or before the taking of the vote at the Annual Meeting, a
written notice of revocation bearing a later date than the proxy, (ii) duly
executing a later-dated proxy relating to the same shares and delivering it to
the Company before the taking of the vote at the Annual Meeting or (iii)
attending the Annual Meeting and voting in person (although attendance at the
Annual Meeting will not in and of itself constitute a revocation of a proxy).
Any written notice of revocation or subsequent proxy should be sent to the
Company c/o American Stock Transfer & Trust Company, 6201 Fifteenth Ave.,
Brooklyn, NY 11219, Attention: Paula Caroppoli, or hand delivered to the Company
at American Stock Transfer & Trust Company, so as to be delivered at or before
the taking of the vote at the Annual Meeting.
All expenses of this solicitation, including the cost of preparing and
mailing of this Proxy Statement, 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 Common 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 dissenter's
appraisal rights in connection with the Investment. See "RISK FACTORS -- Risk
Factors Relating to the Investment -- No Appraisal Rights."
455009.26
47
<PAGE>
PROPOSAL 1 -- APPROVAL OF THE INVESTMENT
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 INVESTMENT AGREEMENT, ATTACHED TO THIS PROXY STATEMENT AS
ANNEX A, AND THE FORM OF CERTIFICATE OF DESIGNATION, ATTACHED TO THIS PROXY
STATEMENT AS ANNEX B. SHAREHOLDERS ARE URGED TO READ THE ANNEXES TO THIS PROXY
STATEMENT IN THEIR ENTIRETY.
Overview
Shareholders are requested at the Annual Meeting to approve the issuance
and sale of up to 12,639,405 and no less than 11,895,911 Class A Preferred
Shares to Veqtor for a maximum aggregate purchase price of no more than
approximately $34 million and no less than approximately $32 million, based upon
a per share purchase price of $2.69 (the "Investment"). The actual number of
Class A Preferred Shares to be issued will be determined by Veqtor. When such
Preferred Shares (assuming 12,267,658 Preferred Shares are purchased by Veqtor
pursuant to the Investment Agreement) are acquired by Veqtor, Veqtor will hold
approximately 90% of the outstanding voting shares of the Company. The terms of
the Investment are described in the Investment Agreement and the Certificate of
Designation. The Investment is subject to certain conditions, including the
shareholder approval requested herein. See "-- INVESTMENT AGREEMENT" and
"DESCRIPTION OF CAPITAL SHARES."
The Investment will provide the Company with additional capital to make
investments and to pay costs and expenses of the Company and Veqtor associated
with the Investment and working capital. See "BUSINESS OF THE COMPANY FOLLOWING
THE INVESTMENT AND THE ACQUISITION" and "-- USE OF PROCEEDS." The Investment
will increase the number of outstanding shares of the Company by approximately
134% (assuming 12,267,658 Class A Preferred Shares are purchased by Veqtor
pursuant to the Investment Agreement) and significantly reduce the percentage
ownership interests and proportionate voting power of the existing holders of
Common Shares. See "RISK FACTORS."
The Company is seeking shareholder approval of the Investment pursuant to
applicable NYSE rules. Specifically, the NYSE rules require an issuer that has
securities listed on NYSE to seek shareholder approval of any issuance of a
number of securities that exceed 20% of the outstanding securities listed on
such exchange. The Common Shares underlying the Class A Preferred Shares to be
issued in connection with the Investment equals approximately 134% of the
outstanding Common Shares which are listed on the NYSE.
Background of and Reasons for the Proposal; Board of Trustees' Recommendation
In April 1994, the Company's Former Parent voted its Common Shares to
replace the Company's then incumbent Board of Trustees with a new three member
Board of Trustees comprised of trustees and officers of the Former Parent. This
action was undertaken by the Former Parent's board of trustees during its
bankruptcy reorganization proceedings. The newly elected Board of Trustees of
the Company terminated the existing contracts with the Company's then outside
advisor and property manager and took steps to stabilize and restore value to
the Company's real property and mortgage portfolio, including retaining a new
property manager to supervise the day-to-day operations of its income-producing
properties, authorizing overdue repairs and maintenance to its income-producing
properties and initiating foreclosure proceedings on delinquent mortgage notes
held by the Company. In May 1995 two other persons were appointed to serve as
independent trustees, joining the three incumbent trustees. Subsequently, those
trustees were elected at the Company's annual meeting of shareholders in June
1995.
In late 1994 and early 1995, the Company's Board of Trustees analyzed
various opportunities to grow and improve the profitability of its real property
and mortgage portfolio, including various acquisition and lending opportunities.
To facilitate the growth strategy, the Board of Trustees undertook to redeploy
its current asset portfolio into better performing assets. Once the Company
initiated its activities in pursuing growth opportunities, the Company
455009.26
48
<PAGE>
and its Former Parent received third party offers to acquire the Company or the
Former Parent's shares in the Company. Since such offers reflected values below
the Company's net asset value and did not consider the Company's growth
potential, they were rejected by the Company's Board of Trustees and the Former
Parent.
In considering various alternatives, the Company's Board of Trustees
actively pursued a proposal to become a hotel REIT and, in connection therewith,
offered to acquire four hotel properties owned by the Former Parent in exchange
for certain assets of the Company. On two separate occasions, the Company
submitted offers to acquire such hotel properties to the Former Parent's board
of trustees. The Company signed a letter of intent with a prospective financing
partner that had offered to provide $20 million in equity capital to fund the
hotel REIT business plan. The Former Parent did not accept the Company's offer,
expressing concerns over the dilution it would experience as a result of the
proposed equity investment by the financing partner. The Company's offer was
withdrawn in December 1995 and the letter of intent with the prospective
financing partner was terminated.
After the Company withdrew its offer to acquire the Former Parent's hotel
properties, the Company continued to pursue discussions in early 1996 with other
owners of hotel properties. None of those discussions resulted in any firm
proposals.
As part of its ongoing efforts to pursue an expansion transaction for the
Company and enhance shareholder value, the Board of Trustees met with a venture
capital firm, McCown DeLeeuw & Company, and McCown DeLeeuw & Company's
investment banking firm to evaluate their proposal to convert the Company to a
residential mortgage REIT. The venture capital firm and its advisor believed
that, with the Company's asset base of $25 million in relatively liquid real
estate investments, it was possible to steadily grow the Company into a
successful residential mortgage REIT over a three- to five-year time frame.
Those firms also suggested that such a plan would be consistent with the various
mortgage origination activities in which an affiliate of the venture capital
firm was already involved.
In April 1996, the Company's Board of Trustees was informed that the Former
Parent had decided to sell its 6,959,593 Common Shares (representing 76% of the
outstanding shares) and that the Former Parent had hired an investment banking
firm to find potential buyers for its common shares. The Board of Trustees of
the Company appointed an independent committee (the "Special Transaction
Committee") comprised of Elliott G. Steinberg and Juliana Bancroft to report to
the full Board with respect to Former Parent's efforts to sell its ownership
interest in the Company.
The Company's Board of Trustees reviewed the Company's historic status as a
REIT with equity and mortgage investments in light of developing opportunities
in the financial markets. It endorsed shifting the composition of its holdings
to other asset classes in order to obtain growth. Additionally, the Board
explored the possibility of changing from primarily an equity REIT to a mortgage
REIT.
When the aforementioned venture capital firm became aware of the Former
Parent's interest in selling its ownership interest in the Company, it commenced
negotiations with a special committee of the Former Parent to acquire such
ownership interest. Pursuant to a share purchase agreement that was executed in
September 1996, the Former Parent agreed to sell its shares to the venture
capital firm for approximately $21 million (or $3.02 per share), which
represented a premium over the $2.30 per share average trading market price for
the Common Shares in September 1996.
The proposed share purchase transaction was conditioned upon the approval
of the Company's Board of Trustees. In its request for the approval from the
Company's Board of Trustees, the Former Parent requested that the Company,
through action of the Board of Trustees, waive certain voting provisions of the
Company's declaration of trust relating to the ownership and transfer of blocks
of the Company's Common Shares that exceed 10% of the outstanding shares. In
response, the Special Transaction Committee and the Board of Trustees undertook
a due diligence review of the proposed buyer and its business plan for the
Company. The plan presented by the proposed buyer to the Board of Trustees
contemplated that the Company would convert to a fully dedicated residential
mortgage REIT, which would be managed externally by an affiliate of the buyer.
455009.26
49
<PAGE>
The review conducted by the Special Transaction Committee and the Board of
Trustees revealed that the mortgage affiliate of the potential buyer, the
proposed external manager of the residential mortgage REIT, had suffered
significant losses and was no longer engaged in the mortgage business. The Board
of Trustees also had concerns as to the background and experience of the
external manager's newly formed management team, conflicts of interest
associated with the proposed compensation structure, the inability to review
transaction documentation requested by the independent trustees and the lack of
equity risk assumed by the proposed buyer. As a result, the Special Transaction
Committee and the Board of Trustees did not approve the Former Parent's proposed
transfer of its Common Shares to the buyer.
The Special Transaction Committee and the Board of Trustees believed,
however, that a strategy of acquiring and managing real estate mortgage assets,
whether acquired as whole loans or as mortgage securities representing interests
in or obligations backed by pools of mortgage loans, could represent a viable
growth strategy in other circumstances. The Board of Trustees determined that,
given the Company's limited working capital and equity, if such a strategy were
to be pursued, the Company would derive the most benefit from a plan calling for
substantial equity investment in the Company and internal self-administration.
With the foregoing in mind, Mr. Steinberg, on behalf of the Board of Trustees,
contacted Samuel Zell and EGI in late 1996 to discuss the recapitalization of
the Company to pursue and expand the mortgage asset business. EGI confirmed its
interest and submitted an offer to the Former Parent to purchase the 6,959,593
Common Shares owned by the Former Parent for $20,222,011, or $2.91 per share. At
the same time, the Board of Trustees was also pursuing funding from EGI to
acquire the Former Parent's shares pursuant to the exercise of the redemption
provisions in the Company's declaration of trust.
Because the Former Parent did not respond to EGI's offer, representatives
of the Former Parent were invited to attend a meeting of the Company's Board of
Trustees to listen to a presentation by EGI and its partner, Victor Capital, as
to the terms of their proposed equity investment in the Company and their new
business plan for the Company. At a Board of Trustees meeting on December 12,
1996, EGI's offer to purchase the Former Parents' Common Shares for $20,222,011
was reaffirmed. Representatives of EGI and Victor Capital then described their
respective organizations' substantial real estate investment and finance
experience, their plans to introduce a new management team into the Company,
their proposed investment of a minimum of $30 million in preferred shares
(convertible into Common Shares at $2.69 per share) in the Company and the
proposed business plan of having the Company enter the commercial mortgage
finance market to pursue opportunities in the market for high-yielding
"mezzanine" and other lending investments in commercial real estate, commercial
mortgage backed securities and preferred equity investments backed by commercial
or multi-family income producing properties. The presentation to the Board
included detailed financial projections and other information relating to the
proposed business plan. The Board also received a presentation from legal
counsel with regard to the Board of Trustee's fiduciary obligations in
considering the proposed transfer of Common Shares, the new business plan,
management team and the preferred share investment.
Following the meeting, representatives of EGI and representatives of the
Former Parent commenced negotiations with respect to the purchase and sale of
the Former Parent's 6,959,593 Common Shares. After the parties reached agreement
on the terms of the share purchase agreement, the Former Parent formally
requested that the Company's Board of Trustees approve the proposed sale to
CRIL, an affiliate of EGI. After reviewing the definitive share purchase
agreement and following discussions among the trustees, the Company's Board of
Trustees approved (i) the purchase of the Former Parent's 6,959,593 Common
Shares, (ii) the plan presented to the Board of Trustees by representatives of
EGI and Victor Capital to have the Company enter the commercial mortgage finance
business according to the plans outlined therein and (iii) the issuance of a
minimum of $30 million in preferred shares at $2.69 per share (convertible into
Common Shares at a rate of one Common Share for each preferred share) on the
terms consistent with those presented to the Company's Board of Trustees by
representatives of EGI and Victor Capital.
455009.26
50
<PAGE>
The Special Transaction Committee and the then incumbent board determined
that the per share consideration to be paid to the Company in connection with
the minimum $30 million preferred share investment was fair to, and in the best
interest of, the shareholders of the Company. In reaching their determination as
to the fairness of the consideration to be paid to the Company and their
decision to approve the foregoing, the Special Transaction Committee and the
then incumbent Board of Trustees considered a number of factors, including,
without limitation, the following factors:
a. The attractiveness of the plan proposed by EGI and Victor Capital.
b. The significant real estate investment and financing background and
experience of EGI and Victor Capital and the management team that EGI
and Victor Capital would make available to the Company.
c. The significant amount of equity capital the Company would obtain from
the proposed preferred equity investment.
d. The financial strength of EGI and its affiliates, and EGI's ability to
commit to purchase the Former Parent's Common Shares without a
financing condition or the need to pledge the shares to finance the
purchase price.
e. The fact that the Company's minority public shareholders would
participate in any increase in the value of the Company's Common
Shares resulting from implementation of the new business plan.
f. The recent historical trading prices of the Company's Common Shares in
relation to the proposed conversion price of the Class A Preferred
Shares which, during the 60 trading days preceding the Board of
Trustees meeting at which the proposed equity investment was approved,
averaged $2.38 per share.
g. The ease of valuing the Company's assets and the fair market value of
the Company's assets on a per share basis.
h. Alternative offers and opportunities of which the then incumbent Board
of Trustees was aware that had previously been presented to the Former
Parent.
i. The value of the Company's net operating losses and the likely impact
of the proposed business plan and preferred equity investment on their
continued availability .
In view of the variety of factors considered in connection with its
evaluation of the transfer of Common Shares, the new business plan and the
preferred share investment, the Board of Trustees did not find it practicable
to, and did not, quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its determination. The current Board of
Trustees believes that consideration of the risk factors with respect to the
transfer of Common Shares, the preferred share investment and the new business
plan set forth under "RISK FACTORS" was subsumed in the then incumbent Board of
Trustees' consideration of the factors set forth above.
The Special Transaction Committee and the then incumbent Board of Trustees
also considered adverse factors relating to the transfer of Common Shares, the
new business plan and the preferred share investment, including (i) the risk
that the Company could not successfully implement the proposed business plan,
(ii) the dilutive effect of the issuance of the convertible preferred stock,
(iii) the risks associated with the new business plan, (iv) the risk that EGI
and Victor Capital would not obtain the financing for the preferred share
investment, and (v) the fact that EGI and Victor Capital would be able to
exercise voting control over any future transactions requiring shareholder
approval. It was the Special Transaction Committee's and the Board's business
judgment that the positive factors outweighed the negative factors involved in
proceeding with EGI's and Victor Capital's proposed investment, new business
plan for the Company and new management team. They based their conclusion on
their own internal assessment of the appropriateness terms of the proposed
investment, the attractiveness and achievability of the new
455009.26
51
<PAGE>
business plan and the quality of Victor Capital's management. They did not
retain a financial advisor to provide a fairness opinion with respect to the
proposed investment.
The current Board of Trustees has considered all of the foregoing and
unanimously recommends that the Company's shareholders vote in favor of approval
of the Investment and the other proposals. The current Board of Trustees has
considered all of the positive and adverse factors discussed above and believes
that the Investment is fair to, and in the best interest of, the shareholders of
the Company.
The Investment Agreement
General. Pursuant to the terms of the Investment Agreement, the Company
will sell to Veqtor up to 12,639,405 and no less than 11,895,911 Class A
Preferred Shares for a maximum aggregate purchase price of no more than
approximately $34 million and no less than approximately $32 million, based upon
a per share purchase price of $2.69. The actual number of Class A Preferred
Shares to be issued will be determined by Veqtor prior to the closing under the
Investment Agreement. The purchase price is payable in full in cash at closing.
A copy of the Investment Agreement is attached as annex A hereto and the form of
Certificate of Designation is attached as annex B hereto. For a description of
the rights, privileges, preferences and other terms of the Class A Preferred
Shares, see "DESCRIPTION OF CAPITAL SHARES."
Conditions to Closing. The Investment Agreement provides that consummation
of the Investment is subject to the satisfaction of certain conditions on or
before the closing. Each of the parties' obligations under the Investment
Agreement are subject to the following conditions, among others: (i) the absence
of any order, injunction or decree either preventing the consummation of the
Investment or which is reasonably likely to materially adversely affect
properties or assets of the Company; (ii) the absence of any claim, suit or
action challenging the consummation of the Investment; and (iii) the receipt of
all necessary approvals by the shareholders of the Company, including the
adoption of the Restated Declaration and the approval of the Investment.
In addition to the foregoing conditions, Veqtor's obligations under the
Investment Agreement are further conditioned by, among other things, the
following: (i) the performance, in all material respects, by the Company of its
obligations under the Investment Agreement; (ii) the accuracy of the
representations and warranties of the Company as set forth in the Investment
Agreement as of June __, 1997 and as of the closing date; and (iii) the receipt
by Veqtor of financing with terms and in an amount reasonably acceptable to
Veqtor and determined to be reasonably adequate to permit the consummation of
the Investment.
In addition to the conditions which are applicable to both parties, the
Company's obligations under the Investment Agreement are further conditioned by,
among other things, the following: (i) the performance, in all material
respects, by the Veqtor of its obligations under the Investment Agreement; and
(ii) the accuracy of the representations and warranties of Veqtor as set forth
in the Investment Agreement as of June __, 1997 and as of the closing date.
Provided that the conditions to closing have been satisfied, the sale of
the Class A Preferred Shares to Veqtor under the Investment Agreement is to
occur within two business days after the Annual Meeting. Prior to the closing,
the Company has agreed not to (i) conduct its business and operations in a
manner, incur any indebtedness or engage in any transaction which could impair
its ability to consummate the Investment, (ii) declare or pay any dividend or
make any distribution to shareholders or (iii) change its capitalization (except
as described in this Proxy Statement; see "DESCRIPTION OF CAPITAL SHARES").
Representations and Warranties. The Investment Agreement contains
representations and warranties of the Company and Veqtor which are customary in
transactions of this type, including, but not limited to, representations and
warranties concerning: (a) the organization of the Company and Veqtor; (b) the
due authorization, execution, delivery and enforceability of the Investment
Agreement; (c) the capitalization of the Company; (d) compliance with the
securities laws; (e) the receipt of all consents or approvals required, and the
lack of conflicts or violations under applicable charter documents, instruments
and laws, with respect to the transactions contemplated by the Investment
455009.26
52
<PAGE>
Agreement; (f) the payment by the Company of taxes; (g) the absence of material
litigation; (h) compliance with laws and regulations; and (i) the accuracy and
completeness of the information contained in this Proxy Statement.
Indemnification. The Investment Agreement provides that the Company will
indemnify Veqtor from all damages as the result of any breach of any
representation, warranty, covenant or agreement of the Company contained in the
Investment Agreement. Veqtor's right to indemnification and the Company's
obligation to provide indemnification with respect to any breach of a
representation or warranty will continue after the closing for a period of one
year.
Registration Rights. The Investment Agreement provides that Veqtor and the
other holders of the Company's 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 the shares of the
Company held by Veqtor and the other holders from time to time. 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 registration, Veqtor and the other
holders 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.
Certain Additional Covenants. The Investment Agreement provides that the
Company will not amend the Restated Declaration 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 Preferred
Shares.
The Company has also agreed not to issue any shares of its capital stock
that are not Junior Shares and not to issue any Class B Preferred Shares except
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 which is subject, under the terms of
the Restated Declaration, 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 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 shall be entitled to
receive out of assets of the Company available for distribution to shareholders,
the liquidation preference with respect to the Class A 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 have
theretofore been redeemed or converted.
The costs and expenses incurred by the Company, Veqtor, EGI and Victor
Capital in connection with the negotiation, preparation, execution, delivery and
enforcement of the Investment Agreement and the consummation of the transactions
contemplated thereby are to be paid by the Company.
The Company has agreed that, so long as any Class A Preferred Shares remain
outstanding, without the prior written consent of the holders of more than 50%
of the Class A Preferred Shares then outstanding, the Company will not incur any
indebtedness if the Company's debt to equity ratio would exceed 5:1.
Interests of the Principal Shareholder and Management in the Investment and the
Acquisition
CRIL, the Company's largest shareholder (with ownership of 76% of the
Commons Shares) and certain trustees of the Company have certain interests in
the Investment that are in addition to the interests of the Company and the
shareholders generally. Mr. Zell, who may be deemed to be the beneficial owner
of the Common Shares held by CRIL, and Mr. Garrabrant, and Mr. Klopp, trustees
of the Company, will beneficially own indirectly approximately 34.3%, 4.5% and
25%, respectively, of the ownership interests in Veqtor which will acquire the
Class A Preferred Shares pursuant to the Investment. In addition, concurrently
with the consummation of the Investment,
455009.26
53
<PAGE>
the Company will acquire ownership of Victor Capital and certain of its
affiliates in exchange for the Acquisition Notes in principal amount of $5.0
million. Mr. Klopp, who owns directly 42.5% of Victor Capital and 50% of the
relevant affiliates, will receive $2,162,500 in principal amount of the
Acquisition Notes. Valentine Wildove & Company, Inc., which owns 15% of Victor
Capital and in which Mr. Klopp is a 50% owner, will receive $675,000 in
principal amount of the Acquisition Notes. To the extent Messrs. Zell,
Garrabrant and Klopp derive benefits fro the Investment and Acquisition, their
interests conflict with shareholders generally since shareholders will not
derive similar benefits from consummation of such transactions. See "PROPOSAL 3
- -- ELECTION OF TRUSTEES--Certain Relationships and Related Transactions."
Use of Proceeds
The proceeds from the Investment will be used along with the Company's
existing assets to fund the acquisition of assets in accordance with the new
business plan.
PROPOSAL 2 -- APPROVAL OF RESTATED DECLARATION
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 FORM OF RESTATED DECLARATION ATTACHED TO THIS PROXY
STATEMENT AS ANNEX C. SHAREHOLDERS ARE URGED TO READ THE ANNEXES TO THIS PROXY
STATEMENT IN THEIR ENTIRETY.
Certain amendments to the Company's Declaration of Trust are necessary in
connection with the consummation of the Investment. In addition, the Board of
Trustees has also determined that various other amendments to the Existing
Declaration are desirable in light of the Company's new business plan. The
Restated Declaration makes the following significant Amendments to the Existing
Declaration.
Capitalization. The Restated Declaration reclassifies the Common Shares as
"Class A Common Shares" and creates another class of common shares to be known
as "Class B Non-Voting Common Shares." Under the Restated Declaration, a Bank
Holding Company (as defined in Section 1841(a) of the Bank Holding Company Act
of 1956, as amended), and an affiliate of a Bank Holding Company (as defined in
Section 1841(k) of the Bank Holding Company Act), may not own voting securities
of the Company except in limited amounts. A holder of any Class A Common Shares
or Class A Preferred Shares that is limited in the number of voting securities
of the Company that it may hold, such as a Bank Holding Company, may convert
such Class A Common Shares or Class A Preferred Shares into Class B Preferred
Shares or Class B Non-Voting Common Shares. See "DESCRIPTION OF CAPITAL SHARES."
Related Party Transactions. The Existing Declaration provided certain
restrictions upon transactions between the Company and certain large
shareholders and other affiliates. These provisions have been revised in the
Related Declaration to indicate that no contract or transaction between a
Trustee, officer or Shareholder and the Company shall be void or voidable solely
because of the interested party's relationship with the Company or the
interested party's presence at a meeting where such transaction was approved or
the interested party's votes were counted for such purpose if either (i) the
material facts as to the interested party's relationship or interest were
disclosed and the transaction was approved in good faith by either a majority of
the Shareholders or a majority of the disinterested Trustees or (ii) the
contract or transaction is fair to the Company. In addition, Section 3.7 of the
Restated Declaration eliminates any "corporate opportunity" claims by the
Company or any Shareholder with respect to any Trustee, officer or Shareholder.
Change of Company Name. The Restated Declaration provides that the Company
will conduct its business under the name "Capital Trust."
455009.26
54
<PAGE>
Elimination of Provisions Relating to the Company's Qualification as a
REIT. Under the Company's new business plan, the Company will no longer be
operated as a "real estate investment trust." Several provisions of the Existing
Declaration provide limitations upon the conduct of the Company's business,
including providing investment policies intended to assure the Company's ability
to continue to be treated as a "real estate investment trust" for federal income
tax purposes. The Restated Declaration eliminates the provisions relating to the
Company's qualification as a real estate investment trust, including
restrictions on share ownership relating to continued real estate investment
trust qualification, restrictions upon investments permitted to be made by the
Company and the requirement that a majority of the members of the Board of
Trustees be independent.
Change of Principal Office Location; Change in Location of Annual Meeting.
The Restated Declaration reflects the relocation of the Company's headquarters
from San Francisco, California to New York, New York, including providing that
future meetings of the shareholders will be held in New York, New York.
Right to Borrow Funds. The Restated Declaration permits the Board of
Trustees to cause the Company to borrow funds and issue debt obligations.
Board of Trustees. The Restated Declaration increases the maximum
permissible size of the Board of Trustees from seven to 21 and provides that
Trustees will be elected at each annual meeting by a plurality of the shares
entitled to vote at such meeting. In addition, the requirement that a majority
of the members of the Board of Trustees be independent has been eliminated. The
Restated Declaration provides that a Trustee may participate in a meeting of the
Board of Trustees by means of conference telephone.
Inspectors of Elections; Shareholder List. The Restated Declaration
provides for the appointment of election inspectors and that lists of
shareholders shall be kept and made available prior to shareholder meetings.
Certain Matters Requiring Super Majority Approval. The Existing Declaration
provides that the Company may not incorporate, merge, consolidate, reorganize,
liquidate, dissolve or sell, lease, exchange or otherwise dispose of all or
substantially all of its assets without the affirmative vote or written consent
of either (i) 75% of the trustees and a majority of the Common Shares entitled
to vote or (ii) 662/3% of the Common Shares entitled to vote. The Restated
Declaration changes the approval requirement to the affirmative vote or written
consent of a majority of the outstanding voting shares entitled to vote, voting
as a single class or series. The Existing Declaration also provides that the
early termination or dissolution of the Company and amendments to the Existing
Declaration require the affirmative vote or written consent of either (i) 75% of
the trustees and a majority of the Common Shares entitled to vote or (ii) 662/3%
of the Common Shares entitled to vote. The Restated Declaration changes the
approval requirement to the affirmative vote or written consent of either (i) a
majority of the trustees and a majority of the outstanding voting shares
entitled to vote or (ii) 662/3% of the outstanding voting shares entitled to
vote.
Exculpation and Indemnification. The Restated Declaration provides that the
Company may, to the full extent permitted by law, limit the liability of and
indemnify any and all trustees, officers, employees or agents for actions on the
Company's behalf by a by-law adopted by a majority of the Board of Trustees. The
proposed by-laws include the adoption of the exculpation and indemnification
provisions which are currently included in the Existing Declaration for the
benefit of trustees, officers, employees and agents of the Company.
By-laws. The Restated Declaration provides that the Board of Trustees may
adopt and from time to time amend or repeal by-laws for the conduct of its
business and the business of the Company, including without limitation, the form
of share certificates, mechanics of share transfers, limitations upon the
transferability of shares, and provisions with respect to the exculpation and
indemnification of trustees, officers and other parties by the Company. Certain
provisions of the Existing Declaration relating to such matters have been
eliminated from the Restated Declaration and are proposed to be set forth in
by-laws of the Company adopted by the Board of Trustees. The Board of Trustees
will be permitted to amend such by-laws without shareholder approval.
Following the adoption of the Restated Declaration, the Board of Trustees
will adopt By-laws for the Company.
455009.26
55
<PAGE>
The following is a comparison of the principal provisions of the Restated
Declaration (and the related form of By-Laws to be adopted in connection
therewith) and the Existing Declaration. Although the Restated Declaration will
result in substantive changes in the Existing Declaration governing the Company,
which could affect the rights of shareholders and the Company's officers and
directors, the Company does not believe that such changes will result in any
material benefits to trustees and officers or any material detriments to
shareholders. The comparisons herein are summaries which do not purport to be
complete and are qualified in their entirety by reference to the form of
Restated Declaration attached to the Proxy Statement as annex C (and related
form of By-Laws) and the Existing Declaration.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Declaration Formal declaration of terms and conditions upon Same provisions as Existing
- ----------- which the trust is to be created and terms and Declaration with additional declaration
conditions upon which the proportionate share and that Trustees will hold all investments
interest of each shareholder is to be determined as of every type and description acquired
well as terms and conditions under which property and investment proceeds in trust and
is to be held. manage, improve, hold and dispose of
such investments for the benefit of the
shareholders of record.
The Company
- -----------
Name No comparable provision. Section 2.1 names the Company
"Capital Trust" and requires the Board
of Trustees to conduct the Company's
activities under that name, unless the
name is not practical, legal or
convenient, in which case they may
adopt a more appropriate name.
Principal Office No comparable provision. Section 2.2 designates a principal
office and empowers the Board of
Trustees to change it from time to
time and to maintain additional
business addresses.
Purpose No comparable provision.
Section 2.3
delineates the purposes of the Company
as engaging in any lawful business or
activity for which a trust may be
organized under the laws of
California.
No Partnership Section 2.3 contains a provision which states that Section 2.4 incorporates Section 2.3 of
Relationship the Trustees, the shareholders or any other Person the Existing old Declaration and, in
are not to be considered co-partners or members of addition, characterizes the Company as
any association. a common law trust under California
law, states that it is not to be
treated as a general partnership,
limited partnership, joint venture or
joint stock company, and establishes
the status of the shareholders as
solely beneficiaries of the Company.
</TABLE>
455009.26
56
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amendment and No comparable provision. Section 2.5 states that the Restated
Restatement of Declaration amends and restates in its
Original Declaration entirety the Existing Declaration of
of Trust Trust.
Investment Policy
General Statement of Section 3.1 sets forth the Company's intent to Section 3.1 eliminates the references to
Policy operate as a REIT and instructs the Trustees to REIT status and the descriptions of
comply with all necessary rules and regulations permissible real property investments,
required to maintain the Company's REIT status. stating that the Board of Trustees shall
Section 3.2 sets forth permissible investments for from time to time establish policies to
the Company, primarily in the area of real govern the investment and reinvestment
property. of monies and other property held in
the trust estate.
Maintenance of Section 3.3 empowers the Trustees to maintain the Section 3.2 incorporates Section 3.3 of
Assets Company's assets. the Existing Declaration and adds a
clause indicating that all expenses
relating to the maintenance of the
Company's assets are to be reimbursed
from Company funds.
Disposition or Section 3.4 vests the Trustees with full discretion Section 3.3 incorporates Section 3.4 of
Encumbrance of in disposing of or encumbering Company assets. the Existing Declaration and also grants
Assets the Board of Trustees discretion in
financing Company assets.
Use of Brokers and Section 3.5 authorizes the Trustees to employ any Section 3.4 incorporates Section 3.5 of
Appraisers Person for the purposes of appraising, acquiring, the Existing Declaration and broadens
encumbering or disposing of Company assets, it to include employing Persons for
subject to the Declaration's restrictions governing financing purposes.
transactions with related parties.
Management of Section 3.6 authorizes the Trustees to select a Section 3.5 incorporates Section 3.6 of
Company Property qualified contractor to actively manage the the Existing Declaration.
Company property, subject to the Declaration's
restrictions governing transactions with related
parties.
Company's Right to No comparable provision. Section 3.6 authorizes the Company to
Borrow Funds borrow funds and issue debt
obligations.
</TABLE>
455009.26
57
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transactions with Section 3.7 sets forth the procedures requiring Section 3.7 indicates that no contractor
Related Parties disinterested Trustee Approval of any "Material transaction between a Trustee, officer
Transaction" with a "Related Party." Section 3.7 or shareholder and the Company shall
provides that such transactions must be fair and be void or voidable solely because of
reasonable to the Company and its shareholders as the interested party's relationship with
a whole at the time of authorization. "Material the Company or the interested party's
Transaction" is defined to include, without presence at a meeting where such
limitation, any purchase, sale, loan, lease, pledge, transaction was approved or the
exchange or other transfer of Company assets or interested party's votes were counted
securities, and any merger, consolidation, for such purpose if either (i) the
reorganization, joint venture, partnership or other material facts as to the interested
entity involving the Company. "Related Party" party's relationship or interest were
means any Trustee, officer, Large Shareholder, disclosed and the transaction was
investment manager or advisor of the Company, or approved in good faith by either a
any Affiliate or Associate of such person. "Large majority of the shareholders or a
Shareholder" means any person who is the majority of the disinterested Trustees
beneficial owner (within the meaning of Rule 13d-3 or (ii) the contract or transaction is fair
of the Act) of 5% or more of the outstanding to the Company. In addition, Section
common shares or preferred shares of the Company 3.7 eliminates any "corporate
entitled to vote in the election of Trustees after opportunity" claims by the Company or
including among his shares those owned by an any shareholder with respect to any
Affiliate or Associate. "Affiliate" and "Associate" Trustee, officer or shareholder.
have the meanings assigned in Rule 12b-2 of the
Exchange Act; provided that a person is not an
"Affiliate" or an "Associate" of any other person
solely by reason of being a Trustee or officer of
the Company.
Classes of Shares;
Designations,
Preferences, etc.;
Shareholders
Number of Shares; Sections 4.1(a) and (b) provide for two classes of Sections 4.1(a) and (b) provide for four
Classes shares, common shares and preferred shares, classes of shares, in unlimited amounts:
in unlimited amounts. Class A Common Shares, Class B Common
Shares, Class A Preferred Shares and
Class B Preferred Shares. It provides
that the Board of Trustees may
establish additional classes or series
of preferred shares as set forth in
Section 6.1 of the Restated
Declaration.
Designations, No comparable provision. Section 4.2 provides that designations,
Preferences, etc. preferences, qualifications and special
or relative rights or privileges of
the common and preferred shares are
set forth in Articles V and VI.
</TABLE>
455009.26
58
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Statement of Source Section 5.2 provides that distributions to No comparable provision.
shareholders shall be accompanied by a statement
identifying the source or sources to which the
distribution is charged.
Shareholder's Section 2.2 specifies the nature of a shareholder's Section 4.3 incorporates the text of
Interest in Company interest in the Company. Section 2.2 of the Existing Declara-
tion.
Common Shares
- -------------
Common Shares; Section 4.1(a) provides that all common shares Section 5.1 provides that, except as
Identical Rights have equal rights. otherwise specifically provided in
Article V of the Restated Declaration
or as required by law, all common
shares are identical and have the same
rights.
Dividends Sections 4.1(a) and 5.1 provide the terms governing Section 5.2 incorporates text from
the declaring of dividends on the common shares. Sections 4.1(a) and 5.1 of the old
Declaration and also provides that the
holders of all classes of common
shares are entitled to share equally
in dividends based upon the numbers of
shares held and that if dividends are
declared payable in common shares,
such dividends are payable in Class A
Common Shares to holders of Class A
Common Shares and in Class B Common
Shares to holders of Class B Common
Shares. It also provides that the
Board of Trustees may set a record
date for payment of dividends pursuant
to Section 7.3.
Liquidation Rights Section 4.1(a) provides the terms governing the Section 5.3 incorporates text from
liquidation rights of the holders of common shares. Sections 4.1(a) and 9.2 of the
Existing Declaration, but specifies
that amounts will be distributed
ratably among the holders of all
classes of common shares.
</TABLE>
455009.26
59
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Voting Rights No comparable provision. Section 5.4 provides that Class B
Common Shares have no voting rights.
In addition, subject to special voting
rights of Voting Preferred Shares, the
approval of matters brought for a
shareholders' vote requires a majority
of the Voting Shares (including the
Class A Common Shares) voting as a
single class. Each Voting Share
entitles the holder to the voting
rights specified in Section 5.4 or,
with respect to Voting Preferred
Shares, the voting rights specified in
the certificate of designation.
Section 5.4 further provides that any
Voting Shares owned by the Company
have no voting rights and are not
counted for determining a quorum.
Conversion Rights No comparable provision. Section 5.5(a) provides that each
Class A Common Share is convertible at
the holder's option into one fully
paid and nonassessable Class B Common
Share and that each Class B Common
Share is convertible at the holder's
option into one fully paid and
nonassessable Class A Common Share.
Section 5.5(b) sets forth the
procedures for exercising the
conversion right, including the
requirements of providing the Company
with a certification relating to
compliance with the Bank Holding
Company Act of 1956, as amended, and
surren- dering share certificates on
the Conversion Date. Section 5.5(c)
pro- vides that conversions are to be
made without a charge to the
converting holder for any tax. Section
5.5(d) provides that common shares
issued upon conversion of common
shares will be fully paid and
nonassessable and free of liens.
</TABLE>
455009.26
60
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stock Splits, etc. No comparable provision. Section 5.6 provides that there will be
no subdivision or combination of any
outstanding class or series of common
shares through stock splits,
reclassifications, stock dividends,
recapitalizations, consolidations or
otherwise, unless all classes and series
of common shares are subdivided or
combined proportionately and in the
same manner.
Consolidation, No comparable provision. Section 5.7 provides that the Company
Merger or Sale will not consolidate, merge or sell or
convey Company assets unless the
outstanding common shares of all
classes and series are convertible
into the same kind and amount of
consideration receivable by the
holders of common shares in such
transaction.
Reacquired Shares No comparable provision. Section 5.8 provides for the prompt
retirement and cancellation of any
common shares which are converted,
purchased, redeemed or otherwise
acquired by the Company.
Preferences, Section 4.1(a) and Section 4.7 provide that holders Section 5.9 incorporates the text of
Appraisals, of common shares are not entitled to preferences, Section 4.1(a) of the Existing Declara-
Redemption and appraisals, conversions, exchanges, preemptive or tion and eliminates the prohibitions on
Preemptive Rights redemption rights (except redemption rights as conversions and exchanges.
provided in Section 4.10).
Nonassessability of Section 4.2 provides that the Company's shares are Section 5.10 provides that the
Common Shares nonassessable. Company's common shares are
nonassessable after the payment of the
subscription price.
Preferred Shares
- ----------------
Preferred Shares Section 4.1(b) authorizes the Trustees to issue Section 6.1 incorporates the text of
preferred shares and to set the rights, powers, Section 4.1(b) of the Existing
preferences, privileges and restrictions with Declaration and adds a provision
respect to such shares in a resolution set forth in empowering the Board of Trustees to
a certificate of designation. amend the resolutions creating such
classes or series of preferred shares.
The Class A No comparable provision. Section 6.2 provides that the Class A
Preferred Shares and Preferred Shares and the Class B
the Class B Preferred Preferred Shares have the rights,
Shares preferences, privileges and restrictions
stated in the Certificates of Designa-
tion.
</TABLE>
455009.26
61
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonassessability of Section 4.2 provides that the Company's shares are Section 6.3 provides that the
Preferred Shares nonassessable. Company's preferred shares are
nonassessable after the payment of the
subscription price.
Recording of No comparable provision. Section 6.4 provides that the Company
Certificates of may record the Certificate of
Designation Designation.
Share Certificates
- ------------------
Issuance of Section 4.3 provides for the issuance of share Section 4.1 of the By-Laws
Certificates certificates. incorporates the text of Section 4.3 of
the Existing Declaration.
Authentication of Section 4.4 provides procedures for the Section 4.2 of the By-Laws
Certificates authentication of share certificates. incorporates the text of Section 4.4 of
the Existing Declaration, substituting
two officers designated by the Board
as signatories in place of specified,
titled officers.
Replacement Section 4.5 provides procedures for the Section 4.3 of the By-Laws incorpo-
Certificates replacement of share certificates. rates the text of Section 4.5 of the
Existing Declaration.
Only Registered Section 4.6 provides for a registry of shareholders Section 4.4 of the By-Laws incorpo-
Holder Recognized and procedures for resolving disputes concerning rates the text of Section 4.6 of the
title to share certificates. Existing Declaration.
Shareholder's Section 4.7 provides procedures for share Section 4.5 of the By-Laws incorpo-
Transfer of Shares certificate transfers. rates the text of Section 4.7 of the
Existing Declaration, eliminating
references to the prohibition on
fractional shares.
Transfers by Section 4.8 establishes the procedures for transfer Section 4.6 of the By-Laws
Operation of Law of shares by operation of law. incorporates the text of Section 4.8 of
the Existing Declaration, eliminating
the reference to the prohibition on
fractional shares.
Certain Restrictions No comparable provision. Section 4.7 of the By-Laws imposes
on Transfer; Legend conditions on certain transfers of
shares to Bank Holding Companies,
including requirements that the
transferred shares be converted into
non-voting shares and that a
restrictive legend be placed on the
share certificates.
</TABLE>
455009.26
62
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Right to Refuse to Section 4.10 provides restrictions on transferability Provision eliminated.
Transfer Shares; and limited rights of the Company to redeem shares
Acquisition in order to ensure that the Company qualifies as a
Restriction; REIT under applicable law.
Redemption Rights
Meetings of
- -----------
Shareholders
- ------------
Annual Meeting Section 7.1 establishes the time and place of the Section 7.1 incorporates the text of
annual meeting and the method of providing Section 7.1 of the Existing Declaration,
notice. changing the location to New York,
New York instead of San Francisco,
California.
Special Meetings Section 7.2 establishes the procedures for calling Section 7.2 incorporates the text of
a special meeting. Section 7.2 of the Existing Declaration.
Record Date Section 7.5 provides for the fixing of a record Section 7.3 incorporates the text of
date. Section 7.5 of the Existing Declaration,
but changes the date for fixing the
record date from no more than 50 days
to no more than 60 days, prior to the
date of any meeting of shareholders or
dividend payment.
Voting of Shares Section 7.7 establishes the procedures for voting. Section 7.4 incorporates the text of
Section 7.7 of the Existing Declara-
tion, eliminates a cross-reference to
maintenance of REIT status and a
reference to action without a meeting
and adds a reference to Section 5.4's
voting rights provisions.
Inspectors of No comparable provision. Section 7.5 provides for the
Elections appointment of election inspectors and
specifies their duties at shareholder
meetings.
Shareholder List No comparable provision. Section 7.6 establishes the procedures
for keeping a shareholder list for
election purposes.
Quorum Section 7.6 establishes quorum requirements for Section 7.7 incorporates the text of
shareholder meetings. Section 7.6 of the Existing Declara-
tion.
Notice Section 7.3 establishes notice requirements for Section 7.8 incorporates the text of
shareholder meetings. Section 7.3 of the Existing Declara-
tion, eliminating the reference to the
special meeting notice requirement now
covered in Section 7.9.
</TABLE>
455009.26
63
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Business Transacted Section 7.3 provides that no business may be Section 7.9 incorporates the special
transacted at a special meeting unless notice of meeting notice requirement from
such business has been given in the call for the Section 7.3 of the Existing Declara-
meeting. tion.
Action at a Meeting Section 7.7(a) provides that whenever any action is Section 7.10 incorporates the text of
to be taken by shareholders, unless otherwise Section 7.7(a) of the Existing Declara-
required by the Declaration, by provisions relating tion.
to outstanding preferred shares or by law, it is by
affirmative majority vote.
Action Without a Section 7.7(a) provides for shareholder action Section 7.11 incorporates the text of
Meeting without a meeting. Section 7.7(a) of the Existing Declara-
tion which refers to shareholder
action without a meeting and adds a
90-day notice to shareholders who have
not consented in writing.
Effect of Action Section 7.4 provides that, except as provided by Section 7.11 incorporates the text of
law or the Declaration, no action taken by the Section 7.4 of the Existing Declaration
shareholders is binding on the Trustees in their and adds an additional exception for
management of the Company. provisions in certificates of
designation.
Annual Report Section 7.8 provides for a report at each annual Provision eliminated.
meeting.
Trustees
- --------
Authority of Trustees Section 2.1 entrusts, except as otherwise expressly Section 8.1 incorporates the text of
provided, the business, affairs and assets of the Section 2.1 of the Existing Declaration.
Company to the exclusive management and control of
the Trustees and directs that the Trustees exercise
their powers for the exclusive benefit of the
shareholders.
Powers of Trustees Section 8.10 specifies the powers of the Trustees. Section 8.2 incorporates the text of
Section 8.10 of the Existing
Declaration, eliminates a geographic
restriction on where the Company can
conduct business, and adds (i) the
ability to terminate the Company's
status as a REIT and (ii) the power to
adopt by-laws.
</TABLE>
455009.26
64
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number, Term and Section 8.1 directs that the Trustees act as a Section 8.3(a) incorporates the text of
Qualifications Board, provides that the number of Trustees be no Section 8.1, changing the permissible
less than seven nor more than 13 and for the number of Trustees to no less than
method of Trustee succession, and vests ownership three nor more than 21. Section 8.3(b)
of Company assets in the Trustees jointly. Section incorporates the text of Section 8.2(b),
8.2(b) specifies the Trustees' terms of office. and Section 8.3(c) incorporates the text
Section 8.2(d) specifies the method for electing of Section 8.2(d) of the Existing
and qualifying Trustees. Section 8.2(a) contains a Declaration. Section 8.2(a)'s restriction
restriction that limits, to less than a majority, with respect to the number of Affiliates
the number of Trustees that are Affiliates or or Associates that may be Trustees has
Associates of an investment manager or advisor to been eliminated.
the Company.
Resignations Section 8.4 specifies how Trustees may resign. Section 8.4 incorporates the text of
Section 8.4 of the Existing Declaration,
eliminating a requirement that a
resignation be recorded in order to be
effective.
Removal of Trustees Section 8.3 specifies how Trustees are removed. Section 8.5 incorporates the text of
Section 8.3 of the Existing Declaration
and changes the required Trustee vote
to a simple majority.
Newly Created Section 8.5 provides that the Trustees may fill Section 8.6 incorporates the text of
Trusteeships and vacancies on the Board of Trustees and specifies Section 8.5 of the Existing Declaration
Vacancies the term of the newly-elected Trustee. and also provides for the transfer of the
interest of a Trustee in Company
property upon resignation or removal.
Place of Meeting No comparable provision. Section 1.1 of the By-Laws provides
that Trustee meetings are to be held at
the principal office of the Company or
as designated by the Chairman or a
majority of the Board of Trustees.
Quorum Section 8.5 provides that a majority of the Trustees Section 1.2 of the By-Laws
constitutes a quorum. incorporates the text of Section 8.5 of
the Existing Declaration.
Notice Section 8.5 provides that meetings may be called Section 1.3 of the By-Laws
at any time by the Chairman or any two Trustees, incorporates the text of Section 8.5 of
upon at least three days' notice. the Existing Declaration.
Action by Trustees Section 8.5 provides that the Trustees may act Section 1.4 of the By-Laws provides
pursuant to the vote or written consent, with or that the vote of a majority of the
without a meeting, of more than half of the Trustees present at a meeting at which
number of Trustees in office. a quorum is present shall be the act
of the Board (fixing an inconsistency
in Section 8.5 of the Existing
Declaration with respect to actions
with and without meetings).
</TABLE>
455009.26
65
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
By-Laws Section 8.6 provides that the Trustees may adopt, Section 8.2 empowers the Trustees to
amend or repeal by-laws for the conduct of their adopt, implement, amend and restate
duties and for defining the duties of the Company's by-laws which are not inconsistent
officers, agents, employees and representatives. with the new Declaration. Section 8.9
incorporates the text of Section 8.6
of the Existing Declaration and
specifies the scope of the permitted
by-laws.
Compensation Section 8.8 provides that the Trustees, the Section 8.7 incorporates the text of
secretary and every other person engaged to assist Section 8.8 of the Existing Declaration
in the execution of the Company are to be and broadens it slightly to cover all
compensated from Company assets at rates fixed Company officers.
by the Board.
Action without Section 8.5 provides that no action of the Trustees Section 1.5 of the By-Laws
Meeting without a meeting is effective unless all Trustees incorporates the text of Section 8.5 of
in office sign a written consent to such action and the Existing Declaration.
a waiver of a meeting and further provides that lack
of written consent and waiver will not bar claims
of a third-party relying in good faith upon such
action.
Telephonic Meeting No comparable provision. Section 1.6 of the By-Laws provides
that the Board of Trustees or
committee meetings may be held by
telephone or similar communication
devices and that participation by a
Trustee by telephone constitutes
personal presence at a meeting.
Use and Effect of Section 8.9 provides for the custody of the Section 1.7 of the By-Laws
Company Seal Company seal and establishes the effect of its use. incorporates the text of Section 8.9 of
the Existing Declaration.
Committees Section 8.7 provides for the appointment of Section 8.8 incorporates the text of
committees of the Company and the delegation of Section 8.7 of the Existing Declaration,
powers to such committees, excepting the power to eliminating the references to the
declare dividends and to amend the Declaration of delegation of authority to act on behalf
Trust and for the delegation of authority to act in of the Company (which is covered in
behalf of the Company to any Trustee, officer, Article IX of the Restated
employee or agent. Declaration).
</TABLE>
455009.26
66
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Officers
- --------
Officers Generally Section 8.7 provides for the delegation of authority Article IX incorporates the provisions
to act in behalf of the Company to any Trustee, of Section 8.7 of the Existing
officer, employee or agent. Declaration, and further provides that
the Board of Trustees may appoint such
officers and agents as it deems
advisable and determine the duties,
powers and terms of office of such
appointees. Article III of the By-Laws
contains provisions addressing the
powers of officers, the delegation of
duties to officers, the resignation
and removal of officers and the
filling of office vacancies.
Consolidation,
- --------------
Merger, Sale of
- ---------------
Assets, etc.
- ------------
Consolidation, Section 3.8 provides that, subject to other Article X incorporates the restrictions
Merger, Sale of restrictions in the Declaration and in any series of on the major transactions contained in
Assets, etc. preferred shares that may be outstanding, the (b) and (c) of Section 3.8 of the
Company may not: (a) take any action which would Existing Declaration, eliminates the
forseeably cause it to lose its REIT status; (b) be restriction on losing REIT status, and
incorporated, merged, consolidated, reorganized, changes the approval requirement to the
liquidated or dissolved; or (c) sell, lease, exchange affirmative vote or written consent of a
or otherwise dispose of all or substantially all of majority of the outstanding Voting
its assets, without the affirmative vote or written Shares entitled to vote, voting as a
consent of either (i) 75% of the Trustees and a single class or series.
majority of the common shares entitled to vote or
(ii) 662/3% of the common shares entitled to vote.
Accounting
- ----------
Standard Section 6.1 provides that the books and records of Section 11.1 incorporates the text of
the Company be kept in conformity with GAAP. Section 6.1 of the Existing Declaration
and adds a provision allowing the
Board of Trustees to determine
otherwise.
Inspection of Records Section 6.2 specifies the procedures for inspecting Section 11.2 incorporates the text of
the records of the Company. Section 6.2 of the Existing Declaration.
Annual Audit Section 6.3 provides for an annual audit of the Section 11.3 incorporates the text of
Company's books in conformity with GAAS and Section 6.3 of the Existing Declaration,
the filing and distribution to the shareholders of eliminates a reference to Company
the audit within 90 days of the close of the period surplus, and adds a provision allowing
covered by the report. the Board of Trustees to determine
whether the audit should be conducted
in conformity with GAAS.
</TABLE>
455009.26
67
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interim Reports Section 6.4 provides for interim reports containing Section 11.4 incorporates the text of
a balance sheet, which may be unaudited, to be Section 6.4 of the Existing Declaration.
prepared quarterly and to be distributed to
shareholders within a reasonable time after the
close of the quarter.
Duration of the
- ---------------
Company
- -------
Duration Section 9.1 provides that the Company will Section 12.1 incorporates the text of
continue for the lives of the named children and Section 9.1 of the Existing Declaration.
grandchildren of the initial Trustees, living on the
day of execution of the Declaration and for 20 years
after the death of the last survivor of them and
that the Company will then cease.
Early Termination Section 9.2 provides that the Trust is irrevocable Section 12.2 incorporates the text of
and that, subject to the provisions of any series of Section 9.2 of the Existing Declaration
outstanding preferred shares, it may be terminated and changes the approval requirement
or dissolved only upon the affirmative vote or to the affirmative vote or written
written consent of either (i) 75% of the Trustees consent of either (i) a majority of the
and a majority of the common shares entitled to Trustees and a majority of the
vote or (ii) 662/3% of the common shares entitled to outstanding Voting Shares or (ii)
vote. 662/3% of the outstanding Voting
Shares.
Procedure Upon Section 9.3 provides that upon termination of the Section 12.3 incorporates the text of
Termination Company, the Trustees will liquidate the Company Section 9.3, adds a requirement for
assets as they deem desirable, pay or make payment of any preferential amounts
provision for payment of all present and contingent due to any holders of preferred shares,
Company liabilities, and distribute the remaining and revises how the remaining assets
assets, either in kind or in money or both, to the are to be distributed by requiring that
shareholders in proportion to their holdings. they be distributed ratably to holders of
outstanding common shares, subject to
any participating or similar rights of
the outstanding preferred shares.
Amendments
- ----------
Amendment Section 10.3 provides that any amendment must be Section 13.1 incorporates the text of
Procedure in writing and, subject to the changes required by Section 10.3 of the Existing
law or to maintain REIT status and the provisions Declaration, eliminates the reference to
of any outstanding preferred shares, requires the maintenance of REIT status and
affirmative vote or written consent of either (i) 75% changes the approval requirement to the
of the Trustees and a majority of the outstanding affirmative vote or written consent of
common shares entitled to vote or (ii) 662/3% of the either (i) a majority of the Trustees and
outstanding common shares entitled to vote. a majority of the outstanding Voting
Shares or (ii) 662/3% of the
outstanding Voting Shares.
</TABLE>
455009.26
68
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amendments Section 10.4 provides that, notwithstanding Section Section 13.2 the text of
Without Shareholder 10.3, the Declaration may be amended by 75% of Section 10.4 of the Existing
Approval the Trustees without the vote or consent of the Declaration, eliminates the reference
shareholders to the extent they deem it necessary to REIT status and extends the notice
to maintain REIT status or to conform the period to 90 days.
Declaration to the requirements of applicable laws,
rulings or regulations, that the Trustees are not
liable for failing to so amend it, and that notice
of such amendment be sent to the shareholders within
30 days.
Recording Section 10.5 provides for the execution and Section 13.3 incorporates the text of
Amendments recording of an instrument setting forth the Section 10.5 of the Existing
amendment by the Secretary and the Chairman. Declaration, but provides that such
instrument may be recorded if deemed
advisable by the Board of Trustees.
Exculpation and
- ---------------
Indemnification
- ---------------
Exculpation of Section 2.6 provides that no Trustee, officer, Section 14.1 provides that the
Trustees, Officers employee or agent of the Company is liable to the Company may, to the full extent
and Others; Fidelity Company or any other for any act or permitted by law, limit the liability of
Bond omission except for his own willful misfeasance, and indemnify any and all Trustees,
bad faith, gross negligence or reckless disregard of officers, employees or agents and their
duty or his failure to act in good faith in the respective legal successors for actions
reasonable belief that his actions are in the on the Company's behalf in a by-law
Company's best interests. It further provides that adopted by a majority of the Board of
the above named individuals when acting in Trustees. Section 2.1 of the By-Laws
connection with the Company are deemed to be incorporates the text of Section 2.6 of
acting for the Company and not as individuals, that the Existing Declaration, eliminating
they are not liable for actions taken or omitted for the fidelity bond requirement.
or on behalf of the Company, and that resort must be
to the assets of the Company for payment or
performance. It also requires that the Trustees
obtain, file and maintain a good and sufficient
fidelity bond by a California-qualified corporate
surety.
Limitation on Section 2.5 provides that anyone dealing with or Section 14.2 incorporates the text of
Liability of having a claim against the Trustees, or any officer, Section 2.6 of the Existing Declaration.
Shareholders, agent or employee of the Company must look only
Trustees and Officers to the Company for payment, that no shareholder
is personally or individually liable, that every
Company contract provide that shareholders are not
personally liable, and that the Company maintain
adequate liability insurance for protection of the
Company and those connected to it.
</TABLE>
455009.26
69
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Restated Declaration of Trust (and
Topic Existing Declaration of Trust related By-Laws)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Indemnification and Section 2.7 provides for indemnification of those Section 2.2 of the By-Laws
Reimbursement connected to the Company and acting on its behalf, incorporates the text of Section 2.7 of
unless the claim or asserted liability arises out of
the Existing Declaration. willful misfeasance, bad
faith, gross negligence or reckless disregard of
duty or failure to act in good faith in the
reasonable belief that the actions are in the
Company's best interests. It further provides that
the right of indemnification is not exclusive of any
other right to which any individual is lawfully
entitled, that the Company may enter into individual
indemnification agreements with any person entitled
to indemnification under this section, and that the
Company may set aside assets to fund its
indemnification obligations.
Right of Trustees and Section 4.9 provides that any Trustee, officer, Section 14.3 incorporates the text of
Officers to Own agent, or employee of the Company may acquire Section 4.9 of the Existing Declaration.
Shares or Other or dispose of Company shares for his individual
Property and to account and exercise all rights of a shareholder, as
Engage in Other if he were not associated with the Company.
Businesses
Representations and Section 2.10 limits the authority of an officer, Section 14.4 incorporates the text of
Guarantees agent, representative or employee of the Company Section 2.10 of the Existing
to make representations or guarantees concerning Declaration.
the Company, to be responsible for the validity or
sufficiency of the Company or the share
certificates, to change the terms or conditions of
the Declaration or any Company certificates, or to
bind the Company or its agents.
Miscellaneous
- -------------
Fiscal Year No comparable provision. Section 15.1 establishes the calendar
year as the Company's fiscal year,
unless otherwise required by law or set
by resolution of the Trustees.
Checks No comparable provision. Section 15.2 authorizes the Trustees to
establish signatory policies for checks,
drafts, orders for payment of money,
notes or other evidences of
indebtedness.
</TABLE>
455009.26
70
<PAGE>
PROPOSAL 3 -- ELECTION OF TRUSTEES
All of the Company's trustees will be elected at the Annual Meeting to
serve until the next succeeding annual meeting of shareholders and until their
successors are elected and shall have qualified. Martin L. Edelman, Gary R.
Garrabrant and John R. Klopp are currently members of the Board of Trustees. All
nominees, if elected, are expected to serve until the next succeeding annual
meeting of shareholders.
The Board of Trustees has been informed that all of the nominees are
willing to serve as trustees but, if any of them should decline or be unable to
act as a trustee, the individuals named in the proxies will vote for the
election of such other person or persons as they, in their discretion, may
choose. The Board of Trustees has no reason to believe that any such nominees
will be unable or unwilling to serve.
The election to the Board of Trustees of each of the seven Nominees
identified in this Proxy Statement will require the affirmative vote of the
holders of a majority of the shares of Common Stock present in person or
represented by proxy at the Annual Meeting and entitled to vote assuming a
question is present. In tabulating the vote, abstentions and broker non-votes
will be disregarded. The Board of Trustees unanimously recommends that
shareholders vote FOR the election to the Board of Trustees of each of the seven
Nominees identified below.
Nominees for Election as Trustees
The name, age as of June 12, 1997, and existing or expected trustee
positions with the Company of each of the nominees for election as a trustee are
as follows:
Name Age Position
---- --- --------
Martin L. Edelman............... 56 Trustee (2)
Gary R. Garrabrant.............. 40 Trustee (1)(3)
Craig M. Hatkoff................ 43 Nominee for Trustee (3)
John R. Klopp................... 43 Trustee (1)(3)
Sheli Z. Rosenberg.............. 55 Nominee for Trustee (1)(3)
Lynne B. Sagalyn................ 49 Nominee for Trustee (2)
Samuel Zell..................... 55 Nominee for Trustee (4)
- --------------------------
(1) Expected to become a member of the Compensation Committee following the
Annual Meeting.
(2) Expected to become a member of the Audit Committee following the Annual
Meeting.
(3) Expected to become a member of the Executive Committee following the Annual
Meeting.
(4) Expected to be appointed Chairman of the Board following the Annual
Meeting.
The principal occupation for the last five years, selected biographical
information and the period of service as a trustee of the Company, if any, of
each of the nominees for trustee are set forth below.
Martin L. Edelman. Martin L. Edelman has been a trustee of the Company
since February 4, 1997. Mr. Edelman has been a director of Chartwell Leisure
Inc., a publicly traded owner and operator of hotel properties ("Chartwell"),
since November 1994 and has been president of Chartwell since January 1997. He
has also been a director of HFS Incorporated and a member of that corporation's
executive committee since November 1993. Mr. Edelman has been of counsel to
Battle Fowler LLP, a New York City law firm, since January 1994 and was a
partner with that firm from 1972 through 1993. Mr. Edelman also serves as a
director of Presidio Capital Corp. and G. Soros Realty, Inc.
455009.26
71
<PAGE>
Gary R. Garrabrant. Mr. Garrabrant has been a trustee of the Company since
January 2, 1997 and vice chairman of the Company since February 1997. After the
Acquisition, Mr. Garrabrant will resign as vice chairman of the Company. Mr.
Garrabrant has been a senior vice president of EGI, an owner, manager and
financier of real estate and corporations since January, 1996 and managing
partner of EGI Capital Markets, L.L.C. since September 1996. Prior to joining
EGI, he was a director of Sentinel Securities Corporation where he established a
real estate securities investment management operation. In 1994, Mr. Garrabrant
co-founded Genesis Realty Capital Management, a money management firm
exclusively focused on the equity and debt securities of public real estate
companies. From 1989 to 1994, he was responsible for equity private placements
and asset sales in the real estate investment banking division of The Bankers
Trust Company. From 1981 to 1989 he was associated with Chemical Bank.
Craig M. Hatkoff. After the Acquisition, Mr. Hatkoff will serve as the vice
chairman of the Company and chairman of the executive committee of the Board of
Trustees. 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. Mr. Klopp has been a trustee of the Company since January 2,
1997 and chief executive officer of the Company since February 1997. After the
Acquisition, Mr. Klopp will also serve as vice chairman of the Company. 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 a portfolio of construction and permanent loans. He
is a director of Metropolis Realty Trust, Inc., a Manhattan office REIT.
Sheli Z. Rosenberg. Ms. Rosenberg is the chief executive officer, president
and a director of EGI. She is a principal of the law firm Rosenberg &
Liebentritt P.C. for more than the past five years. Ms. Rosenberg has been a
director of Jacor Communications, Inc., an owner of radio stations since 1994
and has been the chairman of its board of directors since February 1996. Ms.
Rosenberg is a director of: Capsure Holdings Corp., a provider of surety and
fidelity bonds in the United States ("Capsure Holdings"); Falcon Building
Products, Inc., a manufacturer and supplier of building products; American
Classic Voyages Co., an owner and operator of cruise lines ("American Classic");
Manufactured Home Communities, Inc., a real estate investment trust specializing
in the ownership and management of manufactured home communities ("MHC"); Sealy
Corporation, a bedding manufacturer ("Sealy"); Anixter International Inc., a
provider of integrated network and cabling systems ("Anixter"), Quality Food
Centers, Inc. an owner and operator of supermarkets ("Quality Food"), and Revco
D.S., Inc. a drugstore chain ("Revco"). She is also a trustee of Equity
Residential Properties Trust, a REIT specializing in the ownership and
management of multi-family housing. 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. Dr. Lynne B. 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.
Samuel Zell. Mr. Zell is chairman of the board of directors of EGI,
American Classic and Anixter. Mr. Zell is chairman of the board and chief
executive officers of both Capsure Holdings and MHC. He is Chairman of the board
of trustees of Equity Residential Properties Trust. He is co-chairman of the
board of directors of Revco and is a director of Quality Food, Sealy, Charthouse
Enterprises, Inc., an owner and operator of restaurants, Ramco Energy PLC, an
independent oil company based in the United Kingdom, and TeleTech Holdings,
Inc., a provider of telephone and computer based customer care solutions.
455009.26
72
<PAGE>
Board of Trustees
The Board of Trustees is currently comprised of Messrs. Edelman, Klopp and
Garrabrant and Frank A. Morrow, Elliot G. Steinberg, Juliana Bancroft and Arnold
E. Brown. The Board of Trustees has three standing committees, an audit
committee, a compensation committee and a nominating committee which were each
comprised of Mr. Steinberg and Ms. Bancroft, neither of whom is or has been a
salaried officer or employee of the Company.
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. The
compensation committee establishes the Company's general compensation policies
and makes recommendations to the Board regarding compensation and benefit
arrangements for officers and other key managerial employees of the Company. The
nominating committee establishes the qualifications for trustees and procedures
for identifying possible nominees, and nominates on behalf of the Board nominees
for election as trustee. The Company does not have any policy or procedure for
consideration of nominees recommended by shareholders of the Company. Following
the Annual Meeting, the Board of Trustees will create an executive committee and
will disband the nominating committee.
In April 1996, the Board of Trustees created the Special Transaction
Committee to report to the full board with respect to the Former Parent's
efforts to sell its ownership interest in the Company. The Special Transaction
Committee was comprised of Elliott G. Steinberg and Juliana Bancroft. See
"PROPOSAL 1 -- APPROVAL OF THE INVESTMENT -- Background of and Reasons for the
Proposal; Board of Trustees' Recommendations."
During 1996, the Board of Trustees held 12 meetings, including three
telephonic meetings. The audit committee held one meeting in 1996. During 1996,
the compensation committee held one meeting. The nominating committee held two
meetings in 1996. The Special Transaction Committee held 12 meetings in 1996.
During 1996, each trustee attended at least 92 percent of the total number of
meetings of the Board and 100 percent of the total number of meetings of
committees on which he or she served.
Messrs. Brown, Morrow and Steinberg and Ms. Bancroft will not stand for
election at the Annual Meeting.
Compensation of Trustees
Trustees who currently are not receiving compensation as officers or
employees of the Company or any of its subsidiaries are paid an annual retainer
fee of $20,000, meeting fees of $1,000 for each Board of Trustees meeting
attended and $500 for each committee or telephonic meeting. Mr. Steinberg
received additional compensation totaling $50,000 and $90,000 in 1995 and 1996,
respectively for consulting services provided to the Company in connection with
the Company's review and consideration of alternative expansion opportunities.
Executive Officers
Following the consummation of the Investment and the Acquisition, it is
expected that the Company will appoint additional executive officers, including
a chief financial officer for which an executive search is currently being
conducted.
455009.26
73
<PAGE>
Executive Compensation
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the chief executive
officer of the Company for services rendered in all capacities to the Company
and its subsidiaries during such period. There were no other executive officers
earning over $100,000 of annual compensation from the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
- -----------------------------------------------------------------------------------------
All Other
Compensation
Name and Principal Position Year Salary($) Bonus($) ($)
- --------------------------- ---- --------- -------- ----
<S> <C> <C> <C> <C>
Frank A. Morrow(1) 1996 $180,000 -- --
Chairman of the Board and Chief 1995 72,000 -- --
Executive Officer 1994 64,000 -- --
</TABLE>
- ----------------------
(1) During 1994 and 1995, Mr. Morrow was employed by the Former Parent and did
not receive any compensation directly from the Company. Mr. Morrow's
compensation from the Former Parent was paid to his wholly owned consulting
firm, Frank A. Morrow Associates ("FAMA"). Pursuant to an oral cost
allocation agreement with the Former Parent, certain services, including
Mr. Morrow's services, were shared by the Company with the Former Parent.
Pursuant to this agreement, the Company reimbursed the Former Parent for
approximately $72,000 and $64,000 of the compensation paid by the Former
Parent to FAMA in 1995 and 1994, respectively, which amounts represented
the agreed-upon allocation of such costs. See "-- CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS." Mr. Morrow was not employed by the Former Parent
after January [ ], 1996. The Company accrued $180,000 as compensation due
to FAMA for 1996, which amount was paid in the first quarter of 1997. FAMA
is being paid $20,000 per month in 1997.
The Company has not yet paid any compensation (other than trustee fees) to
any of the persons who have been appointed executive officers this year or will
be appointed executive officers following consummation of the Investment and the
Acquisition. The Board of Trustees will continue to rely on a compensation
committee composed of a majority of non-employee members to recommend the form
and amount of compensation to be paid to the executive officers of the Company.
Following the Annual Meeting, a new compensation committee will be appointed.
The Board of Trustees expects that the compensation program for the Company's
executive officers will change significantly as the Company intends to
appropriately compensate and provide incentives to its new management team,
although except as described under "--Employment and Consulting Agreements," no
new compensation has been proposed. It is anticipated that when the new
compensation committee meets to determine such compensation after the
consummation of the Investment and the Acquisition, the compensation committee
will generally adhere to compensation policies which reflect the belief that (i)
the Company must attract and retain individuals of outstanding ability and
motivate and reward such individuals for sustained performance, (ii) a
substantial portion of an executive's compensation should be at risk based upon
the executive's performance and that of the Company and (iii) within these
parameters, levels of compensation should generally be in line with that offered
by comparable corporations. On an ongoing basis, the type and amount of
compensation to be paid by the Company to its officers will be entirely
discretionary and within the subjective judgment of the compensation committee.
It is expected that future executive compensation will be comprised of
three elements: annual base salary, annual bonus compensation and long-term
incentive compensation.
Messrs. Klopp and Hatkoff will receive the salaries established by their
employment contracts, and the Board of Trustees expects that the other executive
officers will receive the salaries established by the compensation committee
commensurate with prevailing salaries for similar positions in other similarly
sized companies. The Board of Trustees
455009.26
74
<PAGE>
expects that annual salary adjustments will be made based on the Company's
performance, the individual executive's contribution to that performance,
prevailing salaries and changes in the cost of living.
The Board of Trustees' goal 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. The Board of Trustees expects to develop programs
designed to meet such goals.
The Company's long-term incentive compensation will be provided by grants
of share options under the Company's Incentive Share Plan. The Incentive Share
Plan will be administered by the compensation committee which the Board of
Trustees expects will assess various factors when considering option grants.
Such factors will include prevailing norms for the ratio of options outstanding
to total shares outstanding, the relative influence each executive officer will
have on building shareholder value over the long term, and the amount, vesting
and expiration dates of each executive officer's outstanding options.
Section 162(m) of the Code, as amended, and the regulations promulgated
thereunder limit the federal income tax deductions of publicly traded companies
to the extent total compensation paid to chief executive officers and the four
other most highly compensated executive officers exceeds $1,000,000 in any year,
unless such compensation qualifies as "performance-based" as defined in the
regulations. Grants of share options under the Company's Incentive Share Plan
would qualify as performance-based compensation. The Board of Trustees currently
intends the compensation paid to its executive officers will comply with the
regulations promulgated under Section 162(m) so that compensation paid to such
officers will be deductible without limitation under Section 162(m). However, in
the future, if, in the judgment of the Board of Trustees, 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
Board may adopt such a program.
Employment and Consulting Agreements
The Company will enter into employment agreements with John R. Klopp and
Craig M. Hatkoff in connection with the Acquisition. The employment agreements
will provide for five-year terms of employment commencing as of the date of the
Acquisition. On the fifth anniversary of the commencement of the employment
agreements, and on each succeeding anniversary, the terms of the employment
agreements shall be automatically extended for one additional year unless, not
later than three months prior to such anniversary date, either party shall have
notified the other that it will not extend the term of the agreement. The
employment agreements provide for base annual salaries of $500,000, which will
be increased each calendar year to reflect increases in the cost of living and
will otherwise be subject to increase in the discretion of the Board of
Trustees. Mr. Klopp and Mr. Hatkoff are also entitled to annual incentive cash
bonuses to be determined by the Board of Trustees or the Compensation Committee
based on individual performance and the profitability of the Company. Mr. Klopp
and Mr. Hatkoff will also be participants in the Incentive Share Plan and other
employee benefit plans of the Company.
If the employment of Mr. Klopp or Mr. Hatkoff is terminated without cause,
with good reason or following a change of control, as those terms are defined in
the employment agreements, the affected employee would be entitled to (i) a
severance payment equal to the greater of the amount payable to such employee
over the remainder of the term of the employment agreement or an amount equal to
the aggregate base salary and cash incentive bonus paid to the employee during
the previous two years; (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 three years following the employee's
termination. See "PROPOSAL 5 --APPROVAL OF THE 1997 LONG-TERM INCENTIVE SHARE
PLAN." 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 will enter into a consulting agreement with Gary R. Garrabrant
upon consummation of the Investment. The consulting agreement will have a term
of one year and will provide for a consulting fee of $150,000. Pursuant to the
agreement, Mr. Garrabrant will provide consulting services including, strategic
planning, identifying and
455009.26
75
<PAGE>
negotiating mergers, acquisitions, joint ventures and strategic alliances, and
advising as to capital structure matters. Pursuant to the agreement, Mr.
Garrabrant will also be entitled to participate in the Company's Incentive Share
Plan.
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 New York Stock Exchange. 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 and 4 and amendments thereto
furnished to the Company during 1996 and written representation from certain of
the trustees and from the Former Parent that no form is required to be filed,
the Company believes that no trustee, officer or beneficial owner of more than
10% of its Common Shares failed to file on a timely basis reports required
pursuant to Section 16(a) of the Exchange Act with respect to 1996 or any prior
fiscal year. However, John McMahan, a former trustee of the Company, 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.
455009.26
76
<PAGE>
Report on Executive Compensation1
The compensation committee of the Board of Trustees establishes the general
compensation policies of the Company and the compensation plans and specific
compensation levels for executive officers, subject to approval by the Board of
Trustees. Following the appointment of new management in April 1994 after the
then incumbent Board of Trustees was removed by the Former Parent, the Company
did not compensate any officers directly. Rather until January 1996, the
Company's executive officers, who were during such period also officers of the
Former Parent, were compensated pursuant to their employment agreements with the
Former Parent. The Company and the Former Parent shared such compensation
expenses in proportion to their respective net assets, which arrangement was
terminated in January 1996. See "-- Certain Relationships and Related
Transactions." In 1996, the Company began accruing compensation to be paid
directly to the wholly owned consulting firm of the Company's chief executive
officer, Frank A. Morrow, the only executive officer of the Company.
In considering Mr. Morrow's compensation, the compensation committee
believes it appropriate that Mr. Morrow's compensation be tied to the
accomplishment of the goals established by the board of trustees to increase
shareholder value. In late 1994 and 1995, the Company pursued opportunities to
grow and improve the profitability of its real property and mortgage portfolio
(including acquiring the hotel assets of the Former Parent). When the proposed
transactions were deemed impracticable, the board of trustees determined that
the Company should redeploy its current asset portfolio into better performing
assets. The compensation committee believed that Mr. Morrow's compensation for
1996 should be based on his performance in selling portfolio assets in a timely
manner and for the highest possible price and his cooperation with the special
committee in identifying and consummating a transaction to maximize shareholder
value. The compensation committee believed that these goals had been
substantially accomplished or were in the process of being accomplished by
November 1996 and accordingly, on November 14, 1996, the compensation committee
recommended to the board of trustees that Mr. Morrow's compensation be fixed at
$20,000 per month retroactive to January 1, 1996. The board approved the
recommendation subject to discussion with a trustee who was not present during
that part of the meeting. Thereafter, the board determined that Mr. Morrow
should be paid $15,000 per month for 1996 and $20,000 per month effective
January 1, 1997. The $180,000 payable for 1996 was accrued on the books of the
Trust for 1996 and was paid in March 1997 after the sale of the Company's
remaining two commercial properties.
Compensation Committee
Juliana Bancroft
Elliot G. Steinberg
Board of Trustees
Frank A. Morrow
Juliana Bancroft
Arnold E. Brown
Martin L. Edelman
Gary R. Garrabrant
John R. Klopp
Elliott G. Steinberg
- --------
1 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 or the Exchange Act, whether
made before or after the date hereof and irrespective of any general
incorporation language in any filing.
455009.26
77
<PAGE>
Performance Graph
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on California Real Estate Investment
Trust ("CalREIT") Common Shares against the cumulative total return of companies
listed on the New York Stock Exchange and within the National Association of
Real Estate Investment Trusts ("NAREIT") Hybrid REIT group. The five-year period
compared commences January 1, 1992 and ends December 31, 1996. This graph
assumes that $100 was invested on January 1, 1992 in CalREIT and each of the two
indices, and that all cash distributions were reinvested. The Common Share price
performance shown on the graph is not necessarily indicative of future price
performance.
Comparison of Five-Year Cumulative Total Returns
CalREIT Common Shares, New York Stock Exchange Index
& NAREIT Hybrid REIT Index
[GRAPHIC OMITTED]
<TABLE>
Dec. 31, 1991 Dec. 31, 1992 Dec. 31, 1993 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CalREIT $100.00 $124.60 $136.71 $110.06 $101.60 $186.26
NYSE Market Index $100.00 $104.70 $118.88 $116.57 $151.15 $182.08
NAREIT Hybrid $100.00 $116.59 $142.94 $146.94 $180.72 $233.77
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The foregoing price performance comparisons shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act, or under the
455009.26
78
<PAGE>
Exchange Act, except to the extent that the Company specifically incorporates
this graph by reference, and shall not otherwise be deemed filed under such
acts.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of June 12, 1997 certain information with
respect to the beneficial ownership of Common Stock, and the voting power
possessed thereby (based on 9,137,535 Common Shares outstanding on that date),
by (i) each person known to the Company to be the beneficial owner of more than
5% of the outstanding shares of each class of Common Stock, (ii) each trustee,
nominee for trustee and named executive officer of the Company who is a
beneficial owner of any Common Shares and (iii) all trustees, nominees for
trustee and executive officers of the Company as a group, and as adjusted at
that date to reflect the sale of the Class A Preferred Shares upon consummation
of the Investment (assuming 12,267,658 Class A Preferred Shares are purchased by
Veqtor pursuant to the Investment Agreement).
<TABLE>
<CAPTION>
Common Shares Preferred Shares
------------------------------------------------- ------------------------
Amount and Nature of Amount and Nature of Amount and Nature of
Beneficial Ownership(1) Beneficial Ownership(1) Beneficial Ownership(1)
Prior to the Investment After the Investment After the Investment
----------------------- ---------------------- ------------------------
Percent of
Total Voting
Five Percent Shareholders, Percent of Percent of Percent of Power After
Directors and Executive Officers Number Class Number Class Number Class the Investment
- ---------------------------------- ----------- ---------- ---------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
CalREIT Investors Limited 6,959,593(3) 76.2% -- -- -- -- --
Partnership (2)
c/o Equity Group
Investments, Inc.
Two North Riverside Plaza,
7th Floor
Chicago, Illinois 60606
Veqtor Finance Company LLC (4) -- -- 6,959,593(3) 76.2% 12,267,658 100% 90%
c/o Victor Capital Group, L.P.
885 Third Avenue, 12th Floor
New York, New York 10022
Martin L. Edelman -- -- -- -- -- -- --
Gary R. Garrabrant (5) -- -- -- -- -- -- --
Craig M. Hatkoff -- -- -- -- -- -- --
John R. Klopp -- -- -- -- -- -- --
Sheli Z. Rosenberg (5) -- -- -- -- -- -- --
Lynne B. Sagalyn -- -- -- -- -- -- --
Samuel Zell 6,959,593(6) 76.2% -- -- -- -- --
All executive officers, -- -- -- -- -- -- --
trustees and nominees
for trustees as a group
(7 persons)
</TABLE>
- ---------------------------
(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
455009.26
79
<PAGE>
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) The general partner of CRIL is Zell General Partnership, Inc., the sole
stockholder of which is the Samuel Zell Revocable Trust (the "SZRT"). Mr.
Samuel Zell serves as the trustee of the SZRT.
(3) Concurrently with the consummation of the Investment, CRIL will sell its
6,959,593 Common Shares to Veqtor.
(4) John R. Klopp, Craig M. Hatkoff and Samuel Zell collectively will
indirectly control the affairs of Veqtor. Each of Messrs. Hatkoff, Klopp
and Zell disclaim beneficial ownership of the shares to be owned by Veqtor
following consummation of the Investment.
(5) Excludes shares held by CRIL, in which Gary R. Garrabrant and Sheli Z.
Rosenberg hold limited partnership interests. Mr. Garrabrant and Ms.
Rosenberg disclaim beneficial ownership of such shares.
(6) Represents the shares owned by CRIL.
Certain Relationships and Related Transactions
Pursuant to an oral agreement with 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
paid or accrued as a payable to the Former Parent 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.
The Company has entered into an interest purchase agreement, dated as of
June , 1997, with John R. Klopp, Craig M. Hatkoff and Valentine Wildove &
Company, Inc. with respect to the Acquisition, pursuant to which the Company
will acquire 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
will provide for ten semi-annual principal amortization payments in equal
installments. Mr. Klopp, a trustee of the Company, and Mr. Hatkoff, a nominee
for trustee of the Company, will each receive 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, will receive $675,000 in
principal amount of the Acquisition Notes.
The closing of the Acquisition is conditioned upon the closing of the
Investment and other customary closing conditions, including, among others, (i)
the absence of any order, injunction or decree either preventing the
consummation of the Acquisition or which is reasonably likely to materially
adversely affect the business, properties or assets of Victor Capital, (ii) the
performance by each of the parties of their obligations under the interest
purchase agreement, and (iii) the accuracy of the representations and warranties
of the parties as of June __, 1997 and as of the closing date.
The interest purchase agreement contains representations and warranties of
the Company and the sellers which are customary in transactions of this type,
including, but not limited to, representations and warranties concerning: (a)
the organization of the Company, Victor Capital and its affiliates, (b) the due
authorization, execution, delivery and enforceability of the interest purchase
agreement, (c) the capitalization and ownership of interests in Victor Capital
and its affiliates, (d) compliance with laws and regulations, (e) the receipt of
all consents or approvals required, and the lack of conflicts or violations
under applicable charter documents, instruments and laws, with respect to the
transactions contemplated by the interest purchase agreement, (f) the payment by
Victor Capital and its affiliates
455009.26
80
<PAGE>
of taxes, (g) the absence of material litigation, (h) the accuracy and
completeness of Victor Capital's consolidated financial statements included in
this Proxy Statement, (i) the employees and employee benefit plans maintained by
Victor Capital and its affiliates, (j) Victor Capital's and its affiliates'
material contracts and (k) the absence of any material adverse change with
respect to the business, liabilities and assets of Victor Capital and its
affiliates since December 31, 1996.
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 will continue after the closing for a period of two
years.
The Company has agreed to pay the costs and expenses of the parties
incurred in connection with the execution and delivery of the interest purchase
agreement and the consummation of the Acquisition.
In connection with their consideration of the interest purchase agreement,
the Board of Trustees engaged Coopers & Lybrand Securities L.L.C. ("CLS") to
render a fairness opinion to the Board of Trustees with respect to the fairness
to the Company of the proposed Acquisition. On May 23, 1997, CLS delivered its
written opinion to the Company's Board of Trustees (which opinion does not
evaluate the impact or implications of the Proposals on the Company's or Victor
Capital's financial and operating performance or the market value of the
Company's debt and equity securities). The opinion of CLS states that, as of the
date of the opinion, the consideration paid in the Acquisition is fair, from a
financial point of view, to the Company. In approving the Acquisition, the Board
of Trustees considered, among other things, (i) the significant real estate
investment and financing background and experience of Victor Capital's
management team, (ii) the amount of the purchase price and its payment by
delivery of the Company's non-interest bearing five year note, (iii) Victor
Capital's and its affiliates' historical performance and historical earnings and
(iv) the desire of the Board of Trustees to eliminate the conflicts that may
arise if Victor Capital continued operating as a sister affiliate of the
Company.
455009.26
81
<PAGE>
PROPOSAL 4 -- RATIFICATION OF INDEPENDENT AUDITORS
The Board of Trustees of the Company has appointed Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending December 31,
1997, 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 Ernst & Young LLP 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. Ernst & Young LLP 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. It is
not expected that the Company's current independent auditors, Coopers & Lybrand
LLP will have a representative at the Annual Meeting.
Shareholder ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors is not required by the Declaration of Trust or
otherwise. However, the Board of Trustees is submitting the appointment of Ernst
& Young LLP 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 Ernst & Young LLP 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 most recent fiscal years ended December 31, 1996,
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.
455009.26
82
<PAGE>
PROPOSAL 5-- APPROVAL OF THE 1997 LONG-TERM INCENTIVE SHARE 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 LONG-TERM INCENTIVE SHARE PLAN, ATTACHED TO THIS PROXY
STATEMENT AS ANNEX D. ALL CAPITALIZED TERMS WHICH ARE NOT DEFINED HEREIN ARE
DEFINED IN THE PLAN. SHAREHOLDERS ARE URGED TO READ THE ANNEXES TO THIS PROXY
STATEMENT IN THEIR ENTIRETY.
On June [___], 1997, the Board of Trustees of the Company adopted the 1997
Long-Term Incentive Share Plan (the "Long-Term Plan"). The Long-Term Plan is
effective upon shareholder approval. The Long-Term 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 Long-Term Plan has been designed to comply with Section 162(m) of the
Code, which generally denies a tax deduction for annual compensation exceeding
$1,000,000 paid to the chief executive officer and the four other most highly
compensated officers of a public company ("Covered Employees"). Certain types of
compensation, including "performance-based compensation," are generally excluded
from this deduction limit. It is contemplated that all Awards made under the
Long-Term Plan, with the exception of the Share Unit Awards, will constitute
"performance-based compensation" under Section 162(m) of the Code. Share Unit
Awards will count toward the annual $1,000,000 deduction limit. In an effort to
ensure that most Awards under the plan will qualify as "performance-based
compensation," the Long-Term Plan is being submitted to shareholders for
approval at the Annual Meeting. While the Company believes that compensation
payable pursuant to the Long-Term Plan generally will be deductible for federal
income tax purposes, under certain circumstances such as death, disability and
change in control, compensation not qualified under Section 162(m) of the Code
may be payable pursuant to the provisions of the Long-Term Plan. By approving
the Long-Term Plan, shareholders will be approving, among other things, the
performance measures, eligibility requirements and limits on Awards contained
therein.
Purpose. The purpose of the Long-Term 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 Long-Term Plan will be administered by the Board or by
a committee (the "Committee") of the Board of Trustees. The Committee will be
composed solely of not less than two Trustees, who, to the extent required for
compliance with Rule 16b-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), qualify as "Non-Employee Directors" for purposes of Rule 16b-3.
Alternatively, awards under the Long-Term Plan may be made in reliance on
another exemption from Section 16(b) of the Exchange Act. To the extent required
by Section 162(m) of the Code, members of the Committee will also qualify as
"outside directors" for purposes of Section 162(m). Among other things, the
Board or the Committee will have the authority to select Eligible Individuals to
whom Awards may be granted, to determine the type of Awards as well as the
number of Common Shares to be covered by each Award, and to determine the terms
and conditions of any such Awards. The Board or the Committee will also have the
authority to construe and interpret the plan, establish, amend or waive rules
and regulations for its administration, accelerate the exercisability of any
Award, and amend the terms and conditions of any outstanding Option, SAR or
other Award. However, the Board or the Committee shall have no authority to
adjust upward any amounts payable to a Covered Employee with respect to a
particular Award or to take any action to the extent that such action would
cause any Award to any Covered Employee to fail to qualify as "performance-based
compensation" under Section 162(m) of the Code. All decisions made by the Board
or the Committee will be final and binding.
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,
455009.26
83
<PAGE>
in the opinion of the Board or the Committee, contribute significantly to the
growth and profitability of the Company and its Subsidiaries.
Number of Shares. The maximum number of shares that may be made subject of
Awards under the Long-Term Plan is 2,000,000. The maximum number of shares shall
be reduced by the number of shares made the subject of Awards under the
Company's 1997 Non-Employee Trustee Share Plan. The maximum number of shares
that may be subject of Awards to any Eligible Individual during the term of the
plan may not exceed 500,000 shares. 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.
Subject to the foregoing limits, the shares available under the Long-Term
Plan can be divided among the various types of Awards and among the Participants
as the Board or the Committee sees fit. The shares are to be made available from
authorized but unissued Company Common Shares or shares reacquired by the
Company in the open market. The maximum number of shares subject to Awards under
the Long Term Plan and the limit on the number of Awards to Elgible Individuals,
will adjust with any share dividend or split, recapitalization,
reclassification, merger, consolidation, combination or exchange of shares, or
similar change affecting the Company's Common Shares.
Description of Awards
Share Options. The Long-Term 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 Long-Term Plan authorizes the Board or the
Committee to grant SARs in lieu of Options, in addition to Options, independent
of Options or as a combination of the foregoing. A holder of a SAR is entitled
upon exercise to receive Common Shares, or cash or a combination of both, as the
Board or the Committee may determine, equal in value on the date of exercise to
the amount by which the Fair Market Value of one Common Share on the date of
exercise exceeds the exercise price fixed by the Board or the Committee on the
date of grant (which price shall not be less than 100% if the market price of a
Common Share on the date of grant) multiplied by the number of shares in respect
of which the SARs are exercised. If granted in lieu of an Option, the SAR is
exercisable at the same time as the related Option and, when exercised, the
related Option must be surrendered and ceases to be exercisable. If granted in
addition to an Option, the exercise of the related Option causes the SAR also to
be exercised. If granted independently of an Option, the SAR will be exercisable
at such time as the Board or the Committee determines and its exercise will be
unrelated to any Option. The term of any SAR will not exceed ten years.
Restricted Shares. The Long-Term Plan authorizes the Board or the Committee
to grant Restricted Shares to individuals with such Periods of Restriction as
the Board or the Committee may designate. In the case of Covered Employees, the
Board or the Committee shall also condition the vesting or lapse of such Periods
of Restriction upon the attainment of one or more Performance Goals established
by the Board or the Committee within the time period prescribed by Section
162(m) of the Code. These Performance Goals must be based on the attainment, by
the Company or its Subsidiaries, of certain objective and/or subjective
performance measures, which may include one
455009.26
84
<PAGE>
or more of the following: total shareholder return, return on equity, return on
capital, earnings per share, cash flow per share, market share, share price,
revenues, costs, net income, cash flow and retained earnings. Such Performance
Goals may also be based upon the attainment of specified levels of performance
of the Company or one or more Subsidiaries relative to the performance of other
corporations. With respect to Covered Employees, all Performance Goals shall be
objective performance goals satisfying the requirements for "performance-based
compensation" within the meaning of the 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 Long-Term Plan
authorizes the Board or the Committee to grant Performance Units and Performance
Shares which may be earned if specified long-term corporate goals are achieved
over a period of time selected by the Board or the Committee (a "Performance
Period"). Prior to the grant of Performance Units or Performance Shares, the
Board or the Committee must establish the Performance Goals (from among the
performance measures described above relating to Restricted Shares) that must be
satisfied before a payout of such Awards is made. At the conclusion of a
particular Performance Period, the Board or the Committee will determine the
extent to which the Performance Goals have been met. It will then determine the
applicable percentage (which may exceed 100%) to be applied to, and will apply
such percentage to, the value of the Performance Units or Performance Shares
awarded to determine the payout to be received by the Participant; provided that
no payout to a Covered Employee will be made thereunder except upon written
certification by the Board or the Committee that the applicable Performance
Goal(s) have been satisfied to a particular extent. As a result, depending upon
the Company's performance in relation to the Performance Goals, a Participant
may earn less or more than the number of Performance Shares or Performance Units
initially awarded. In addition, to the extent that the value of a Performance
Unit or Performance Share is related to the Common Shares, the value of any
payout will be dependent upon the changing value of the shares. Payments may be
made in cash, Common Shares or a combination, as determined by the Board or the
Committee. With respect to Covered Employees, all Performance Goals will be
objective performance goals satisfying the requirements for "performance-based
compensation" within the meaning of Section 162(m)(4)(C) of the Code.
The Long-Term Plan also authorizes the grant of Share Units at any time and
from time to time on such terms as shall be determined by the Board or the
Committee. A Share Unit is a derivative interest in a Common Share based on a
share equivalent. Share Units shall be payable in Common Shares upon the
occurrence of certain trigger events set forth on the Participant's Election
Form in his or her complete discretion ("Trigger Events"). The terms and
conditions of the Trigger Events may vary by Share Unit award, by Participant,
or both. Each Share Units awarded is credited to a Share Unit Account as a
Common Share equivalent to reflect the Company's liability to that Participant.
Additional share equivalents may be added to the Share Unit Account equal to the
amount of Common Shares that could be purchased with dividends equal to that
paid on one Common Share, multiplied by the number of share equivalents then
existing in the Share Unit Account and based on the Fair Market Value of the
Common Shares on the date a dividend is paid. A Participant is entitled to
receive the Common Shares in his or her Share Unit Account upon the occurrence
of the applicable Trigger Event. Share Unit Awards will not constitute
"performance-based compensation" within the meaning of Section 162(m)(4)(C) of
the Code and, as such, will count toward the annual $1,000,000 deduction limit.
Change in Control. Upon a Change in Control of the Company, all share-based
Awards, such as ISOs, NQSOs, SARs, Restricted Shares and Share Units shall vest
100%, and all performance-based Awards, such as Performance Units and
Performance Shares, shall immediately be paid out in cash, based upon the
extent, as determined by the Board or the Committee, to which the Performance
Goals have been met through the effective date of the Change in Control or based
upon the assumed achievement of such goals, whichever is higher.
Limits on Transferability and Exercisability. No Award granted under the
Long-Term 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.
455009.26
85
<PAGE>
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 or the Committee 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 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 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 Long-Term 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 Long-Term Plan, the plan may not be amended without shareholder approval to
the extent such approval is required by law or the rules of a securities
exchange on which the Company's Common Shares are listed.
Federal Income Tax Consequences. The following is a brief discussion of the
relevant federal income tax rules. The rules are highly technical and are
subject to change.
NQSOs and SARs. Upon the grant of a NQSO (with or without an SAR), the
optionee will not recognize any taxable income and the Company will not be
required to record an expense. Upon the exercise of a NQSO or an SAR, the excess
of the fair market value of the shares acquired on the exercise of the NQSO over
the purchase price (the "spread"), or the consideration paid to the optionee
upon the exercise of the SAR, will constitute compensation taxable to the
optionee as ordinary income. In determining the amount of the spread or the
amount of consideration paid to the optionee, the fair market value of the
shares on the date of exercise is used, except that special timing rules may
apply in the case of an optionee subject to the six month short-swing profit
recovery provisions of Section 16(b) of the Exchange Act. The Company, in
computing its federal income tax, will generally be entitled to a deduction in
an amount equal to the compensation taxable to the optionee in the Company's
taxable year in which the amount is included as income to the optionee. The
optionee's tax basis in an Award paid in Common Shares is equal to the amount of
ordinary income recognized and the holding period commences as of the date that
income is recognized. Upon a subsequent sale or exchange of the Common Shares
acquired, the optionee will have capital gain or loss (long-term or short-term
depending upon whether the shares have been held for more than one year)
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 or (ii) one year after the transfer of the shares to the optionee
(the "ISO Holding Period"), the optionee will recognize long-term capital gain
or loss, as the case may be, measured by the difference between the sale price
and the exercise price. The Company is not entitled to any tax deduction by
reason of the grant or exercise of an ISO, or by reason of a disposition of
shares received upon exercise of an ISO if the ISO Holding Period is satisfied.
Different rules apply if the optionee disposes of the shares acquired pursuant
to the exercise of an ISO before the expiration of the ISO Holding Period.
Option grants for shares which are exercisable for the first time by an optionee
during any calendar year (under all plans of the Company and any parent
corporation or Subsidiary of the Company), which have a fair market value in
excess of $100,000, shall be treated as options which are not ISO's, and will be
subject to the same tax treatment as the grant of NQSO's discussed above.
455009.26
86
<PAGE>
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 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 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 (long-term or short-term depending upon whether the
shares have been held for more than one year) 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 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 (long-term or short-term
depending upon whether the shares have been held for more than one year)
measured by the difference between the amount realized on the disposition and
his or her tax basis in the shares.
1997 Share Option Plan Benefits. Since Awards will be considered by the
Board or the Committee following consummation of the Investment and the
Acquisition or, in the case of Messrs. Hatkoff and Klopp are subject to further
negotiation, future Awards to executive officers and employees of the Company
under the Long-Term Plan cannot be determined at this time.
Vote Required. The affirmative vote of a majority of shares present or
represented at the Annual Meeting and entitled to vote thereon is required to
approve the Long-Term Plan with respect to Section 162(m) of the Code. Such vote
will also satisfy the shareholder approval requirements of Section 422 of the
Code with respect to the grant of ISOs.
455009.26
87
<PAGE>
PROPOSAL 6 --APPROVAL OF THE NON-EMPLOYEE TRUSTEE SHARE 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 1997 NON-EMPLOYEE TRUSTEE SHARE PLAN, ATTACHED TO THIS
PROXY STATEMENT AS ANNEX E. ALL CAPITALIZED TERMS WHICH ARE NOT DEFINED HEREIN
ARE DEFINED IN THE PLAN. SHAREHOLDERS ARE URGED TO READ THE ANNEXES TO THIS
PROXY STATEMENT IN THEIR ENTIRETY.
On June [___], 1997, the Board of Trustees of the Company adopted the 1997
Non-Employee Trustee Share Plan (the "Trustee Share Plan"). The Trustee Share
Plan will be effective upon shareholder approval. The Trustee Share Plan permits
the grant of Nonqualified Share Option (NQSO), Restricted Shares, Share
Appreciation Right (SAR), Performance Unit, Performance Share and Share Unit
Awards.
Purpose. The purpose of the Trustee Share 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 Trustee Share Plan will be administered by the Board of
Trustees. Among other things, the Board will have the authority to select
Trustees to whom Awards may be granted, to determine the type of Awards as well
as the number of Common Shares to be covered by each Award and to determine the
terms and conditions of any such Awards. The Board will also have the authority
to construe and interpret the plan, establish, amend or waive rules and
regulations for its administration, accelerate the exercisability of any Award
and amend the terms and conditions of any outstanding Award. All decisions made
by the Board will be final and binding.
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. The maximum number of shares that may be made subject of
Awards under the Trustee Share Plan is 2,000,000. The maximum number of shares
shall be reduced by the number of shares made the subject of awards under the
Company's 1997 Long-Term Incentive Share Plan. 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 Trustee
Share Plan can be divided among the various types of Awards and among the
Participants as the Board determines. The shares are to be made available from
authorized but unissued Company Common Shares or shares reacquired by the
Company in the open market. The maximum number of shares subject to Awards under
the Trustee Share Plan will adjust with any share dividend or split,
recapitalization, reclassification, merger, consolidation, combination or
exchange of shares or similar change to the Company's Common Shares.
Description of Awards
Share Options. The Trustee Share Plan permits the award of NQSOs. Each NQSO
granted under the plan must be evidenced by an Option Agreement specifying
terms, the number of shares covered, the exercise price, when it is exercisable,
any restriction on transferability of shares obtained upon the exercise of the
option and the duration. The purchase price per Common Share covered by a NQSO
shall be determined by the Board. Payment of a NQSO may be made with cash, with
previously owned Common Shares, by foregoing compensation in accordance with
Board rules or by a combination of these.
455009.26
88
<PAGE>
Share Appreciation Rights. The Trustee Share Plan authorizes the Board to
grant SARs in lieu of a NQSO, in addition to a NQSO, independent of a NQSO or as
a combination of the foregoing. A holder of a SAR is entitled upon exercise to
receive a number of shares of Common Shares, or cash or a combination, as the
Board may determine, equal in value on the date of exercise to the amount by
which the Fair Market Value of one Common Share on the date of exercise exceeds
the exercise price fixed by the Board on the date of grant (which price shall
not be less than 100% of the of the market price of a Common Share on the date
of grant) multiplied by the number of shares in respect of which the SARs are
exercised. If granted in lieu of a NQSO, the SAR is exercisable at the same time
as the related NQSO and, when exercised, the related NQSO must be surrendered
and ceases to be exercisable. If granted in addition to a NQSO, the exercise of
the related NQSO causes the SAR also to be exercised. If granted independently
of a NQSO, the SAR will be exercisable at such time as the Board determines and
its exercise will be unrelated to any NQSO. The term of any SAR will not exceed
ten years.
Restricted Shares. The Trustee Share Plan authorizes the Board to grant
Restricted Shares to individuals with such Periods of Restriction as the Board
may designate. Each grant of Restricted Shares will be evidenced by a Restricted
Share Agreement that shall specify the Period of Restriction, the number of
Restricted Shares granted and such other provisions determined by the Board.
These provisions may include Performance Goals that must be satisfied before
payout of an Award is made. The Performance Goals may be objectively based on
measures such as total shareholder return, return on equity, return on capital,
earnings per share, cash flow per share, market share, share price, revenues,
costs, net income, cash flow and retained earnings, 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 Trustee Share
Plan authorizes the Board to grant Performance Units and Performance Shares
which may be earned if specified long-term Company goals are achieved over a
period of time selected by the Board (a "Performance Period"). Prior to the
grant of Performance Units or Performance Shares, the Board may establish the
Performance Goals (from among the performance measures described above relating
to Restricted Shares) that must be satisfied before a payout of such Awards is
made. At the conclusion of a particular Performance Period, the Board will
determine the extent to which such Performance Goals have been met. It will then
determine the applicable percentage (which may exceed 100%) to be applied to,
and will apply such percentage to, the value of the Performance Units or
Performance Shares awarded to determine the payout to be received by the
Participant. As a result, depending upon the Company's performance in relation
to the Performance Goals, a Participant may earn less or more than the number of
Performance Shares or Performance Units initially awarded. In addition, to the
extent that the value of a Performance Share or Performance Unit is related to
the Company's Common Shares, the value of any payout will be dependent upon the
changing value of the Common Shares. Payments may be made in cash, Common Shares
or a combination as determined by the Board.
The 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. A Share Unit is a derivative interest in a Common Share based on a
share equivalent. Share Units shall be payable in Common Shares upon the
occurrence of certain trigger events set forth on the Participant's Election
Form in his or her complete discretion ("Trigger Events"). The terms and
conditions of the Trigger Events may vary by Share Unit Award, by the
Participant, or both. Each Share Unit awarded is credited to a Share Unit
Account to reflect the Company's liability to that Participant. Additional share
equivalents may be added to the Share Unit Account equal to the amount of Common
Shares that could be purchased with dividends equal to that paid on one Common
Share, multiplied by the number of share equivalents then existing in the Share
Unit Account and based on the Fair Market Value of the Common Shares on the date
a dividend is paid. A Participant is entitled to receive the Common Shares in
his or her Share Unit Account to which a Share Unit Award relates upon the
occurrence of the applicable Trigger Event.
Change in Control. Upon a Change in Control of the Company, all NQSOs,
SARs, Share Units and Restricted Shares shall vest 100%. All Performance Units
and Performance Shares shall immediately be paid out in cash, based upon the
extent, as determined by the Board, to which the Performance Goals have been met
through the effective date of the Change in Control or based upon the assumed
achievement of such goals, whichever is higher.
455009.26
89
<PAGE>
Limits on Transferability and Exercisability. Generally, no Award under the
Trustee Share Plan may be sold, transferred, assigned, pledged or hypothecated,
other than by will or by the laws of descent and distribution and all rights to
any Award shall be exercisable only by the Participant during his or her
lifetime. NQSOs may, in the Board's discretion, be transferrable to members of
the optionee's immediate family, a trust established for the benefit of one or
more such family members or a partnership in which such family members are the
only partners. The optionee may not receive any consideration for such
transfers.
All outstanding Awards granted under the plan will be forfeited immediately
if the Trustee is removed. Upon ceasing service as a Trustee due to death or
disability, all outstanding and vested NQSOs and SARs may be exercised within
one year but in no event after the expiration date. If a Trustee retires or
terminates service for any other reason, all outstanding and vested NQSOs and
SARs may be exercised within three months but in no event after the expiration
date.
In the event a Trustee terminates service for any reason during the Period
of Restriction, then any Restricted Shares subject to restrictions as of the
date of such termination shall automatically be forfeited subject to the
discretion of the Board to waive the forfeiture and impose new restrictions to
such Restricted Shares in the event a Participant's service terminates for any
reason other than for removal. Outstanding Performance Units and Performance
Shares will entitle the Trustee to receive pro-rated payments based upon the
full months of service during the Performance Period. Share Units will be
payable to the Participant if vested in the event of death, disability or
retirement. If a Trustee terminates service for any other reason, Performance
Units, Performance Shares and unvested Share Units will be forfeited.
Amendment and Discontinuance. The Trustee Share 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 Trustee
Share Plan, the plan may not be amended without shareholder approval to the
extent such approval is required by law or the rules of a securities exchange on
which the Company's Common Shares are listed.
Federal Income Tax Consequences. The following is a brief discussion of the
relevant federal income tax rules. The rules are highly technical and are
subject to change.
NQSOs and SARs. Upon the grant of a NQSO (with or without an SAR), the
optionee will not recognize any taxable income and the Company will not be
required to record an expense. Upon exercise, the excess of the fair market
value of the shares acquired on the exercise of a NQSO over the purchase price
(the "spread"), or the consideration paid to the optionee upon the exercise of
the SAR, will constitute a payment for services taxable to the optionee as
ordinary income. In determining the amount of the spread or the amount of
consideration paid to the optionee, the fair market value of the shares on the
date of exercise is used, except that special timing rules may apply as a result
of Section 16(b) of the Exchange Act. The Company, in computing its federal
income tax, will generally be entitled to a deduction in an amount equal to the
amount included in the optionee's gross income in the Company's taxable year in
which the amount is included as income to the optionee. The optionee's tax basis
in an Award paid in Common Shares is equal to the amount of ordinary income
recognized and the holding period commences as of the date that income is
recognized. Upon a subsequent sale or exchange of the Common Shares acquired,
the optionee will have capital gain or loss (long-term or short-term depending
upon whether the shares have been held for more than one year) 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.
455009.26
90
<PAGE>
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
a compensation expense to the Company. The Company is generally entitled to a
tax deduction for any ordinary income taxed to the Participant with respect to
the shares. The Participant's tax basis is equal to the amount of ordinary
income recognized and the 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 (long-term or short-term
depending upon whether the shares have been held for more than one year)
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 Stock 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 (long-term or short-term depending upon whether
the shares have been held for more than one year) measured by the difference
between the amount realized on the disposition and his or her tax basis in the
shares.
1997 Trustee Share Plan Benefits. Awards under the Trustee Share Plan will
commence only after it has been approved by shareholders at the Annual Meeting.
Since any Awards will be considered by the Board after the Annual Meeting and
following the consummation of the Investment and the Acquisition, Awards under
the plan cannot be determined at this time.
Vote Required. The Board of Trustees determined to adopt the Trustee Share
Plan subject to shareholder approval at the Annual Meeting. Adoption of this
proposal requires an affirmative vote of the majority of shares present or
represented at the Annual Meeting and entitled to vote.
455009.26
91
<PAGE>
DESCRIPTION OF CAPITAL SHARES
As of the date hereof, the authorized capital shares of the Company consist
of the Common Shares and preferred shares of beneficial interests of the Company
issuable in classes or series, of which 9,137,335 Common Shares are issued and
outstanding and no preferred shares are authorized, issued or outstanding.
Following approval of the Restated Declaration and the adoption by the
Board of Trustees of the Certificate of Designation, the capital of the Company
will consist of preferred shares of beneficial interests of the Company and
common shares of beneficial interests in the Company issuable in classes or
series, of which (i) up to 12,639,405 class A 9.5% cumulative convertible
preferred shares, $1.00 par value, of beneficial interests in the Company (the
"Class A Preferred Shares") will be authorized, (ii) up to 12,639,405 class B
9.5% cumulative convertible non-voting preferred shares, $1.00 par value, of
beneficial interests in the Company (the "Class B Preferred Shares" and,
together with the Class A Preferred Shares, the "Preferred Shares") will be
authorized, (iii) the existing Common Shares of the Company will be redesignated
as class A common shares, $1.00 par value, of beneficial interests in the
Company (the "Class A Common Shares"), of which up to 21,776,740 will be
authorized, and 9,137,335 will be issued and outstanding, and (iv) up to
21,776,740 class B common shares, $1.00 par value, of beneficial interests in
the Company (the "Class B Common Shares") will be authorized, none of which will
be issued and outstanding. The Restated Declaration 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 of
beneficial interests and common interests from time to time, including
additional Class A Common Shares, Class B Common Shares, Class A Preferred
Shares and Class B Preferred Shares. The Certificate of Designation and
Investment Agreement, however, provide that the approval of the holders of the
Preferred Shares is required in order to authorize, create or issue any class or
series of capital shares of the Company other than "Junior Shares" (see
"--Preferred Shares -- Voting Rights"), or to issue any Class B Preferred Shares
other than upon the conversion of any Class A Preferred Shares (see "PROPOSAL 1
- -- APPROVAL OF THE INVESTMENT -- The Investment Agreement").
The following summary description of the capital shares of the Company is
qualified in its entirety by reference to the Certificate of Designation and the
Restated Declaration, a copy of each of which is annexed hereto as annex B and
annex C, respectively.
Common Shares
Except as described below or as required by law, all Class A Common Shares
and Class B Common Shares are identical and entitled to the same voting,
dividend, liquidation and other rights. Holders of Class A Common Shares and
Class B Common Shares are not entitled to preferences, appraisals or preemptive
rights of any kind. No shareholder may demand that the Company redeem his or her
Class A Common Shares or Class B Common Shares.
Dividends. 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 out of
funds legally available for such purpose, subject to the rights of the holders
of any series of preferred shares. No dividends may be declared or paid in cash
or property on any share of any class of Class A Common Shares and Class B
Common Shares, however, unless simultaneously the same dividend is declared or
paid on each share of the other classes of Class A Common Shares and Class B
Common Shares except that if dividends are declared that are payable in common
shares, such dividends shall be payable at the same rate on each class or series
of Class A Common Shares and Class B Common Shares and shall be payable only in
Class A Common Shares to holders of Class A Common Shares and in Class B Common
Shares to holders of Class B Common Shares.
Liquidation Rights. In the event of the liquidation of the Company and the
distribution of its assets, after the payment in full or the setting apart for
payment to all creditors of the Company of the amounts to which they shall be
entitled and subject to such preferential amounts, if any, to which the holders
of preferred shares at the time outstanding shall be entitled, the remaining
assets of the Company available for payment and distribution to holders of Class
A Common Shares and Class B Common Shares shall, subject to any participating or
similar rights of preferred shares at the time outstanding, be distributed
ratably, in accordance with the number of Class A Common
-92-
455009.26
92
<PAGE>
Shares and Class B Common Shares held by each such holder, equally among the
holders of Class A Common Shares and Class B Common Shares at the time
outstanding.
Voting Rights. 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.
Except as otherwise provided by law and subject to the special voting
rights of any outstanding preferred shares, the approval of all matters brought
before the shareholders requires the affirmative vote of the holders of a
majority in voting power of the voting shares (including the Class A Common
Shares) that are present in person or represented by proxy and voting as a
single class.
Conversion Rights. Each Class A Common Share is convertible at the option
of the holder thereof at any time and from time to time into one fully paid and
nonassessable Class B Common Share and, subject to delivery of the certification
described below, each Class B Common Share is convertible at the option of the
holder thereof at any time and from time to time into one fully paid and
nonassessable Class A Common Share. If Class B Common Shares are to be converted
into Class A Common Shares, the holder of the Class B Common Shares must certify
to the Company that the shareholder either (a) will not, together with any other
person (other than the Company) who previously held voting shares of the Company
now held by the shareholder, upon the issuance of such Class A Common Shares,
own more than 4.9% of any class of voting shares of the Company or (b) is not
limited by the Bank Holding Company Act of 1956, as amended, to holding more
than 4.9% of any class or series of voting shares of the Company.
Preferred Shares
General. The Restated Declaration permits the Board of Trustees to issue
preferred shares in one or more classes or series, with such rights, powers,
preferences, privileges and restrictions as shall be stated and expressed in the
resolution or resolutions providing for the issue thereof adopted by the Board
of Trustees, including, but not limited to: (i) the distinctive designation of
such class or series, and the number of preferred shares of such class or series
authorized; (ii) the dividends payable with respect to such class or series, the
rates or basis for determining such dividends, and conditions and dates upon
which such dividends shall be payable, the preferences, if any, of such
dividends over, or the relation of such dividends to, the dividends payable on
any other class or series of securities of the Company, whether such dividends
shall be noncumulative or cumulative, and, if cumulative, the date or dates from
which such dividends shall be cumulative; (iii) whether preferred shares of such
class or series shall be redeemable at the option of the Company or upon the
happening of a specified event, and, if redeemable, whether for cash, property
or rights, including securities of the Company, the times, prices or rates and
any adjustment and other terms and conditions of such redemption; (iv) the terms
and amount of any sinking, retirement or purchase fund provided for the purchase
or redemption of preferred shares of such class or series; (v) whether or not
preferred shares of such class or series shall be convertible into or
exchangeable for other securities of the Company, at the option of the Company
or of the holder of such preferred shares or both, or upon the happening of a
specified event, and, if provision be made for such conversion or exchange, the
terms, prices, rates, adjustments and any other terms and conditions thereof;
(vi) the extent, if any, to which the holders of the preferred shares of such
class or series shall be entitled to vote with respect to the election of
Trustees or on other issues, including without limitation the extent, if any, to
which such holders shall be entitled, voting as a class or series or jointly
with other classes or series, to elect one or more Trustees upon the happening
of a specified event or otherwise, or entitled to multiple votes per preferred
share; (vii) the restrictions, if any, on the issue or reissue of preferred
shares of such class or series or any other classes or series; (viii) the
extent, if any, to which the holders of the preferred shares of such class or
series shall be entitled to preemptive rights; (ix) the rights of the holders of
the preferred shares of such class or series upon the termination of the Company
or any distribution of its assets, including without limitation any preferential
amount payable upon such preferred shares or any other rights of holders of such
preferred shares in the event of the liquidation, dissolution or winding up of
the Company or the distribution of its assets; and (x) the terms of any other
provisions to be applicable to such preferred shares and such other powers,
preferences, rights, limitations or restrictions as the Board of Trustees shall
determine.
-93-
455009.26
<PAGE>
In connection with the Investment, the Board of Trustees will adopt a
resolution which is set forth in the Certificate of Designation attached hereto
as annex B providing for the creation of two classes of the Company's preferred
shares, consisting of 12,639,405 Class A Preferred Shares and 12,639,405 Class B
Preferred Shares. In connection with the closing of the Investment Agreement,
Veqtor will purchase from the Company up to 12,639,405 and no less than
11,895,911 Class A Preferred Shares for a maximum aggregate purchase price of no
more than approximately $34 million and no less than approximately $32 million,
based upon a per share purchase price of $2.69.
Except as described below or as required by law, both classes of Preferred
Shares are identical and entitled to the same voting, dividend, liquidation and
other rights.
Dividends. Holders of the Preferred Shares are entitled to receive, when
and as declared by the Board of Trustees, out of funds legally available
therefor, cash dividends per share at the rate of 9.5% per annum on $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. No dividends may be declared
or paid in cash or property on any Preferred Share unless simultaneously the
same dividend is declared or paid on both classes of Preferred Shares except
that if dividends are declared that are payable in Common Shares or Preferred
Shares, such dividends shall be payable at the same rate on the Preferred Shares
and shall be payable only in Class A Common Shares and Class A Preferred Shares
to holders of Class A Preferred Shares and in Class B Common Shares and Class B
Preferred Shares to holders of Class B Preferred Shares. The Certificate of
Designation provides that, unless all dividends and other amounts then accrued
with respect to the Preferred Shares are paid in full, the 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 the Company (other than
payment in or in exchange for Junior Shares (as defined below)).
Liquidation Preference. In the event of the liquidation of the Company and
the distribution of its assets, the holders of the Preferred Shares are entitled
to receive out of assets of the Company available for distribution to
shareholders, 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 shareholders, 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 Company.
Voting Rights. 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 below, 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 holders of a majority of the outstanding Preferred Shares, voting
together as a single class, but voting together as a separate class from the
Common Shares, have, with certain limited exceptions, the right to approve any
merger, consolidation or transfer of all or substantially all of the assets of
the Company.
In addition, the affirmative vote of the holders of a majority of the
outstanding Preferred Shares, voting together as a single class, but voting
together as a separate class from the Common Shares, is required in order to
amend, alter or repeal any provision of the Certificate of Designation;
authorize, create or issue any class or series of capital shares of the Company
(other than Junior Shares); and incur any indebtedness if the Company's debt to
equity ratio would exceed 5:1. "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 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 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 Preferred Shares shall be
entitled to receive out of assets of the Company available for distribution to
shareholders, the liquidation preference with respect to the Preferred Shares
and any accrued and unpaid dividends thereon before
-94-
455009.26
<PAGE>
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
Preferred Shares have theretofore been redeemed or converted.
Conversion Right. Each Class A Preferred Share is 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 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 at any time
and from time to time in whole or in part 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. If Class B Preferred shares are to be
converted into Class A Preferred shares, the holder of the Class B Preferred
Shares must certify to the Company that the shareholder either (a) will not,
together with any other person (other than the Company) who previously held
voting shares of the Company now held by the shareholder, upon the issuance of
such Class A Preferred Shares, own more than 4.9% of any class of voting shares
of the Company or (b) is not limited by the Bank Holding Company Act of 1956, as
amended, to holding more than 4.9% of any class or series of voting shares of
the Company. Initially, the "Conversion Price" will be equal to $2.69, but the
Conversion Price will be adjusted to provide the holders of the Class A
Preferred Shares with customary anti-dilution protection, including protection
for the issuance of additional shares at a price less than $2.69 per share.
If Class B Preferred Shares are to be converted into Class A Preferred
Shares, in connection with any conversion, the shareholder must certify to the
Company that the shareholder either (a) will not, together with any other person
(other than the Company) who previously held voting shares of the Company now
held by the shareholder, upon the issuance of such Class A Preferred Shares, own
more than 4.9% of any class of voting shares of the Company or (b) is not
limited by the Bank Holding Company Act of 1956, as amended, to holding more
than 4.9% of any class or series of voting shares of the Company.
-95-
455009.26
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth material federal income tax matters
relevant to the Company after consummation of the Investment and implementation
of the proposed new business plan. This discussion is based on the Code,
applicable Treasury regulations thereunder, administrative rulings, practice and
procedures and judicial authority on the date of this Proxy Statement, all of
which are subject to change, which changes could be applied retroactively. This
discussion is for general information only.
Termination of REIT Status. The new business plan contemplates that the
Company will grow through a combination of leverage and a retention of all or a
substantial portion of the earnings of the Company. Accordingly, for this and
other reasons, the Company will not be able to comply with the real estate
investment trust ("REIT") requirement that it distribute at least 95% of its
REIT taxable income, and, therefore, the Company anticipates that its status as
a REIT will terminate, effective for 1997. Accordingly, the Company anticipates
that it will be treated as a corporation for federal, state and local income tax
purposes, and that it will be subject to federal, state and local income tax on
its taxable income. The discussion that follows assumes that the Company's
status as a REIT will terminate for 1997, and that the Company will be taxed as
a corporation for 1997 and future years.
Consequences of Distributions from a Company Not Taxable as a REIT. It is
anticipated that the Company will not qualify as a REIT during 1997 or
thereafter. As a consequence, the Company will be subject to federal income
taxes on taxable income earned during 1997 and thereafter and will no longer be
entitled to a deduction for any dividends paid to shareholders. In addition, the
Company will not be subject to the required distribution rules applicable to
REITs. Corporate shareholders that satisfy certain holding period requirements
will be entitled to a dividends received deduction on dividends paid out of
current or accumulated earnings and profits. The Company, however, generally
does not intend to pay dividends on its Common Shares for the foreseeable
future.
Distributions. The Company expects to pay dividends on its Preferred
Shares, although it does not anticipate making any distributions with respect to
its Common Shares. Any distributions will be treated as dividends for federal
income tax purposes to the extent of the Company's current or accumulated
earnings and profits, and as such, will be eligible for any applicable dividends
received deduction for corporate shareholders and will be treated as ordinary
dividend income for other shareholders.
Utilization of Net Operating Losses and Capital Loss Carry-forward.
Generally, a corporation is allowed to carry its net operating losses back three
years and forward up to 15 years following the taxable year in which such losses
arose. A net operating loss from a year in which an entity was a REIT can be
carried forward but cannot be carried back, and losses from years in which an
entity is not a REIT cannot be carried back to a year in which it was a REIT.
A corporation is generally able to utilize a net operating loss that arose
in a year in which it qualified as a REIT in a subsequent year in which it no
longer qualified as a REIT. Accordingly, the Company will not be prevented by
the net operating loss rules from using its net operating losses solely because
its operations and assets will no longer allow for qualification as a REIT.
The Company is entitled to carry any net long term capital losses forward
up to five years following the taxable year in which such losses arose. Capital
losses can only be offset against capital gains and not against ordinary income.
Limitations on Net Operating Losses. The ability of the Company to utilize
net operating losses ("NOLs") has been restricted under Section 382 of the Code
as a result of the "ownership changes" that have occurred and may be further
restricted as a result of the ownership change that will occur with respect to
the Company as a result of the Investment. Code Section 382 limits a
corporation's ability to use its net operating losses when certain changes in
the ownership of the corporation's shares occur within a three year period. The
limitation on the utilization of NOLs also applies to any net unrealized built
in losses of the Company. An ownership change occurred with respect to the
Company in October 1994 as a result of an ownership change with respect to the
Company's Former Parent, and a second ownership change occurred in January 1997
as a result of CRIL's acquisition of the ownership interest from the Former
Parent. The Investment is expected to result in another ownership change with
respect to the Company
-96-
455009.26
<PAGE>
under Code Section 382 for purposes of limitations on the use of the Company's
net operating loss and capital loss Carry-forward ("Loss Carry-forward").
As of December 31, 1996, the Company had approximately $17,631,000 million
of Loss Carry-forward for Federal income tax purposes. The amount of the
Company's annual taxable income which may be offset by Loss Carry-forward
generally will be limited as a result of an ownership change to an amount
determined by multiplying the value of the Company at the time of the ownership
change (not including the Investment) by the "long-term tax exempt rate"
published monthly by the Treasury Department. The limitations resulting from the
October 1994 and January 1997 ownership changes can be reduced by the ownership
change that will occur as a result of the Investment, but cannot be increased by
that transaction. For this purpose, the value of the Company on January 3, 1997,
based on the number of shares outstanding (9,137,335) and the closing price of
the Company's common shares ($2 3/4) on January 2, 1997, was approximately $25
million and the long-term tax exempt rate, as of January 3, 1997, was 5.60%. The
value of the Company based on the purchase price paid in the January 1997
ownership change was approximately $26.6 million. Accordingly, the January 1997
ownership change is expected to result in a limitation on the amount of Loss
Carry-forward that may be used to offset the taxable income of the Company, if
any, in an amount equal to approximately $1.5 million per year. The ownership
change that is expected to occur as a result of the Investment may result in a
lower, but not a higher limitation. The actual amount of the limitation imposed
by Code Section 382 may vary, depending upon the actual data used in the
foregoing calculations, which will be made as of the effective date of the
change in the Company's ownership. The Loss Carry-forward that consist of
capital losses will be useable only to the extent that the Company recognizes
capital gains.
In addition to this limitation, if the Company does not continue its
business enterprise within the meaning of Code Section 382(c) at all times
during the two-year period beginning on the date of the Closing, the amount of
Loss Carry-forward and built-in losses that may be used to offset taxable income
will, subject to certain exceptions, be reduced to zero, and the net operating
loss limitation may also be reduced if the Company has substantial non-business
assets. The Company's business activities during 1995 and 1996 included both the
ownership of real estate, and the ownership of mortgages secured by real estate.
The Company intends to continue the business of ownership of real estate
mortgages, and believes that this business activity will satisfy the business
continuity requirement, and allow it to satisfy the other requirements of
Section 382, although there can be no assurance that it will do so.
Alternative Minimum Tax. For alternative minimum tax purposes, net
operating losses can be used to offset only 90 percent of alternative minimum
taxable income ("AMTI"). Thus, to the extent that the net operating losses of
the Company are used to offset regular taxable income, alternative minimum tax
will still be required to be paid on 10 percent of AMTI at the alternative
minimum tax rate of 20 percent. In addition, if the Code Section 382 limitation
were triggered, the amount of NOLs that could be used to offset AMTI would be
subject to limitations similar to those described above for utilization of NOLs
to offset income subject to the regular income tax.
Personal Holding Company Status. Following the Investment, it is
anticipated that more than 50% of the equity ownership of the Company will be
held, directly or indirectly, by five or fewer individuals, with the result that
the Company will meet the share ownership test of the personal holding company
rules of Code Section 542(a)(2). In that event, if the Company also satisfied
the adjusted ordinary gross income requirement of Code Section 542(a)(1), the
Company would be treated as a personal holding company for federal income tax
purposes, and would be subject to an additional tax on its undistributed
personal holding company income. Such undistributed personal holding income is
taxed at a rate of 39.6% A corporation that receives most of its income from
interest would generally satisfy the adjusted ordinary gross income requirement.
However, the personal holding company rules contain an exception for a lending
or finance company that satisfies the tests established in Code Section
542(c)(6). The requirements for qualification as a lending or finance company
are complex, and although the Company will endeavor to operate in a manner that
enables it so to qualify, there can be no assurances that it will be able to do
so.
Shareholders should consult their own tax advisors as to the effect of the
Investment and the adoption of the other proposals described in this Proxy
Statement under applicable state or local tax laws.
-97-
455009.26
<PAGE>
SHAREHOLDER PROPOSALS
Under the rules and regulations of the Commission as currently in effect,
any holder of at least $1,000 in market value of Common Shares who desires to
have a proposal presented in the Company's proxy material for use in connection
with the annual meeting of shareholders to be held in 1998 must transmit that
proposal (along with his or her name, address, the number of Common Shares that
he or she holds of record or beneficially, the dates on which the securities
were acquired and documentary support for a claim of beneficial ownership) in
writing to the Company at 131 Stewart Street #200, San Francisco, California
94105. Proposals of shareholders intended to be presented at the next annual
meeting of shareholders must be received by the Company not later than January
15, 1998.
Shareholders desiring to have proposals submitted for consideration at
future meetings of the shareholders should consult the applicable rules and
regulations of the Commission with respect to such proposals, including the
permissible number and length of proposals and other matters governed by such
rules and regulations.
By order of the Board of Trustees
FRANK A. MORROW
Chairman of the Board
June __, 1997
-98-
455009.26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
Page
INDEPENDENT AUDITORS' REPORT................................................F-2
INDEPENDENT ACCOUNTANTS' REPORT.............................................F-3
COMBINED BALANCE SHEETS - DECEMBER 31, 1996 AND 1995
AND MARCH 31, 1997....................................................F-4
COMBINED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 ...................F-5
COMBINED STATEMENTS OF CHANGES IN PARTNERS' AND MEMBERS'
CAPITAL (DEFICIENCY) FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
AND THE THREE MONTHS ENDED MARCH 31, 1997 ...........................F-6
COMBINED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 ..................F-7
NOTES TO COMBINED FINANCIAL STATEMENTS .....................................F-9
455009.26
F-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 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
455009.26
F-2
<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 March 31, 1997
and the related combined statements of income, changes in partners' and members'
capital (deficiency), and cash flows for the three months then ended and the
combined statements of income and cash flows for the three months ended March
31, 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
April 21, 1997
455009.26
F-3
<PAGE>
<TABLE>
<CAPTION>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, MARCH 31,
------------------------------ ------------
ASSETS 1996 1995 1997
------ ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2(c)) $1,056,048 $1,258,429 $1,150,282
Investment in available for sale securities (Note 2(d)) 8,400 8,400 8,400
Investment in unregistered securities (Note 2(e)) -- 124,250 --
Accounts receivable (Note 2(i)) 563,602 900,000 520,955
Expense reimbursement receivable 30,294 85,727 26,550
Due from partner (Note 4) 24,000 159,000 --
Sundry 16,701 5,405 26,266
---------- ---------- ----------
TOTAL CURRENT ASSETS 1,699,045 2,541,211 1,732,453
DEFERRED COSTS (Note 2(j)) 106,110 -- --
PROPERTY AND EQUIPMENT - NET (Notes 2(g) and 3) 90,071 107,840 99,584
SECURITY DEPOSITS 3,220 3,110 3,220
---------- ---------- ----------
TOTAL ASSETS $1,898,446 $2,652,161 $1,835,257
========== ========== ==========
LIABILITIES AND PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 173,511 $ 78,979 $ 154,592
Bonuses payable - discretionary (Note 5) 1,441,500 1,206,000 --
Accrued local business taxes 27,845 48,869 63,745
Unearned revenue (Note 2(b)) 19,739 -- 19,739
Due to partners (Note 6) -- -- 725,000
---------- ---------- ----------
TOTAL LIABILITIES 1,662,595 1,333,848 963,076
COMMITMENTS AND CONTINGENCIES (Note 9)
PARTNERS' AND MEMBERS' CAPITAL 235,851 1,318,313 872,181
(DEFICIENCY) ---------- ---------- ----------
TOTAL LIABILITIES AND PARTNERS' AND
MEMBERS' CAPITAL (DEFICIENCY) $1,898,446 $2,652,161 $1,835,257
========== ========== ==========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
455009.26
F-4
<PAGE>
<TABLE>
<CAPTION>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------- ----------------------------
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 $1,624,314 $1,652,329
Investment income 70,126 23,627 31,174 4,622 9,615
Gain on sale of securities -- 518 3,263 -- --
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 1,628,936 1,661,944
EXPENSES:
Employee salaries $1,164,897 $1,294,416 $1,265,384 $373,788 $287,182
Discretionary employee bonuses (Note 5) 1,441,500 1,206,000 1,247,000 -- --
Payroll taxes 103,504 101,013 100,122 54,799 50,090
Employee benefits 123,146 112,420 96,004 31,957 28,986
Management fees (Note 8) 860,573 836,560 821,000 218,913 215,143
Rent expense (Note 9) 292,309 261,917 125,143 73,384 66,739
Telephone 61,439 62,139 39,259 16,503 12,215
Insurance 15,828 30,927 36,594 8,165 7,531
Stationery, printing and supplies 31,483 46,960 26,663 16,803 5,136
Local travel and transportation 7,531 8,532 12,711 2,039 877
Postage 7,702 7,775 3,317 3,065 1,609
Travel and entertainment 49,147 76,364 51,535 20,436 7,954
Messenger/courier 2,909 2,987 2,764 1,105 1,129
Payments to subcontractors 40,450 168,553 325,434 31,610 12,125
Public relations 24,010 25,236 25,122 6,000 6,000
Dues and subscriptions 10,623 11,814 12,257 2,830 6,002
Miscellaneous 33,614 34,785 29,343 9,156 3,675
Contributions 29,315 8,545 6,575 6,050 525
Professional fees 67,804 79,647 119,259 67,136 11,964
Local business taxes 143,642 97,620 21,462 35,900 43,700
Advertising 52,076 33,151 9,117 -- 2,365
Bad debt expense -- -- 8,581 -- --
Information system expense 22,299 31,832 16,189 1,984 4,538
Depreciation 44,004 49,638 43,529 10,983 11,001
Interest expense (Note 7) -- 30,852 64,459 -- --
---------- ---------- ---------- ----------- ----------
TOTAL EXPENSES 4,629,805 4,619,683 4,508,823 992,606 786,486
---------- ---------- ---------- ----------- ----------
NET INCOME BEFORE EXTRAORDINARY
ITEM 2,642,942 1,412,232 723,054 636,330 875,458
EXTRAORDINARY ITEM - Gain on
extinguishment of debt (Note 7) -- 181,319 -- -- --
---------- ---------- ---------- ----------- ----------
NET INCOME $2,642,942 $1,593,551 $ 723,054 $ 636,330 $ 875,458
========== =========== ========== =========== ==========
</TABLE>
The accompanying notes to combined financial statements are an
integral part of these statements.
455009.26
F-5
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' AND MEMBERS' CAPITAL
(DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
THE THREE MONTHS ENDED MARCH 31, 1997
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY) - 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) - 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 - 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) - DECEMBER 31, 1996 235,851
Net income for the three months ended March 31, 1997 (Unaudited) 636,330
---------
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY) - MARCH 31, 1997 $ 872,181
(UNAUDITED) =========
The accompanying notes to combined financial statements are
an integral part of these statements.
455009.26
F-6
<PAGE>
<TABLE>
<CAPTION>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------ MARCH 31,
-------------------------
1996 1995 1994 1997 1996
------ ------ ------ ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,642,942 $1,593,551 $ 723,054 $ 636,330 $ 875,458
---------- ---------- ---------- ---------- ----------
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 10,983 11,001
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) 42,647 667,164
Expense reimbursement receivable 55,433 21,884 (50,538) 3,744 59,401
Prepaid local business taxes -- 12,691 (12,691) -- --
Sundry (11,296) (5,405) 11,036 (9,565) 1,904
Security deposits (110) 11,590 (12,313) -- (5,000)
(Decrease) increase in:
Accounts payable and accrued liabilities 94,532 8,372 (1,681) (18,919) 49,355
Bonuses payable - discretionary 235,500 284,000 922,000 (1,441,500) (1,206,000)
Accrued local business taxes (21,024) 48,869 -- 35,900 43,700
Unearned revenue 19,739 -- -- -- --
Accrued interest due to affiliate -- 30,852 4,402 -- --
--------- ---------- ---------- ---------- ----------
Total adjustments (259,409) (118,197) 609,403 (1,376,710) (378,475)
--------- ---------- ---------- ---------- ----------
NET CASH PROVIDED BY (USED IN ) OPERATING
ACTIVITIES 2,383,533 1,475,354 1,332,457 (740,380) 496,983
--------- ---------- ---------- ---------- ----------
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) (20,496 (16,970)
Proceeds from the sale of securities 386,835 -- -- -- --
Proceeds from disposal of property and equipment -- 4,256 -- -- --
--------- ---------- ---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING 389,490 (167,109) (107,524) 109,614 139,530
--------- ---------- ---------- ---------- ----------
ACTIVITIES
Subtotal (carried forward) 2,773,023 1,308,245 1,224,933 (630,766) 636,513
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
455009.26
F-7
<PAGE>
<TABLE>
<CAPTION>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, THREE MONTHS
ENDED MARCH 31,
----------------------------------------------- ------------------------------
(UNAUDITED)
1996 1995 1994 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Subtotal (brought forward) $2,773,023 $1,308,245 $1,224,933 $ (630,766) $ 636,513
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Contributions from partners -- 282,883 -- -- --
Distributions to partners and members (2,975,404) (336,038) (1,833,309) -- (900,000)
Payment of note payable due affiliate -- (500,000) -- -- --
Increase in note payable due affiliate -- -- 60,057 -- --
Due to partners -- -- -- 725,000 --
--------------- -------------- ---------------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (2,975,404) (553,155) (1,773,252) 725,000 (900,000)
----------- ---------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (202,381) 755,090 (548,319) 94,234 (263,487)
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 -
END OF PERIOD $1,056,048 $1,258,429 $ 503,339 $1,150,282 $ 994,942
========== ========== ========== ========== ==========
NONCASH FINANCING ACTIVITIES:
Unregistered securities distributed to $ 750,000 $ -- $ -- $ -- $ --
partners ========== ============== ============== ============= ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ -- $ 2,214 $ -- $ -- $ --
============= ========== ============= ============= ========
The accompanying notes to combined financial statements are an integral part of these statements.
</TABLE>
455009.26
F-8
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 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 three months (unaudited) ended March 31, 1997, the
Partnership did not make any additional distributions to
Valentine Wildove & Company, Inc.
Victor Asset Management Partners, L.L.C., VP Metropolis
Services, L.L.C. and 970 Management, LLC (collectively the
"Affiliates") 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
entities. Each affiliate was organized for the purpose of
providing asset management and advisory services relating to
various mortgage pools and/or real estate properties. 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 and 970
Management, LLC was organized in New York State during 1996.
455009.26
F-9
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1997 AND 1996 IS UNAUDITED)
NOTE 1 - ORGANIZATION (continued)
------------
Profits, losses and distributions relating to each affiliate
are allocated to each of the owners on a pro rata basis in
accordance with their ownership percentage.
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), 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.
Revenues earned from 10 engagements during the three months
(unaudited) ended March 31, 1997 included approximately
$1,157,000 from three clients and accounted for approximately
71% of quarterly revenues earned. Revenues earned from 11
engagements during the three months (unaudited) ended March
31, 1996 included approximately $1,186,000 from five clients
and accounted for approximately 72% of quarterly revenues
earned.
(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 March 31, 1997 (unaudited), the securities
continue to be carried at their market values.
455009.26
F-10
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1997 AND 1996 IS UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
(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.
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 its Affiliates 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 Affiliates are subject to New York
City Unincorporated Business taxes which taxes are reflected
in local business taxes on the 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 March 31, 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 three months ended March 31, 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 March 31, 1997.
455009.26
F-11
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1997 AND 1996 IS UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------------------------------------------
(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
March 31, 1997 and the reported amounts of income and expenses
during the three years ended December 31, 1996 and the three
months ended March 31, 1997 and 1996. Actual results could
differ from those estimates.
NOTE 3 - PROPERTY AND EQUIPMENT
----------------------
Property and equipment - at cost, consists of the following at
December 31, 1996 and 1995 and March 31, 1997:
<TABLE>
<CAPTION>
December 31 March 31
---------------------------------- -----------------
1996 1995 1997
------ ------ -----
(Unaudited)
<S> <C> <C> <C>
Furniture and fixtures $ 80,328 $ 79,630 $ 80,328
Office, telephone and
computer equipment 236,961 211,424 257,457
--------- --------- -------
Total 317,289 291,054 337,785
Less, accumulated depreciation (227,218) (183,214) (238,201)
--------- ---------
$ 90,071 $107,840 $ 99,584
========= ======== ========
</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 March 31, 1997 (unaudited), $725,000 was due to
partners. The entire amount represents short-term
noninterest-bearing loans made to the Partnership. During
April 1997, $225,000 of 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).
455009.26
F-12
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 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 three
months (unaudited) ended March 31, 1997 and 1996 amounted to
$218,913 and $215,143, respectively, of which $88,913 remains
unpaid at March 31, 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 three months (unaudited) ended
March 31, 1997 and 1996, respectively, include $231,564 and
$214,629 from these affiliates.
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 three months
(unaudited) ended March 31, 1997 and 1996 amounted to
approximately $54,000 and $53,000, respectively.
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
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
-----------------------------
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.
455009.26
F-13
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1997 AND 1996 IS UNAUDITED)
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 to occur based upon their
knowledge of the asset portfolio and its history and
accordingly have not recognized these fees, $11,450 in 1996,
$311,000 in 1995 and $37,000 in 1994, as income. For the three
months (unaudited) ended March 31, 1997 and 1996, VP
Metropolis Services, L.L.C. was not entitled to any resolution
fees.
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.
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 year 1996. For the years ended December 31, 1996 and 1995
and for the three months (unaudited) ended March 31, 1997 and
March 31, 1996, respectively, the Partnership did not incur
any administrative costs directly associated with the plan.
455009.26
F-14
<PAGE>
ANNEX A
PREFERRED SHARE PURCHASE AGREEMENT
dated as of June ___ , 1997
by and between
California Real Estate Investment Trust,
a trust organized under the laws of the State of California
and
Veqtor Finance Company, LLC,
a Delaware limited liability company
604509.3
1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
ARTICLE 1 DEFINITIONS...................................................................................A-1
ARTICLE 2 SALE AND PURCHASE.............................................................................A-4
Section 2.1 Sale of Class A Preferred Shares.....................................................A-4
Section 2.2 Purchase Price.......................................................................A-4
Section 2.3 Closing and Closing Date.............................................................A-4
Section 2.4 Conditions to Closing................................................................A-4
Section 2.5 Additional Closing Deliveries........................................................A-5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................................A-6
Section 3.1 Existence and Authority..............................................................A-6
Section 3.2 Capitalization; Consolidated Subsidiaries............................................A-6
Section 3.3 Securities Act and Exchange Act Filings..............................................A-7
Section 3.4 No Consents, Approvals, Violations or Breaches.......................................A-7
Section 3.5 Taxes................................................................................A-7
Section 3.6 Financial Statements.................................................................A-8
Section 3.7 Litigation; Legal and Governmental Proceedings and Judgments;
Licenses and Permits...............................................................A-8
Section 3.8 Brokers..............................................................................A-8
Section 3.9 No Material Change...................................................................A-8
Section 3.10 Compliance with Laws.................................................................A-8
Section 3.11 Statements True and Correct..........................................................A-8
Section 3.12 Incorporation of Certain Additional Representations and Warranties by Reference......A-9
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER.......................................................A-9
Section 4.1 Existence and Authority of Buyer.....................................................A-9
Section 4.2 Investment Intent....................................................................A-9
Section 4.3 No Consents, Approvals, Violations or Breaches.......................................A-9
Section 4.4 Brokers.............................................................................A-10
ARTICLE 5 COVENANTS OF THE COMPANY.....................................................................A-10
Section 5.1 Operations in Ordinary Course.......................................................A-10
Section 5.2 Conditions to Closing...............................................................A-10
Section 5.3 Shareholder Approval................................................................A-10
Section 5.4 Investigations......................................................................A-10
ARTICLE 6 COVENANTS OF BUYER...........................................................................A-11
Section 6.1 Conditions to Closing...............................................................A-11
Section 6.2 Bank Holding Company Restrictions...................................................A-11
ARTICLE 7 REGISTRATION RIGHTS..........................................................................A-12
Section 7.1 Definitions.........................................................................A-12
Section 7.2 Demand Registration ................................................................A-13
Section 7.3 Piggyback Registration..............................................................A-14
Section 7.4 Registration Procedures.............................................................A-15
Section 7.5 Holder's Obligations................................................................A-17
Section 7.6 Expenses of Registration............................................................A-17
Section 7.7 Indemnification; Contribution.......................................................A-17
Section 7.8 Transfer of Registration Rights.....................................................A-20
Section 7.9 Covenants of the Company............................................................A-20
604509.3
A-i
<PAGE>
ARTICLE 8 FURTHER AGREEMENTS...........................................................................A-21
Section 8.1 Further Assurances..................................................................A-21
Section 8.2 Restrictions on Certain Amendments to Amended and Restated
Declaration of Trust; Restrictions on Certain Equity Issuances....................A-21
Section 8.3 Costs and Expenses..................................................................A-21
Section 8.4 Buyer's Access to Records...........................................................A-21
Section 8.5 Home Office Payment.................................................................A-22
Section 8.6 Confidentiality.....................................................................A-22
Section 8.7 SECTION Filings and Press Releases..................................................A-22
Section 8.8 Limitation Upon Incurrence of Indebtedness..........................................A-22
ARTICLE 9 MISCELLANEOUS................................................................................A-22
Section 9.1 Survival of Representations, Warranties and Covenants...............................A-22
Section 9.2 Assignment; Transfer of Interests...................................................A-23
Section 9.3 Notices.............................................................................A-23
Section 9.4 Entire Agreement....................................................................A-24
Section 9.5 No Waiver...........................................................................A-24
Section 9.6 Governing Law.......................................................................A-25
Section 9.7 Counterparts........................................................................A-25
Section 9.8 Public Announcements................................................................A-25
Section 9.9 Availability of Equitable Remedies..................................................A-25
Section 9.10 Construction........................................................................A-25
Section 9.11 Arbitration.........................................................................A-25
EXHIBITS
Exhibit A Certificate of Designation for the Class A Preferred Shares and Class B Preferred
Shares
Exhibit B Form of Amended and Restated Declaration of Trust
Exhibit C Form of Opinion of Greenberg Glusker Fields Claman Machtinger LLP
Exhibit D Form of Opinion of Battle Fowler LLP
Exhibit E List of Holders
Exhibit F Form of Transfer Agreement
DISCLOSURE SCHEDULES
Schedule 3.2 Capital Stock
Schedule 3.7 Litigation
</TABLE>
604509.3
A-ii
<PAGE>
PREFERRED SHARE PURCHASE AGREEMENT, dated as of June , 1997, by and
between CALIFORNIA REAL ESTATE INVESTMENT TRUST, a trust organized under the
laws of the State of California, whose name is intended to be changed to CAPITAL
TRUST, and VEQTOR FINANCE COMPANY, LLC, a Delaware limited liability company.
Preliminary Statement
Capitalized terms used in this agreement are defined in Article 1
hereof. The Company desires to sell, and Buyer desires to purchase at the
Closing, pursuant to the terms and conditions set forth in this agreement, an
aggregate of up to 12,639,405 shares, and no less than 11,895,911 shares, of the
Company's Class A 9.5% Cumulative Convertible Preferred Shares of Beneficial
Interests, $1.00 par value.
Accordingly, the Company agrees with Buyer as follows:
ARTICLE 1
DEFINITIONS
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by or under common control with
such Person.
"Amended and Restated Declaration of Trust" means the Amended and
Restated Declaration of Trust of the Company as set forth in Exhibit B hereto.
"Bank Holding Company" has the meaning set forth in Section 6.2(a).
"Business Day" means a 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.
"Buyer" means Veqtor Finance Company, LLC, a Delaware limited
liability company.
"Capital Shares" means any and all shares, rights, warrants or options
to purchase shares, securities convertible into or exchangeable or exercisable
for shares and participations in or other equivalents of or interests (other
than security interests) in shares of beneficial interest in the Company,
however designated and whether voting or non-voting.
"Certificate of Designation" means the 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
as set forth in Exhibit A hereto.
"Class A Common Shares" means the Company's Class A Common Shares of
Beneficial Interests, $1.00 par value, having the designations and rights,
qualifications, limitations and restrictions set forth in the Amended and
Restated Declaration of Trust.
"Class A Preferred Shares" means the Company's Class A 9.5% Cumulative
Convertible Preferred Shares of Beneficial Interest, having the designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations and restrictions set forth in the Certificate of
Designation.
"Class B Common Shares" means the Company's Class B Non-Voting Common
Shares of Beneficial Interests, $1.00 par value, having the designations and
rights, qualifications, limitations and restrictions set forth in the Amended
and Restated Declaration of Trust.
A-i
604509.3
<PAGE>
"Class B Preferred Shares" means the Company's Class B 9.5% Cumulative
Convertible Non-Voting Preferred Shares of Beneficial Interest, having the
designations, preferences and relative, participating, optional or other special
rights and qualifications, limitations and restrictions set forth in the
Certificate of Designation.
"Closing" has the meaning set forth in Section 2.3.
"Closing Date" has the meaning set forth in Section 2.3.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means, collectively, the Class A Common Shares and
Class B Common ------------- Shares.
"Company" means California Real Estate Investment Trust, a trust
organized under the laws of the State of California, whose name is intended to
be changed to Capital Trust..
"Consolidated Subsidiaries" means, as of any date, all Persons
included as of such date in the consolidated financial statements of the
Company.
"control" including, with correlative meanings, the terms "controlled
by" and "under common control with," means, as to any Person, the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Persons, whether through the ownership of voting
securities, by contract or otherwise.
"D/E Ratio" means, as of the date of determination, the ratio of (i)
the sum of (x) the total Indebtedness of the Company and its consolidated
Subsidiaries as reflected on the Company's last regularly prepared balance
sheet, plus (y) all Indebtedness issued by the Company since that date less all
Indebtedness retired or repurchased by the Company since that date, plus (z) the
Company'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 Company's equity in its Equity Affiliates)
over total liabilities of the Company, as reflected on the Company's last
regularly prepared 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.
"Disclosure Schedules" means the disclosure schedules referred to in
Article 3 hereof and delivered in connection with the execution of this
agreement.
"Equity Affiliate" means any Person in which the Company 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 Company's consolidated
financial statements.
"Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"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 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. In the event of a change in
GAAP, the Company and Buyer will thereafter negotiate in good faith to revise
A-2
604509.3
<PAGE>
any covenants of this agreement affected thereby in order to make such covenants
consistent with GAAP then in effect.
"Incur" means to issue, assume, guarantee, incur or otherwise become
liable for.
"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.
"Indemnified Party" has the meaning set forth in Section 9.1(c).
"Indemnifying Party" has the meaning set forth in Section 9.1(c).
"Junior Shares" means Common Shares and any other class or series of
Capital Shares of the Company now or hereafter authorized, issued or outstanding
which is subject, under the terms of the Company's Amended and Restated
Declaration of Trust (including any certificate of designation adopted
thereunder relating to any class or series of preferred shares), to the
following restrictions and limitations:
(a) 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 Shares shall have been paid
in full;
(b) in the event of any liquidation, dissolution or
winding up of the Company, either voluntary or
involuntary, the holders of Preferred Shares shall be
entitled to receive out of assets of the Company
available for distribution to shareholders, the
amount specified in section 4 of the Certificate of
Designation, before any payment shall be made or any
assets distributed to the holders of such other class
or series of Capital Shares of the Company, and
(c) 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 Preferred Shares have
theretofore been redeemed or converted.
"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.
"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.
"Preferred Shares" means, collectively, the Class A Preferred Shares
and the Class B Preferred Shares.
"Proxy Statement" has the meaning set forth in Section 3.11.
"Purchase Price" has the meaning set forth in Section 2.2.
"Securities Act" means the Securities Act of 1933, as amended.
A-3
604509.3
<PAGE>
"Shareholders' Meeting" has the meaning set forth in Section 3.11.
"Taxes" has the meaning set forth in Section 3.5.
"Transactions" means the transactions contemplated by this agreement
including, but not by way of limitation, (i) the sale of the Class A Preferred
Shares to Buyer, (ii) the adoption by the Company's shareholders of the Amended
and Restated Declaration of Trust and (iii) the adoption of the Certificate of
Designation.
ARTICLE 2
SALE AND PURCHASE
Section 2.1 Sale of Class A Preferred Shares. On the terms and subject
to the conditions of this agreement, and in reliance upon the representations
and warranties contained herein, at the Closing the Company shall sell or cause
to be sold to Buyer, and Buyer shall purchase from the Company for the
consideration specified in Section 2.2, up to Twelve Million Six Hundred Thirty
Nine Thousand Four Hundred Five (12,639,405) and no less than Eleven Million
Eight Hundred Ninety Five Thousand Nine Hundred Eleven (11,895,911) Class A
Preferred Shares.
Section 2.2 Purchase Price. The aggregate purchase price for the Class
A Preferred Shares (the "Purchase Price") shall be no more than Thirty Four
Million Dollars ($34,000,000) and no less than Thirty Two Million Dollars
($32,000,000), based upon a per share purchase price of $2.69.
Section 2.3 Closing and Closing Date. The closing of the sale and
purchase of the Class A Preferred Shares (the "Closing") will take place in a
mutually acceptable manner and on a mutually acceptable day and place (the
"Closing Date"), which shall be as soon as reasonably practicable and no later
than two Business Days after the Shareholders' Meeting. Prior to the Closing
Date, Buyer shall advise the Company in writing of the number of Class A
Preferred Shares to be purchased pursuant to Section 2.1 and shall confirm the
Purchase Price therefor, calculated as provided in Section 2.2. At the Closing,
the Company shall deliver to Buyer, free and clear of any lien, charge,
encumbrance or expense (including, without limitation, any tax or other fee
payable in connection with such issuance), a certificate or certificates
representing the Class A Preferred Shares, with appropriate legends, against
payment of the Purchase Price therefor. Buyer shall pay the Purchase Price to
the Company by wire transfer of immediately available funds.
Section 2.4 Conditions to Closing. (a) The obligation of Buyer to
close the transactions contemplated hereunder is subject to the satisfaction on
or prior to the Closing Date of the following conditions:
(i) No order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition (A)
preventing the consummation of the closing of the transactions
contemplated by this agreement or (B) which is reasonably likely to
materially adversely affect the business, properties or assets of the
Company or the transactions contemplated by this agreement, shall be in
effect, and no claim, suit or action shall have been asserted
challenging the consummation of the Transactions which remains
outstanding.
(ii) Each of the terms, covenants and conditions of this
agreement to be complied with and performed by the Company on or prior
to the Closing Date shall have been duly complied with and performed in
all material respects, or the Buyer shall have waived such compliance
or performance, and all documents to be delivered or actions to be
taken by the Company pursuant to Section 2.5 shall have been delivered
or performed.
A-4
604509.3
<PAGE>
(iii) Each of the representations and warranties made by the
Company herein shall be true and correct as of the date hereof and as
of the Closing Date (unless such representation and warranty is made as
of a specific date and then shall be true and correct as of such date)
with the same force and effect as though such representations and
warranties had been made as of the Closing Date.
(iv) Buyer shall have obtained financing on terms and in an
amount reasonably acceptable to Buyer and determined by Buyer to be
reasonably adequate to permit the consummation by Buyer of the
Transactions contemplated hereby.
(v) The shareholders of the Company shall have approved the
adoption of the Amended and Restated Declaration of Trust and the
issuance of the Class A Preferred Shares as contemplated hereby, in
each case as required by applicable law, at a duly called Shareholders'
Meeting.
(vi) The form and substance of all instruments and documents
required to be delivered pursuant to this agreement by the Company
shall be reasonably satisfactory in all respects to Buyer.
(b) The obligation of the Company to close the transactions
contemplated hereunder is subject to the satisfaction on or prior to the Closing
Date of the following conditions:
(i) No order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition (A)
preventing the consummation of the closing of the transactions
contemplated by this agreement or (B) which is reasonably likely to
materially adversely affect the business, properties or assets of the
Company or the transactions contemplated by this agreement, shall be in
effect, and no claim, suit or action shall have been asserted
challenging the consummation of the Transactions which remains
outstanding.
(ii) Each of the terms, covenants and conditions of this
agreement to be complied with and performed by Buyer on or prior to the
Closing Date shall have been duly complied with and performed in all
material respects, or the Company shall have waived such compliance or
performance, and all documents to be delivered or actions to be taken
by Buyer pursuant to Section 2.5 shall have been delivered or
performed.
(iii) Each of the representations and warranties made by the
Buyer herein shall be true and correct as of the date hereof and as of
the Closing Date (unless such representation and warranty is made as of
a specific date and then shall be true and correct as of such date)
with the same force and effect as though such representations and
warranties had been made as of the Closing Date.
(iv) The shareholders of the Company shall have approved the
adoption of the Amended and Restated Declaration of Trust and the
issuance of the Class A Preferred Shares as contemplated hereby, in
each case as required by applicable law, at a duly called Shareholders'
Meeting.
(v) The form and substance of all instruments and documents
required to be delivered pursuant to this agreement by Buyer shall be
reasonably satisfactory in all respects to the Company.
Section 2.5 Additional Closing Deliveries. (a) On or prior to the
Closing Date, the Company shall deliver or cause to be delivered to Buyer the
documents listed below, in form and substance satisfactory to Buyer:
A-5
604509.3
<PAGE>
(i) the Amended and Restated Declaration of Trust of the Company
and the Certificate of Designation, each certified as of the Closing
Date by the Company's secretary or assistant secretary;
(ii) resolutions of the Board of Trustees of the Company
approving and authorizing this agreement and the transactions
contemplated hereby, including the approval of the Certificate of
Designation, each certified as of the Closing Date by the Company's
secretary or assistant secretary as being in full force and effect
without modification or amendment;
(iii) resolutions of the shareholders of the Company approving
and authorizing the adoption of the Amended and Restated Declaration
of Trust and the issuance of the Class A Preferred Shares as
contemplated hereby, certified as of the Closing Date by the Company's
secretary or assistant secretary as being in full force and effect
without modification or amendment;
(iv) signature and incumbency certificates of the officers of
the Company executing this agreement and any other documents executed
and delivered in connection herewith;
(v) opinions of Greenberg Glusker Fields Claman Machtinger LLP,
counsel to the Company, in the form of Exhibit C; and
(vi) wire transfer instructions with respect to the payment of
the Purchase Price.
(b) On or prior to the Closing Date, Buyer shall deliver or
cause to be delivered to the Company the documents listed below, in form and
substance satisfactory to the Company:
(i) copies of the certificate of formation of Buyer together
with a good standing certificate from the state of its formation,
dated as of a recent date prior to the Closing Date and certified by
the Secretary of State or other authorized governmental entity;
(ii) signature and incumbency certificates of the
officers executing this agreement on behalf of Buyer and any other
documents executed and delivered in connection herewith; and
(iii) opinions of Battle Fowler LLP, counsel to Buyer, in the
form of Exhibit D.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to Buyer as follows:
Section 3.1 Existence and Authority. (a) The Company is a trust duly
formed, validly existing and in good standing under the laws of the State of
California. The Company has full trust power and authority to enter into this
agreement and, subject to the approval of the shareholders contemplated by
Section 2.4(a)(v), to perform its obligations hereunder. The execution, delivery
and performance of this agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have been duly authorized by all
necessary proceedings on the part of the Company (other than the approval of the
shareholders contemplated by Section 2.4(a)(v)), and this agreement constitutes
the valid and legally binding obligation of the Company, enforceable against the
Company in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and by general equity principles.
A-6
604509.3
<PAGE>
(b) The Company has full trust power to carry on the business in which
it is currently engaged, and to own and use the properties owned and used by it.
The Company is duly qualified or licensed to do business as a foreign trust and
is in good standing in the jurisdictions in which the failure to so qualify is
reasonably likely to materially adversely affect the business, properties or
assets of the Company and the Consolidated Subsidiaries, taken as a whole.
Section 3.2 Capitalization; Consolidated Subsidiaries. (a) The
authorized Capital Shares of the Company is unlimited and may consist of common
shares of beneficial interest and preferred shares of beneficial interest. As of
December 31, 1996, 9,137,335 shares of beneficial interest designated as common
shares of beneficial interests of the Company, $1.00 par value, and no shares of
beneficial interest designated as preferred shares were issued and outstanding
and no shares were held in treasury. Since December 31, 1996, except as
contemplated by the Amended and Restated Declaration of Trust and the
Certificate of Designation, there has been no change in the authorized, issued
or outstanding Capital Shares of the Company and no shares have been redeemed or
converted into treasury shares. All of the issued and outstanding common shares
of beneficial interests of the Company, $1.00 par value, have been, and upon its
issuance as provided herein the Class A Preferred Shares shall be, duly
authorized, validly issued, fully paid and nonassessable. There are no
preemptive rights that have not been waived or terminated with respect to the
issuance of the Class A Preferred Shares and any Class B Preferred Shares or
Common Shares issuable upon the conversion or exercise of the Class A Preferred
Shares. Except as set forth on Schedule 3.2 of the Disclosure Schedules, there
were no outstanding or authorized options, warrants, rights, contracts, rights
to subscribe, conversion rights or other Agreements or commitments to which the
Company was a party or which were binding upon the Company as of December 31,
1996 providing for the issuance or acquisition of any of the Company's Capital
Shares and, except as contemplated by the Certificate of Designation, no
options, warrants, rights, contracts, rights to subscribe, conversion rights or
other such Agreements or commitments have been issued since December 31, 1996.
Except as set forth on Schedule 3.2 of the Disclosure Schedules, there are no
outstanding or authorized share appreciation, phantom share or similar rights
with respect to the Company.
(b) Schedule 3.2 of the Disclosure Schedules lists each of the
Consolidated Subsidiaries. Except as set forth on Schedule 3.2 of the Disclosure
Schedules, the Company does not, directly or indirectly, own or control or have
any capital, equity, partnership, participation or other interest in any Person.
Section 3.3 Securities Act and Exchange Act Filings. Since December
31, 1995, the Trust has filed all documents required to be filed by it pursuant
to the Securities Act and the Exchange Act and each such document when filed
complied as to form in all material respects with the requirements of the
Securities Act and the Exchange Act. Such documents taken together with all
information in this agreement and the Disclosure Schedules and all press
releases issued since December 31, 1996, do not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the statements
contained therein not misleading.
Section 3.4 No Consents, Approvals, Violations or Breaches. Neither
the execution and delivery by the Company of this agreement, nor the
consummation by the Company of the transactions contemplated hereby, will (i)
require any consent, approval, authorization or permit of, or filing,
registration or qualification with or notification to, any governmental or
regulatory authority under any law of the United States, any state or any
political subdivision thereof, applicable to the Company or any Consolidated
Subsidiary other than the Proxy Statement, a listing application with the New
York Stock Exchange with respect to the Class A Common Shares issuable upon the
conversion of the Class B Common Shares and the Preferred Shares, and any action
required to be taken by Buyer, (ii) violate any provision of the declaration of
trust of the Company or any constituent document of any Consolidated Subsidiary,
subject to the approval of the shareholders contemplated by Section 2.4(a)(v),
(iii) assuming no violation on the part of Buyer, violate any statute, law,
ordinance, rule or regulation of the United States, any state or any political
subdivision thereof, or any judgment, order, writ, decree or injunction
applicable to the Company or any Consolidated Subsidiary or any of their
properties or assets or (iv) assuming no violation on the part of Buyer,
violate, conflict with, or result in a material breach of any provisions of, or
constitute a material default (or any event which, with or without due notice or
lapse of time, or both, would constitute a material default) under, or result in
the
A-7
604509.3
<PAGE>
termination of, or accelerate the performance required by, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which either the
Company or any Consolidated Subsidiary is a party or by which any thereof or any
of their respective properties or assets may be bound. Neither the Company nor
any Consolidated Subsidiary is (x) in violation of, or default under, any terms
or provisions of its constituent documents or (y) in violation of, or default
under, any Lien, mortgage, lease, indenture, agreement, instrument, order,
judgment, decree or law to which it is a party or by which it or any of its
properties or assets is bound or subject.
Section 3.5 Taxes. (a) The Company has timely filed all federal,
state, local and foreign tax returns and reports required to be filed by or with
respect to the Company in respect of all taxes, assessments or other
governmental charges, including, without limitation, income, estimated income,
business, occupation, franchise, gross income, gross receipts, alternative
minimum, property, sales, transfer, gains, value-added, use, ad valorem,
intangibles, document, employment, commercial rent or withholding taxes,
including interest, penalties and additions in connection therewith ("Taxes").
The returns and information filed with respect to any Taxes are accurate in all
material respects.
(b) All Taxes for which the Company is or may be liable (whether
disputed, incurred or which may be incurred) in respect of periods or portions
thereof ending on or before the Closing Date shall have been paid to the proper
taxing authority or an adequate reserve (in conformity with GAAP) established
therefor, and the Company does not have any material liability for Taxes in
excess of the amounts so paid or reserved. All Taxes that the Company has been
required to collect or withhold have been duly collected or withheld and, to the
extent required when due, have been or will be duly paid by the Company to the
proper taxing authority.
Section 3.6 Financial Statements. The Company has delivered to Buyer
copies of the audited consolidated balance sheet of the Company as of December
31, 1996, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the fiscal year ended on such date,
certified by Coopers & Lybrand L.L.P., independent certified public accountants
and, promptly after they become available, will deliver the consolidated balance
sheet of the Company as of March 31, 1997, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for the
fiscal quarter ended on such date. Such financial statements fairly represent
the financial condition of the Company and its Consolidated Subsidiaries as of
such date and for the period ending on such date, and have been prepared in
accordance with GAAP applied on a basis consistent with that of prior periods.
Section 3.7 Litigation; Legal and Governmental Proceedings and
Judgments; Licenses and Permits. (a) Except as set forth in Schedule 3.7 of the
Disclosure Schedules, (i) there is no claim, suit, action or legal,
administrative, arbitration or other proceeding or governmental investigation
pending, or to the knowledge of the Company threatened, against the Company or
any Consolidated Subsidiary, (ii) to the knowledge of the Company, neither the
Company nor any employee of the Company or any of the Consolidated Subsidiaries
is a target or subject of any pending or threatened criminal investigation or
proceeding and (iii) neither the Company nor any of the Consolidated
Subsidiaries is the subject of any order, judgment, stipulation or decree, which
has not been subsequently reversed, suspended or vacated.
(b) The Company and each of the Consolidated Subsidiaries have all
material licenses, permits and similar authorizations from all federal, state
and local and all foreign authorities which are required in connection with
their businesses.
Section 3.8 Brokers. None of the Company, any Consolidated Subsidiary
or any of their Affiliates has engaged any broker in connection with the
transactions contemplated by this agreement and no Person acting on behalf of
the Company or any Consolidated Subsidiary or any of their Affiliates is or will
be entitled to any brokerage fee, commission, finder's fee or financial advisory
fee, directly or indirectly, from the Company or any Consolidated Subsidiary or
any of their Affiliates in connection with the transactions contemplated by this
agreement.
A-8
604509.3
<PAGE>
Section 3.9 No Material Change. Since December 31, 1996, and except as
otherwise disclosed in a filing under the Securities Act, the Exchange Act, a
press release or in this agreement, there has not been any material adverse
change in the financial position, operations, assets, liabilities, prospects or
the business of the Company and the Consolidated Subsidiaries taken as a whole.
Section 3.10 Compliance with Laws. The Company and each Consolidated
Subsidiary is in substantial compliance with, and has conducted its business in
all material respects so as to comply with, all applicable laws and regulations.
Section 3.11 Statements True and Correct. The proxy statement (the
"Proxy Statement") to be used by the Company to solicit any required approval of
its shareholders as contemplated by this agreement does not contain any
statement which, at the time of the meetings of the shareholders of the Company
to be held pursuant to Section 5.3, including any adjournments thereof (the
"Shareholders' Meeting") and in the light of the circumstances under which it is
made, is false or misleading with respect to any material fact or which omits to
state any material fact necessary in order to make the statements therein not
false or misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of a proxy for the same meeting
or subject matter which as become false or misleading.
Section 3.12 Incorporation of Certain Additional Representations and
Warranties by Reference. Subsequent to the date hereof, it is anticipated that
Buyer may be required to make certain customary representations and warranties
with respect to the Company to investors in Buyer. All such representations and
warranties relating to the Company, its business, assets, liabilities or
prospects shall be deemed to be incorporated herein by reference as if set forth
in full herein as additional representations and warranties made by the Company
to Buyer hereunder. Buyer will promptly provide the Company with a copy of such
representations and warranties and, if requested by Buyer, the Company will
execute and deliver such further instruments as may be necessary or appropriate
to reflect the Company's making such additional representations and warranties
to Buyer.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Company as follows:
Section 4.1 Existence and Authority of Buyer. Buyer is a limited
liability company duly formed, validly existing and in good standing under the
laws of the State of Delaware and has full limited liability company power and
authority to enter into this agreement and to perform its obligations hereunder.
The execution, delivery and performance of this agreement by Buyer and the
consummation by Buyer of the transactions contemplated hereby have been duly
authorized by all necessary proceedings on the part of Buyer, and this agreement
constitutes the valid and legally binding obligation of Buyer, enforceable
against Buyer in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and by general equity principles.
Section 4.2 Investment Intent. The Class A Preferred Shares, and the
Class B Preferred Shares and Common Shares underlying the Class A Preferred
Shares, will be held by Buyer for its own account for investment and not with a
view to, or for sale in connection with, any distribution thereof within the
meaning of the Securities Act, nor with any present intention of distributing or
selling the same. Buyer acknowledges that the certificates evidencing the Class
A Preferred Shares, and the Class B Preferred Shares and Common Shares to be
issued upon conversion or exercise of the Class A Preferred Shares, contain or
will contain customary legends the Company may apply, and that neither the Class
A Preferred Shares, nor the Class B Preferred and the Common Shares underlying
the Class A Preferred Shares, has been registered under the Securities Act or
any
A-9
604509.3
<PAGE>
applicable state securities laws, and that the Class A Preferred Shares, Class B
Preferred Shares and Common Shares may not be sold, transferred, offered for
sale, pledged, hypothecated or otherwise disposed of without registration under
the Securities Act or any applicable state securities laws, except pursuant to
an applicable exemption.
Section 4.3 No Consents, Approvals, Violations or Breaches. Neither
the execution and delivery of this agreement by Buyer, nor the consummation by
Buyer of the transactions contemplated hereby, will (i) require any consent,
approval, authorization or permit of, or filing, registration or qualification
with or notification to, any governmental or regulatory authority under any law
of the United States, any state or any political subdivision thereof applicable
to Buyer other than any action required to be taken by the Company, (ii) violate
any provision of the certificate of formation or operating agreement of Buyer,
(iii) assuming no violations on the part of the Company, violate any statute,
law, ordinance, rule or regulation of the United States, any state or any
political subdivision thereof, or any judgment, order, writ, decree or
injunction applicable to Buyer or any of its properties or assets, the violation
of which would have a material adverse effect upon Buyer or (iv) assuming no
violation on the part of the Company, violate, conflict with, or result in a
breach of any provisions of, or constitute a default (or any event which, with
or without due notice or lapse of time, or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Buyer is a party or by which Buyer or any of its properties
or assets may be bound which would have a material adverse effect upon Buyer.
Section 4.4 Brokers. Neither Buyer nor any of its Affiliates
has engaged any broker in connection with the transactions contemplated by this
agreement and no Person acting on behalf of Buyer is or will be entitled to any
brokerage fee, commission, finder's fee or financial advisory fee, directly or
indirectly, from Buyer or any of its Affiliates in connection with the
transactions contemplated by this agreement.
ARTICLE 5
COVENANTS OF THE COMPANY
During the period from the date hereof to the Closing Date, the
Company covenants and agrees that:
Section 5.1 Operations in Ordinary Course. Without the consent of the
Buyer, the Company shall not
(i) conduct its business and operations in such a manner as to impair
its ability to consummate the Transactions,
(ii) incur any Indebtedness or engage in any transaction, take any
action or omit to take any action, which could reasonably be expected to impair
its ability to consummate the Transactions,
(iii) declare or pay any dividend or make any distribution on any
shares of beneficial interests in the Company, or
(iv) subdivide or reclassify any shares of beneficial interests in the
Company, or combine any shares of beneficial interests in the Company.
Section 5.2 Conditions to Closing. The Company shall use its
reasonable best efforts to satisfy, as expeditiously as reasonably possible, all
of the conditions to the obligations of the Company hereunder within the
Company's control, including obtaining all consents, approvals and Agreements
which are required in order to consummate the transactions contemplated hereby.
A-10
604509.3
<PAGE>
Section 5.3 Shareholder Approval. The Company has filed the Proxy
Statement in preliminary form with the appropriate federal and state
governmental authorities prior to the date of this agreement and shall use its
reasonable best efforts to have such Proxy Statement approved by such federal
and state governmental authorities and mailed to the Company shareholders as
soon practicable. The Company shall call a meeting of its shareholders to be
held as soon as practicable for the purpose of voting upon the adoption of the
Amended and Restated Declaration of Trust and the issuance of the Class A
Preferred Shares as contemplated hereby at a duly called Shareholders' Meeting.
The Board of Trustees of the Company shall submit for approval of its
shareholders the matters to be voted upon at the Shareholders' Meeting, and
shall, subject to the exercise of its fiduciary obligations, recommend approval
of such matters and use its reasonable best efforts (including, without
limitation, soliciting proxies for such approvals) to obtain such shareholder
approvals.
Section 5.4 Investigations. The Company shall permit Buyer and its
agents to inspect the properties, assets, operations, books and records of the
Company at reasonable times and upon reasonable notice; provided, however, that
any such inspection shall be conducted in such manner at such times and upon
such notice as is reasonably acceptable to the Company. In addition, the Company
shall furnish Buyer and its agents with copies of such documents and records
with respect to the Company, its properties, assets, operations, books and
records as Buyer shall from time to time reasonably request.
ARTICLE 6
COVENANTS OF BUYER
Section 6.1 Conditions to Closing. Buyer shall use its reasonable best
efforts to satisfy, as expeditiously as reasonably possible, all of the
conditions to the obligations of Buyer hereunder within Buyer's control,
including obtaining all consents, approvals and Agreements which are required in
order to consummate the transactions contemplated hereby.
Section 6.2 Bank Holding Company Restrictions. (a) Buyer represents
that it is not a bank holding company (as defined in Section 1841(a) of the Bank
Holding Company Act of 1956, as amended) nor an 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) (collectively, a "Bank Holding Company").
(b) Buyer shall not transfer Class A Preferred Shares or Class
A Common Shares to any Bank Holding Company, unless, after giving effect to such
transfer, such Bank Holding Company would own no more than 4.9% of any class of
voting securities of the Company.
(c) Buyer understands and agrees that the Class B Preferred
Shares and the Class B Common Shares may be transferred by a Bank Holding
Company only (i) in accordance with applicable federal and state securities laws
and (ii) either (A) in a widely dispersed offering in which no more than 2% of
the outstanding Class B Common Shares and Capital Shares convertible into Class
B Common Shares are transferred to any one holder, in which circumstance the
transferee will be permitted to convert such Class B Common Shares into Class A
Common Shares, and Class B Preferred Shares into Class A Preferred Shares or (B)
to a transferee who agrees, in a written agreement satisfactory in form and
substance to the Company, to be bound by the provisions of this Section 6.2.
(d) Buyer agrees that substantially the following legend shall be
placed on the certificates representing any Class B Preferred Shares and Class B
Common Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO THE LIMITATIONS UPON TRANSFER AND CONVERSION
CONTAINED IN THE CERTIFICATE OF DESIGNATION,
A-11
604509.3
<PAGE>
PREFERENCES AND RIGHTS OF THE CLASS B 9.5% CUMULATIVE
CONVERTIBLE NON-VOTING PREFERRED SHARES OF BENEFICIAL
INTERESTS AND THE BY-LAWS OF THE COMPANY (COPIES OF WHICH ARE
ON FILE AT THE OFFICE OF THE COMPANY)."
ARTICLE 7
REGISTRATION RIGHTS
Section 7.1 Definitions. As used in this Article 7 the following terms
have the meanings indicated:
"Agent" means the principal placement agent on an agented placement of
Registrable Securities.
"Continuously Effective" means, with respect to a specified
registration statement, that it shall not cease to be effective and available
for Transfers of Registrable Securities thereunder for longer than either (i)
any ten (10) consecutive Business Days, or (ii) an aggregate of fifteen (15)
Business Days during the period specified in the relevant provision of this
agreement.
"Demand Registration" has the meaning set forth in Section 7.2(a).
"Demanding Holders" has the meaning set forth in Section 7.2(a).
"Holder" means the Buyer, the Persons named on Exhibit E hereto and
Transferees of Buyer's and such Persons' Registrable Securities with respect to
the rights that such Transferees shall have acquired in accordance with Section
7.8, at such times as such Persons shall own Registrable Securities.
"Majority Selling Holders" means those Selling Holders whose
Registrable Securities included in such registration represent a majority of the
Registrable Securities of all Selling Holders included therein.
"Piggyback Registration" has the meaning set forth in Section 7.3.
"Register", "Registered" and "Registration" refer to a registration
effected by preparing and filing a registration statement or similar document in
compliance with the Securities Act, and the declaration or ordering by the
Commission of effectiveness of such registration statement or document.
"Registrable Securities" means, subject to Section 7.8 and Section
7.9(c): (i) the Common or Preferred Shares owned by Holders on the date hereof,
and owned by a Holder on the date of determination; (ii) any Common Shares or
Preferred Shares or other securities issued as (or issuable upon the conversion
or exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange by the Company
generally for, or in replacement by the Company generally of, such shares; and
(iii) any securities issued in exchange for Common or Preferred Shares in any
merger or reorganization of the Company; provided, however, that Registrable
Securities shall not include any securities which have theretofore been
registered and sold pursuant to the Securities Act or which have been sold to
the public pursuant to Rule 144 or any similar rule promulgated by the
Commission pursuant to the Securities Act, and, provided further, the Company
shall have no obligation under Sections 7.2 and 7.3 to register any Registrable
Securities of a Holder if the Company shall deliver to the Holders requesting
such registration an opinion of counsel reasonably satisfactory to such Holders
and their counsel to the effect that the proposed sale or disposition of all of
the Registrable Securities for which registration was requested does not require
registration under the Securities Act for a sale or disposition in a single
public sale, and offers to remove any and
A-12
604509.3
<PAGE>
all legends restricting transfer from the certificates evidencing such
Registrable Securities. For purposes of this agreement, a Person will be deemed
to be a Holder of Registrable Securities whenever such Person has the
then-existing right to acquire such Registrable Securities (by conversion,
purchase or otherwise), whether or not such acquisition has actually been
effected.
"Registrable Securities then outstanding" means, with respect to a
specified determination date, the Registrable Securities owned by all Holders on
such date.
"Registration Expenses" has the meaning set forth in Section 7.6.
"Selling Holders" means, with respect to a specified registration
pursuant to this Article 7, Holders whose Registrable Securities are included in
such registration.
"Transfer" means and includes the act of selling, giving,
transferring, creating a trust (voting or otherwise), assigning or otherwise
disposing of (other than pledging, hypothecating or otherwise transferring as
security) (and correlative words shall have correlative meanings); provided
however, that any transfer or other disposition upon foreclosure or other
exercise of remedies of a secured creditor after an event of default under or
with respect to a pledge, hypothecation or other transfer as security shall
constitute a Transfer.
"Underwriters' Representative" means the managing underwriter, or, in
the case of a co-managed underwriting, the managing underwriter designated as
the Underwriters' Representative by the co-managers.
"Violation" has the meaning set forth in Section 7.7(a).
Section 7.2 Demand Registration.
(a)
(i) If one or more Holders shall make a written request to the
Company (the "Demanding Holders"), the Company shall cause there to be filed
with the Commission a registration statement meeting the requirements of the
Securities Act (a "Demand Registration"), and each Demanding Holder shall be
entitled to have included therein (subject to Section 7.8) all or such number of
such Demanding Holder's Registrable Securities as the Demanding Holder shall
report in writing. Any request made pursuant to this Section 7.2(a) shall be
addressed to the attention of the secretary of the Company, and shall specify
the number of Registrable Securities to be registered, the intended methods of
disposition thereof and that the request is for a Demand Registration pursuant
to this Section 7.2(a)(i).
(ii) Whenever the Company shall have received a demand pursuant
to Section 7.2(a)(i) to effect the registration of any Registrable Securities,
the Company shall promptly give written notice of such proposed registration to
all Holders. Any such Holder may, within twenty (20) days after receipt of such
notice, request in writing that all of such Holder's Registrable Shares, or any
portion thereof designated by such Holder, be included in the registration.
(b) Following receipt of a request for a Demand Registration, the
Company shall:
(i) File the registration statement with the Commission as
promptly as practicable, and shall use the Company's best efforts to have the
registration declared effective under the Securities Act as soon as reasonably
practicable, in each instance giving due regard to the need to prepare current
financial statements, conduct due diligence and complete other actions that are
reasonably necessary to effect a registered public offering.
A-13
604509.3
<PAGE>
(ii) Use the Company's best efforts to keep the relevant
registration statement Continuously Effective for up to 270 days or until such
earlier date as of which all the Registrable Securities under the Demand
Registration statement shall have been disposed of in the manner described in
the Registration Statement. Notwithstanding the foregoing, if for any reason the
effectiveness of a registration pursuant to this Section 7.2 is suspended, the
foregoing period shall be extended by the aggregate number of days of such
suspension or postponement.
(c) The Company shall be obligated to effect no more than three
Demand Registrations. For purposes of the preceding sentence, registration shall
not be deemed to have been effected (i) unless a registration statement with
respect thereto has become effective, (ii) if after such registration statement
has become effective, such registration or the related offer, sale or
distribution of Registrable Securities thereunder is interfered with by any stop
order, injunction or other order or requirement of the Commission or other
governmental agency or court for any reason not attributable to the Selling
Holders and such interference is not thereafter eliminated, or (iii) if the
conditions to closing specified in the underwriting agreement, if any, entered
into in connection with such registration are not satisfied or waived, other
than by reason of a failure on the part of the Selling Holders. If the Company
shall have complied with its obligations under this Article 7, a right to demand
a registration pursuant to this Section 7.2 shall be deemed to have been
satisfied upon the earlier of (x) the date as of which all of the Registrable
Securities included therein shall have been disposed of pursuant to the
Registration Statement, and (y) the date as of which such Demand Registration
shall have been Continuously Effective for a period of 270 days, provided no
stop order or similar order, or proceedings for such an order, is thereafter
entered or initiated.
(d) A registration pursuant to this Section 7.2 shall be on such
appropriate registration form of the Commission as shall (i) be selected by the
Company and be reasonably acceptable to the Majority Selling Holders, and (ii)
permit the disposition of the Registrable Securities in accordance with the
intended method or methods of disposition specified in the request pursuant to
Section 7.2(a)(i).
(e) If any registration pursuant to Section 7.2 involves an
underwritten offering (whether on a "firm", "best efforts" or "all reasonable
efforts" basis or otherwise), or an agented offering, the Majority Selling
Holders shall have the right to select the underwriter or underwriters and
manager or managers to administer such underwritten offering or the placement
agent or agents for such agented offering; provided, however, that each Person
so selected shall be reasonably acceptable to the Company.
(f) Whenever the Company shall effect a registration pursuant to this
Section 7.2 in connection with an underwritten offering by one or more Selling
Holders of Registrable Securities: (i) if such Selling Holders have requested
the inclusion therein of more than one class of Registrable Securities, and the
Underwriters' Representative or Agent advises each such Selling Holder in
writing that, in its opinion, the inclusion of more than one class of
Registrable Securities would adversely affect such offering, the Demanding
Holders holding at least a majority of the Registrable Securities proposed to be
sold therein by them shall decide which class of Registrable Securities shall be
included therein in such offering and the related registration, and the other
class shall be excluded; and (ii) if the Underwriters' Representative or Agent
advises each such Selling Holder in writing that, in its opinion, the amount of
securities requested to be included in such offering (whether by Selling Holders
or others) exceeds the amount which can be sold in such offering within a price
range acceptable to the Majority Selling Holders, securities shall be included
in such offering and the related registration, to the extent of the amount which
can be sold within such price range, and on a pro rata basis among all Selling
Holders.
Section 7.3 Piggyback Registration.
(a) If at any time the Company proposes to register (including for
this purpose a registration effected by the Company for shareholders of the
Company other than the Holders) securities under the Securities Act in
connection with the public offering solely for cash on Form S-1, S-2 or S-3 (or
any replacement or successor forms), the Company shall promptly give each Holder
of Registrable Securities written
A-14
604509.3
<PAGE>
notice of such registration (a "Piggyback Registration"). Upon the written
request of each Holder given within 20 days following the date of such notice,
the Company shall cause to be included in such registration statement and use
its best efforts to be registered under the Securities Act all the Registrable
Securities that each such Holder shall have requested to be registered. The
Company shall have the absolute right to withdraw or cease to prepare or file
any registration statement for any offering referred to in this Section 7.3
without any obligation or liability to any Holder.
(b) If the Underwriters' Representative or Agent shall advise the
Company in writing (with a copy to each Selling Holder) that, in its opinion,
the amount of Registrable Securities requested to be included in such
registration would materially adversely affect such offering, or the timing
thereof, then the Company will include in such registration, to the extent of
the amount and class which the Company is so advised can be sold without such
material adverse effect in such offering: securities proposed to be sold by the
Company for its own account; the Registrable Securities requested to be included
in such registration by Holders pursuant to this Section 7.3; and all other
securities being registered pursuant to the exercise of contractual rights
comparable to the rights granted in this Section 7.3, pro rata based on the
estimated gross proceeds from the sale thereof.
(c) Each Holder shall be entitled to have its Registrable Securities
included in an unlimited number of Piggyback Registrations pursuant to this
Section 7.3.
(d) If the Company has previously filed a registration statement with
respect to Registrable Securities pursuant to Section 7.2 or pursuant to this
Section 7.3, and if such previous registration has not been withdrawn or
abandoned, the Company will not file or cause to be effected any other
registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Form S-8 or any successor form), whether on its own behalf or at
the request of any holder or holders of such securities, until a period of 180
days has elapsed from the effective date of such a previous registration.
Section 7.4 Registration Procedures. Whenever required under Section
7.2 or Section 7.3 to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as practicable:
(a) Prepare and file with the Commission a registration statement
with respect to such Registrable Securities and use the Company's best efforts
to cause such registration statement to become effective; provided, however,
that before filing a registration statement or prospectus or any amendments or
supplements thereto, including documents incorporated by reference after the
initial filing of the registration statement and prior to effectiveness thereof,
the Company shall furnish to one firm of counsel for the Selling Holders
(selected by Majority Selling Holders) copies of all such documents in the form
substantially as proposed to be filed with the Commission at least four (4)
Business Days prior to filing for review and comment by such counsel, which
opportunity to comment shall include an absolute right to control or contest
disclosure if the applicable Selling Holder reasonably believes that it may be
subject to controlling person liability under applicable securities laws with
respect thereto.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act and rules thereunder with respect to the
disposition of all securities covered by such registration statement. If the
registration is for an underwritten offering, the Company shall amend the
registration statement or supplement the prospectus whenever required by the
terms of the underwriting agreement entered into pursuant to Section 7.5(b). In
the event that any Registrable Securities included in a registration statement
subject to, or required by, this Article 7 remain unsold at the end of the
period during which the Company is obligated to use its best efforts to maintain
the effectiveness of such registration statement, the Company may file a
post-effective amendment to the registration statement for the purpose of
removing such securities from registered status.
A-15
604509.3
<PAGE>
(c) Furnish to each Selling Holder of Registrable Securities, without
charge, such numbers of copies of the registration statement, any pre-effective
or post-effective amendment thereto, the prospectus, including each preliminary
prospectus and any amendments or supplements thereto, in each case in conformity
with the requirements of the Securities Act and the rules thereunder, and such
other related documents as any such Selling Holder may reasonably request in
order to facilitate the disposition of Registrable Securities owned by such
Selling Holder.
(d) Use the Company's best efforts (i) to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such states or jurisdictions as shall be reasonably requested
by the Underwriters' Representative or Agent (as applicable, or if inapplicable,
the Majority Selling Holders), and (ii) to obtain the withdrawal of any order
suspending the effectiveness of a registration statement, or the lifting of any
suspension of the qualification (or exemption from qualification) of the offer
and transfer of any of the Registrable Securities in any jurisdiction, at the
earliest possible moment; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
(e) In the event of any underwritten or agented offering, enter into
and perform the Company's obligations under an underwriting or agency agreement
(including indemnification and contribution obligations of underwriters or
agents), in usual and customary form, with the managing underwriter or
underwriters of or agents for such offering. The Company shall also cooperate
with the Majority Selling Holders and the Underwriters' Representative or Agent
for such offering in the marketing of the Registrable Shares, including making
available the Company's officers, accountants, counsel, premises, books and
records for such purpose, but the Company shall not be required to incur any
material out-of-pocket expense pursuant to this sentence.
(f) Promptly notify each Selling Holder of any stop order issued or
threatened to be issued by the Commission in connection therewith (and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered.
(g) Make generally available to the Company's security holders copies
of an earnings statement satisfying the provisions of Section 11(a) of the
Securities Act no later than 90 days following the end of the 12-month period
beginning with the first month of the Company's first fiscal quarter commencing
after the effective date of each registration statement filed pursuant to this
agreement.
(h) Make available for inspection by any Selling Holder, any
underwriter participating in such offering and the representatives of such
Selling Holder and Underwriter (but not more than one firm of counsel to such
Selling Holders), all financial and other information as shall be reasonably
requested by them, and provide the Selling Holder, any underwriter participating
in such offering and the representatives of such Selling Holder and Underwriter
the opportunity to discuss the business affairs of the Company with its
principal executives and independent public accountants who have certified the
audited financial statements included in such registration statement, in each
case all as necessary to enable them to exercise their due diligence
responsibility under the Securities Act; provided, however, that information
that the Company determines, in good faith, to be confidential and which the
Company advises such Person in writing is confidential shall not be disclosed
unless such Person signs a confidentiality agreement reasonably satisfactory to
the Company or the related Selling Holder of Registrable Securities agrees to be
responsible for such Person's breach of confidentiality on terms reasonably
satisfactory to the Company.
(i) Use the Company's best efforts to obtain a so-called "comfort
letter" from its independent public accountants, and legal opinions of counsel
to the Company addressed to the Selling Holders, in customary form and covering
such matters of the type customarily covered by such letters, and in a form that
shall be reasonably satisfactory to Majority Selling Holders. The Company shall
furnish to each Selling Holder a signed counterpart of any such comfort letter
or legal opinion. Delivery of any such opinion or comfort letter
A-16
604509.3
<PAGE>
shall be subject to the recipient furnishing such written representations or
acknowledgments as are customarily provided by selling shareholders who receive
such comfort letters or opinions.
(j) Provide and cause to be maintained a transfer agent and registrar
for all Registrable Securities covered by such registration statement from and
after a date not later than the effective date of such registration statement.
(k) Use all reasonable efforts to cause the Registrable Securities
covered by such registration statement (i) if such Securities are then listed on
a securities exchange or included for quotation in a recognized trading market,
to continue to be so listed or included for a reasonable period of time after
the offering, and (ii) to be registered with or approved by such other United
States or state governmental agencies or authorities as may be necessary by
virtue of the business and operations of the Company to enable the Selling
Holders of Registrable Securities to consummate the disposition of such
Registrable Securities.
(l) Use the Company's reasonable efforts to provide a CUSIP number for
the Registrable Securities prior to the effective date of the first registration
statement including Registrable Securities.
(m) Take such other actions as are reasonably required in order to
expedite or facilitate the disposition of Registrable Securities included in
each such registration.
Section 7.5 Holders' Obligations. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Article 7
with respect to the Registrable Securities of any Selling Holder of Registrable
Securities that such Selling Holder shall:
(a) Furnish to the Company such information regarding such Selling
Holder, the number of the Registrable Securities owned by it, and the intended
method of disposition of such securities as shall be required to effect the
registration of such Selling Holder's Registrable Securities, and to cooperate
with the Company in preparing such registration;
(b) Agree to sell their Registrable Securities to the underwriters at
the same price and on substantially the same terms and conditions as the Company
or the other Persons on whose behalf the registration statement was being filed
have agreed to sell their securities, and to execute the underwriting agreement
agreed to by the Majority Selling Holders (in the case of a registration under
Section 7.2) or the Company and the Majority Selling Holders (in the case of a
registration under Section 7.3).
Section 7.6 Expenses of Registration. Expenses in connection with
registrations pursuant to this agreement shall be allocated and paid as follows:
(a) With respect to each Demand Registration, the Company shall bear
and pay all expenses incurred in connection with any registration, filing, or
qualification of Registrable Securities with respect to such Demand
Registrations for each Selling Holder (which right may be assigned to any Person
to whom Registrable Securities are Transferred as permitted by Section 7.8),
including all registration, filing and National Association of Securities
Dealers, Inc. fees, all fees and expenses of complying with securities or blue
sky laws, all word processing, duplicating and printing expenses, messenger and
delivery expenses, the reasonable fees and disbursements of counsel for the
Company, and of the Company's independent public accountants, including the
expenses of "cold comfort" letters required by or incident to such performance
and compliance, and the reasonable fees and disbursements of one firm of counsel
for the Selling Holders of Registrable Securities (selected by Demanding Holders
owning a majority of the Registrable Securities owned by Demanding Holders to be
included in a Demand Registration) (the "Registration Expenses"), but excluding
underwriting discounts and commissions relating to Registrable Securities (which
shall be paid on a pro rata basis by the Selling Holders), provided, however,
that the Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant to Section 7.2 if the registration is
subsequently withdrawn at the request of the Majority Selling Holders (in which
case all Selling Holders shall bear such
A-17
604509.3
<PAGE>
expense), unless Holders whose Registrable Securities constitute a majority of
the Registrable Securities then outstanding agree that such withdrawn
registration shall constitute one of the demand registrations under Section 7.2
hereof.
(b) The Company shall bear and pay all Registration Expenses incurred
in connection with any Piggyback Registrations pursuant to Section 7.3 for each
Selling Holder (which right may be Transferred to any Person to whom Registrable
Securities are Transferred as permitted by Section 7.8), but excluding
underwriting discounts and commissions relating to Registrable Securities (which
shall be paid on a pro rata basis by the Selling Holders of Registrable
Securities).
(c) Any failure of the Company to pay any Registration Expenses as
required by this Section 7.6 shall not relieve the Company of its obligations
under this agreement.
Section 7.7 Indemnification; Contribution. If any Registrable
Securities are included in a registration statement under this agreement:
(a) To the extent permitted by applicable law, the Company shall
indemnify and hold harmless each Selling Holder, each Person, if any, who
controls such Selling Holder within the meaning of the Securities Act, and each
officer, director, partner, and employee of such Selling Holder and such
controlling Person, against any and all losses, claims, damages, liabilities and
expenses (joint or several), including attorneys' fees and disbursements and
expenses of investigation, incurred by such party pursuant to any actual or
threatened action, suit, proceeding or investigation, or to which any of the
foregoing Persons may become subject under the Securities Act, the Exchange Act
or other federal or state laws, insofar as such losses, claims, damages,
liabilities and expenses arise out of or are based upon any of the following
statements, omissions or violations (collectively, a "Violation"):
(i) Any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein, or any amendments
or supplements thereto;
(ii) The omission or alleged omission to state therein a material
fact required to be stated therein, or necessary to make the statements therein
not misleading; or
(iii) Any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any applicable state securities law or any
rule or regulation promulgated under the Securities Act, the Exchange Act or any
applicable state securities law;
provided, however, that the indemnification required by this Section 7.7(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or expense if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or expense to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished to the Company by the indemnified party expressly for use in
connection with such registration; provided, further, that the indemnity
agreement contained in this Section 7.7 shall not apply to any underwriter to
the extent that any such loss is based on or arises out of an untrue statement
or alleged untrue statement of a material fact, or an omission or alleged
omission to state a material fact, contained in or omitted from any preliminary
prospectus if the final prospectus shall correct such untrue statement or
alleged untrue statement, or such omission or alleged omission, and a copy of
the final prospectus has not been sent or given to such Person at or prior to
the confirmation of sale to such Person if such underwriter was under an
obligation to deliver such final prospectus and failed to do so. The Company
shall also indemnify underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, their
officers, directors, agents and employees and each Person who controls such
Persons (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) to the same extent as provided above with respect to the
indemnification of the Selling Holders.
A-18
604509.3
<PAGE>
(b) To the extent permitted by applicable law, each Selling Holder
shall indemnify and hold harmless the Company, each of its directors, each of
its officers who shall have signed the registration statement, each Person, if
any, who controls the Company within the meaning of the Securities Act, any
other Selling Holder, any controlling Person of any such other Selling Holder
and each officer, director, partner, and employee of such other Selling Holder
and such controlling Person, against any and all losses, claims, damages,
liabilities and expenses (joint and several), including attorneys' fees and
disbursements and expenses of investigation, incurred by such party pursuant to
any actual or threatened action, suit, proceeding or investigation, or to which
any of the foregoing Persons may otherwise become subject under the Securities
Act, the Exchange Act or other federal or state laws, insofar as such losses,
claims, damages, liabilities and expenses arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Selling Holder expressly for use in connection with such
registration; provided, however, that (x) the indemnification required by this
Section 7.7(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or expense if settlement is effected without the
consent of the relevant Selling Holder of Registrable Securities, which consent
shall not be unreasonably withheld, and (y) in no event shall the amount of any
indemnity under this Section 7.7(b) exceed the gross proceeds from the
applicable offering received by such Selling Holder.
(c) Promptly after receipt by an indemnified party under this Section
7.7 of notice of the commencement of any action, suit, proceeding, investigation
or threat thereof made in writing for which such indemnified party may make a
claim under this Section 7.7, such indemnified party shall deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties. The failure to deliver written notice to the
indemnifying party within a reasonable time following the commencement of any
such action, if prejudicial to its ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 7.7 but shall not relieve the indemnifying party of any liability that
it may have to any indemnified party otherwise than pursuant to this Section
7.7. Any fees and expenses incurred by the indemnified party (including any fees
and expenses incurred in connection with investigating or preparing to defend
such action or proceeding) shall be paid to the indemnified party, as incurred,
within thirty (30) days of written notice thereof to the indemnifying party
(regardless of whether it is ultimately determined that an indemnified party is
not entitled to indemnification hereunder). Any such indemnified party shall
have the right to employ separate counsel in any such action, claim or
proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be the expenses of such indemnified party unless (i) the
indemnifying party has agreed to pay such fees and expenses or (ii) the
indemnifying party shall have failed to promptly assume the defense of such
action, claim or proceeding or (iii) the named parties to any such action, claim
or proceeding (including any impleaded parties) include both such indemnified
party and the indemnifying party, and such indemnified party shall have been
advised by counsel that there may be one or more legal defenses available to it
which are different from or in addition to those available to the indemnifying
party and that the assertion of such defenses would create a conflict of
interest such that counsel employed by the indemnifying party could not
faithfully represent the indemnified party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the reasonable
judgment of such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party shall be liable to an indemnified party for any settlement
of any action, proceeding or claim without the written consent of the
indemnifying party, which consent shall not be unreasonably withheld.
A-19
604509.3
<PAGE>
(d) If the indemnification required by this Section 7.7 from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to in this
Section 7.7:
(i) The indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any Violation has been committed by, or relates to
information supplied by, such indemnifying party or indemnified parties, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such Violation. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section 7.7(a) and Section 7.7(b), any legal or other fees or expenses
reasonably incurred by such party in connection with any investigation or
proceeding.
(ii) The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 7.7(d) were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in Section 7.7(d)(i). No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
(e) If indemnification is available under this Section 7.7, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in this Section 7.7 without regard to the relative fault of such
indemnifying party or indemnified party or any other equitable consideration
referred to in Section 7.7(d)(i).
(f) The obligations of the Company and the Selling Holders of
Registrable Securities under this Section 7.7 shall survive the completion of
any offering of Registrable Securities pursuant to a registration statement
under this agreement, and otherwise.
Section 7.8 Transfer of Registration Rights. Rights with respect to
Registrable Securities may be Transferred as follows: all rights of a Holder
with respect to Registrable Securities pursuant to this agreement may be
Transferred by such Holder to any Person in connection with the Transfer of
Registrable Securities to such Person, in all cases, if (x) any such Transferee
shall have executed and delivered to the secretary of the Company a properly
completed agreement substantially in the form of Exhibit F, and (y) the
Transferor shall have delivered to the secretary of the Company, no later than
15 days following the date of the Transfer, written notification of such
Transfer setting forth the name of the Transferor, name and address of the
Transferee, and the number of Registrable Securities which shall have been so
Transferred.
Section 7.9 Covenants of the Company. The Company hereby agrees and
covenants as follows:
(a) The Company shall file as and when applicable, on a timely basis,
all reports required to be filed by it under the Exchange Act. If the Company is
not required to file reports pursuant to the Exchange Act, upon the request of
any Holder of Registrable Securities, the Company shall make publicly available
the information specified in subparagraph (c)(2) of Rule 144 of the Securities
Act, and take such further action as may be reasonably required from time to
time and as may be within the reasonable control of the Company, to enable the
Holders to Transfer Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144
under the Securities Act or any similar rule or regulation hereafter adopted by
the Commission.
A-20
604509.3
<PAGE>
(b) The Company shall not, and shall not permit its majority owned
subsidiaries to, effect any public sale or distribution of any shares of Common
Shares or any securities convertible into or exchangeable or exercisable for
shares of Common Shares, during the five (5) Business Days prior to, and during
the 90-day period beginning on, the commencement of a public distribution of the
Registrable Securities pursuant to any registration statement prepared pursuant
to this agreement. The Company shall not effect any registration of its
securities (other than on Form S-4, Form S-8, or any successor forms to such
forms or pursuant to such other registration rights Agreements as may be
approved in writing by the Majority Selling Holders) or effect any public or
private sale or distribution of any of its securities, including a sale pursuant
to Regulation D under the Securities Act, whether on its own behalf or at the
request of any holder or holders of such securities from the date of a request
for a Demand Registration pursuant to Section 7.2 until the earlier of (x) 90
days following the date as of which all securities covered by such Demand
Registration statement shall have been Transferred, and (y) 270 days following
the effective date of such Demand Registration Statement, unless the Company
shall have previously notified in writing all Selling Holders of the Company's
desire to do so, and Selling Holders owning a majority of the Registrable
Securities or the Underwriters' Representative, if any, shall have consented
thereto in writing.
(c) Any agreement entered into after the date of this agreement
pursuant to which the Company or any of its majority owned subsidiaries issues
or agrees to issue any privately placed securities similar to any issue of the
Registrable Securities (other than (x) shares of Common Shares pursuant to a
stock incentive, stock option, stock bonus, stock purchase or other employee
benefit plan of the Company approved by its Board and (y) securities issued to
Persons in exchange for ownership interests in any Person in connection with a
business combination in which the Company or any of its majority owned
subsidiaries is a party) shall contain a provision whereby holders of such
securities agree not to effect any public sale or distribution of any such
securities during the periods described in the first sentence of Section 7.9(b),
in each case including a sale pursuant to Rule 144 under the Securities Act
(unless such Person is prevented by applicable statute or regulation from
entering into such an agreement).
(d) The Company shall not, directly or indirectly, (x) enter into any
merger, consolidation or reorganization in which the Company shall not be the
surviving corporation or (y) Transfer or agree to Transfer all or substantially
all the Company's assets, unless prior to such merger, consolidation,
reorganization or asset Transfer, the surviving corporation or the Transferee,
respectively, shall have agreed in writing to assume the obligations of the
Company under this Article 7, and for that purpose references hereunder to
"Registrable Securities" shall be deemed to include the securities which the
Holders of Registrable Securities would be entitled to receive in exchange for
Registrable Securities pursuant to any such merger, consolidation or
reorganization.
(e) The Company shall not grant to any Person (other than a Holder of
Registrable Securities) any registration rights with respect to securities of
the Company, or enter into any agreement, that would entitle the holder thereof
to have securities owned by it included in a Demand Registration.
ARTICLE 8
FURTHER AGREEMENTS
Section 8.1 Further Assurances. Each party to this agreement shall, at
the request of another party to this agreement, at any time and from time to
time following the Closing hereunder, execute and deliver or cause to be
executed and delivered all such further instruments and take or cause to be
taken all such further action as may be reasonably necessary or appropriate in
order more effectively to sell, assign, transfer and con vey to Buyer the Class
A Preferred Shares and the underlying Class B Preferred Shares and Common
Shares, or otherwise to confirm or carry out the provisions of this agreement.
A-21
604509.3
<PAGE>
Section 8.2 Restrictions on Certain Amendments to Amended and Restated
Declaration of Trust; Restrictions on Certain Equity Issuances. The Company
shall not amend its Amended and Restated Declaration of Trust at any time unless
(i) the Company has notified Buyer of such change no less than fifteen (15) days
prior to its adoption and (ii) in the reasonable judgment of the Company's Board
of Trustees, such amendment does not contravene or violate the provisions of
this agreement or the Certificate of Designation. So long as any Preferred
Shares remain outstanding, the Company shall not issue any Capital Shares that
are not Junior Shares, and shall not issue any Class B Preferred Shares (except
upon the conversion of any Class A Preferred Shares) without the affirmative
vote of the holders of a majority of the outstanding Preferred Shares, voting
together as a separate class from the Common Shares.
Section 8.3 Costs and Expenses. The Company shall bear the costs and
expenses (including, but not limited to, all compensation and expenses of
counsel, financial advisors, consultants and independent accountants) incurred
by the Company, Buyer, Equity Group Investments, Inc. and Victor Capital Group,
L.P. in connection with the negotiation, preparation, execution, delivery and
enforcement of this agreement and the consummation of the Transactions.
Section 8.4 Buyer's Access to Records.
(a) The Company shall afford, and shall cause each of the Consolidated
Subsidiaries to afford, Buyer and its authorized representatives, access during
normal business hours to their respective properties, books and records, in
order that they may have the opportunity to make such investigations as they
shall desire to make of the affairs of the Company and each Consolidated
Subsidiary. The Company shall cause its trustees, officers, employees,
investment bankers, counsel, accountants and other authorized representatives to
furnish such additional financial and operating data and other information as
Buyer and such other Persons shall from time to time reasonably request.
(b) Nothing in this Section 8.4 shall be construed as a limitation
upon Buyer's right to receive information from the Company as a shareholder and
beneficiary of the Company under California law.
Section 8.5 Home Office Payment. The Company agrees that the Company
will make any payments to Buyer on the Common Shares, the Class A Preferred
Shares and the Class B Preferred Shares by wire transfer in immediately
available funds by 12:00 noon, local time at the location of Buyer's account, on
the date of payment to such account as specified by Buyer in writing to the
Company.
Section 8.6 Confidentiality. Except to the extent disclosure is
required by law, or in response to any governmental authority, or in connection
with any litigation relating to an alleged breach of this agreement, each party
shall maintain the confidentiality of all information obtained from the other
party hereto other than information that is otherwise publicly available and
shall use such information only for purposes reasonably related to this
agreement and the transactions contemplated hereby.
Section 8.7 SEC Filings and Press Releases. Promptly upon their
becoming available, the Company will deliver to Buyer copies of (i) all
financial statements, reports, notices and proxy statements sent or made
available by the Company or any of its Consolidated Subsidiaries to their
security holders, (ii) all regular and periodic reports and all registration
statements and prospectuses, if any, filed by the Company or its Consolidated
Subsidiaries with any securities exchange or with the Commission or any
governmental or private regulatory authority and (iii) all press releases and
other statements made available by the Company or any of its Consolidated
Subsidiaries to the public concerning developments in the business of any such
Person.
Section 8.8 Limitation Upon Incurrence of Indebtedness. So long as any
Preferred Shares remain outstanding, without the prior written consent of the
holders of a majority of the outstanding Preferred Shares, voting together as a
single class, but voting together as a separate class from the Common Shares,
the Company shall not Incur any Indebtedness if the Company's D/E Ratio would
exceed 5:1.
A-22
604509.3
<PAGE>
ARTICLE 9
MISCELLANEOUS
Section 9.1 Survival of Representations, Warranties and Covenants. (a)
Notwithstanding any investigation made by or on behalf of Buyer, the
representations and warranties of the Company contained in this agreement shall
be continuing representations and warranties and shall survive the Closing for a
period of one year thereafter. The covenants and other Agreements of the Company
and Buyer contained in this agreement shall be continuing covenants and
Agreements and shall survive the Closing indefinitely.
(b) From and after the Closing Date, the Company will indemnify and
hold Buyer harmless from and against, and reimburse Buyer for any damages
resulting from, any and all loss, liability, damage or expense (including,
without limitation, interest, penalties and reasonable attorneys' fees and
disbursements) resulting to the Company or Buyer and based upon, arising out of
or otherwise in respect of any breach of any representation, warranty, covenant
or agreement of the Company contained in this agreement.
(c) Each party entitled to indemnification under this Section 9.1(c)
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnified Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnified Party of its
obligations under this Section 9.1(c), except to the extent that such failure to
give notice prejudices the Indemnifying Party. The Indemnified Party may
participate in such defense at such party's expense; provided, however, that the
Indemnifying Party shall pay the expense of one law firm for all Indemnified
Parties if representation of such Indemnified Parties by the counsel retained by
the Indemnifying Party would be inappropriate due to actual or potential
differing interests between an Indemnified Party and any other party represented
by such counsel in such proceeding. No Indemnifying Party, in the defense of any
such claim or litigation shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
of such claim or litigation, and no Indemnified Party shall consent to entry of
any judgment or settle such claim or litigation without the prior written
consent of the Indemnifying Party.
(d) Subsequent to the date hereof, it is anticipated that Buyer may be
required to make certain customary representations and warranties with respect
to the Company to investors in Buyer and, with respect to such representations
and warranties, indemnify and hold such investors harmless from any breach of
such representations and warranties. The terms and conditions of any
indemnification with respect to such representations and warranties relating to
the Company, its business, assets, liabilities or prospects shall be deemed to
be incorporated herein by reference as if set forth in full herein as an
additional indemnification obligation of the Company as the Indemnifying Party
in favor of Buyer. Buyer will promptly provide the Company with a copy of such
indemnification provisions and, if requested by Buyer, the Company will execute
and deliver such further instruments as may be necessary or appropriate to
reflect the Company's obligation to indemnify Buyer for any breach of such
additional representations and warranties.
Section 9.2 Assignment; Transfer of Interests. This agreement may be
assigned by Buyer, upon written notice to the Company, to any transferee of
Common Shares, Class A Preferred Shares or Class B Preferred Shares from Buyer
provided that such transferee agrees to be bound by all the provisions of this
agreement. This agreement may be assigned by the Company provided that such
transferee agrees to be bound by the provisions of this agreement and provided
further that such assignment shall not relieve the Company of
A-23
604509.3
<PAGE>
any of its obligations or liabilities to Buyer under this agreement. This
agreement shall be binding upon and inure to the benefit of the parties hereto,
their successors in interest and permitted assigns.
Section 9.3 Notices. Any notices or other communications required or
permitted hereunder shall be sufficient if in writing and delivered by hand or
sent by telecopy, or sent, postage prepaid, by registered, certified or
express-mail, or by recognized overnight air courier service and shall be deemed
given when so delivered by hand or telecopied, or if mailed or sent by overnight
courier service, on the fifth (5) Business Day after mailing (one Business Day
in the case of express mail or overnight courier service) to the parties at the
following addresses:
(a) If to Buyer to:
Veqtor Finance Company, LLC
c/o Victor Capital Group, L.P.
885 Third Avenue
New York, New York 10022
Attention: John R. Klopp
Telecopy: (212) 593-0316
with a copy to:
Equity Group Investments, Inc.
Two North Riverside Plaza, 7th Floor
Chicago, Illinois 60606
Attention: Gary Garrabrant
Telecopy: (312) 454-0157
and:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Thomas E. Kruger
Telecopy: (212) 856-7815
(b) If to the Company, to:
California Real Estate Investment Trust
131 Steuart Street, #200
San Francisco, California 94105
Attention: Frank A. Morrow
Telecopy: (415) 543-6269
with a copy to:
Greenberg Glusker Fields Claman Machtinger LLP
1900 Avenue of the Stars, #2100
Los Angeles, California 90067
Attention: Paula Peters
Telecopy: (310) 553-0687
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein.
A-24
604509.3
<PAGE>
Section 9.4 Entire Agreement. This agreement, including the Disclosure
Schedules and Exhibits hereto, constitutes the entire understanding of the
parties relating to the subject matter hereof and supersede all prior agreements
and understandings, whether oral or written. No amendment or modification of the
terms of this agreement shall be binding or effective unless expressed in
writing and signed by each party.
Section 9.5 No Waiver. The waiver by any party of the breach of any of
the terms and conditions of, or any right under, this agreement shall not be
deemed to constitute the waiver of any other breach of the same or any other
term or condition or of any similar right. No such waiver shall be binding or
effective unless expressed in writing and signed by the party giving such
waiver.
Section 9.6 Governing Law. This agreement shall be governed by and
construed in accordance with the laws of the state of California applicable to
agreements executed and to be fully performed in such State.
Section 9.7 Counterparts. This agreement may be executed in one or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
Section 9.8 Public Announcements. The Company and Buyer agree to
consult with each other prior to issuing any press release or otherwise making
any public statement (including without limitation any filing with the
Securities and Exchange Commission) with respect to the transactions
contemplated hereby. The Company will consult with Buyer prior to issuing any
press release or otherwise making any public statement with respect to Buyer or
its members.
Section 9.9 Availability of Equitable Remedies. Since a breach of the
provisions of this agreement could not adequately be compensated by money
damages, any party to this agreement shall be entitled, in addition to any other
right or remedy available to it, to an injunction restraining such breach or a
threatened breach and to specific performance of any such provision of this
agreement, and in either case no bond or other security shall be required in
connection therewith, and the parties hereby consent to the issuance of such an
injunction and to the ordering of specific performance.
Section 9.10 Construction. The article and section headings contained
in this agreement are inserted for reference purposes only and shall not affect
the meaning or interpretation of this agreement.
Section 9.11 Arbitration. Any dispute or controversy between the
Company and Buyer arising under, out of, in connection with, or in relation to
this agreement, the Amended and Restated Declaration of Trust, the Certificate
of Designation (including without limitation any dispute concerning any
determination made by the board of trustees of the Company) shall be determined
and settled by arbitration in New York City by a panel of three members in
accordance with the Commercial Rules of the American Arbitration Association as
in effect for New York City. In the event of any dispute with respect to any
calculation, such calculation shall be determined by an accountant from a "Big
Six" accounting firm selected by agreement of the parties (which accounting firm
shall have no material relationship with any party hereto or any of their
Affiliates) or, in the event the parties are unable to agree upon such
accountant, an accountant selected in accordance with the procedures established
by the Commercial Rules of the American Arbitration Association as in effect for
New York City. Any determination rendered therein shall be final and binding
upon the parties and their legal representatives.
A-25
604509.3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the day and year first above written.
CALIFORNIA REAL ESTATE INVESTMENT TRUST
By: -------------------------------
Name: Frank A. Morrow
Title: Chairman of the Board
VEQTOR FINANCE COMPANY, LLC
By:
Name:
Title:
A-26
604509.3
<PAGE>
SCHEDULE 3.2
CAPITAL STOCK
(1) The Company owns a 59% interest in Totem Square, L.P. ("Totem"), a
Washington limited partnership.
(2) The Company owns 100% of CalREIT Totem Square, Inc. ("Cal-CORP"), which
acts as general partner of Totem. Cal-CORP has a 1% interest in Totem.
(3) The Company owns 100% of B.B. Real Estate Investment Corp.
A-27
604509.3
<PAGE>
SCHEDULE 3.7
LITIGATION
None.
A-28
604509.3
<PAGE>
ANNEX B
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF THE
CLASS A 9.5% CUMULATIVE CONVERTIBLE
PREFERRED SHARES
(par value $1.00 per share)
AND THE
CLASS B 9.5% CUMULATIVE CONVERTIBLE NON-VOTING
PREFERRED SHARES
(par value $1.00 per share)
of
CAPITAL TRUST
------------------------------------------------
Pursuant to Article VI of the
Amended and Restated Declaration of Trust of
Capital Trust
------------------------------------------------
Capital Trust, a trust organized under the laws of the State of
California (hereinafter called the "Company"), does hereby certify that,
pursuant to authority conferred on its board of trustees (the "Board") by
Article VI of the Amended and Restated Declaration of Trust of the Company, the
Board, at a meeting held on May 23, 1997, adopted the following resolution
providing for the creation of two classes of the Company's preferred shares of
beneficial interests, consisting of 12,639,405 Class A 9.5% Cumulative
Convertible Preferred Shares, par value $1.00 per share, and 12,639,405 Class B
9.5% Cumulative Convertible Non-Voting Preferred Shares, par value $1.00 per
share.
"RESOLVED, that pursuant to the authority vested in this Board in
accordance with the provisions of Article VI of the Amended and Restated
Declaration of Trust of the Company, two classes of preferred shares of
beneficial interests in the Company, known, respectively, as Class A 9.5%
Cumulative Convertible Preferred Shares, par value $1.00 per share, and Class B
9.5% Cumulative Convertible Non-Voting Preferred Shares, par value $1.00 per
share, be, and each hereby is, created, classified and authorized and that the
designation and number of shares, and relative rights, preferences and
limitations thereof, shall be as follows:
1 Designation and Amount. The shares of the classes of preferred shares
of beneficial interests in the Company created hereby shall be
designated as (i) "Class A 9.5% Cumulative Convertible Preferred
Shares," and the number of shares constituting such class shall be
12,639,405, with a par value of $1.00 per share, and (ii) "Class B 9.5%
Cumulative Convertible Non-Voting Preferred Shares," and the number of
shares constituting such class shall be 12,639,405, with a par value of
$1.00 per share. The relative rights, preferences, restrictions and
other matters relating to the Class A Preferred Shares and the Class B
Preferred Shares are contained in this Certificate of Designation.
B-1
604509.3
<PAGE>
2 Definitions. As used in this Certificate of Designation, the following
terms shall have the following meanings:
(a) "Aggregate Consideration Receivable" by the Company in
connection with the issuance of any Common Shares or any
Common Share Equivalents means the sum of:
(i) the aggregate consideration paid to the Company
for such Common Shares or Common Share Equivalents and
(ii) the aggregate consideration or premiums, if any,
stated in such Common Share Equivalents to be
payable for the Common Shares upon the exercise
or conversion of such Common Share 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 Company 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 Company who previously held Voting
Shares of the Company 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 trustees of the Company.
(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) "Capital Shares" means any and all shares, rights, warrants or
options to purchase shares, securities convertible into or
exchangeable or exercisable for shares and participations in
or other equivalents of or interests (other than security
interests) in shares of beneficial interest in the Company,
however designated and whether voting or nonvoting.
(h) "Certificate of Designation" means this Certificate of
Designation, Preferences and Rights establishing the Class A
Preferred Shares and Class B Preferred Shares pursuant to
Article VI of the Amended and Restated Declaration of Trust,
as the same may be amended, supplemented or modified from time
to time in accordance with the terms hereof and pursuant to
applicable law.
(i) "Class A Common Shares" means the class A common shares, par
value $1.00 per share, of beneficial interests in the Company,
having the designations and rights, qualifications,
limitations and restrictions set forth in the Amended and
Restated Declaration of Trust of the Company.
B-2
604509.3
<PAGE>
(j) "Class A Preferred Shares" means the Class A 9.5% Cumulative
Convertible Preferred Shares, par value $1.00 per share, in
the Company established pursuant to this Certificate of
Designation.
(k) "Class B Common Shares" means the class B common shares, par
value $1.00 per share, of beneficial interests in the Company,
having the designations and rights, qualifications,
limitations and restrictions set forth in the Amended and
Restated Declaration of Trust of the Company.
(l) "Class B Preferred Shares" means the Class B 9.5% Cumulative
Convertible Non-Voting Preferred Shares, par value $1.00 per
share, in the Company established pursuant to this Certificate
of Designation.
(m) "Common Shares" means, collectively, the Class A Common Shares
and the Class B Common
Shares.
(n) "Common Share Equivalents" means, without double counting:
(i) Common Shares, where one Common Share shall
constitute one Common Share
Equivalent,
(ii) Capital Shares (including without limitation the
Preferred Shares) convertible into Common
Shares, where any one Capital Share shall
constitute a number of Common Share Equivalents
equal to the number of Common Shares issuable in
respect of such Capital Share,
(iii) any rights, warrants, options and convertible,
exchangeable or exercisable securities entitling
the holder thereof to subscribe for or purchase
any Common Shares, 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 Common Shares issuable in respect of
such rights, warrants, options or convertible or
exercisable securities, and
(iv) any share appreciation rights entitling the
holders thereof to any interest in an increase
in value, however measured, of Common Shares,
where any such share appreciation rights shall
constitute a number of Common Share Equivalents
equal to the Common Shares equivalent, as nearly
as it may be calculated, of such share
appreciation rights.
(o) "Company" means Capital Trust, a trust organized under the
laws of the State of California.
(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) "D/E Ratio" means, as of the date of determination, the ratio
of (i) the sum of (x) the total Indebtedness of the Company
and its consolidated Subsidiaries as reflected on the
Company's most recent last regularly prepared balance sheet,
plus (y) all Indebtedness issued by the Company since the date
of such balance sheet less all indebtedness retired or
repurchased by the Company since that date, plus (z) the
Company's pro rata share, based upon its percentage equity
ownership interest therein, of aggregate total Indebtedness of
Equity Affiliates, to (ii)
B-3
604509.3
<PAGE>
the excess of total assets (including the Company's equity in
its Equity Affiliates) over total liabilities of the Company,
as reflected on the Company's most recent last regularly
prepared 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.
(t) "Dividend Payment Date" has the meaning set forth in section
3(a) hereof.
(u) "Dividend Period" has the meaning set forth in section 3(a)
hereof.
(v) "Effective Purchase Price per Share" at which the Company
issues any Common Shares or any Common Share Equivalents means
an amount equal to the ratio of:
(i) the Aggregate Consideration Receivable by the Company in
connection with the issuance of such Common Shares or
Common Share Equivalents to
(ii) the number of Common Shares and Common Share Equivalents
so issued.
(w) "Equity Affiliate" means any Person in which the Company 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 Company's consolidated financial
statements.
(x) "Exempted Transaction" means each and any of the following:
(i) the issuance, from April 1, 1997 through the date of
the Exempted Transaction, of Common Share Equivalents
to employees or officers of the Company or any of its
subsidiaries, or to consultants or service providers to
the Company or any of its subsidiaries, or to trustees
or directors of the Company or any of its subsidiaries,
under an employee benefit plan or similar arrangement
adopted by the Company in an amount not to exceed 10%
of the aggregate number of Common Share Equivalents
outstanding at such time,
(ii) the issuance of any Common Shares or Preferred Shares
of the Company upon the conversion of any Common Shares
or Preferred Shares, and
(iii) the issuance of any Capital Shares of the
Company in exchange, in whole or in part, for
any acquisition by the Company of shares or
other assets of any kind.
(y) "Fair Market Value" of a Common Share" means, as of any date,
the average of the closing prices of Class A Common Shares 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 Shares are 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 occurred, of one Class A
Common Share 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 Shares are listed or
admitted for trading; or
(ii) if not listed or admitted for trading as
described in clause (i) of this section 2(y),
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
Class A Common Share quoted in the NASDAQ
National Market System or any similar system of
B-4
604509.3
<PAGE>
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(y), the average of the highest
bid and lowest offered quotations for one Class
A Common Share as reported by the National
Quotation Bureau Incorporated if at least two
securities dealers have inserted both bid and
offered quotations for Class A Common Shares 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 Class A Common Share on any day or the average of
such closing prices for any period shall be the fair market
value of one Common Share for such day or period as determined
in good faith by the Board.
"Fair Market Value" of a Preferred Share means the Fair Market
Value of a number of fully paid and nonassessable Class A
Common Shares equal to the ratio of (a) the Liquidation
Preference for such Preferred Share 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.
(z) "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 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.
(aa) "Holder" of a Class A Preferred Share or a Class B Preferred
Share means the Person in whose name such Class A Preferred
Share or Class B Preferred Share is registered on the books of
the Company.
(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 Share,
the date on which such Preferred Share is issued by the
Company.
(ee) "Junior Shares" means Common Shares and any other class or
series of Capital Shares of the Company now or hereafter
authorized, issued or outstanding which is subject, under the
terms of the Company's Amended and Restated Declaration of
Trust (including any certificate of designation adopted
thereunder relating to any class or series of preferred
shares), to the following restrictions and limitations:
B-5
604509.3
<PAGE>
(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 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 the Preferred Shares
shall be entitled to receive out of assets of
the Company 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 Capital Shares of the
Company, and
(iii) shares of such class or series may not be
redeemed under any circumstances, either at the
option of the Company or of any holder thereof,
unless all of the outstanding Preferred Shares
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 Preferred
Share, an amount equal to $2.69.
(hh) "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.
(ii) "Preferred Shares" means, collectively, the Class A Preferred
Shares and the Class B Preferred Shares.
(jj) "Restricted Payment" has the meaning set forth in section 3(c)
hereof.
(kk) "Subsidiary" means:
(i) any corporation 50% or more of the Voting Shares of
which is owned, directly or indirectly, by the Company,
or
(ii) any other Person whose accounts are required
under GAAP to be included in the Company's
consolidated financial statements.
(ll) "Trading Day" means, with respect to the Class A Common
Shares: (i) if the Class A Common Shares are listed or
admitted for trading on any national securities exchange, days
on which such national securities exchange is open for
business; or (ii) if the Class A Common Shares are not listed
or admitted for trading on any national securities exchange,
but are 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 Shares are not quoted
on any system or listed or admitted for trading on any
securities exchange, a Business Day.
(mm) "Voting Shares" means, with respect to the Company, all
classes of Capital Shares of the Company then outstanding and
normally entitled to vote for the election of directors,
managers or trustees of the Company. Any reference to a
percentage of Voting Shares shall refer to the
B-6
604509.3
<PAGE>
percentage of votes eligible to be cast for the election of
directors, managers or trustees which are attributable to the
applicable Voting Shares.
3 Dividends.
(a) Payment of Dividends. The Holders of the Preferred Shares
shall be entitled to receive, when and as 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
Preferred Shares shall accrue on a daily basis whether or not
the Company 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 year; provided,
however, that the first Dividend Period shall commence on the
Issuance Date and shall end on and include December 15, 1997.
Dividends on the Preferred Shares shall be payable, when and
as declared, semi-annually, in arrears, no later than December
26 and June 25 of each year commencing December 26, 1997 (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 Preferred Shares 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 Preferred Share 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 the initial
Dividend Period and 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 Company shall not declare or pay or set apart for payment
any dividends or make any other distributions on either class
of Preferred Shares unless the Company 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 Shares.
(b) Distribution of Partial Dividend Payments. Except as otherwise
provided in this Certificate of Designation, if on any
Dividend Payment Date the Company pays less than the total
amount of dividends then accrued with respect to the Preferred
Shares, the amount so paid shall be distributed ratably, each
share being treated equally, among the Holders of the
Preferred Shares based upon the number of Preferred Shares
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
Shares shall have been paid in full, the Company 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
Capital Shares of the Company other than the Preferred Shares
(each, a "Restricted Payment"); provided, however, that a
"Restricted Payment" shall not include:
(i) any dividend or distribution payable solely in Junior
Shares, or
B-7
604509.3
<PAGE>
(ii) the acquisition of any Capital Shares in exchange
solely for Junior Shares.
4 Liquidation Preference.
In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the Holders of Preferred
Shares shall be entitled to receive out of assets of the Company
available for distribution to shareholders, 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 shareholders, whether or not declared, before any payment shall be
made or any assets distributed to the holders of any other class or
series of Capital Shares of the Company.
If the assets and funds thus distributed among the Holders of the
Preferred Shares 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 Company legally available for
distribution shall be distributed ratably, each share being treated
equally, among the Holders of the Preferred Shares based on the number
of Preferred Shares then held by each such Holder.
5 Consolidation, Merger and Sale of Assets, etc. Unless all of the
outstanding Preferred Shares shall have been redeemed or converted on
or prior to the effective date of any consolidation, merger or transfer
referred to below involving the Company, without the approval of the
Holders of a majority of the outstanding Preferred Shares, voting
together as a single class, but voting together as a separate class
from the Common Shares, the Company 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 Company is the
surviving entity, the rights and preferences of the Preferred
Shares are not modified the Company, as the surviving entity,
does not have outstanding any Capital Shares that are not
Junior Shares, and immediately after the consummation of such
merger or consolidation and after giving effect thereto, the
D/E Ratio of the Company 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 Company shall make effective
provision such that, upon consummation of such transaction,
the Holders of Preferred Shares shall receive preferred shares
of the surviving entity having substantially identical terms
as the Preferred Shares surrendered by them, the surviving,
resulting or acquiring Person does not have outstanding any
Capital Shares that are not Junior Shares 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 Shares.
(a) Voting Rights of the Class A Preferred Shares. In addition to
the voting rights described in sections 5 and 6(c) hereof, the
Class A Preferred Shares shall be entitled to vote together
with the holders of Class A Common Shares as a single class on
all matters submitted for a vote of shareholders, and shall be
entitled to notice of all shareholders' meetings and to act by
written consent in the same manner as the holders of Class A
Common Shares. Each Class A Preferred Share shall entitle the
Holder thereof to such number of votes per share as shall
equal the number of Class A Common Shares into which such
Class A Preferred Share is then convertible.
B-8
604509.3
<PAGE>
(b) Voting Rights of the Class B Preferred Shares. Except for the
voting rights described in sections 5 and 6(c) hereof, the
Class B Preferred Shares shall not have voting rights and
shall not be counted in determining the presence of a quorum.
(c) Preferred Shares Class Vote. So long as any Preferred Shares
remain outstanding, the affirmative vote of the Board and the
Holders of a majority of the outstanding Preferred Shares,
voting together as a single class, but voting together as a
separate class from the Common Shares, shall be required in
order:
(i) to amend, alter or repeal any of the provisions of
this Certificate of Designation;
(ii) to authorize, create or issue any class or series of
Capital Shares of the Company that are not Junior
Shares; and
(iii) for the Company to Incur any Indebtedness if the
Company's D/E Ratio would exceed 5:1.
Any Preferred Shares owned, directly or indirectly, by the
Company 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 Class A Preferred Share 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 Class A
Common Shares equal to the ratio of:
(x) the Liquidation Preference of such
Class A Preferred Share 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 Class
B Preferred Shares,
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.
Each Class B Preferred Share 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 Class B Common
Shares equal to the ratio of:
(x) the Liquidation Preference of such
Class B Preferred Share 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
B-9
604509.3
<PAGE>
(ii) if the Holder (a) would not, together with such
Holder's Aggregated Transferors, upon the
issuance of such Class A Preferred Shares, own
more than 4.9% of any class of Voting Shares of
the 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 of Voting
Shares of the Company, an equal number of fully
paid and nonassessable Class A Preferred Shares,
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 this Certificate of Designation, 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 Preferred Shares to be converted in
whole or in part shall surrender the certificate or
certificates evidencing such shares to the Company and shall
give written notice to the Company ("Conversion Notice") that
the Holder elects to convert such shares or the portion
thereof specified in said notice into Class A Common Shares,
Class B Common Shares, Class A Preferred Shares or Class B
Preferred Shares, 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 Common Shares or Preferred Shares, as the
case may be, shall be issued and (ii) if Class B Preferred
Shares are to be converted into Class A Preferred Shares,
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
Shares, own more than 4.9% of any class of Voting Shares of
the 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 of Voting Shares of the Company. Each certificate
evidencing Preferred Shares surrendered for conversion shall,
unless the shares issuable on conversion are to be issued in
the same name as the registration of such Preferred Shares, be
duly endorsed by, or be accompanied by instruments of transfer
in form satisfactory to the Company 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
evidencing the Preferred Shares relating thereto, the Company
shall issue and deliver to such Holder (or upon the written
order of such Holder) a certificate or certificates for the
number of full Class A Common Shares, Class B Common Shares,
Class A Preferred Shares or Class B Preferred Shares, as
specified in the Conversion Notice, issuable upon the
conversion of such Preferred Shares 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 Preferred Shares represented by a
certificate are to be converted, the Company shall issue and
deliver or cause to be issued and delivered to (or upon the
written order of) the Holder of the Preferred Shares so
surrendered, without charge to such Holder, a new certificate
or certificates representing a number of Preferred Shares
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 evidencing such Preferred Shares shall have been
surrendered to the Company or its transfer agent and a
Conversion Notice with respect to such shares shall have been
received by the Company, as described above. Any Person in
whose name any certificate or certificates for Common Shares
or Preferred Shares shall be issuable upon conversion shall be
deemed to have become the holder of record of the shares
represented
B-10
604509.3
<PAGE>
thereby on the Conversion Date; provided, however, if the
certificate or certificates evidencing such Preferred Shares
are surrendered on any date when the share transfer books of
the Company 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.
Except as otherwise provided in this section 7, no payment or
adjustment will be made for dividends or other distributions
with respect to any Common Shares or Preferred Shares issuable
upon conversion of Preferred Shares 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 Shares. If any fractional share
would, but for this section 7(c), be issuable upon the
conversion of any Preferred Shares, the Company 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
Shares. The Conversion Price with respect to the conversion of
the Preferred Shares into Common Shares shall be adjusted from
time to time by the Company as follows:
(i) In the event that the Company shall at any time after the
Issuance Date:
(A) declare a dividend or make a distribution on the
Common Shares in Common Shares,
(B) subdivide or reclassify the Common Shares into a
greater number of shares,
(C) combine the Common Shares into a smaller number
of shares,
(D) pay a dividend or make a distribution on the
Common Shares in any class of its Capital Shares
other than Common Shares, or
(E) reclassify the Common Shares,
then the conversion right and the Conversion
Price in effect immediately prior thereto shall
be adjusted so that the Holder of any Preferred
Shares thereafter surrendered for conversion
into Common Shares shall be entitled to receive
the number of Common Shares or other Capital
Shares of the Company which such Holder would
have owned or have been entitled to receive
after the happening of any of the events
described above had such Preferred Shares been
converted into Common Shares 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 Company shall at any time
after the Issuance Date issue any Common Shares
or any Common Share Equivalents other than in an
Exempted Transaction, at an Effective Purchase
Price per Share less than the Conversion
B-11
604509.3
<PAGE>
Price in effect immediately prior to the date of
such issuance, then such Conversion Price shall
be adjusted to equal the ratio of:
(A) the sum of:
(1) the product of:
(a) the number of Common Shares and Common
Share 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 Company in connection with such
issuance to
(B) the sum of:
(1) the number of Common Shares and Common Share
Equivalents outstanding immediately prior to
such issuance and
(2) the number of additional Common Shares and
Common Share Equivalents.
For example, if on any given date the Company
has 20,000,000 Common Shares and Common Share
Equivalents outstanding, the Company issues
warrants exercisable at $1 per share to purchase
an additional 1,000,000 Common Shares 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 =
[(20,000,000 shares 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 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, convertible
or exercisable securities or share appreciation
rights had not been issued, but such
readjustment shall not affect the number of
Common Shares or other Capital Shares delivered
upon any conversion prior to the date such
readjustment is made.
(iii) In the event that the Company shall distribute
to all holders of its Common Shares any of its
assets (other than cash dividends payable on or
after April 1, 1997 which together with all
prior cash dividends payable on or after April
1, 1997, do not exceed the amount of retained
earnings of the Company accrued on or after
April 1, 1997 and on or prior to the date of
such dividends) or debt
B-12
604509.3
<PAGE>
securities, or rights, options, warrants or
convertible or exercisable securities of the
Company (including securities issued for cash,
but excluding distributions of Capital Shares
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 Company so distributed or of
such rights, options, warrants or convertible or
exchangeable securities applicable to one Common
Share. 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
Shares of such rights, options, warrants,
convertible securities, assets or debt
securities if the plan or arrangement under
which such rights, options, warrants,
convertible securities, assets or debt
securities are issued provides for their
issuance to Holders of Preferred Shares 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 Company 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
Company to its shareholders, shall not be taxable.
(v) Whenever the Conversion Price is adjusted as
provided in this section 7(d), or the Preferred Shares
become convertible into shares of securities, property
or assets pursuant to section 7(e) hereof, or the
Company reduces the Conversion Price pursuant to
section 7(f) hereof, the Company shall prepare a notice
of such adjustment of the Conversion Price setting
forth the adjusted Conversion Price and the date on
which such adjustment becomes effective, and setting
forth in reasonable detail the facts requiring such
adjustment and the calculation of such adjustment, and
shall mail such notice of adjustment to all Holders of
Preferred Shares at their last addresses appearing on
the share transfer books of the Company.
(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 Company may defer until
the occurrence of such event:
(A) issuing to the Holder of any Preferred
Shares converted after such record date
and before the occurrence of such event
the additional Common Shares issuable
upon such conversion by reason of the
adjustment required by such event over
and above the Common Shares 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
Common Shares 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:
B-13
604509.3
<PAGE>
(A) in the case of the issuance of Common
Shares or Common Share 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 Company for
any underwriting of the issue or
otherwise in connection therewith; and
(B) in the case of the issuance of Common
Shares or Common Share 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 Preferred
Shares may, upon conversion of such security,
receive two or more classes of Capital Shares of
the Company, the Company shall determine on a
fair basis the allocation of the adjusted
Conversion Price between the classes of Capital
Shares. After such allocation, the conversion
right and the Conversion Price of each class of
Capital Shares shall thereafter be subject to
adjustment on terms comparable to those
applicable to Common Shares in this section 7.
(e) Effect of Reclassification, Consolidation, Merger or Sale.
Unless all of the Preferred Shares 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
Common Shares issuable upon conversion of any
class of Preferred Shares (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 Company with
another Person shall be effected as a result of
which holders of Common Shares issuable upon
conversion of any class of Preferred Shares
shall be entitled to receive shares, securities
or other property or assets (including cash)
with respect to or in exchange for such Common
Shares, or
(iii) any sale or conveyance of the properties and assets of
the Company as, or substantially as, an entirety to
any other Person,
then the Company or such successor or purchasing Person, as
the case may be, shall make provisions in its constituent
documents to establish that each Preferred Share 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 Common Shares issuable upon conversion of such
Preferred Shares immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance, each
Preferred Share 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.
B-14
604509.3
<PAGE>
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
Shares. The Company shall not (i) subdivide or reclassify any
class of Preferred Shares or (ii) combine any class of
Preferred Shares, unless the Company simultaneously
subdivides, reclassifies or combines, at the same rate, each
share being treated equally, all classes of Preferred Shares.
(g)
Taxes on Shares Issued. The issuance of share
certificates upon conversion of Preferred Shares 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 Company covenants that all Common
Shares and Preferred Shares which may be issued upon
conversion of Preferred Shares will upon issuance be validly
issued, fully paid and nonassessable by the Company 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 Company shall take any action
that would require an adjustment in the
Conversion Price pursuant to section
7(d)(i) or (iii) hereof; or
(B) that any event described in section 7(e)
hereof shall occur; or
(C) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
the Company shall cause notice of such proposed
action or event to be mailed to each Holder of
record of Preferred Shares at its address
appearing on the share transfer books of the
Company, 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 Company first publicly
announces such proposed action or event.
(ii) In the event that the Company shall take any
action that would require an adjustment in the
Conversion Price pursuant to section 7(d)(ii)
hereof, the Company shall cause notice of such
proposed action or event to be mailed to each
Holder of record of Preferred Shares at its
address appearing on the share transfer books of
the Company, as promptly as possible but in no
event later than the date that the Company
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 Common Shares 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 Common Shares
shall be entitled to exchange their
Common Shares for securities or other
property deliverable upon such event.
B-15
604509.3
<PAGE>
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 Preferred Shares which are converted,
purchased, redeemed or otherwise acquired by the Company, shall be
retired and canceled by the Company promptly thereafter. No such
shares shall upon their cancellation be reissued.
9 Covenant Regarding Employee Equity Plans. For so long as any shares of
Preferred Stock are outstanding, the Company will not:
(a) grant to any employees or officers of the Company or any of
its subsidiaries, or to any consultants or service providers
to the Company or any of its subsidiaries, or to any trustees
or directors of the Company or any of its subsidiaries, under
an employee benefit plan or similar arrangement adopted by the
Company, any options to purchase Common Share Equivalents
having an exercise price per share less than the fair market
value of a Common Share Equivalent on the date of grant of
such option as determined in good faith by any reasonable
method by the Board, or
(b) issue or sell to any employees or officers of the Company or
any of its subsidiaries, or to any consultants or service
providers to the Company or any of its subsidiaries, or to any
trustees or directors of the Company or any of its
subsidiaries, or to any shareholder of the Company, any Common
Share Equivalents at a price per share below the fair market
value of such Common Share 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) Holder shall not transfer Class A Preferred Shares or Class A
Common Shares 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
Shares of the Company 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 Shares of the Company.
(b) The Class B Preferred Shares and the Class B Common Shares may
be transferred by a Bank Holding Company only:
(i) in accordance with applicable federal and state
securities laws and
(ii) unless the Company shall have received an
opinion of counsel stating that the restriction
in this section 10(b)(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 Shares and Capital
Shares convertible into Class B Common
Shares are transferred to any one
holder,
(B) to a transferee who has agreed in
writing acceptable to the Company to be
bound by the restrictions set forth in
this section 10.
(c) Holder agrees that substantially the following legend shall be
placed on the certificates representing any Class B Preferred
Shares and Class B Common Shares:
B-16
604509.3
<PAGE>
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
LIMITATIONS UPON TRANSFER AND CONVERSION CONTAINED IN THE
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF THE
CLASS B 9.5% CUMULATIVE CONVERTIBLE NON-VOTING PREFERRED
SHARES AND THE BY-LAWS OF THE COMPANY (COPIES OF WHICH ARE ON
FILE AT THE OFFICE OF THE COMPANY)."
IN WITNESS WHEREOF, Capital Trust has caused this Certificate of
Designation to be duly signed and acknowledged as of this ___ day of June, 1997
by the undersigned, its Chief Executive Officer.
CAPITAL TRUST
By:_________________________________
Name: John R. Klopp
Title: Chief Executive Officer
<PAGE>
ANNEX C
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
CAPITAL TRUST
a California trust
As amended through June ___ , 1997
B-17
604509.3
<PAGE>
<TABLE>
<CAPTION>
CAPITAL TRUST
TABLE OF CONTENTS
Page
<S> <C> <C>
ARTICLE I DEFINITIONS...........................................................................................C-2
Section 1.1 "Aggregated Transferor"......................................................................C-2
Section 1.2 "Board"......................................................................................C-2
Section 1.3 "Business Day"...............................................................................C-2
Section 1.4 "By-Laws"....................................................................................C-2
Section 1.5 "Certificate of Designation".................................................................C-2
Section 1.6 "Class A Common Shares"......................................................................C-2
Section 1.7 "Class A Preferred Shares"...................................................................C-2
Section 1.8 "Class B Common Shares"......................................................................C-2
Section 1.9 "Class B Preferred Shares"...................................................................C-2
Section 1.10 "Common Shares"..............................................................................C-2
Section 1.11 "Conversion Date"............................................................................C-2
Section 1.12 "Conversion Notice"..........................................................................C-2
Section 1.13 "Corporations Commissioner"..................................................................C-2
Section 1.14 "Declaration" and "Declaration of Trust".....................................................C-3
Section 1.15 "File for Record"............................................................................C-3
Section 1.16 "GAAP".......................................................................................C-3
Section 1.17 "Internal Revenue Code"......................................................................C-3
Section 1.18 "Person".....................................................................................C-3
Section 1.19 "Preferred Shares"...........................................................................C-3
Section 1.20 "Shares".....................................................................................C-3
Section 1.21 "Shareholders"...............................................................................C-3
Section 1.22 "Subsidiary".................................................................................C-3
Section 1.23 "Trustees....................................................................................C-3
Section 1.24 "Voting Preferred Shares"....................................................................C-3
Section 1.25 "Voting Shares"..............................................................................C-3
ARTICLE II THE COMPANY..................................................................................C-4
Section 2.1 Name.........................................................................................C-4
Section 2.2 Principal Office.............................................................................C-4
Section 2.3 Purpose......................................................................................C-4
Section 2.4 No Partnership Relationship..................................................................C-4
Section 2.5 Amendment and Restatement of Original Declaration of Trust...................................C-4
ARTICLE III INVESTMENT POLICY............................................................................C-4
Section 3.1 General Policy...............................................................................C-4
Section 3.2 Maintenance of Assets........................................................................C-4
Section 3.3 Disposition of Encumbrance of Assets.........................................................C-4
Section 3.4 Use of Brokers and Appraisers................................................................C-4
Section 3.5 Management of Company Property...............................................................C-4
Section 3.6 The Company's Right to Borrow Funds..........................................................C-5
Section 3.7 Transactions with Related Parties............................................................C-5
ARTICLE IV CLASSES OF SHARES; DESIGNATIONS, PREFERENCES, ETC............................................C-5
Section 4.1 Number of Shares; Classes....................................................................C-5
Section 4.2 Designations, Preferences, etc...............................................................C-6
Section 4.3 Shareholder's Interest in the Company........................................................C-6
C-i
604509.3
<PAGE>
ARTICLE V COMMON SHARES................................................................................C-6
Section 5.1 Common Shares; Identical Rights..............................................................C-6
Section 5.2 Dividends....................................................................................C-6
Section 5.3 Liquidation Rights...........................................................................C-6
Section 5.4 Voting Rights................................................................................C-7
Section 5.5 Conversion Rights ...........................................................................C-7
Section 5.6 Stock Splits, etc............................................................................C-8
Section 5.7 Reacquired Shares............................................................................C-8
Section 5.8 Preferences, Appraisals, Redemption and Preemptive Rights....................................C-8
Section 5.9 Nonassessability of Common Shares............................................................C-8
ARTICLE VI PREFERRED SHARES.............................................................................C-8
Section 6.1 Preferred Shares.............................................................................C-8
Section 6.2 The Class A Preferred Shares and the Class B Preferred Shares................................C-9
Section 6.3 Nonassessability of Preferred Shares.........................................................C-9
Section 6.4 Recording of Certificates of Designation.....................................................C-9
ARTICLE VII MEETING OF SHAREHOLDERS.....................................................................C-10
Section 7.1 Annual Meeting..............................................................................C-10
Section 7.2 Special Meetings............................................................................C-10
Section 7.3 Record Date.................................................................................C-10
Section 7.4 Voting of Shares............................................................................C-10
Section 7.5 Inspectors of Elections.....................................................................C-10
Section 7.6 Shareholder List............................................................................C-11
Section 7.7 Quorum......................................................................................C-11
Section 7.8 Notice......................................................................................C-11
Section 7.9 Business Transacted.........................................................................C-11
Section 7.10 Action at a Meeting.........................................................................C-11
Section 7.11 Action Without a Meeting....................................................................C-11
Section 7.12 Effect of Action............................................................................C-11
ARTICLE VIII TRUSTEES; MEETINGS OF TRUSTEES..............................................................C-12
Section 8.1 Authority of Trustees.......................................................................C-12
Section 8.2 Powers of Trustees..........................................................................C-12
Section 8.3 Number, Term and Qualifications.............................................................C-13
Section 8.4 Resignations................................................................................C-13
Section 8.5 Removal of Trustees.........................................................................C-13
Section 8.6 Newly Created Trusteeships and Vacancies....................................................C-14
Section 8.7 Compensation................................................................................C-14
Section 8.8 Committees..................................................................................C-14
Section 8.9 By-Laws.....................................................................................C-14
ARTICLE IX OFFICERS....................................................................................C-14
ARTICLE X CONSOLIDATION, MERGER, SALE OF ASSETS, ETC..................................................C-14
ARTICLE XI ACCOUNTING..................................................................................C-15
Section 11.1 Standard....................................................................................C-15
Section 11.2 Inspection of Records.......................................................................C-15
Section 11.3 Annual Audit................................................................................C-15
Section 11.4 Interim Reports.............................................................................C-15
ARTICLE XII DURATION OF THE COMPANY.....................................................................C-15
C-ii
604509.3
<PAGE>
Section 12.1 Duration....................................................................................C-15
Section 12.2 Early Termination...........................................................................C-15
Section 12.3 Procedure Upon Termination..................................................................C-15
ARTICLE XIII AMENDMENTS................................................................................. C-16
Section 13.1 Amendment Procedure.........................................................................C-16
Section 13.2 Amendments Without Shareholder Approval.....................................................C-16
Section 13.3 Recording Amendments........................................................................C-16
ARTICLE XIV EXCULPATION AND INDEMNIFICATION; LIMITATION OF LIABILITY; RIGHTS OF
TRUSTEES AND OFFICERS TO OWN SHARES; REPRESENTATIONS AND
GUARANTEES..................................................................................C-16
Section 14.1 Exculpation and Indemnification of Trustees, Officers and Others ...........................C-16
Section 14.2 Limitation on Liability of Shareholders, Trustees and Officers; Insurance...................C-16
Section 14.3 Right of Trustees and Officers to Own Shares................................................C-16
Section 14.4 Representations and Guarantees..............................................................C-17
ARTICLE XV MISCELLANEOUS...............................................................................C-17
Section 15.1 Fiscal Year.................................................................................C-17
Section 15.2 Checks .....................................................................................C-17
Section 15.3 Successors in Interest......................................................................C-17
Section 15.4 Severability................................................................................C-17
Section 15.5 California Laws Govern......................................................................C-17
Section 15.6 Headings....................................................................................C-17
Section 15.7 No Third-Party Reliance.....................................................................C-17
Section 15.8 Counterparts................................................................................C-17
Section 15.9 Notice......................................................................................C-17
Section 15.10 agreement of Shareholders.................................................................. C-17
</TABLE>
C-iii
604509.3
<PAGE>
AMENDED AND RESTATED
DECLARATION OF TRUST OF
CAPITAL TRUST
a California trust
As amended through June ___ , 1997
AMENDED AND RESTATED DECLARATION OF TRUST of Capital Trust, a
California trust (the "Company"), dated as of June ___ , 1997.
R E C I T A L S
WHEREAS, Stanley C. Bateman, Noel Coleman, Donald Gilson, H. Glover
Hughes, John M. Inman, Edward P. Jones, Leo G. McClatchy and C. Frank Pratt,
Sr., desiring to create a trust entered into a Declaration of Trust, dated the
15th of September, 1966 (the "Original Declaration of Trust"), creating
California Real Estate Investment Trust, a California trust, for the benefit of
the holders from time to time of shares to be issued hereunder, who become
parties hereto and beneficiaries of the Company by becoming the holders of one
or more shares of beneficial interests in the Company;
WHEREAS, Messrs. Bateman, Coleman, Gilson, Hughes, Inman, Jones,
McClatchy and Pratt agreed to serve as the initial trustees of the Company;
WHEREAS, pursuant to the terms of the Original Declaration of Trust,
such individuals have been replaced as trustees by vote of the Shareholders by
Martin L. Edelman, Gary R. Garrabrant, Craig M. Hatkoff, John R. Klopp, Sheli Z.
Rosenberg, Lynne B. Sagalyn and Samuel Zell;
WHEREAS, the holders of no less than sixty-six and two-thirds percent
(66-2/3%) of the outstanding common shares of the Company entitled to vote,
desiring to amend and restate the Original Declaration of Trust, have approved
the amendment and restatement of the Original Declaration of Trust as set forth
herein, including without limitation changing the name of the Company from
"California Real Estate Investment Trust" to "Capital Trust"; and
WHEREAS, the Board and the Shareholders desire that the Company
qualify as an "association" taxable as a corporation under the Code, so long as
such qualification, in the opinion of the Board, is advantageous to the
Shareholders, and cease qualifying as a "real estate investment trust" under the
Code;
D E C L A R A T I O N
NOW, THEREFORE, in order to declare the terms and conditions upon
which the Company is to be created, continued and operated and the terms and
conditions upon which the proportionate share and interest of each Shareholder
thereof is to be determined, as well as the terms and conditions under which
property is to be held therein, the Trustees hereby declare that they will hold
all investments of every type and description which they may acquire as such
Trustees, together with the proceeds thereof, in trust, to manage, improve, hold
and dispose of the same for the benefit of the holders of record from time to
time of the Shares issued and to be issued hereunder, and in the manner and
subject to the provisions hereof, to wit:
C-1
604509.3
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.1 "Aggregated Transferor". The phrase "Aggregated
Transferor" of a Person shall mean any other Person other than the Company who
previously held Voting Shares of the Company now held by such Person.
Section 1.2 "Board". The word "Board" shall mean the board of trustees
of the Company established pursuant to Section 8.3.
Section 1.3 "Business Day". The phrase "Business Day" shall mean any
day other than a Saturday, 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.
Section 1.4 "By-Laws". The word "By-Laws" shall mean the By-Laws of
the Company as adopted, and as amended and restated from time to time, by the
Board pursuant to Section 8.2(m) and Section 8.9 hereof, which By-Laws are
incorporated herein by reference and shall form a part of the governing
instrument of the Company.
Section 1.5 "Certificate of Designation". The phrase "Certificate of
Designation" shall mean a certificate of designation, preferences and rights
establishing a class or series of preferred shares pursuant to Section 6.1.
Section 1.6 "Class A Common Shares". The phrase "Class A Common
Shares" shall mean the class A common shares, par value $1.00 per share, of
beneficial interests in the Company, having the designations and rights,
qualifications, limitations and restrictions set forth in this Declaration.
Section 1.7 "Class A Preferred Shares". The phrase "Class A Preferred
Shares" shall mean the class A 9.5% cumulative convertible preferred shares, par
value $1.00 per share, in the Company established pursuant to the Certificate of
Designation of the class A 9.5% cumulative convertible preferred shares and the
class B 9.5% cumulative convertible non-voting preferred shares adopted pursuant
to Section 6.2.
Section 1.8 "Class B Common Shares". The phrase "Class B Common
Shares" shall mean the class B common shares, par value $1.00 per share, in the
Company, having the designations and rights, qualifications, limitations and
restrictions set forth in this Declaration.
Section 1.9 "Class B Preferred Shares". The phrase "Class B Preferred
Shares" shall mean the class B 9.5% cumulative convertible non-voting preferred
shares, par value $1.00 per share, in the Company established pursuant to the
Certificate of Designation of the class A 9.5% cumulative convertible preferred
shares and the class B 9.5% cumulative convertible non-voting preferred shares
adopted pursuant to Section 6.2.
Section 1.10 "Common Shares". The phrase "Common Shares" shall mean,
collectively, the Class A Common Shares and the Class B Common Shares.
Section 1.11 "Conversion Date". The phrase "Conversion Date" is
defined in Section 5.5(b).
Section 1.12 "Conversion Notice". The phrase "Conversion Notice" is
defined in Section 5.5(b).
Section 1.13 "Corporations Commissioner". The phrase "Corporations
Commissioner" shall mean the Commissioner of Corporations of the State of
California or his or her authorized representatives.
C-2
604509.3
<PAGE>
Section 1.14 "Declaration" and "Declaration of Trust". The word
"Declaration" and the phrase "Declaration of Trust" shall mean this document as
it may from time to time be supplemented, amended or modified pursuant to the
provisions hereof.
Section 1.15 "File for Record". The phrase "File for Record" shall
mean to file for record in the office of the county recorder for the county in
which the Company maintains its principal office, and in the offices of the
recorders for such other places as the Board may, from time to time, designate.
Section 1.16 "GAAP". The phrase "GAAP" shall mean 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 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.
Section 1.17 Internal Revenue Code". The phrase "Internal Revenue
Code" shall mean the United States Internal Revenue Code of 1986, as amended and
in effect from time to time (or any corresponding provision of succeeding law).
Section 1.18 "Person". The word "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, any unincorporated organization or any
other entity.
Section 1.19 "Preferred Shares". The phrase "Preferred Shares" shall
mean the Class A Preferred Shares, the Class B Preferred Shares and such other
shares of the Company created pursuant to Section 6.1.
Section 1.20 "Shares". The word "Shares" shall mean the Common Shares
and the Preferred Shares, collectively.
Section 1.21 "Shareholders". The word "Shareholders" shall mean the
holders of record of the Company's outstanding Shares.
Section 1.22 "Subsidiary". The phrase "Subsidiary" shall mean (a) any
corporation 50% or more of the voting securities of which is owned, directly or
indirectly, by the Company, or (b) any other Person whose accounts are required
under GAAP to be included in the Company's consolidated financial statements.
Section 1.23 "Trustees". The word "Trustees" shall mean the trustees
of the Company elected from time to time as provided in Article VIII hereof.
Section 1.24 "Voting Preferred Shares". The phrase "Voting Preferred
Shares" shall mean the Class A Preferred Shares and such other shares of the
Company created pursuant to Section 6.1 and designated by the Board at such time
as Shares entitled to vote.
Section 1.25 "Voting Shares". The phrase "Voting Shares" shall mean,
collectively, the Class A Common Shares and the Voting Preferred Shares.
C-3
604509.3
<PAGE>
ARTICLE II
THE COMPANY
Section 2.1 Name. The name of the Company is "Capital Trust," and so
far as may be practicable the Board shall conduct the Company's activities,
execute all documents and sue or be sued under that name, which name shall refer
to the Company and the Trustees in their capacity as trustees, and not
individually or personally, and shall not refer to the officers or Shareholders
of the Company or to the agents or employees of the Company or of such Trustees.
Should the Board determine that the use of such name is not practicable, legal
or convenient, the Board may use such other designation or they may adopt such
other name for the Company as they deem proper and the Company may hold property
and conduct its activities under such designation or name.
Section 2.2 Principal Office. The Company shall maintain its principal
office at 885 Third Avenue, New York, New York 10022. Such office may be changed
from time to time by the Board. The Company may have additional business
addresses as the Board may determine from time to time.
Section 2.3 Purpose. The purpose of the Company shall be, as
determined from time to time by the Board, to engage in any lawful business or
activity for which a trust may be organized under the laws of the State of
California.
Section 2.4 No Partnership Relationship. The Company shall be a common
law trust under the laws of the State of California. The Company is not intended
to be, and shall not be deemed to be, and shall not be or elect to be treated
as, a general partnership, limited partnership, joint venture or joint stock
company. The Shareholders shall be beneficiaries and their relationship to the
Trustees shall be solely in that capacity in accordance with the rights
conferred upon them hereunder. Nothing contained herein or in any Share
certificate, and no act done or any writing or agreement made during the
continuance of the Company, shall be construed as, or have the effect of
constituting the Trustees, the Shareholders or any of them or any other Person,
co-partners or otherwise members of any association.
Section 2.5 Amendment and Restatement of Original Declaration of
Trust. This Declaration of Trust amends and restates in its entirety the
Original Declaration of Trust with respect to the Company.
ARTICLE III
INVESTMENT POLICY
Section 3.1 General Policy. The Board shall from time to time
establish by resolution or in the By-Laws of the Company policies to govern the
investment and reinvestment of monies and other property held in the trust
estate. Any such investment policies may contain prohibitions or restrictions
upon certain types of investments.
Section 3.2 Maintenance of Assets. The Board, on behalf of the
Company, shall have the authority, itself or through officers, agents or
independent contractors, to incur all expenses and make all expenditures from
Company assets necessary or desirable for the protection, improvement,
maintenance, repair, alteration, efficient operation or ready marketability of
any asset of the Company. All such expenses shall be paid or reimbursed from the
assets of the Company.
Section 3.3 Disposition or Encumbrance of Assets. The Board shall have
full discretion in retaining, selling, exchanging, financing or encumbering any
asset of the Company, or any interest in such asset.
Section 3.4 Use of Brokers and Appraisers. Subject to the provisions
of Section 3.7 hereof, the Board may employ at the expense of the Company the
services of any Person, including without limitation any real estate or
securities broker, for the purpose of appraising, acquiring, financing,
encumbering or disposing of assets of the Company.
C-4
604509.3
<PAGE>
Section 3.5 Management of Company Property. Subject to the provisions
of Section 3.7 hereof, whenever any property of the Company shall require active
management, such services shall be provided for reasonable compensation by a
contractor selected for such purpose by the Board from among qualified Persons.
The Board shall not perform such services.
Section 3.6 The Company's Right to Borrow Funds. The Company may, in
the discretion of the Board, borrow funds from institutional lenders, banks and
other lenders through the issuance of commercial paper, notes, debentures, bonds
and other debt obligations of any kind and nature whatsoever (which may be
convertible into Shares or other equity interests or be issued together with
warrants to acquire Shares or other equity interests), and may grant security
interests in or otherwise encumber any Company assets or provide Company
guarantees in connection therewith.
Section 3.7 Transactions with Related Parties. (a) No contract or
transaction between the Company and one or more of its Trustees, officers or
Shareholders, or between the Company and any other Person in which one or more
of its Trustees, officers or Shareholders are directors, officers or trustees,
or have a financial interest, shall be void or voidable solely for this reason,
or solely because the Trustee or officer is present at or participates in the
meeting of the Board or any committee thereof which authorizes the contract or
transaction, or solely because his, her or their votes are counted for such
purpose, if:
(i) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the
Board or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested Trustees, even though the disinterested
Trustees be less than a quorum; or
(ii) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the
Shareholders entitled to vote thereon, and the contract or transaction
is specifically approved in good faith by vote of the Shareholders; or
(iii) the contract or transaction is fair as to the Company as of
the time it is authorized, approved or ratified, by the Board, a
committee of the Board or the Shareholders.
Interested Trustees may be counted in determining the presence of a quorum at a
meeting of the Board or of a committee which authorizes the contract or
transaction.
(b) The Board or any committee thereof shall be entitled in their
discretion to retain, at the Company's expense, independent appraisers,
investment bankers, legal counsel, accountants and other professional
consultants or advisors to assist them in their determination as described in
paragraph (a) above.
(c) No Shareholder shall have any right, by virtue of this Agreement or
otherwise, to share or participate in or to approve any other investments or
activities of any other Shareholder, Trustee or employee or the income or
proceeds derived therefrom. No Shareholder, Trustee or employee shall be
obligated to offer or bring to the attention of the Company or the Board any
business investment or opportunity, whether or not within the scope of the
Company's purposes. Any Shareholder, Trustee or employee may at any time own,
invest in or manage any business investment or opportunity, whether or not
competitive with the Company or otherwise within the scope of the Company
purpose. No Shareholder, Trustee or employee shall have any restriction on
competing with the Company (except as may be specifically provided for in a
written agreement between the Company and such Trustee, Shareholder or employee)
or any obligation or responsibility to disclose, account for or offer any
investment or opportunity to the Company or its Shareholders, and the Company
and its Shareholders shall have no rights or interests therein.
ARTICLE IV
CLASSES OF SHARES; DESIGNATIONS, PREFERENCES, ETC.; SHAREHOLDERS
C-5
604509.3
<PAGE>
Section 4.1 Number of Shares; Classes. (a) The total number of Common
Shares and Preferred Shares which may be issued by the Board shall not be
limited.
(b) There shall be four classes of shares of beneficial interest: the
Class A Common Shares, the Class B Common Shares, the Class A Preferred Shares
and the Class B Preferred Shares; provided, however, that the Board may
establish additional classes or series of Preferred Shares as set forth in
Section 6.1. All Common Shares, the Class A Preferred Shares and the Class B
Preferred Shares shall be of one dollar ($1.00) par value.
(c) Effective on the date hereof, each Common Share of beneficial
interest, $1.00 par value, of the Company, issued and outstanding immediately
prior to the date hereof (the "Old Common Shares") shall be reclassified as and
changed into one (1) validly issued, fully paid, and non-assessable Class A
Common Share. Each certificate that theretofore represented an Old Common Share
or Old Common Shares shall thereafter represent that number of Class A Common
Shares into which the Old Common Share or Old Common Shares represented by Such
certificate shall have been reclassified. Each record holder of a share
certificate or certificates that theretofore represented an Old Common Share or
Old Common Shares shall receive, upon surrender of such certificates or
certificates, a new certificate or certificates evidencing and representing the
number of Class A Common Shares to which such record holder is entitled.
Section 4.2 Designations, Preferences, etc. The designations,
preferences, powers, qualifications and special or relative rights or privileges
of the Common Shares and Preferred Shares of the Company shall be as set forth
below in Article V with respect to Common Shares and in Certificates of
Designation adopted pursuant to Article VI with respect to Preferred Shares.
Section 4.3 Shareholder's Interest in the Company. The interest in the
Company of each Shareholder consists of his or her right to enforce the
performance of the Company, including the right to participate in distributions
of the Company's assets, as provided in this Declaration of Trust and any
Certificate of Designation. Such interest is personal property. During the
continuation of the Company's business, no Shareholder or his or her legal
representative or successor shall be entitled to a partition of the Company's
property or, except as herein provided, to an accounting, nor shall the Company
be in any manner affected by the death, insanity or bankruptcy of any
Shareholder, or by the transfer of any Share or Shares of the Company.
ARTICLE V
COMMON SHARES
Section 5.1 Common Shares; Identical Rights. Except as expressly
provided otherwise in this Article V or as required by law, all Common Shares
shall be identical and shall entitle the holders thereof to the same voting,
dividend or distribution, liquidation and other rights.
Section 5.2 Dividends. Subject to any preferences which may be granted
to holders of Preferred Shares, the Board may cause dividends to be declared and
paid on outstanding Common Shares out of funds legally available therefor, at
such times, in such amounts and from such sources, whether income, surplus,
capital or any combination thereof, as they in their discretion may determine.
When, as and if such dividends are declared by the Board, whether payable in
cash, property or securities of the Company, the holders of Common Shares shall
be entitled to share equally in, and to receive in accordance with the number of
Common Shares held by each such holder, all such dividends, except that if
dividends are declared that are payable in Common Shares, such dividends shall
be payable at the same rate on each class or series of Common Shares and shall
be payable only in Class A Common Shares to holders of Class A Common Shares and
in Class B Common Shares to holders of Class B Common Shares. The Board,
pursuant to Section 7.3, may fix a record date for the determination of holders
of Common Shares entitled to receive such dividend.
Section 5.3 Liquidation Rights. In the event of the termination of the
Company pursuant to Section 12.2, or upon the distribution of its assets, after
the payment in full or the setting apart for payment to all creditors of the
Company of the amounts to which they shall be entitled and subject to such
preferential amounts, if any, to which the
C-6
604509.3
<PAGE>
holders of Preferred Shares at the time outstanding shall be entitled, the
remaining assets of the Company available for payment and distribution to
holders of Common Shares shall, subject to any participating or similar rights
of Preferred Shares at the time outstanding, be distributed ratably, in
accordance with the number of Common Shares held by each such holder, equally
among the holders of Common Shares at the time outstanding.
Section 5.4 Voting Rights. (a) The Class B Common Shares shall not
have voting rights and shall not be counted in determining the presence of a
quorum.
(b) Except as otherwise required by law or provided in Section 5.4(a)
or Section 8.3(c), and subject to the special voting rights of any outstanding
Voting Preferred Shares, the approval of all matters brought before the
Shareholders shall require the affirmative vote of the holders of a majority in
voting power of the Voting Shares (including the Class A Common Shares) that are
present in person or represented by proxy and voting as a single class. Each
Voting Share shall entitle the holder thereof to such voting rights as are
specified in this Section 5.4 or, with respect to a Voting Preferred Share, in
the Certificate of Designation with respect to such Voting Preferred Share.
(c) Notwithstanding anything to the contrary in this Section 5.4 or any
Certificate of Designation, any Voting Shares owned, directly or indirectly, by
the Company or any of its Subsidiaries shall not have voting rights hereunder
and shall not be counted in determining the presence of a quorum.
Section 5.5 Conversion Rights.
(a) Each Class A Common Share shall be convertible at the option of the
holder thereof at any time and from time to time into one fully paid and
nonassessable Class B Common Share. Subject to delivery of the certification
described in Section 5.5(b) below, each Class B Common Share shall be
convertible at the option of the holder thereof at any time and from time to
time into one fully paid and nonassessable Class A Common Share.
(b) In order to exercise the conversion right, the holder of any Common
Shares to be converted in whole or in part shall surrender the certificate or
certificates evidencing such Common Shares to the Company and shall give written
notice to the Company ("Conversion Notice") that the Shareholder elects to
convert such Common Shares or the portion thereof specified in said notice into
Class A Common Shares or Class B Common Shares, as specified by the Shareholder
in the Conversion Notice. The Conversion Notice shall also (i) state the name or
names (with address) in which the certificates for Common Shares shall be issued
and (ii) if Class B Common Shares are to be converted into Class A Common
Shares, contain a certification by the Shareholder that the Shareholder either
(a) will not, together with such Shareholder's Aggregated Transferors, upon the
issuance of such Class A Common Shares, own more than 4.9% of any class of
Voting Shares of the 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 Shares of the Company. Each certificate evidencing Common Shares
surrendered for conversion shall, unless the Shares issuable on conversion are
to be issued in the same name as the registration of such Common Shares, be duly
endorsed by, or be accompanied by instruments of transfer in form satisfactory
to the Company duly executed by, the Shareholder or its duly authorized
attorney. As promptly as practicable after receipt of a Conversion Notice and
surrender of the certificate or certificates evidencing the Common Shares
relating thereto, the Company shall issue and deliver to such Shareholder (or
upon the written order of such Shareholder) a certificate or certificates for
the number of full Common Shares issuable upon the conversion of such Common
Shares or portion thereof in accordance with the provisions of this Section
5.5(b). In the event that less than all the Common Shares represented by a
certificate are to be converted, the Company shall issue and deliver or cause to
be issued and delivered to (or upon the written order of) the Shareholder of the
Common Shares so surrendered, without charge to such Shareholder, a new
certificate or certificates representing a number of Common Shares 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 evidencing such Common Shares shall have been
surrendered to the Company or its transfer agent and a Conversion Notice with
respect to such Common Shares shall have been received by the Company, as
described above. Any Person in whose name any certificate or certificates for
Common Shares shall be issuable upon conversion shall be deemed to have become
the holder of record of the Common Shares represented thereby on the Conversion
Date; provided, however, if the certificate or certificates evidencing Common
Shares are surrendered on any date when the Share transfer books of the Company
shall be closed, the
C-7
604509.3
<PAGE>
Shareholder 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. No payment or adjustment will be made
for dividends or other distributions with respect to any Common Shares issuable
upon conversion of Common Shares as provided herein.
(c) The issuance of Share certificates upon conversion of Common Shares
shall be made without charge to the converting Shareholder for any tax in
respect of the issuance thereof.
(d) The Company covenants that all Common Shares which may be issued
upon conversion of Common Shares will upon issuance be validly issued, fully
paid and nonassessable by the Company and free from all taxes, liens and charges
with respect to the issuance thereof.
Section 5.6 Stock Splits, etc. The Company shall not in any manner
subdivide or combine (by any stock split, reclassification, stock dividend,
recapitalization, consolidation or otherwise) any outstanding class or series of
Common Shares unless all classes and series of outstanding Common Shares shall
be subdivided or combined proportionately and in the same manner.
Section 5.7 Reacquired Shares. Any Common Shares which are converted,
purchased, redeemed or otherwise acquired by the Company shall be retired and
canceled by the Company promptly thereafter.
Section 5.8 Preferences, Appraisals, Redemption and Preemptive Rights.
Holders of Common Shares shall not be entitled to preferences, appraisals or
preemptive rights of any kind. No Shareholder may demand that the Company or the
Trustees redeem his or her Common Shares.
Section 5.9 Nonassessability of Common Shares. After the payment of
subscription price therefor, no assessment shall ever be made upon the Common
Shares of the Company.
ARTICLE VI
PREFERRED SHARES
Section 6.1 Preferred Shares. (a) The Board is hereby expressly
authorized at any time, and from time to time, to provide for the issuance of
Preferred Shares in one or more classes or series, with such rights, powers,
preferences, privileges and restrictions as shall be stated and expressed in the
resolution or resolutions providing for the issue thereof adopted by the Board,
and as are not otherwise stated and expressed in this Declaration of Trust,
including (without limiting the generality thereof) the following as to each
such class or series:
(i) The distinctive designation of such class or series, and the
number of Preferred Shares of such class or series
authorized;
(ii) The dividends payable with respect to such class or series,
the rates or basis for determining such dividends, and
conditions and dates upon which such dividends shall be
payable, the preferences, if any, of such dividends over, or
the relation of such dividends to, the dividends payable on
any other class or series of securities of the Company,
whether such dividends shall be noncumulative or cumulative,
and, if cumulative, the date or dates from which such
dividends shall be cumulative;
(iii) Whether Preferred Shares of such class or series shall be
redeemable at the option of the Company or upon the happening
of a specified event, and, if redeemable, whether for cash,
property or rights, including securities of the Company, the
times, prices or rates and any adjustment and other terms and
conditions of such redemption;
C-8
604509.3
<PAGE>
(iv) The terms and amount of any sinking, retirement or purchase
fund provided for the purchase or redemption of Preferred
Shares of such class or series;
(v) Whether or not Preferred Shares of such class or series shall
be convertible into or exchangeable for other securities of
the Company, at the option of the Company or of the holder of
such Preferred Shares or both, or upon the happening of a
specified event, and, if provision be made for such conversion
or exchange, the terms, prices, rates, adjustments and any
other terms and conditions thereof;
(vi) The extent, if any, to which the holders of the Preferred
Shares of such class or series shall be entitled to vote with
respect to the election of Trustees or on other issues,
including without limitation the extent, if any, to which such
holders shall be entitled, voting as a class or series or
jointly with other classes or series, to elect one or more
Trustees upon the happening of a specified event or otherwise,
or entitled to multiple votes per Preferred Share;
(vii) The restrictions, if any, on the issue or reissue of
Preferred Shares of such class or series or any other classes
or series;
(viii) The extent, if any, to which the holders of the Preferred
Shares of such class or series shall be entitled to
preemptive rights;
(ix) The rights of the holders of the Preferred Shares of such
class or series upon the termination of the Company or any
distribution of its assets, including without limitation any
preferential amount payable upon such Preferred Shares or any
other rights of holders of such Preferred Shares in the event
of the liquidation, dissolution or winding up of the Company
or the distribution of its assets; and
(x) The terms of any other provisions to be applicable to such
Preferred Shares and such other powers, preferences, rights,
limitations or restrictions as the Board shall determine.
(b) Before the Company shall issue any Preferred Shares of any
class or series, a Certificate of Designation setting forth the resolution or
resolutions of the Board fixing the voting powers, designations, preferences and
rights of such class or series, the qualifications, limitations or restrictions
thereof, and the number of Preferred Shares of such class or series authorized
by the Board, shall be signed and acknowledged by the officer or officers of the
Company designated by the Board pursuant to resolution of the Board and filed
among the records of the Company. Except to the extent otherwise expressly
provided in any such resolution or resolutions creating such class or series,
the number of Preferred Shares of the classes or series authorized by such
resolution or resolutions may be increased or decreased (but not below the
number of Preferred Shares of such class or series then outstanding) and any
other amendment to such resolution or resolutions may be effected, by a
Certificate of Designation, setting forth a resolution or resolutions of the
Board authorizing such increase, decrease or amendment, signed and acknowledged
by the officer or officers of the Company designated by the Board. The Board
shall cause notice of the adoption or amendment of any Certificate of
Designation and a copy thereof to be mailed to Shareholders within 90 days
following such adoption or amendment. Except to the extent otherwise expressly
provided in the resolution or resolutions creating such class or series of
Preferred Shares, any such amendment may, without limitation, cancel or
otherwise affect the right of the holders of Preferred Shares of such class or
series to receive dividends which have accrued but have not been declared.
Section 6.2 The Class A Preferred Shares and the Class B Preferred
Shares. The Class A Preferred Shares and the Class B Preferred Shares shall have
the rights, preferences, privileges and restrictions stated and expressed in the
Certificate of Designation of the Class A Preferred Shares and the Class B
Preferred Shares adopted by resolution or resolutions of the Board providing for
the issue thereof, and signed and acknowledged by the officer or officers of the
Company designated by the Board, as the same may be amended or modified from
time to time.
Section 6.3 Nonassessability of Preferred Shares. After payment of the
subscription price therefor, no assessment shall ever be made upon the Preferred
Shares of the Company.
C-9
604509.3
<PAGE>
Section 6.4 Recording of Certificates of Designation. Following the
adoption of any Certificate of Designation, if deemed advisable by the Board,
the officer or officers of the Company designated by the Board shall execute
such Certificate of Designation and File for Record such Certificate of
Designation.
ARTICLE VII
MEETINGS OF SHAREHOLDERS
Section 7.1 Annual Meeting. The annual meeting of the Shareholders
shall be held on a Business Day during the fifth or sixth calendar month of the
Company's fiscal year, between 9:00 a.m. and 10:00 p.m., at New York, New York,
or at such other location as the Board shall select. Notice of the date, hour
and place of the meeting as determined by resolution of the Board shall be
mailed to Shareholders at least 14 days before the day of the meeting.
Section 7.2 Special Meetings. Special meetings of Shareholders may be
called at any time and place by the Board and the Board shall cause a special
meeting to be called upon receipt of the written request of the holders of
thirty-three and one-third percent (33-1/3%) of the outstanding Voting Shares
entitled to vote on any matter to be voted on at such special meeting, which
request shall specify the purpose or purposes for which such meeting is to be
called. If for any reason an annual meeting of Shareholders as herein provided
for shall be omitted, a special meeting of Shareholders may subsequently be held
in lieu thereof and the business of the annual meeting may be transacted
thereat.
Section 7.3 Record Date. The Board may, without closing the transfer
books, fix a date not more than 60 days prior to the date of any meeting of
Shareholders or dividend payment as a record date for the determination of
Shareholders entitled to vote at such meeting and any adjournment thereof, or to
receive such dividend. Any Person who is a registered Shareholder of Voting
Shares at the time so fixed shall be entitled to vote at such meeting or any
adjournment thereof, and any Person who is a registered Shareholder at the time
so fixed shall be entitled to receive such dividend, even though he or she has
since that date disposed of his or her Shares, and no Shareholder becoming such
after that date shall be so entitled to vote at such meeting or any adjournment
thereof or to receive such dividend.
Section 7.4 Voting of Shares. (a) Each Voting Share shall be entitled
to the vote specified in Section 5.4; provided, that only holders of record as
of the record date for the meeting shall be entitled to vote at any meeting of
Shareholders.
(b) Whenever the vote or written consent of Shareholders is required
or permitted under this Declaration, such vote or consent may be given either in
person or by proxy. The Board may solicit such proxies from the holders of
Voting Shares or any of them in any matter requiring or permitting the
Shareholders' vote or written consent. No proxy for any meeting of Shareholders
shall be effective unless such proxy shall have been received in the office of
the Company, or such other location designated by the Board and indicated in the
material soliciting the proxies, for verification prior to the meeting.
(c) When a Voting Share entitled to vote is held jointly by several
Persons, any one of them may vote at any meeting in person or by proxy with
respect to such Voting Share, but if more than one of them shall be present at
such meeting in person or by proxy and such joint owners or their proxies so
present disagree as to any vote to be cast, no vote shall be received with
respect to such Voting Share.
Section 7.5 Inspectors of Elections. (a) The Board, in advance of any
Shareholders' meeting, may appoint one or more inspectors to act at the meeting
or any adjournment thereof. If inspectors are not so appointed, the person
presiding at a Shareholders' meeting may, and on the request of any Shareholder
entitled to vote thereat shall, appoint at least one inspector. In case any
appointed inspector fails to appear or act, the vacancy may be filled by
appointment made by the Board in advance of the meeting or at that meeting by
the person presiding thereat. Each inspector, before entering upon the discharge
of his or her duties, shall take and sign an oath faithfully to execute the
duties of inspector at such meeting with strict impartiality and according to
the best of his or her ability.
C-10
604509.3
<PAGE>
(b) The inspectors shall determine the number of Shares outstanding,
the number of Shares represented at the meeting, the existence of a quorum and
the validity and effect of proxies; receive votes, ballots or consents; hear and
determine all challenges and questions arising in connection with the right to
vote; count and tabulate all votes, ballots or consents; determine the result;
and do such acts as are necessary to conduct the election or vote with fairness
to all holders of Voting Shares. On request of the person presiding at the
meeting or any Shareholder entitled to vote thereat, the inspectors shall make a
report in writing of any challenge, question or matter determined by them and
execute a certificate of any fact found by them. Any report or certificate made
by them shall be prima facie evidence of the facts stated and of the vote as
certified by them.
Section 7.6 Shareholder List. The officer who has charge of the Share
ledger of the Company shall, at least ten days before each meeting of
Shareholders, prepare a complete alphabetical address list of the Shareholders
entitled to vote at the ensuing election, with the number of Voting Shares held
by each. Said list shall be open to the examination of any Shareholder, for any
purpose germane to the meeting, during ordinary business hours, for a period of
at least ten days prior to the meeting, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall be available for inspection at the meeting.
Section 7.7 Quorum. A majority of the outstanding Voting Shares
entitled to vote on any matter to be voted on at such meeting represented in
person or by proxy shall constitute a quorum at any such meeting. The holders of
Voting Shares present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Shareholders to leave less than a quorum. In the absence of
a quorum, any meeting of Shareholders may be adjourned from time to time, up to
and including the 45th day following the originally noticed meeting date by an
affirmative vote of a majority of the Voting Shares entitled to vote and
represented in person or by proxy at the meeting.
Section 7.8 Notice. Notice of all meetings of Shareholders shall be
given at the direction of the Board by the officer or officers authorized by the
Board, and shall be mailed not less than 14 days nor more than 60 days before
the day of the meeting to each Shareholder at his or her address as given in the
register, or lacking such address, to such Shareholder addressed to the
principal office of the Company. Any adjourned meeting may be held as adjourned,
without further notice.
Section 7.9 Business Transacted. No business shall be transacted at
any special meeting of Shareholders unless notice of such business have been
given in the call for the meeting.
Section 7.10 Action at a Meeting. Whenever any action is to be taken
by the Shareholders, it shall, except as otherwise required by this Declaration,
provisions of the Certificate of Designation relating to any class or series of
Voting Preferred Shares which may at the time be outstanding, or by law, be
authorized by the affirmative vote of a majority of the votes cast at a meeting
of Shareholders at which a quorum is present by holders of Voting Shares
entitled to vote thereon.
Section 7.11 Action Without a Meeting. 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 Voting Shares
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all Shares entitled to vote
thereon were present and voted. Prompt notice (but in any event within 90 days)
of the taking of the action without a meeting by less than unanimous written
consent shall be given to those Shareholders who have not consented in writing.
Section 7.12 Effect of Action. Except as otherwise expressly provided
by law, this Declaration of Trust or the provisions of the Certificate of
Designation relating to any class or series of Voting Preferred Shares which may
at the time be outstanding, no action taken by the Shareholders at any meeting
shall in any way bind the Board in its management of the Company.
C-11
604509.3
<PAGE>
ARTICLE VIII
TRUSTEES; MEETINGS OF TRUSTEES
Section 8.1 Authority of Trustees. Except as otherwise expressly
provided in this Declaration of Trust or a Certificate of Designation, the
business, affairs and assets of the Company shall be entrusted to the exclusive
management and control of the Trustees. The Trustees shall exercise their powers
hereunder for the exclusive benefit of the Shareholders.
Section 8.2 Powers of Trustees. The Trustees shall have full and
absolute power, control and authority over all of the Company's assets held by
or for them hereunder, and over the business and affairs of the Company, to the
same extent as if they were the sole owners of such assets and such business in
their own right, subject only to the limitations expressly stated in this
Declaration of Trust or a Certificate of Designation. Without limitation of the
generality of the foregoing, the Trustees shall have power:
(a) To design and adopt a seal of the Company, and to change
the same from time to time; to locate and relocate the principal office
of the Company; and from time to time to change the name of the
Company, and under such name to make and execute contracts and all
kinds of instruments, conduct business, acquire and convey real or
personal property, and sue or be sued;
(b) To solicit proxies of the Shareholders; to declare and
effect Share dividends and splits; and when good reason appears
therefor, to require that outstanding certificates be handed in to the
Company in exchange for new certificates;
(c) To issue from time to time, without the necessity of a
prior offering thereof to existing Shareholders (subject to the
provisions of the Certificate of Designation relating to any class or
series of Preferred Shares that may then be outstanding), Shares of the
Company in addition to any then outstanding, issuing the same to such
party or parties, for such property or consideration, at such time or
times, and on such terms as the Board deems best, and in so doing, to
allow or eliminate fractional Shares, in their discretion;
(d) To acquire and dispose of assets, and otherwise conduct
the business of the Company; and to cause to be organized or assist in
organizing, under the laws of any jurisdiction, such corporations,
partnerships, limited liability companies, trusts, associations or
other organizations having such rights, powers and discretion as they
deem desirable for purposes of the Company;
(e) To take out policies of insurance at the expense of the
Company, including without limitation liability, life, fire and
casualty insurance, including Workman's Compensation, covering such
Persons, property and contingencies and in such amounts as they deem
proper;
(f) To lease to or from others for a term extending beyond the
possible termination of the Company; to acquire and deal absolutely
with property of any description, real or personal; and to lend and
borrow money and incur indebtedness for the purposes of the Company,
and cause to be executed and delivered therefor promissory notes,
bonds, debentures, deeds of trust, mortgages, pledges, hypothecations
or other evidences of debt and securities therefor;
(g) To exercise all rights, powers and privileges relating to
the ownership of any stock, bonds or other securities forming part of
the Company's assets;
(h) To employ such assistance, at such compensation, as they
deem expedient in the transaction of the
business of the Company;
C-12
604509.3
<PAGE>
(i) To determine in their discretion whether any moneys,
securities or other properties of the Trust are to be considered as
principal or income, and in what manner any expenses or disbursements
are to be charged as between principal and income, or as between
earnings, surplus and capital, as the case may be;
(i) To determine the Fiscal Year and the accounting
procedures of the Company, and to change the same from time to time;
(j) To invest the assets of the Company, and to distribute or
retain the income of the Company in a manner that will terminate the
status of the Company as a real estate investment trust under the Code
or to file an election with the Internal Revenue Service that
terminates such status;
(k) To compromise or settle claims of or against the Company;
and to take such action, legal or otherwise, as appears to them
necessary or desirable in the interests of the Company or the
Shareholders, and in so doing to pay the expenses thereby incurred in
good faith, including counsel fees, from the funds of the Company;
(l) To determine the proper interpretation of any provision
of this Declaration of Trust, the By-Laws and any Certificate of
Designation;
(m) To adopt, implement and from time to time amend or restate
By-Laws of the Company relating to the business and organization of the
Company that are not inconsistent with the provisions of this
Declaration; and
(n) To do all acts and undertake all things which in their
judgment are necessary, convenient or appropriate to promote the
purposes of the Company, although such acts or things are not
specifically mentioned in this Declaration.
Section 8.3 Number, Term and Qualifications. (a) In managing the
business, affairs and assets of the Company, the Trustees shall act as a Board.
The full Board shall consist of no less than three Trustees and no more than 21
Trustees, the number to be established by resolution of the Board from time to
time. Ownership of all trust assets, legal, equitable or both, shall be vested
jointly in those Trustees in office at any time. A successor Trustee shall
succeed immediately upon accepting office to the interest of his or her
predecessor without the necessity of any transfer or conveyance.
(b) Each Trustee shall hold office until the expiration of his or her
term and until the election and qualification of his or her successor. The term
of the Trustees shall expire at each annual meeting of the Shareholders
following the election of Trustees at such annual meeting. Trustees may be
reelected.
(c) Subject to the terms of Section 8.6 and the provisions of the
Certificate of Designation relating to any class or series of Preferred Shares
which may at the time be outstanding, Trustees shall be elected by a plurality
of the Voting Shares represented in person or by proxy at the annual meeting of
Shareholders. At all elections of Trustees, voting by Shareholders shall be
conducted under the non-cumulative method. Each Trustee so elected shall serve
until his or her term of office expires and until the election and qualification
of his or her successor. Each Trustee shall qualify following his or her
election, whether by the Shareholders or by the remaining Trustees, by filing a
notice of acceptance with the Board. The officers so designated by the Board
shall, from time to time when deemed necessary by the Board, execute and File
for Record an instrument which sets forth the then existing membership to the
Board.
Section 8.4 Resignations. Any Trustee may resign his or her office by
an instrument in writing signed by him and delivered to the Board, which
resignation shall take effect after such delivery and on the date indicated in
such instrument.
C-13
604509.3
<PAGE>
Section 8.5 Removal of Trustees. Subject to the provisions of the
Certificate of Designation relating to any class or series of Preferred Shares
which may at the time be outstanding, a Trustee may be removed from office at
any time either:
(a) with or without cause by the vote or written consent of either (i)
a majority of the Trustees then in office and a majority of the outstanding
Voting Shares of the Company entitled to vote or (ii) sixty-six and two-thirds
percent (66-2/3%) of the outstanding Voting Shares of the Company entitled to
vote, or
(b) with cause by the vote or written consent of a majority of the
Trustees then in office.
Section 8.6 Newly Created Trusteeships and Vacancies. In the case of
the death or resignation of one or more Trustees, or vacancies occurring in the
Board for any reason, including newly created trusteeships resulting from an
increase in the number of Trustees, the vacancies so created may be filled by
the Trustee (if only one Trustee is then remaining) or a majority of the
Trustees remaining in office at the time, although less than a quorum exists,
and each new Trustee shall serve for the unexpired term of his or her
predecessor and until the election and qualification of his or her successor. No
vacancy in the Board shall operate to diminish the powers of the Trustee or
Trustees remaining in office. Upon the resignation or removal of any Trustee, or
his or her otherwise ceasing to be a Trustee, his or her interest as a Trustee
in all the Company's properties shall automatically cease and, without need for
any conveyancing document, shall vest in the remaining Trustees, but he or she
shall execute and deliver such documents as the remaining Trustees shall require
to confirm the conveyance of any of the Company's property held in his or her
name, and shall account to the remaining Trustees as they require for all
property which he or she holds as Trustee and shall thereupon be discharged as
Trustee.
Section 8.7 Compensation. The Trustees, the officers and every other
Person appointed, employed or otherwise engaged to assist in the execution of
the Company's business, shall receive such compensation from the assets of the
Company for their respective services to the Company as shall be fixed from time
to time by the Board.
Section 8.8 Committees. The Trustees may appoint one or more
committees from their number and delegate to such committees any of the powers
and authority of the Board in the management of the business, affairs and assets
of the Company, except the power to declare dividends and initiate amendments to
this Declaration.
Section 8.9 By-Laws. The Board may adopt and from time to time amend or
repeal by-laws for the conduct of its business and the business of the Company,
including, without limitation, the form of share certificates, mechanics of
share transfers, limitations upon the transferability of shares, and provisions
with respect to the exculpation and indemnification of Trustees, officers and
other parties by the Company. Such by-laws may also define the duties of the
Company's officers, agents, employees and representatives.
ARTICLE IX
OFFICERS
The Board may appoint such officers and agents as it may deem
advisable, who shall hold their offices for such terms and shall exercise such
power and perform such duties as shall be determined from time to time by the
Board. Officers of the Company shall be elected by the Board and shall hold
office until their successors are elected and qualify or until their earlier
resignation or removal. The officers shall be elected at the first meeting of
the Board after each annual meeting of the Shareholders. More than one office
may be held by the same person. The Board may delegate to any Trustee(s),
officer(s), employee(s) or agent(s) the authority to act on behalf of the
Company, including without limitation the authority to execute any contract,
agreement, document, conveyance, deed, deed of trust, mortgage, release or other
written instruments.
C-14
604509.3
<PAGE>
ARTICLE X
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Subject to other requirements and restrictions of this Declaration of
Trust 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.
ARTICLE XI
ACCOUNTING
Section 11.1 Standard. Unless otherwise determined by the Board, the
books and records of the Company shall be kept in conformity with GAAP.
Section 11.2 Inspection of Records. The records of the Company shall
be open for inspection by the Corporations Commissioner, who shall have the
right to make copies thereof or extracts therefrom. The Share register or a
duplicate thereof, the books of account, and minutes of proceedings of the
Shareholders and the Board and of executive committees of the Board, shall be
open to inspection at any reasonable time upon the written demand of any
Shareholder, made upon the Board, for a purpose reasonably related to his or her
interests as a Shareholder, and shall be exhibited at any time when required by
the demand at any Shareholders' meeting of ten percent of the Shares represented
at the meeting. Inspection by a Shareholder may be made in person or by agent or
attorney, and the right of such inspection includes the right to make extracts.
Each Trustee shall have the right at all reasonable times during his or her term
of office to inspect the records and property of the Company.
Section 11.3 Annual Audit. The Board shall cause to be prepared at
least annually, at the expense of the Company, a report of the Company's
operations, containing a balance sheet and a statement of income and an opinion
of an independent certified public accountant on the financial statements. Such
opinion shall be based on an examination of the books and records of the Company
which is not materially limited in scope and, unless otherwise determined by the
Board, is made in accordance with GAAP.
Section 11.4 Interim Reports. Interim reports, containing a current
balance sheet which may be unaudited, shall be prepared at least quarterly and
shall be furnished within a reasonable time after the close of the quarter to
each Shareholder.
ARTICLE XII
DURATION OF THE COMPANY
Section 12.1 Duration. The Company shall continue for the lives of the
following named children and grandchildren of the initial trustees, living on
the day of execution of the Original Declaration of Trust, to-wit: Phillip Allen
Bateman, Deborah Brown, Donald Gilson, Jr., Judy C. Inman, Gregory B. Jones,
James W. Jones, Steven E. Jones, Valerie Jones, Cherryl McClatchy, Julia
McClatchy, Leo A. McClatchy, Patricia O'Neil, Sean M. O'Neil, C. Frank Pratt,
Jr., C. Frank Pratt III, Paul D. Pratt, George Robert Thompson, Laraine M.
Thompson, Lynette F. Thompson, and for 20 years after the death of the last
survivor of them, and shall thereupon cease.
C-15
604509.3
<PAGE>
Section 12.2 Early Termination. This trust shall be irrevocable.
Subject to the provisions of the Certificate of Designation relating to any
class or series of Preferred Shares which may at the time be outstanding, the
business of 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 Voting Shares of the Company or (ii) sixty-six
and two-thirds percent (66-2/3%) of the outstanding Voting Shares of the
Company.
Section 12.3 Procedure Upon Termination. Upon termination of the
Company, the Board shall cause such liquidation of the Company's assets as they
deem desirable, shall pay or make adequate provision for all liabilities of the
Company, whether present or contingent, shall pay to the holders of Preferred
Shares at the time outstanding such preferential amounts, if any, as such
holders shall be entitled, and shall distribute the remaining assets of the
Company, either in kind or in money or both, ratably to the holders of the
Common Shares at the time outstanding, subject to any participating or similar
rights of the Preferred Shares at the time outstanding.
ARTICLE XIII
AMENDMENTS
Section 13.1 Amendment Procedure. Any amendment to this Declaration of
Trust shall be in writing and, subject to the terms of Section 13.2 and the
provisions of the Certificate of Designation relating to any class or series of
Preferred Shares which may at the time be outstanding, shall require and shall
be effective upon the affirmative vote or written consent of either (i) a
majority of the Trustees then in office and a majority of the outstanding Voting
Shares of the Company, or (ii) sixty-six and two-thirds percent (66-2/3%) of the
outstanding Voting Shares of the Company.
Section 13.2 Amendments without Shareholder Approval. Notwithstanding
Section 13.1, a majority of the Trustees then in office may amend this
Declaration of Trust without the vote or consent of Shareholders to the extent
they deem it necessary to conform this Declaration of Trust to any other
applicable laws, rulings or regulations; provided, that the Trustees shall in no
event be liable for failing to so amend this Declaration of Trust. The Board
shall cause notice of any such amendment to be mailed to Shareholders within 90
days following such amendment.
Section 13.3 Recording Amendments. Following the adoption of any
amendment hereto, if deemed advisable by the Board, the officers of the Company
designated by the Board shall execute an instrument which sets forth such
amendment and File for Record such instrument.
ARTICLE XIV
EXCULPATION AND INDEMNIFICATION; LIMITATION OF LIABILITY;
RIGHT OF TRUSTEES AND OFFICERS TO OWN SHARES;
REPRESENTATIONS AND GUARANTEES
Section 14.1 Exculpation and Indemnification of Trustees, Officers and
Others. The Company may, to the full extent permitted by law, cause the Company
to limit the liability of and indemnify any and all Trustees, officers,
employees or agents from and against any and all expenses, liabilities or other
matters both as to action in his or her official capacity on behalf of the
Company and as to action in another capacity while holding such office, and
shall continue as to a Person who has ceased to be a Trustee, officer, employee
or agent and shall inure to the benefit of the heirs, executors, and
administrators of such Person, as provided in any By-Law adopted by a majority
of the Board.
Section 14.2 Limitation on Liability of Shareholders, Trustees and
Officers; Insurance. (a) All Persons dealing with or having any claim against
the Trustees or any officer, agent or employee of the Company shall look only to
the Company for the payment of any debt, claim, obligation or damage, or of any
money or other thing that might become due or payable in any way, whether
founded upon contract, tort or otherwise, and no Shareholder shall be personally
or individually liable therefor. Each Shareholder shall be entitled to pro rata
indemnity from the Company's
C-16
604509.3
<PAGE>
assets if, contrary to the provisions hereof, such Shareholder is held to any
personal liability for any debt, claim, obligation or damage, or of any money or
other thing that might become due or payable in any way, whether founded upon
contract, tort or otherwise, of the Company.
(b) The Board shall maintain liability insurance for the protection of
the Company and those connected therewith, and cause any premiums therefor to be
paid from Company assets.
Section 14.3 Right of Trustees and Officers to Own Shares. Any
Trustee, officer, agent or employee may acquire, own, hold and dispose of Shares
in the Company, for his or her individual account, and may exercise all rights
of a Shareholder to the same extent and in the same manner as if he or she were
not a Trustee, officer, agent or employee.
Section 14.4 Representations and Guarantees. No officer, agent,
representative or employee of the Company or of any Trustee, nor anyone other
than the Board, has authority to make any representations or guarantees
concerning the Company; nor shall any Trustee or officer of the Company be
responsible for or with respect to the validity or sufficiency of this trust or
of the Share certificates issued hereunder; nor has any such officer, agent,
representative, employee or other Person any authority to change the terms and
conditions of this Declaration of Trust or any certificate issued hereunder, or
to bind the Company or its agents by any representation, statement, agreement or
interpretation, written or oral, not contained herein or in such certificate.
ARTICLE XV
MISCELLANEOUS
Section 15.1 Fiscal Year. The fiscal year of the Company for financial
statement and Federal income tax purposes shall be the same and shall end on
December 31st, except as may be otherwise required by the Internal Revenue Code
or otherwise approved by resolution of the Board.
Section 15.2 Checks. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Company shall be signed by such officer(s) or agent(s) of the Company, and
in such manner, as shall be determined from time to time by resolution of the
Board.
Section 15.3 Successors in Interest. This Declaration of Trust shall
be binding upon and inure to the benefit of the undersigned Trustees and their
successors, assigns, heirs, distributees and legal representatives, and every
Shareholder and his or her successors, assigns, heirs, distributees and legal
representatives.
Section 15.4 Severability. If any provision of this Declaration of
Trust shall be held invalid or unenforceable in any jurisdiction, such
invalidity or unenforceability shall attach only to such jurisdiction and shall
not in any manner affect or render invalid or unenforceable such provision in
any other jurisdiction or any other provision of this Declaration of Trust in
any jurisdiction.
Section 15.5 California Laws Govern. This Declaration of Trust, its
provisions and all rights, powers, privileges, trusts, duties and obligations
hereunder and under all Share certificates, shall be governed by the laws of the
State of California and of the United States of America.
Section 15.6 Headings. The use of headings in this Declaration of
Trust is solely for convenience, and all such headings shall be disregarded in
the construction of its provisions.
Section 15.7 No Third-Party Reliance. Any act done by the Board or
under its authority shall, as to third parties dealing in good faith with the
Company, be conclusively deemed to be within the purposes of the Company and
within the powers and authority of the Person or Persons acting.
C-17
604509.3
<PAGE>
Section 15.8 Counterparts. This Declaration may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 15.9 Notice. No notice to the Board or any officer of the
Company shall be effective for any purpose unless given in writing, and until
the same is received. Any notice required or permitted by this Declaration or by
law to be given by the Board or by an officer or authorized agent of the
Company, shall be conclusively deemed to have been given when such notice is
enclosed in an envelope addressed to the proper Person at the last address shown
in the records of the Company, and such envelope is deposited in the United
States mail, postage prepaid; and the date of mailing shall be deemed the date
such notice is given. All distributions from the Company's assets may be made by
mailing the same in like manner.
Section 15.10 Agreement of Shareholders. Each of the Shareholders,
severally but not jointly, by becoming a Shareholder hereunder, hereby agrees
with the Trustees and their successors in office that he or she accepts and
agrees to, and shall be bound and governed by, the provisions, terms and
conditions of this Declaration, as amended from time to time in accordance with
Section 13.1 and Section 13.2 hereof, in the same manner as if he or she had
personally executed the same.
IN WITNESS WHEREOF, the undersigned individuals, comprising the
current Board of the Company, have hereunto set their hands on the date first
above written.
-------------------------------------
Martin L. Edelman
-------------------------------------
Gary R. Garrabrant
-------------------------------------
Craig M. Hatkoff
-------------------------------------
John R. Klopp
-------------------------------------
Sheli Z. Rosenberg
-------------------------------------
Lynne B. Sagalyn
-------------------------------------
Samuel Zell
C-18
604509.3
<PAGE>
ANNEX D
CALIFORNIA REAL ESTATE INVESTMENT TRUST
1997 LONG-TERM INCENTIVE SHARE PLAN
604509.3
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
1997 LONG-TERM INCENTIVE SHARE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION
1.1 Establishment of the Plan. On June __, 1997, the Board of Trustees
of 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" (hereinafter referred to as the "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 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 commences on the date on which
shareholders first approve the Plan, 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 the tenth anniversary of the effective
date of the Plan.
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) "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.
(b) "Award Agreement" means the agreement required under Article 3
evidencing an Award under this Plan.
(c) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under
the Exchange Act.
(d) "Board" or "Board of Trustees" means the Board of Trustees of
the Company.
(e) "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
D-1
604509.3
<PAGE>
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.
(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:
(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.
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).
(g) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(h) "Committee" means the committee appointed by the Board to
administer the Plan pursuant to Article 3 herein.
D-2
604509.3
<PAGE>
(i) "Common Shares" means the class A common shares, per value
$1.00 per share, of beneficial interest in the Company.
(j) "Company" means California Real Estate Investment Trust, a
California trust, or any successor thereto.
(k) "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.
(l) "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.
(m) "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.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(o) "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.
(p) "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.
(q) "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.
(r) "Option" or "Options" means an Incentive Share Option or a
Nonqualified Share Option.
(s) "Option Agreement" means an Award Agreement evidencing an
Option Award granted under Article 6 herein.
(t) "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.
(u) "Participant" means an Eligible Individual who has been
granted an Award under the Plan.
(v) "Performance Share" means an Award, designated as a
performance share, granted to a Participant pursuant to
Article 9 herein.
(w) "Performance Unit" means an Award, designated as a performance
unit, granted to a Participant pursuant to Article 9 herein.
D-3
604509.3
<PAGE>
(x) "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.
(y) "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.
(z) "Plan" means this Long-Term Incentive Share Plan of the
Company, as herein described and as hereafter from time to
time amended.
(aa) "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.
(bb) "Restricted Shares" means an Award granted to a Participant
pursuant to Article 8 herein.
(cc) "Restricted Share Agreement" means an Award Agreement
evidencing a Restricted Share Award granted under Article 8
herein.
(dd) "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.
(ee) "Share" or "Shares" means the Common Shares.
(ff) "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.
(gg) "Share Appreciation Right" or "SAR" means an Award, designated
as a Share Appreciation Right, granted to a Participant
pursuant to Article 7 herein.
(hh) "Trustee" means a member of the Board.
(ii) "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.
D-4
604509.3
<PAGE>
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 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, to take any of the foregoing actions or to take any other
action to the extent that such action or the Committee's ability to take such
action would cause any Award under the Plan to any Covered Employee to fail to
qualify as "performance-based compensation" within the meaning of Code Section
162(m)(4) and the regulations issued thereunder. 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 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
Certificate of Incorporation and California law for their services as Trustees
of the Company.
3.7 Award Agreements. Each Award under the Plan shall be evidenced 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.
D-5
604509.3
<PAGE>
3.8 Rule 16b-3 Requirements. Notwithstanding any other provision of the
Plan, the Board or the Committee may impose such conditions on any Award
(including, without limitation, the right of the Board or the Committee to limit
the time of exercise to specified periods) as may be required to satisfy the
requirements of Rule 16b-3 (or any successor rule) under the Exchange Act ("Rule
16b-3").
ARTICLE 4. STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. The maximum number of Shares that may be made the
subject of Awards granted under the Plan is two million (2,000,000) reduced by
the number of Shares made the subject of Awards under the Company's 1997
Non-Employee Trustee Share Plan; provided, however, that the maximum number of
Shares that may be the subject of Awards granted to any Eligible Individual
during the term of the Plan may not exceed 500,000 Shares and 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 shall be
$1,000,000. 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.
ARTICLE 6. STOCK OPTIONS
D-6
604509.3
<PAGE>
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.
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,
D-7
604509.3
<PAGE>
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 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 lieu of Options;
(b) In addition to Options;
(c) Independent of Options; or
(d) In any combination of (a), (b), or (c).
D-8
604509.3
<PAGE>
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 Lieu of Options. SARs granted in lieu of
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. Option 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 lieu of 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.
D-9
604509.3
<PAGE>
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 8.3 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 Long-Term
Incentive Share Plan of California Real Estate Investment 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 California Real Estate Investment Trust."
8.6 Removal of Restrictions. Except as otherwise provided in this
Article and subject to applicable securities laws and restrictions imposed
pursuant thereto, Restricted Shares shall become transferable by the Participant
after the last day of the Period of Restriction. Once the Shares are released
from the restrictions, the Participant shall be entitled to have the legend
required by Section 8.5 removed from his Share certificate.
8.7 Voting Rights. During the Period of Restriction, Participants
holding Restricted Shares granted hereunder may exercise full voting rights with
respect to those Shares.
8.8 Dividends and Other Distributions. During the Period of
Restriction, Participants holding Restricted Shares granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares while they are so held. If any such dividends or distributions are
paid in Shares, the Shares shall be subject to the same restrictions on
transferability as the Restricted Shares with respect to which they were paid.
8.9 Termination of Employment or Service. In the event that a
Participant terminates his employment or service with the Company or any of its
Subsidiaries for any reason or is terminated for Cause during the Period of
Restriction, then any Restricted Shares still subject to restrictions as of the
date of such termination shall
D-10
604509.3
<PAGE>
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,
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 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
D-11
604509.3
<PAGE>
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, further adjusted based on the achievement
of the Performance Goals during the entire Performance Period, as computed by
the Board or the Committee. Payment shall be made at the time payments are made
to Participants who did not terminate service during the Performance Period. In
the case of Share Units, all such Share Units held, to the extent vested at the
date of such Participant's termination of employment or service, will be paid as
set forth in the Participant's Election Form.
9.9 Termination of Employment or Service for Other Reasons. In the
event that a Participant terminates employment or service with the Company or
any of its Subsidiaries for any reason other than death, disability, or
retirement, all Performance Units and Performance Shares shall be forfeited;
provided, however, that in the event of an involuntary termination of the
employment or service of the Participant by the Company or any of its
Subsidiaries other than for Cause, the Board or the Committee in its sole
discretion may waive the automatic forfeiture provisions and pay out on a pro
rata basis. In the case of termination other than for Cause, all Share Units
held, to the extent vested at the date of such Participant's termination of
employment or service, will be paid as set forth in the Participant's Election
Form. However, in the event of termination for Cause, all Share Units held will
be forfeited.
9.10 Nontransferability. No Performance Units, Performance Shares or
Share Units granted under the Plan may be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated, otherwise than by will or by the laws of
descent and distribution until the termination of the applicable Performance
Period or, in the case of Share Units, vesting and payment. All rights with
respect to Performance Units, Performance Shares and Share Units granted to a
Participant under the Plan shall be exercisable during his lifetime only by such
Participant.
D-12
604509.3
<PAGE>
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.
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
D-13
604509.3
<PAGE>
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.
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.
D-14
604509.3
<PAGE>
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.
D-15
604509.3
<PAGE>
ANNEX E
CALIFORNIA REAL ESTATE INVESTMENT TRUST
1997 NON-EMPLOYEE TRUSTEE SHARE PLAN
604509.3
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
1997 NON-EMPLOYEE TRUSTEE SHARE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION
1.1 Establishment of the Plan. On June __, 1997, the Board of Trustees
of California Real Estate Investment Trust, a California trust (the "Company")
adopted, subject to the approval of shareholders, an incentive share plan for
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 Share,
Performance Units, Performance Shares and Share Units.
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 commences on the date on which
shareholders first approve the Plan, 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 the tenth anniversary of the effective
date of the Plan.
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) "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.
(b) "Award Agreement" means the agreement required under
Article 3 evidencing an Award under this Plan.
(c) "Beneficial Owner" shall have the meaning ascribed to
such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
(d) "Board" or "Board of Trustees" means the Board of Trustees
of the Company.
(e) "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 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;
E-1
604509.3
<PAGE>
(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).
(f) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(g) "Common Shares" means the class A common shares, par
value $1.00 per share, of beneficial interest in the
Company.
(h) "Company" means California Real Estate Investment
Trust, a California trust, or any successor thereto.
(i) "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.
(j) "Exchange Act" means the Securities Exchange Actof
1934, as amended from time to time.
(k) "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.
(l) "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.
(m) "Option" or "Options" means a Nonqualified Share
Option.
(n) "Option Agreement" means an Award Agreement evidencing
an Option Award granted under Article 6 herein.
E-2
604509.3
<PAGE>
(o) "Participant" means a Trustee who has been granted an
Award under the Plan.
(p) "Performance Share" means an Award, designated as a
performance share, granted to a Participant pursuant to
Article 9 herein.
(q) "Performance Unit" means an Award, designated as a
performance unit, granted to a Participant pursuant to
Article 9 herein.
(r) "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.
(s) "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.
(t) "Plan" means this Non-Employee Trustee Share Plan of
the Company, as herein described and as hereafter from
time to time amended.
(u) "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.
(v) "Restricted Shares" means an Award granted to a
Participant pursuant to Article 8 herein.
(w) "Restricted Share Agreement" means an Award Agreement
evidencing a Restricted Share Award granted under
Article 8 herein.
(x) "Share" or "Shares" means the Common Shares.
(y) "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.
(z) "Share Appreciation Right" or "SAR" means an Award,
designated as a share appreciation right, granted to a
Participant pursuant to Article 7 herein.
(aa) "Trustee" means a member of the Board.
(bb) "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
E-3
604509.3
<PAGE>
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 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. 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 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
Co-chairman) on behalf of the Board and by the Participant, and shall contain
such terms and conditions as may be approved by the Board. Such terms and
conditions need not be the same in all cases.
3.7 Rule 16b-3 Requirements. Notwithstanding any other provision of the
Plan, the Board may impose such conditions on any Award (including, without
limitation, the right of the Board to limit the time of exercise to specified
periods) as may be required to satisfy the requirements of Rule 16b-3 (or any
successor rule), under the Exchange Act ("Rule 16b-3").
ARTICLE 4. STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. The maximum number of Shares that may be made the
subject of Awards granted under the Plan is two million (2,000,000) reduced by
the number of Shares made the
E-4
604509.3
<PAGE>
subject of Awards under the Company's 1997 Long-term Incentive Share Plan. 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, officers or 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 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.
E-5
604509.3
<PAGE>
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 only to the extent that the Participant was entitled to
exercise the Options on the date of his termination of service.
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
E-6
604509.3
<PAGE>
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 lieu of 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 Lieu of Options. SARs granted in lieu of
Options may be exercised for all or part of the Shares subject to the related
Option upon the surrender of the related Options representing the right to
purchase an equivalent number of Shares. The SAR may be exercised only with
respect to the Shares for which its related Option is then exercisable. Option
Shares with respect to which the SAR shall have been exercised may not be
subject again to an Award under the Plan.
7.3 Exercise of SARs in Addition to Options. SARs granted in addition
to Options shall be deemed to be exercised upon the exercise of the related
Options. The deemed exercise of SARs granted in addition to Options shall not
necessitate a reduction in the number of related Options.
7.4 Exercise of SARs Independent of Options. Subject to Section 3.7
herein and Section 7.5 herein, SARs granted independently of Options may be
exercised upon whatever terms and conditions the
E-7
604509.3
<PAGE>
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 lieu of or in
addition to an Option shall terminate in the same manner as its related Option
as specified under Sections 6.8 and 6.9 herein. The exercisability of any
outstanding SARs granted independent of Options also shall terminate in the
manner provided under Sections 6.8 and 6.9 hereof.
7.9 Nontransferability of SARs. No SAR granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
otherwise than by will or by the laws of descent and distribution. Further, all
SARs granted to a Participant under the Plan shall be exercisable during his
lifetime only by such Participant.
ARTICLE 8. RESTRICTED SHARES
8.1 Grant of Restricted Shares. Subject to the terms and provisions of
the Plan, the Board, 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 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.
E-8
604509.3
<PAGE>
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
Non-Employee Trustees Share Plan of California Real Estate Investment
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 California Real Estate
Investment Trust."
8.6 Removal of Restrictions. Except as otherwise provided in this
Article and subject to applicable securities laws and restrictions imposed
pursuant thereto, Restricted Shares shall become transferable by the Participant
after the last day of the Period of Restriction. Once the Shares are released
from the restrictions, the Participant shall be entitled to have the legend
required by Section 8.5 removed from his Share certificate.
8.7 Voting Rights. During the Period of Restriction, Participants
holding Restricted Shares granted hereunder may exercise full voting rights with
respect to those Shares.
8.8 Dividends and Other Distributions. During the Period of
Restriction, Participants holding Restricted Shares granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares while they are so held. If any such dividends or distributions are
paid in Shares, the Shares shall be subject to the same restrictions on
transferability as the Restricted Shares with respect to which they were paid.
8.9 Termination of 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
E-9
604509.3
<PAGE>
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, 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.
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 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.
E-10
604509.3
<PAGE>
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, further adjusted based on the achievement of the Performance Goals
during the entire Performance Period, 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, all Performance Units and Performance Shares
shall be forfeited. 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.
E-11
604509.3
<PAGE>
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 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
E-12
604509.3
<PAGE>
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.
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.
E-13
604509.3
<PAGE>
ANNEX F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K*
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
[Fee Required]
For the fiscal year ended December 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
For the Transition period from ---------------------------
Commission File Number 1-8063
California Real Estate Investment 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.)
131 Steuart Street, Suite 200, San Francisco, California 94105
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (415) 905-0288
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Shares of Beneficial Interest New York Stock Exchange
$1.00 par value ("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, and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No __
Sequential Page: 01 of
Exhibit Index: Page
- --------
* This Annual Report on Form 10-K was amended by means of the Annual Report
on Form 10-K/A which follows as the next document within this annex.
605218.1
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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.
[ ]
MARKET VALUE
Based on the closing sales price of $5.125 per share, the aggregate market value
of the outstanding Common Shares of Beneficial Interest held by non-affiliates
of the Registrant as of March 7, 1997 was $11,160,927.
OUTSTANDING SHARES
As of March 7, 1997 there were 9,137,335 outstanding Common Shares of Beneficial
Interest ("Common Shares"). The Common Shares are listed on the New York and
Pacific Stock Exchanges (trading symbol "CT"). Trading is reported in many
newspapers as "Cal REPRESENTATIVE" (CUSIP No. 130559107).
605218.1
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART I PAGE
- -------------------------------------------------------------------------------
Item 1. Business 1-3
Item 2. Properties 4
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Securities Holders 5
- -------------------------------------------------------------------------------
PART II
- -------------------------------------------------------------------------------
Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-13
Item 8. Financial Statements and Supplementary Data 14-32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 33
- -------------------------------------------------------------------------------
PART III
- -------------------------------------------------------------------------------
Item 10. Trustees and Executive Officers of the Registrant 34-36
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 39
- -------------------------------------------------------------------------------
PART IV
- -------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 40-45
- -------------------------------------------------------------------------------
(i)
605218.1
<PAGE>
PART I
- -------------------------------------------------------------------------------
Item 1. Business
- -------------------------------------------------------------------------------
Overview
California Real Estate Investment Trust (the "Trust" or "CalREIT") is a
self-administered real estate investment trust ("REIT") formed in 1966 in
California as a real estate trust.
In 1995, the Trust analyzed pursuing various opportunities to grow and improve
the profitability of its real property and mortgage portfolio, including various
acquisition and lending opportunities. To facilitate the growth strategy, the
Board of Trustees undertook to redeploy its current asset portfolio into better
performing assets. During 1996, the Trust continued its activities in pursuing
growth opportunities and explored various alternatives to maximize shareholder
value through proposed expansion transactions.
Recent Developments
On January 3, 1997, CalReit Investors Limited Partnership ("CRIL"), an affiliate
of Equity Group Investments, Inc. ("EGI") and Samuel Zell, purchased from the
Trust's former parent, The Peregrine Real Estate Trust ("Peregrine"), 6,959,593
common shares of beneficial interest in the Trust ("Common Shares")
(representing approximately 76% of the outstanding Common Shares) then owned by
Peregrine for an aggregate purchase price of $20,222,011.
Prior to the purchase, EGI and Victor Capital Group, L.P. ("VCG") presented to
the Board a proposed new business plan for the Trust to cease to be a REIT and
to become instead a specialty finance company designed primarily to take
advantage of opportunities in the market for high-yielding "mezzanine"
investments in commercial real estate. EGI and VCG also proposed, in connection
with the new business plan, that they provide the Trust with a new management
team to implement the business plan and that they invest through an affiliate a
minimum of $30 million in a new class of preferred shares to be issued by the
Trust.
The Board approved CRIL's purchase of Peregrine's Common Shares, the new
business plan and the issuance of the convertible preferred shares of the Trust
at $2.69 per share, the preferred shares to be convertible into common shares of
the Trust on a one-for-one basis. The Board also concluded that the transfer to
CRIL would not jeopardize the qualification of the Trust as a REIT, and exempted
CRIL's ownership from certain provisions of the Trust's declaration of trust
intended to discourage ownership of more than 10% of the outstanding shares of
the Trust.
In reaching its decision to approve the foregoing, the Board of Trustees
considered a number of factors 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 Trust would obtain from the proposed preferred share issuance. The Board
also considered the terms of previous alternative offers to purchase Peregrine's
interest in the Trust of which the Board was aware and the fact that the average
price of the Trust's Common Shares during the 60 trading days preceding the
Board of Trustees' meeting at which the proposed equity investment was approved
was $2.38 per share.
In connection with CRIL's purchase of the 6,959,593 Common Shares from
Peregrine, the Board of Trustees increased the size of the Board from five to
seven trustees, appointed three new trustees and accepted the resignation of one
then incumbent trustee associated with Peregrine.
605218.1
1
<PAGE>
The Trust has filed a preliminary proxy statement with the Securities and
Exchange Commission with respect to the annual meeting of its shareholders which
is expected to be held in June. At the annual meeting, the Trust's shareholders
will be asked to vote on proposals to (i) approve the issuance by the Trust of
$32 to $34 million of cumulative convertible preferred shares ("Preferred
Shares") to an affiliate of Samuel Zell and the principals of VCG (the
"Investment"), (ii) approve an amended and restated declaration of trust of the
Trust, (iii) elect seven trustees to serve on the Trust's board of trustees,
(iv) ratify the appointment of Ernst & Young LLP as auditors of the Trust for
the fiscal year 1997 and (v) approve a share option plan. The preliminary proxy
statement also outlines the terms of the Investment and the Preferred Shares and
the Trust's proposed new business plan and management team.
In connection with the commencement of the new business plan (the "New Business
Plan"), concurrently with the consummation of the Investment, the Trust will
acquire the business of VCG, including VCG's existing management team (the
"Acquisition"). The Trust believes that, by acquiring direct ownership of VCG's
existing real estate investment banking, real estate advisory and real estate
asset management businesses and the services of VCG's experienced management and
professional team, the Trust will be better positioned to implement the New
Business Plan.
The issuance and sale of the Preferred Shares and related transactions are
subject to customary conditions, including completion of definitive
documentation.
CRIL, the affiliate of Samuel Zell, that owns the 76% common share interest in
the Trust has advised the Trust that it intends to vote in favor of the
proposals presented in the proxy statement. Accordingly, approval of the
proposals is assured. The record and meeting dates for the annual meeting will
be announced in the near future.
Disposition of Properties and Mortgage Notes
Two of the Trust's four commercial properties, Redfield Commerce Center in
Scottsdale, Arizona and the Bekins Storage Facility in Pasadena, California,
were sold in 1996. Despite improvements in operations and the implementation of
a lease arrangement financially favorable to the Trust, the Casa Grande Motor
Inn in Arroyo Grande, California was unable to generate sufficient revenue to
cover its debt service requirements. After a refusal by the lender to
restructure debt terms, the Trust allowed the property to be foreclosed upon in
the first quarter of 1996. In addition, four of the Trust's seven mortgage notes
were sold during 1996.
The proceeds from these sales were invested in liquid mortgage-backed securities
which satisfy REIT-asset qualification requirements and mortgage loans. As of
year end, the Trust had $14,115,000 invested in such mortgage backed securities
and $1,576,000 in mortgage loans.
As of December 31, 1996, the Trust's investment portfolio included two
commercial properties, as well as three mortgage notes secured by real property.
Its real estate portfolio, carried at a book value of $8,585,000 as of year end
1996, included Fulton Square Shopping Center in Sacramento, California and a 60%
interest in Totem Square, a mixed-use retail property in Kirkland, Washington. A
contract for the sale of these two properties was in place as of year end 1996;
the sale of Fulton Square closed on February 14, 1997 and the sale of Totem
Square closed on March 3, 1997.
The Trust's mortgage note portfolio, carried at a book value of $1,576,000 as of
December 31, 1996, consists of three loans which bear interest at an overall
effective rate of approximately 8% and are collateralized by mortgages on real
property. The investments in the three loans were made prior to 1996.
605218.1
2
<PAGE>
Management of the Trust's Investments
All strategic and investment decisions are made by the Board of Trustees. The
Trust is self-administered and has no employees; in 1996 operating and
administration services were provided by the employees of Peregrine (for which
Peregrine received a reimbursement of costs) and by independent contractors. As
of January 7, 1997, the arrangement with Peregrine was mutually terminated.
Day-to-day operations and administration of CalREIT are currently being provided
by independent contractors.
United Property Services, Inc. ("UPSI"), with an office in Sacramento, was the
property manager for the Trust's commercial properties. UPSI operated under an
agreement signed in 1994 that ran for consecutive month-to-month terms, but was
terminable by either the Trust or UPSI upon 30 days notice or upon disposition
of the properties. The Trust's agreement with UPSI terminated upon the
disposition of Totem Square. The Trust's agreement with CapStar, the hotel
management signed to lease the Casa Grande Motor Inn in 1994, terminated in
February 1996 with disposition of the hotel property.
The Trust's financial and operating performance information is further set forth
in the accompanying financial statements.
605218.1
3
<PAGE>
- -------------------------------------------------------------------------------
Item 2: Properties
- -------------------------------------------------------------------------------
The following table sets forth certain information relating to properties owned
by the Trust at December 31, 1996. All of the properties are suitable for the
purpose for which they are designed and are being used.
<TABLE>
<CAPTION>
Date of Ownership
Direct Equity Investments Acquisition Percentage Square Feet Total Cost (1) Encumbrances
<S> <C> <C> <C> <C> <C>
SHOPPING CENTERS:
Fulton Square, Sacramento, California 5/91 100% 35,493 $ 3,618,000
Totem Square, Kirkland, Washington 11/90 60% 126,623 9,520,000 $ 4,283,000
------------ ------------
Total shopping centers 13,138,000 4,283,000
------------ ------------
$ 13,138,000 $ 4,283,000
============ ============
</TABLE>
(1) Total cost before any reduction for valuation allowance related to
investments and accumulated depreciation.
605218.1
4
<PAGE>
- -------------------------------------------------------------------------------
Item 3. Legal Proceedings
- -------------------------------------------------------------------------------
The Trust filed a complaint in San Francisco Superior Court on September 27,
1996, seeking a declaratory judgment against Carrillion V, a California limited
partnership, and its general partner, with respect to an earnest money deposit
given by the Defendant under a May 1996 mortgage loan purchase agreement. The
dispute was settled out-of-court in the Trust's favor in the first quarter of
1997.
- -------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Securities Holders
- -------------------------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth quarter
of 1996.
605218.1
5
<PAGE>
- -------------------------------------------------------------------------------
PART II
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Item 5. Market for the Registrant's Common Equity and Related Security Holder
Matters
- -------------------------------------------------------------------------------
CalREIT's Common Shares are listed on the New York Stock Exchange ("NYSE") and
the Pacific Stock Exchange ("PSE"). The trading symbol for CalREIT's Common
Shares ("Common Shares") is "CT". The Trust had approximately 1,690 shareholders
of record at March 20, 1997.
The following tables set forth the high and low sales prices of CalREIT Common
Shares on the NYSE during the last two years as reported by Dow Jones & Company,
Inc. The Trust did not declare or make any distributions on the Common Shares in
1995 and 1996.
The Trust does not currently expect to declare or pay dividends on its Common
Shares in the foreseeable future. The policy of the Board of Trustees following
adoption of the amended and restated Declaration of Trust will be to reinvest
Trust earnings. 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 Trust may not declare or pay or set
apart for payment any dividends on the Common Shares. The policy of reinvesting
earnings, among other things, will cause the Trust's REIT status to terminate.
MARKET PRICE AND DISTRIBUTIONS DECLARED
Quarter Ended:
3/31/96 6/30/96 9/30/96 12/31/96
High $ 1-1/2 $ 1-7/8 $ 2-3/4 $ 2-7/8
Low $ 1-1/8 $ 1-3/8 $ 1-5/8 $ 1-7/8
Distributions - - - -
3/31/95 6/30/95 9/30/95 12/31/95
High $ 1-5/8 $ 1-7/8 $ 1-5/8 $ 1-1/2
Low $ 1-5/8 $ 1-3/4 $ 1-1/2 $ 1-3/8
Distributions - - - -
605218.1
6
<PAGE>
- -------------------------------------------------------------------------------
Item 6. Selected Financial Data
- -------------------------------------------------------------------------------
The following represents selected financial data for CalREIT for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992. The data should be read in
conjunction with other financial statements and related notes included elsewhere
herein.
<TABLE>
<CAPTION>
Year Ended December 31
(Amounts in thousands, except per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating results:
Revenue $ 3,155 $ 3,535 $ 4,898 $ 5,453 $ 5,889
Operating Income (loss) 260 437 301 (340) 823
Net loss(1) (414) (2,778) (36) (8,111) (10,279)
Per Common Share:
Net loss $ (0.05) $ (0.30) $ (0.00) $ (.89) $ (1.13)
Distributions - .10 .23 .20
Financial Position:
Total assets $ 30,036 $ 33,532 $ 36,540 $ 42,194 $ 55,477
Long-term obligations 5,169 8,335 8,740 13,360 15,682
</TABLE>
(1) Includes valuation losses of $1,743; $3,281; $119; $8,146; and $11,609
for 1996, 1995, 1994, 1993 and 1992, respectively. See Note 5 of the
Notes to Consolidated Financial Statements for a further discussion.
- -------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Overview
The Trust has heretofore elected to be taxed as REIT. As long as the Trust
qualifies as a REIT, dividends paid to shareholders will be allowed as a
deduction for purposes of determining income subject to federal corporate income
tax. As a result, as long as the Trust qualifies as a REIT, the Trust will not
be subject to federal income tax on the portion of its net income that is
distributed to shareholders. However, following consummation of the Investment
and the Acquisition, the Trust anticipates that its status as a REIT will
terminate and it will become subject to income and franchise taxes on its income
to the extent that it cannot offset such income with net operating losses or
capital loss carryforwards.
Since November 1990, the Trust has not made new investments in income-producing
real property. During this period, the Trust originated new mortgage loans in
connection with the disposition of property owned.
The Trust previously developed an expansion strategy to pursue growth
opportunities through acquisitions, joint venture arrangements and a possible
infusion of new capital. In late 1994 and 1995, after pursuing opportunities
605218.1
7
<PAGE>
to grow and improve the profitability of its real property and mortgage
portfolio (including acquiring the hotel assets of Peregrine), the Board of
Trustees determined that the Trust should redeploy its current asset portfolio
into better performing assets. The Trust pursued the foregoing, and by the end
of March 1997, the Trust had sold or disposed of all of its income-producing
properties and had invested the proceeds in liquid mortgage-backed securities
which satisfy REIT-asset qualification requirements and mortgage loans. As of
December 31, 1996, the Trust had $14,115,000 invested in such mortgage-backed
securities and $1,576,000 in mortgage loans.
Following is a discussion and analysis on the operations and financial results
of 1996 compared with the operations and financial results of 1995 and 1994. For
comparison purposes, it should be noted that the CalREIT property portfolio
underwent a significant reduction in size between 1994 and 1996. At the
beginning of 1994, CalREIT owned a total of six properties, one of which was
sold in the latter half of the year. In 1995, CalREIT owned four commercial
properties, one hotel and a portfolio of seven mortgage notes. During 1996, the
Trust disposed of two of its commercial properties, the hotel and four mortgage
notes. As of year end 1996, the Trust's real estate portfolio included two
commercial properties and three mortgage notes.
In 1994, Peregrine, the majority shareholder at the time, voted its shares to
replace CalREIT's Board of Trustees. The new Board terminated the contracts of
CalREIT's then outside advisor and property manager and appointed new
management. During 1994, management concentrated on stabilizing property
operations and bringing mortgage note payments due the Trust current. A new
property management company was selected to oversee operations at the Trust's
commercial properties and a hotel management company was engaged to lease the
hotel property.
In 1995, the Board of Trustees was expanded to include two independent Trustees.
Also in 1995, CalREIT developed and began to implement its strategy to expand
the Trust to improve shareholder value. Management began to monetize the Trust's
assets to facilitate a growth strategy through a merger or acquisition
transaction. As part of this strategy, the Trust's four remaining commercial
properties were readied for sale. Leasing, capital and tenant improvement
expenditures were approved as they related to their impact on potential sales
prices. As of the end of 1995, Redfield Commerce Center was in escrow and the
other three commercial properties were listed with real estate brokerage firms.
In the first quarter of 1996, the sale of Redfield Commerce Center closed and
the Trust allowed foreclosure on its hotel because of the property's limited
investment potential given the lender's unwillingness to restructure the debt.
In the second quarter of 1996, the Bekins Storage Facility was sold. As part of
the Trust's disposition activities, a portion of the Trust's portfolio of
mortgage notes were packaged for sale and by the end of the third quarter four
mortgage notes had been sold. The two remaining commercial properties, Fulton
Square and Totem Square, had a total net book value of $8,585,000 at December
31, 1996 with collateralized indebtedness totaling $4,283,000 (50%). The Trust's
$7,703,000 mortgage note portfolio of three notes had a net book value of
$1,576,000 as of December 31, 1996, the reduction in value due primarily to
cumulative write downs in valuation.
Simultaneous with disposition activities throughout 1996, management and a
Special Committee appointed by the Board of Trustees continued to explore growth
opportunities for the Trust. Potential transactions involving hotels,
apartments, mortgage investments, mobile home communities and a variety of other
proposals were reviewed and potential merger candidates investigated.
Liquidity and Capital Resources
The Trust's primary liquidity and capital resources include its cash, marketable
securities and cash generated from the monetization of assets. The Trust's
unrestricted cash totaled $4,698,000 on December 31, 1996, down slightly from
$4,778,000 at December 31, 1995. In 1996, the Trust's principal sources of
liquidity were from cash on hand, operating income, and from interest and
principal payments from investments in liquid mortgage-backed securities. As of
December 31, 1996, the Trust had $14,115,000 invested in such marketable
securities. No dividends were paid by CalREIT in 1996.
605218.1
8
<PAGE>
Debt service paid on the Trust's first mortgage notes totaled $496,000 in 1996.
The note on Totem Square of $4,256,000 was originally scheduled to mature on
April 1, 1996. The Trust received an extension from the lender to May 1, 1997,
under the same terms and conditions as the original agreement. Upon the sale of
its two remaining commercial properties, which occurred in February and March of
1997, the Trust has retired all first mortgage debt obligations.
The major sources of liquidity for the Trust in 1997 will be its cash on hand as
well as interest and principal payments from its investments in real estate
securities. In addition, in connection with the Investment, the Trust will
obtain between $32 and $34 million in new equity capital to be used in
implementing the New Business Plan. See "Item 1 - Recent Developments."
The primary demands on the Trust's capital resources in 1997 will be funding the
implementation of the New Business Plan. The Trust believes that the Trust has
sufficient financial resources to meet the cash requirements contemplated by the
plan.
Funds From Operations
REIT analysts generally consider Funds From Operations ("FFO") an appropriate
measure of performance in comparing the results of operations of REITs. FFO is
defined by the National Association of Real Estate Investment Trusts as net
income computed in accordance with generally accepted accounting principles
before gains and losses on sales of property and from debt restructuring plus
depreciation and amortization. Funds Available for Distribution ("FAD") is
defined as FFO less capital expenditures funded by operations and loan
amortization. The Trust believes that in order to facilitate a clear
understanding of the historical operating results of the Trust, FFO and FAD
should be examined in conjunction with net income (loss) as presented in this
report. FFO and FAD should not be considered as an alternative to net income
(loss) as an indication of the Trust's performance or to cash flow as a measure
of liquidity.
FFO (which was computed without adding back amortization of deferred financing
costs and depreciation of non-rental real estate assets) and FAD for the years
ended December 31, 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
Calculation of Funds From Operations and Funds Available for Distribution
(Dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income before gain (loss)
on foreclosure or sale of investments and
valuation losses $ 260 $ 437 $ 301
Depreciation and amortization 64 662 595
--------- ------- --------
Funds From Operations 324 1,099 896
Capital Improvements (146) (321) (106)
Loan principal payments (77) (405) (94)
--------- -------- --------
Funds Available for Distribution $ 101 $ 373 $ 696
========= ======= ========
</TABLE>
605218.1
9
<PAGE>
FFO totaled $324,000 in 1996, down 71% from the FFO of $1,099,000 in 1995. FFO
in 1995 was up 23% from $896,000 in 1994. The decrease in 1996 was primarily due
to a reduction in the number of assets contributing to the Trust's income pool.
The increase in FFO in 1995 over 1994 was a result of significant reductions in
operating expenses resulting from the sales of properties and the leasing of the
hotel to a third party. There were no cash distributions paid to shareholders in
either 1995 or 1996 as the Trust continued to build its reserves for a potential
expansion transaction; distributions paid to shareholders totaled $890,000 in
1994.
Results of Operations
As of December 31, 1996, 1995, and 1994 overall weighted occupancy levels by
class of property were as follows:
Property Type 1996 1995 1994
------------- ---- ---- ----
Shopping Center 77% 83% 77%
Hotel - 52% 42%
The weighted average occupancy is calculated by multiplying the occupancy for
each property by its square footage and dividing by the square footage in the
portfolio.
Revenues
Total revenues were $3,155,000 in 1996, down 11% from $3,535,000 in 1995, which
were down 26% from $4,787,000 in 1994. 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 Trust's note portfolio and decreased rental
revenues. In 1995, there was a $473,000 reduction in hotel revenue compared to
the prior year as a result of the terms and conditions of the lease arrangement
in place throughout 1995.
Rental revenues at the Trust's commercial properties were $2,019,000 in 1996,
down 4% from $2,093,000 in 1995. Rental revenues in 1995 were down 19% from
$2,593,000 in 1994. The decrease in rental revenues reported in 1996 was
attributable primarily to the absence of rent collected at Redfield Commerce
Center and the Bekins Storage Facility which were sold in the first half of the
year. The decrease in rental revenue in 1995 compared to that collected in 1994
was attributable to the absence of $196,000 in rent collected in the prior year
at the Imperial Canyon Shopping Center prior to its sale, as well as a decrease
of $305,000 in rents collected at Fulton Square Shopping Center and Totem
Square.
Because of the disposition of the Trust's hotel property in February 1996, and
the change in the status of the hotel from direct management to a lease
arrangement, a comparison of 1996, 1995 and 1994 revenues generated by this
property is not relevant. No revenues were generated to the Trust by the hotel
in 1996. The revenues generated in 1996 are comprised of lease revenues net of
any bad debt from CapStar, the hotel management company which leased the Casa
Grande Motor Inn. Despite improvements in operations and the implementation of a
lease arrangement financially favorable to the Trust, in 1994 the hotel was
unable to generate sufficient revenue to cover its debt service requirements.
The Trust suspended debt payments in 1995 and after a refusal by the lender to
restructure debt terms, CalREIT allowed the property to be foreclosed upon in
the first quarter of 1996.
Revenues from interest were $1,136,000 in 1996, down 19% from $1,396,000 in
1995. The decrease 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. Revenues from interest in 1995 were
down 17% from 1994
605218.1
10
<PAGE>
revenues from interest of $1,675,000. In 1994, the Trust recognized an
additional $735,000 in interest income on one of its mortgage notes. In
September 1994, this note was modified and $491,000 of accrued interest, the
recognition of which had been deferred, was paid in consideration for releasing
an asset from the pool of properties collateralizing the note. This event was
the primary cause of the decrease of interest income in 1995 from 1994.
Expenses
Total expenses were $2,895,000 in 1996, down 7% from $3,098,000 in 1995. In
1995, total expenses were down 31% from total expenses of $4,486,000 in 1994.
The reduction in expenses in 1996 was primarily the result of the downsizing of
the Trust's portfolio which reduced depreciation, interest expense and
associated property operating expenses. The reduction in expenses by $1,388,000
in 1995 over those of 1994 resulted from reduced interest expense and hotel and
commercial property operating expenses caused by the downsizing of the Trust's
portfolio and the lease agreement with the hotel management company. As noted
above, due to the disposition of the hotel property and the change in the
management of hotel operations in 1994, a direct comparison of 1996, 1995 and
1994 results is not relevant. In 1996, the hotel, as a function of the operating
lease agreement generated no income or expense to the Trust. In 1995, hotel
operating expenses decreased $763,000 from 1994, attributable to the leasing of
the property to a third-party hotel management company in mid-year.
Interest expense was $547,000 in 1996, down 33% from $815,000 in 1995, which was
down 22% from $1,044,000 in 1994. The decrease in 1996 reflected the disposition
of the hotel property. The decrease in interest expense in 1995 over that of
1994 reflected the sale of the Imperial Canyon Shopping Center and the payoff of
the note on the Fulton Square Shopping Center.
The 1996 non-cash depreciation charge was $64,000, a decrease of 90% from
$662,000 in 1995. Depreciation charges increased 11% in 1995 compared to the
depreciation charge of $595,000 in 1994. The decrease in 1996 reflected the sale
of Redfield Commerce Center, the Bekins Storage Facility and the disposition of
the hotel property. In addition, the Trust's two remaining properties were not
depreciated in 1996 because they were being held for sale. The slight increase
in 1995 over that of 1994 resulted from amortization of certain property
specific expenses.
General and administrative expenses were $1,503,000 in 1996, up significantly
from $933,000 in 1995. General and administrative expenses in 1995 were up 15%
from the $813,000 reported in 1994. While the Trust was able to lower a number
of office expenses, a net increase in general and administrative costs occurred
in 1996 due primarily to an accelerated investigation of potential merger or
acquisition candidates plus due diligence costs related to the expansion
transaction which had not been incurred in the prior year. Throughout 1996,
CalREIT continued to be negatively impacted by its small size with respect to
general and administrative expenses. As a result of certain fixed costs required
to operate a public company, a disproportionate amount of funds was spent on
overhead expenses and administration of the Trust. A potential benefit to an
expansion of the Trust is expected to be a reduction in the percentage of
revenues required to support overhead and administrative activities. The
increase in general and administrative costs in 1995 over those of 1994 was
primarily due to legal and accounting costs which had not been incurred in the
prior year, plus expansion transaction development costs.
Net Loss
The net loss for the Trust 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 Trust from property and mortgage note
dispositions offset by valuation losses discussed further below. Net loss in
1995 was up significantly from a net loss of $36,000 reported in 1994. The
increase in net loss in 1995 compared to 1994 was due primarily to a substantial
difference in valuation losses charged in 1995 as compared to those charged in
1994.
605218.1
11
<PAGE>
Operating income was $260,000 in 1996, down 41% from $437,000 in 1995. In 1995
operating income was up 45% from $301,000 in 1994. The $177,000 decline in
operating income in 1996 was primarily the result of an increase in Trust
operating expenses during the year offset by a reduction in depreciation
charges. Operating income in 1995 was $136,000 greater than that reported in
1994, primarily because of lower interest expense and reduced hotel operating
expenses.
Net Gain or Loss on Foreclosure or Sale of Investments
Income before valuation losses to the Trust was $1,329,000 in 1996 as compared
to $503,000 in 1995 and $83,000 in 1994. The net gain recognized from the sale
of the Redfield Commerce Center in the first quarter of 1996 was $299,000. There
was no gain or loss upon the foreclosure of the Casa Grande Motor Inn 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 Trust incurred a net loss of $164,000
from the sale of the Bekins Storage Facility. Also during the second quarter of
1996, the Trust sold two of its seven mortgage notes. A gain of $430,000 was
recognized upon the sale of the Trust'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 Trust'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 Trust sold two more
mortgage notes. A gain of $115,000 was recognized upon the sale of the Trust'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 Trust's mortgage note which was collateralized by a second deed of
trust on an office/industrial building in Sunnyvale, California.
In 1995, the Trust recognized a deferred gain from the partial principal payment
received on one of its mortgage notes. During the first five months of 1994, the
Trust's hotel property experienced an average operating loss after debt service
of $107,000 per month. With the execution of a lease with CapStar in 1994, the
hotel management company, 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 with CapStar
was renegotiated in June 1995, reducing the monthly lease payments from $20,000
to approximately $9,000; therefore, increasing the loss recorded by the Trust.
In 1994 the Trust 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 Trust's mortgage notes held at that time.
Valuation Losses
For the year ended December 31, 1996, the Trust reported total valuation losses
of $1,743,000. By year end, the Trust had reduced the book value of the Fulton
Square Shopping Center to $1,215,000 and the book value of Totem Square 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 Fulton Square Shopping
Center's value was the result of the Trust'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 Totem
Square 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 in the first quarter of 1997.
In 1995, valuation losses of $3,281,000 resulted from the write down in value of
two commercial properties and five mortgage notes. In 1994, valuation losses of
$119,000 resulted from the write down of value on two commercial properties. In
1996, 1995 and 1994 there were no extraordinary items.
605218.1
12
<PAGE>
Significant Changes in the Economic Environment
Changing interest rates are not expected to have a significant effect on the
Trust's operations in 1997 as most of the Trust's assets had been monetized by
year end. Should the Trust desire to undertake debt obligations or to raise
equity capital in the future, an increase in interest rates would make either
debt or equity capital more costly.
605218.1
13
<PAGE>
- -------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- -------------------------------------------------------------------------------
Index Page
- -------------------------------------------------------------------------------
Consolidated Financial Statements
Reports of Independent Accountants 15
Consolidated Balance Sheets 16
Consolidated Statements of Operations 17
Consolidated Statements of Changes in Shareholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20-32
Schedule III - Real Estate and Accumulated Depreciation 41-44
Schedule IV - Mortgage Loans on Real Estate 45
605218.1
14
<PAGE>
Coopers Coopers & Lybrand L.L.P.
& Lybrand
a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of California
Real Estate Investment Trust:
We have audited the accompanying consolidated balance sheets of California Real
Estate Investment Trust and Subsidiary (the "Trust") as of December 31, 1996 and
1995, and the related consolidated statements of operations, cash flows, and
changes in shareholders' equity for each of the three years in the period ended
December 31, 1996. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedules as listed in
the accompanying index. 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 California Real
Estate Investment Trust and Subsidiary as of December 31, 1996 and 1995, and the
consolidated 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. In addition, in our opinion, the financial
statements schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
San Francisco, California Coopers & Lybrand L.L.P.
February 14, 197
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International,
a Swiss limited liability association.
605218.1
15
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
----------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments, Generally Held for Sale:
Rental properties, less accumulated depreciation of
$0 and $2,777,000 in 1996 and 1995,
respectively, and valuation allowances of
$0 and $6,898,000 in 1996 and 1995,
respectively $ 8,585,000 $ 17,215,000
Notes receivable, net of valuation allowances and
deferred gains of $6,127,000 and $9,151,000 in
1996 and 1995, respectively 1,576,000 10,502,000
Marketable securities available-for-sale 14,115,000 -
---------- ------------
24,276,000 27,717,000
Cash 4,698,000 4,778,000
Receivables, net of allowance of $1,001,000 and $700,000
in 1996 and 1995, respectively 707,000 680,000
Other assets, net of valuation allowance of $0 and
$310,000 in 1996 and 1995 respectively 355,000 357,000
----------- ------------
Total Assets $ 30,036,000 $ 33,532,000
============= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term notes payable, collateralized by deeds of trust
on rental properties $ 5,169,000 $ 8,335,000
Accounts payable and accrued expenses 326,000 209,000
Other liabilities 70,000 81,000
------------- ------------
Total Liabilities 5,565,000 8,625,000
----------- -----------
Commitments (Note 10)
Shareholders' Equity:
Shares of beneficial interest, par value $1 a share; unlimited
authorization, 9,137,000 and 9,137,000 shares
outstanding in 1996 and 1995, respectively 9,137,000 9,137,000
Additional paid-in capital 55,118,000 55,118,000
Unrealized holding loss on marketable securities (22,000) -
Accumulated deficit (39,762,000) (39,348,000)
------------ ----------
Total Shareholders' Equity 24,471,000 24,907,000
---------- ----------
Total Liabilities and Shareholders' Equity $ 30,036,000 $ 33,532,000
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
605218.1
16
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
----------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rent $ 2,019,000 $ 2,093,000 $ 2,593,000
Interest 1,136,000 1,396,000 1,675,000
Hotel -- 46,000 519,000
------------- -------------- --------------
3,155,000 3,535,000 4,787,000
------------- -------------- -------------
Expenses:
Operating expenses 685,000 584,000 1,011,000
Hotel operating expenses -- 8,000 771,000
Property management 96,000 96,000 252,000
Depreciation and amortization 64,000 662,000 595,000
Interest 547,000 815,000 1,044,000
General and administrative 1,503,000 933,000 813,000
------------- -------------- --------------
2,895,000 3,098,000 4,486,000
------------- -------------- -------------
Income before gain (loss) on
foreclosure or sale of investments and
valuation losses 260,000 437,000 301,000
Net gain (loss) on foreclosure or sale of
investments 1,069,000 66,000 (218,000)
------------- -------------- --------------
Income before valuation losses 1,329,000 503,000 83,000
Valuation losses 1,743,000 3,281,000 119,000
------------- -------------- --------------
Net Loss (414,000) (2,778,000) (36,000)
============= ============== ========
Net loss per share of beneficial interest $ (.05) $ (0.30) $ (0.00)
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
605218.1
17
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
----------
Unrealized
Shares of Additional Holding Loss Total
Beneficial Interest Paid-in Capital Accumulated on Marketable Shareholders'
Number Amount Capital Deficit Securities Equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 9,125,000 $9,125,000 $55,106,000 $(35,620,000) $ - $28,611,000
Net loss - - - (36,000) (36,000)
Proceeds from shares issued 12,000 12,000 12,000 - 24,000
Distributions - - - (914,000) (914,000)
--------- --------- ---------- ----------- ----------
Balance at December 31, 1994 9,137,000 9,137,000 55,118,000 (36,570,000) 27,685,000
--------- --------- ---------- ---------- ----------
Net loss - - - (2,778,000) (2,778,000)
--------- --------- ---------- ----------- ----------
Balance at December 31, 1995 9,137,000 9,137,000 55,118,000 (39,348,000) 24,907,000
--------- --------- ---------- ---------- ----------
Unrealized holding loss on
marketable securities - - - - (22,000) (22,000)
Net loss - - - (414,000) - (414,000)
----------- --------- ----------
Balance at December 31, 1996 9,137,000 $9,137,000 $55,118,000 $(39,762,000) $ (22,000) $24,471,000
========= ========== =========== ============= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
605218.1
18
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
----------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $ (414,000) $ (2,778,000) $ (36,000)
------------ ------------ -----------
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation and amortization 64,000 662,000 595,000
(Gain) loss on foreclosure or sale of
investments (1,069,000) (66,000) 218,000
Valuation losses 1,743,000 3,281,000 119,000
Changes in assets and liabilities:
(Increase) decrease in receivables (38,000) 294,000 107,000
(Increase) decrease in other assets (61,000) (282,000) 82,000
Increase (decrease) in accounts payable
and accrued expenses 226,000 166,000 (45,000)
Increase (decrease) in other liabilities (2,000) 11,000 (106,000)
------------ ------------ -----------
Total adjustments to net (loss) 863,000 4,066,000 970,000
------------ ------------ -----------
Net cash provided by operating activities 449,000 1,288,000 934,000
------------ ------------ -----------
Cash flows from investing activities:
Payments related to sales of rental properties -- -- (100,000)
Proceeds from sale of assets 13,796,000 -- --
Improvements to rental properties (146,000) (321,000) (106,000)
Collections on notes receivable 35,000 850,000 346,000
Purchase of marketable securities (15,849,000) -- --
Principal collection of marketable securities 1,712,000 -- --
Increase in notes receivable -- -- (175,000)
------------ ------------ -----------
Net cash (used in) provided by investing activities (452,000) 529,000 (35,000)
------------ ------------ -----------
Cash flows from financing activities:
Principal payments on long-term notes payable (77,000) (405,000) (94,000)
Distributions paid -- -- (890,000)
------------ ------------ -----------
Net cash used in financing activities (77,000) (405,000) (984,000)
------------- ------------ -----------
Net (decrease) increase in cash (80,000) 1,412,000 (85,000)
Cash, beginning of year 4,778,000 3,366,000 3,451,000
------------ ------------ -----------
Cash, end of year $ 4,698,000 $ 4,778,000 $ 3,366,000
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
605218.1
19
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies:
Organization
California Real Estate Investment Trust (the "Trust" or "CalREIT") was
organized under the laws of the State of California pursuant to a
Declaration of Trust dated September 15, 1966.
The Trust became a partner of Totem Square, L. P. ("Totem"), a Washington
Limited Partnership in which the Trust owns a 59% interest, on November 30,
1990. The Trust also formed CalREIT Totem Square, Inc. ("Cal-CORP") to act
as general partner of Totem. Cal-CORP has a 1% interest in Totem, and Totem
Square Associates, an unrelated party, has the remaining 40%.
In 1994, the Trust operated as a subsidiary of The Peregrine Real Estate
Trust ("Peregrine"), which then held 76% of the Trust's outstanding Shares
of Beneficial Interest. In April 1994, Peregrine replaced the CalREIT Board
of Trustees with a slate of its own Trustees. In 1995, the Board was
expanded from three to five Trustees, two of whom were independent. In
1996, the Board of Trustees was comprised of two independent Trustees, one
Trustee who concurrently served on the Board of Trustees of Peregrine, a
former officer of the Trust, and the then Chief Executive Officer of the
Trust.
On January 3, 1997, Peregrine sold its entire 76%-ownership interest in the
Trust to CalREIT Investors Limited Partnership, an entity controlled by
Samuel Zell. Simultaneous with the closing of this Transaction, the Board
of Trustees was expanded to seven members; one Trustee, who also served on
the Peregrine Board of Trustees, resigned; and three additional Trustees,
nominated by CRIL, were appointed to the Board.
At the end of 1996, the Trust owned two commercial properties, Fulton
Square Shopping Center and Totem Square located in Sacramento, California
and Kirkland, Washington, respectively. The Trust also owned a mortgage
note portfolio of three notes encompassing approximately $7.7 million in
loans, with an aggregate book value of approximately $1.6 million. These
loans bear interest at an overall effective rate of approximately 8%. They
are collateralized by mortgages on real property. Most of the investments
in the three loans were originated by the Trust in connection with the
disposition of Trust properties prior to 1996. Additionally, at December
31, 1996, the Trust had approximately $14 million invested in liquid
mortgage-backed securities.
605218.1
20
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Principles of Consolidation
For 1996, 1995 and 1994, the consolidated financial statements include the
accounts of the Trust, Cal-CORP and Totem.
Rental Properties
At December 31, 1996 and 1995, rental properties are carried at cost, net
of accumulated depreciation and less a valuation allowance for possible
investment losses. The Trust's valuation allowance for possible investment
losses represents the excess of the carrying value of individual properties
over their appraised or estimated fair value less estimated selling costs.
At December 31, 1996 all rental properties are classified as held for sale
and valued at net estimated sales price.
The additions to the valuation allowance for possible investment losses are
recorded after consideration of various external factors, particularly
overbuilding in real estate markets which has a negative impact on
achievable rental rates. A gain or loss will be recorded to the extent that
the amounts ultimately realized from property sales differ from those
currently estimated. In the event economic conditions for real estate
continue to decline, additional valuation losses may be recognized in the
near term.
When applicable, the allowance for depreciation and amortization has been
calculated under the straight-line method, based upon the estimated useful
lives of the properties which lives range from 30 to 40 years. Expenditures
for maintenance, repairs and improvements which do not materially prolong
the normal useful life of an asset are charged to operations as incurred.
Real estate acquired by cancellation of indebtedness or foreclosure is
recorded at fair market value at the date of acquisition but not in excess
of the unpaid balance of the related loan plus costs of securing title to
and possession of the property.
Other Assets
The Trust amortizes leasing commissions on a straight-line basis over the
lives of the leases to which they relate. Financing costs are amortized
over the lives of the loans or other financial instruments to which they
relate.
605218.1
21
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Income Taxes
The Trust has elected to be taxed as a real estate investment trust and as
such, is not taxed on that portion of its taxable income which is
distributed to shareholders, provided that at least 95% of its real estate
trust taxable income is distributed and that the Trust meets certain other
REIT requirements. Due to federal and California tax net operating loss
carryforwards ("NOLs"), the Trust does not have taxable income for the year
ended December 31, 1996. The Trust has federal and California NOLs as of
December 31, 1996 of approximately $17,631,000 and $5,194,000,
respectively. Such NOLs expire through 2011 for federal and 2001 for
California. The Trust also has a federal and California capital loss
carryover of approximately $1,567,000 that can be used to offset future
capital gain.
Due to the transaction and the prior year ownership change related to the
Peregrine bankruptcy, NOLs are limited for both federal and California to
approximately $1,500,000 annually. Any unused portion of such annual
limitation can be carried forward to future periods.
Cash
The Trust invests its cash in demand deposits with banks with strong credit
ratings. Bank balances in excess of federally insured amounts totaled
$4,301,000 and $4,577,000 as of December 31, 1996 and 1995, respectively.
The Trust has not experienced any losses on these deposits.
Sales of Real Estate
The Trust complies with the provisions of Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate." Accordingly, the
recognition of gains on certain transactions are deferred until such
transactions have complied with the criteria for full profit recognition
under the Statement. The Trust had deferred gains of $239,000 and
$1,103,000 at December 31, 1996 and 1995, respectively.
Interest Income Recognition
The Trust recognizes interest income on notes receivable when it is
estimated that the fair value of the collateral related to the note is
adequate.
605218.1
22
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Risks and Uncertainties
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 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.
Impairment of Long-Lived Assets
In 1995, Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" was issued. This statement requires that
companies review long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the carrying amount
of the asset exceeds its estimated undiscounted net cash flow before
interest, the company must recognize an impairment loss equal to the
difference between its carrying amount and its current value. After an
impairment is recognized, the reduced carrying amount of the asset shall be
accounted for as its new cost. For a depreciable asset, the new cost shall
be depreciated over the asset's remaining useful life. Long-lived assets to
be disposed of shall be reported at the lower of carrying amount or fair
value less cost to sell. In 1996, the Trust adopted the provisions of SFAS
121. Generally, fair values are estimated using undiscounted cash flow,
direct capitalization and market comparison analyses.
Net Loss Per Share
Net loss per share of beneficial interest is based upon the
weighted-average number of shares of beneficial interest outstanding.
Shares of beneficial interest equivalents were anti-dilutive for the three
years ended December 31, 1996. The weighted average number of shares of
beneficial interest and earnings per share of beneficial interest are as
follows:
1996 1995 1994
---- ---- ----
Weighted average shares of
beneficial interest 9,137,335 9,137,335 9,130,961
========= ========= =========
Loss per share of beneficial interest $ (.05) $ (0.30) $ (0.00)
605218.1
23
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Reclassifications
Certain reclassifications have been made in the presentation of the 1995
and 1994 financial statements to conform to the 1996 presentation.
2. Related-Party Transactions:
Until April 14, 1994, administrative services were provided to the Trust by
B & B Property Investment, Development and Management Company, Inc. ("B &
B"). B & B's compensation consisted of an advisory fee based on the real
estate investments and real estate commissions in connection with
purchases, sales and leasing of Trust properties as well as a reimbursement
of certain expenses incurred in performing services for the Trust. Until
April 14, 1994, property management responsibilities of the Trust were
assigned to B & B Property Investment, Inc. ("B & B Property"). The
compensation for property management services was computed at 5% of the
gross receipts of each property managed and each note receivable serviced.
Compensation to B & B and B & B Property was $156,000 during 1994. Certain
disputes between the Trust, B & B and B & B Property arising from the
Trust's termination of B & B's and B & B Property's advisory and management
agreements were settled in May 1994 for $60,000. Prior to 1994, the Trust
entered into a management agreement with North Main Street Company ("North
Main"), a company owned by the President and Chairman of the Board of the
Trust's former advisor, B & B, to manage the Trust's hotel. Pursuant to
that agreement, the Trust incurred management fees of $16,000 in 1994. The
Trust also terminated that agreement with North Main in 1994 and leased the
hotel property to an unrelated third party, a professional hotel management
company which operated lodging facilities nationwide. No payments were made
to B & B or B & B Property in 1995 or 1996.
The Trust is self-administered. However, during 1996 and 1995 it shared
certain personnel and other costs with Peregrine, its majority interest
shareholder. The Trust reimbursed Peregrine pursuant to a cost allocation
agreement based on each Trust's respective asset values (real property and
notes receivable) that was subject to annual negotiation. During 1996 and
1995, reimbursable costs charged to the Trust by Peregrine 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 Peregrine at December 31, 1994.
605218.1
24
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
2. Related-Party Transactions, continued:
At December 31, 1996 and 1995, the Trust had $31,000 and $45,000,
respectively, due to Peregrine pursuant to the cost allocation agreement.
The cost allocation agreement between the Trust and Peregrine was
terminated on January 7, 1997.
3. Rental Properties:
At December 31, 1996 and 1995, the Trust's rental property portfolio at
cost included a retail and mixed-use retail property carried at $8,585,000
and $13,018,000 respectively; industrial buildings, carried at $0 and
$7,395,000 respectively; and a hotel property carried at $0 and $6,477,000,
respectively.
The Trust's hotel property, with a carrying value of $3,182,000 at December
31, 1995, was returned to the lender through foreclosure proceedings in
February 1996. No gain or loss was recorded on the foreclosure of the Casa
Grande Motor Inn.
4. Investment in Marketable Securities:
At December 31, 1996 and 1995, the Trust had $14,115,000 and $0,
respectively, invested in mortgage-backed securities classified as
"available-for-sale."
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," ("SFAS 115") issued in
May 1993 requires that at the date of acquisition and at each reporting
date, debt and equity securities be classified as "held-to-maturity,"
"trading" or "available for sale." Investments in debt securities in which
the Trust has the positive intent and ability to hold to maturity are
required to be classified as "held-to-maturity." "Held-to-maturity"
securities are required to be stated at cost and adjusted for amortization
of premiums and discounts to maturity in the statement of financial
position. Investments in debt and equity securities that are not classified
as "held-to-maturity" and equity securities that have readily determinable
fair values are to be classified as "trading" or "available-for-sale" and
are measured at fair value in the statement of financial position.
Securities that are bought and held principally for the purpose of selling
them in the near term are classified as "trading." Unrealized holding gains
and losses for "trading" securities are included in earnings.
605218.1
25
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
4. Investment in Marketable Securities, continued:
Investments that are not classified as "held-to-maturity" or "trading"
securities are classified as "available-for-sale." Unrealized holding gains
and losses for "available-for-sale" securities are excluded from earnings
and reported as a separate component of shareholders' equity until
realized.
In accordance with SFAS 115, the Trust determines the appropriate
classification at the time of purchase and Representative-evaluates such
designation at each balance sheet date.
At December 31, 1996, the Trust's "available-for-sale" securities consisted
of the following:
<TABLE>
<CAPTION>
Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Federal National Mortgage
Association, adjustable rate interest
currently at 7.783%, due April 1, 2024 $2,879 ($34) $2,845
Federal Home Loan Mortgage
Association, adjustable rate interest
currently at 7.625%, due June 1, 2024 $967 ($10) $957
Federal National Mortgage
Association, adjustable rate interest
currently at 7.292%, due April 1, 2025 $732 ($4) $728
Federal National Mortgage
Association, adjustable rate interest
currently at 6.144%, due May 1, 2026 $3,260 ($5) $3,255
Federal National Mortgage
Association, adjustable rate interest
currently at 6.116%, due June 1, 2026 $6,299 $31 - $6,330
------- ------- ------ ------
$14,137 $31 ($53) $14,115
======= ======= ====== =======
</TABLE>
The maturity dates above are not necessarily indicative of expected
maturities as principal is often prepaid on such instruments.
605218.1
26
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
5. Notes Receivable:
In order to facilitate sales of real estate, the Trust has accepted partial
payment in the form of notes receivable collateralized by deeds of trust.
As of December 31, 1996 and 1995, the Trust had long-term notes receivable,
collateralized by deeds of trust (before valuation allowances and deferred
gains) of $7,703,000 and $19,653,000, respectively. The notes are
collateralized by real estate properties in California and Arizona.
The notes bear interest at rates ranging from 7.63% to 9.5% as of December
31, 1996. For the year ended December 31, 1996, the overall effective rate
was approximately 8%.
6. Valuation Allowances:
Based on a review of its investments, the Trust has provided for valuation
allowances as set forth below. Adverse economic factors, particularly
overbuilt real estate markets which caused a decline in lease renewal
rates, were the primary causes of these valuation losses. If such adverse
economic factors continue, additional valuation loss provisions may be
required in the near term.
As of December 31, 1996, the Trust was in the process of monetizing its
assets and accordingly, wrote down such assets to current market value,
less estimated selling costs, the accounting treatment required when
investments are held for sale.
Analysis of changes in the allowance for possible losses on real estate
investments, notes receivable, and rents and interest receivable for 1996,
1995 and 1994 follow:
605218.1
27
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
6. Valuation Allowances, continued:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Rental Properties
-----------------
<S> <C> <C> <C>
Allowance for valuation losses on
rental property investments:
Beginning balance $6,898,000 $ 5,863,000 $ 8,674,000
Provision for valuation losses 1,743,000 1,035,000 69,000
Amounts charged against allowance
for valuation losses ($8,641,000) -- ($2,880,000)
----------- ----------- -----------
Ending balance $ -- $ 6,898,000 $ 5,863,000
=========== =========== ===========
Notes Receivable
----------------
Allowance for valuation losses and deferred
gains on notes receivable:
Beginning balance $ 9,151,000 $ 7,182,000 $ 7,442,000
Provision for valuation losses - 2,246,000 --
Deferred gains on notes and other, net - (66,000) (12,000)
Amounts charged against allowance
for valuation losses (3,024,000) (211,000) (248,000)
------------ ----------- -----------
Ending balance $ 6,127,000 $ 9,151,000 $ 7,182,000
=========== =========== ===========
Rents and Interest Receivable
-----------------------------
Allowance for bad debt losses on
rents and interest receivable:
Beginning balance $ 700,000 $ 323,000 $ 233,000
Provision for losses 501,000 873,000 183,000
Amounts charged against allowance
for losses (200,000) (496,000) (93,000)
------------ ----------- -----------
Ending balance $ 1,001,000 $ 700,000 $ 323,000
=========== =========== ===========
</TABLE>
In addition, the Trust had established an allowance for valuation losses on
other assets in the amount of $ 0 and $310,000 at December 31, 1996 and
1995, respectively.
605218.1
28
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
7. Long-Term Notes Payable:
As of December 31, 1996 and 1995, the Trust had long-term notes payable
(Notes) of $5,169,000 and $8,335,000 respectively, most of which were
collateralized by deeds of trust on rental properties with an aggregate net
book value of $8,585,000 and $11,181,000 at December 31, 1996 and 1995,
respectively. These Notes are due in installments extending to the year
2014 with interest rates ranging from 8% to 10.75%. At December 31, 1996
none of the Notes were delinquent. At December 31, 1995, $3,089,000 of such
Notes, bearing interest at a default rate of 18% and secured by the Casa
Grande Motor Inn (which was foreclosed upon in February 1996) were
delinquent. As of December 31, 1996, contractually scheduled principal
payments during each of the next five years were $4,291,000, $39,000,
$43,000, $38,000 and $41,000, respectively, and $718,000 thereafter. The
Note on the Totem Square Shopping Center of $4,256,000 is due May 1, 1997.
8. Distributions:
There were no distributions paid in 1996 or 1995. Cash distributions were
made per share of beneficial interest in 1994 and were classified for
Federal income tax purposes as follows:
1996 1995 1994
---- ---- ----
Ordinary income - % - % - %
Capital gains income - % - % - %
Return of capital - % - % 100%
------- ------ ------
- % - % 100%
======= ====== ======
Total distributions per share $ 0.00 $ 0.00 $ 0.10
======= ====== ======
9. Stock Option Plans:
In November of 1995, the Board of Trustees approved two stock option plans
(the "Plans"). The Plans provided that if they were not approved by the
holders of a majority of the outstanding shares of the Trust within one
year after their adoption, they would automatically terminate. The Plans
were not approved by the holders of a majority of the outstanding shares of
the Trust within one year after their adoption and automatically terminated
in November 1996. At December 31, 1996 there were no stock options
outstanding.
605218.1
29
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
10. Statements of Cash Flows Supplemental Information:
In connection with the sale of property, the Trust entered into various
non-cash transactions as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales price $ 13,853,000 $ -- $ 4,423,000
Notes receivable -- -- --
Notes payable assumed by buyer and
other liabilities applied to sales
price (57,000) -- (4,523,000)
----------- -------------- ----------
Cash received (paid) $ 13,796,000 $ -- $ (100,000)
=========== ============== ==========
Cost of property sold $ 19,321,000 $ -- $ 8,084,000
=========== ============== =========
</TABLE>
In 1996, with respect to its hotel property, the Trust allowed foreclosure
on a note payable secured by a deed of trust. The amount of $3,089,000
represents the value of the note payable relieved in connection with this
foreclosure and is aggregated in the 1996 sales price category above.
Distributions were made as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total distributions $ -- $ -- $ 914,000
Distributions reinvested -- -- (24,000)
-------------- ------------ -------
Distributions paid in cash $ -- $ -- $ 890,000
============== ============ =======
</TABLE>
Interest paid on the Trust's outstanding debt for 1996, 1995, and 1994 was
$550,000, $730,000 and $1,121,000, respectively.
605218.1
30
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
11. Commitments:
During 1995, the Trust entered into a three year, non-cancelable operating
lease for office facilities in San Francisco, California. Rent expense
under the operating lease was $40,000 in 1996. At December 31, 1996 future
minimum lease payments under the lease are $50,000, with $40,000 due in
1997 and $10,000 in 1998.
12. Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 ("SFAS 107") requires
disclosure of fair value information about financial instruments, whether
or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of 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 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Trust.
The estimated fair value of the Trust's marketable securities is set forth
in Note 4. The estimated fair value of the Trust's financial instruments,
other than marketable securities, including cash, notes receivable, rents
and other receivables and long-term notes payable, at December 31, 1996 and
1995, is approximately the same as their carrying amounts.
13. Minority Interest:
The Trust has a 60% ownership interest in Totem, its subsidiary. Totem's
net losses have exhausted the minority shareholder's equity interest. On
the consolidated statement of operations, no minority interest in the
subsidiary's net loss is recorded for 1996, 1995 or 1994. In the event that
future income is generated from the subsidiary, the Trust will have first
rights to the income to the extent of the minority shareholder's
accumulated deficit in the subsidiary.
Furthermore, the Trust has a note receivable from Totem, which note is
eliminated in consolidation, in the amount of $3,336,000. Pursuant to the
terms of that note, it is likely that CalREIT will be entitled to all
future income from Totem.
605218.1
31
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
14. Selected Quarterly Financial Data (Unaudited):
Quarter Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Revenues $ 871,000 $ 780,000 $ 771,000 $ 733,000
Gain on fore-
closure or sale of
investments, net $ 299,000 $ 297,000 $ 517,000 $ (44,000)
Net income (loss) $ 440,000 $ (213,000) $ (514,000) $ (127,000)
Net income (loss) per share $ 0.05 $ (0.02) $ (0.06) $ (0.02)
1995
Revenues $ 879,000 $ 836,000 $ 942,000 $ 878,000
Gain on fore-
closure or sale of
investments, net $ 66,000 $ - $ - $ -
Net income (loss) $ 242,000 $ 44,000 $ 100,000 $ (3,164,000)
Net income (loss) per share $ 0.03 $ 0.00 $ 0.01 $ (0.34)
1994
Revenues $ 1,131,000 $ 780,000 $ 1,353,000 $ 1,523,000
Gain (loss) on fore-
closure or sale of
investments, net $ - $ 114,000 $ (344,000) $ 12,000
Net income (loss) $ (1,000) $ (328,000) $ 341,000 $ ( 48,000)
Net income (loss) per share $ (0.00) $ (0.04) $ 0.04 $ (0.00)
</TABLE>
605218.1
32
<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 LLP ("C&L") as the Company's auditors for the fiscal year
ending December 31, 1997 and (ii) to engage Ernst & Young LLP 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 opinion nor were they qualified or modified
as to uncertainty, audit scope or accounting principles.
During the Company's two most recent fiscal years ended December 31, 1996, 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 satisfactions 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.
605218.1
33
<PAGE>
- -------------------------------------------------------------------------------
PART III
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Item 10. Trustees and Executive Officers
- -------------------------------------------------------------------------------
Trustees and Executive Officers
As of March 10, 1997, the Board of Trustees consisted of the seven persons
listed below. Messrs. Morrow, Brown, Steinberg and Ms. Bancroft served as
Trustees throughout 1996, as did Mr. John McMahan who resigned in January 1997.
Messrs. Edelman, Garrabrant and Klopp were added to the Board during the first
two months of 1997 following CRIL's acquisition of the 6,959,593 Common Shares
from Peregrine. See "Item 1 - Recent Developments."
Name Age Office
Frank A. Morrow 57 Trustee and Chairman of the Board
Gary R. Garrabrant 39 Trustee and Vice Chairman
John R. Klopp 43 Trustee and Chief Executive Officer
Juliana Bancroft 48 Trustee and Treasurer
Elliot G. Steinberg 59 Trustee and Secretary
Arnold E. Brown 49 Trustee
Martin L. Edelman 55 Trustee
The principal occupations and affiliations of the current Trustees are as
follows:
Frank A. Morrow, Chairman. Mr. Morrow has been active in the real estate
industry for over 25 years. As an independent advisor and business consultant,
he has worked for several real estate companies as a turnaround specialist and
workout expert. Other assignments have included due diligence investigations,
stepping in as senior management in times of crisis, and multi-site real estate
portfolio management. Mr. Morrow has had considerable experience in the
acquisition, financing, leasing, management and sale of single as well as
multiple assets. For a number of years, he served as the Managing Director of
Real Estate for Stanford University and as Senior Vice President for the Boise
Cascade Urban Development Corporation. Prior to his business career, Mr. Morrow
served nine years in the U.S. Navy as an aviator and test pilot. He graduated
from the U.S. Naval Academy and in 1971 received an MBA degree from Stanford
University.
Juliana Bancroft, Independent Trustee. Ms. Bancroft is an independent consultant
to the hospitality industry. Prior to this she served as a vice president and a
regional director with Kimpton Hotel and Restaurant Group headquartered in San
Francisco. The Kimpton Group is the largest developer and operator of
independent hotels and restaurants on the West Coast. During this period, among
other responsibilities, Ms. Bancroft worked as a project manager on seven
construction and redevelopment projects. She also has owned and operated her own
firm in which she acquired, financed, rehabilitated and sold residential
properties in Southern California. She has also been a principal in the
investment banking firm of Bancroft, Garcia & Lavell, Inc. which secured more
than $2 billion in real estate financing through the tax-exempt bond markets.
Ms. Bancroft graduated from the University of Wisconsin with a B.S. degree in
1971 and from the University of Oregon with an M.S. degree in 1975.
605218.1
34
<PAGE>
Arnold E. Brown, Trustee. Mr. Brown has over 20 years experience in real estate
finance and investment. He is a Certified Public Accountant and previously
served as a partner of the international accounting and consulting firm of Grant
Thornton, where he was one of eight members of that firm's U. S. Real Estate
Task Force. Since 1983, Mr. Brown has been in the private real estate investment
and advisory service. Through his company, Brown Partners Ltd., he has acted as
a principal or intermediary in numerous real estate transactions and has advised
real estate investment companies on financial restructuring and real estate
securities valuation matters. Mr. Brown served as the Chief Financial Officer of
CalREIT from April 1994 through 1995. He graduated from the Wharton School of
the University of Pennsylvania in 1969 and received an MBA degree from Stanford
University in 1971.
Elliot G. Steinberg, Independent Trustee. Mr. Steinberg is a managing partner of
Sunrise Creek, a company engaged in real estate development, and a managing
partner of W.S. Ventures, a private investment partnership in emerging growth
companies. Mr. Steinberg has also served as corporate vice president and general
counsel to Itel Corporation and was a founder and senior partner of the San
Francisco law firm of Flynn & Steinberg specializing in real estate, banking,
taxation and business planning. He was an editor of the Journal of Taxation of
Investments and is the co-author of several books. Mr. Steinberg received his
undergraduate degree at the University of California Berkeley in 1961, attended
the London School of Economics through 1961, and in 1964 received his JD degree
from the Boalt Hall School of Law at the University of California at Berkeley.
Mr. Steinberg serves on the Boards of Directors of BioFactors, Inc., Ganson Ltd.
and Cege Co. Ltd. He was formerly a director of Kimco Hotel Management Company.
Martin L. Edelman, Trustee. Martin L. Edelman has been a trustee of the Company
since February 4, 1997. Mr. Edelman has been a director of Chartwell Leisure
Inc., a publicly traded owner and operator of hotel properties ("Chartwell"),
since November 1994 and has been president of Chartwell since January 1997. He
has also been a director of HFS Incorporated and a member of that corporation's
executive committee since November 1993. Mr. Edelman has been of counsel to
Battle Fowler LLP, a New York City law firm, since January 1994 and was a
partner with that firm from 1972 through 1993. Mr. Edelman also serves as a
director of Presidio Capital Corp. and G. Soros Realty, Inc.
Gary R. Garrabrant, Trustee. Mr. Garrabrant has been a trustee of the Company
since January 2, 1997 and vice chairman of the Company since February 1997.
After the Acquisition, Mr. Garrabrant will resign as vice chairman of the
Company. Mr. Garrabrant has been a senior vice president of EGI, an owner,
manager and financier of real estate and corporations since January 1996 and
managing partner of EGI Capital Markets, L.L.C. since September 1996. Prior to
joining EGI, he was a director of Sentinel Securities Corporation where he
established a real estate securities investment management operation. In 1994,
Mr. Garrabrant co-founded Genesis Realty Capital Management, a money management
firm exclusively focused on the equity and debt securities of public real estate
companies. From 1989 to 1994, he was responsible for equity private placements
and asset sales in the real estate investment banking division of The Bankers
Trust Company. From 1981 to 1989 he was associated with Chemical Bank. He is a
director of Meritage Hospitality Group Inc.
John R. Klopp, Trustee. Mr. Klopp has been a trustee of the Company since
January 2, 1997 and chief executive officer of the Company since February 1997.
After the Acquisition, Mr. Klopp will also serve as vice chairman of the
Company. 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 a portfolio of
construction and permanent loans. He is a director of Metropolis Realty Trust,
Inc., a Manhattan office REIT.
605218.1
35
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Trust during 1996 and written representation from certain of the Trustees
and from Peregrine that no Form is required to be filed, the Trust believes that
no trustee, officer or beneficial owner of more than 10% of its Common Shares
failed to file on a timely basis reports required pursuant to Section 16(a) of
the Exchange Act with respect to 1996 or any prior fiscal year. However, John
McMahan, a former Trustee of the Trust, filed a report for January 1997 on or
about March 12, 1997 (30 days after the due date).
605218.1
36
<PAGE>
- -------------------------------------------------------------------------------
Item 11. Executive Compensation
- -------------------------------------------------------------------------------
Executive Compensation
The following table sets forth information for the years indicated concerning
the compensation awarded to, earned by or paid to the chief executive officer of
the Trust for services rendered in all capacities to the Trust and its
subsidiaries during such period. There were no other executive officers earning
over $100,000 of annual compensation from the Trust.
<TABLE>
<CAPTION>
Summary and Compensation Table
Annual Compensation
- --------------------------------------------------------------------------------------------------------
All Other
Compensation
Name and Principal Position Year Salary($) Bonus($) ($)
--------------------------- ---- --------- -------- ------------
<S> <C> <C> <C> <C>
Frank A. Morrow (1) 1996 $180,000 -- --
Chairman of the Board and
Chief Executive Officer
</TABLE>
- ----------------
(1) During 1994 and 1995, Mr. Morrow was employed by Peregrine and did not
receive any compensation directly from the Trust. Mr. Morrow's
compensation from Peregrine was paid to his wholly owned consulting
firm, Frank A. Morrow Associates ("FAMA"). Pursuant to an oral cost
allocation agreement with Peregrine, the Trust reimbursed Peregrine
for approximately $72,000 and $64,000 of the compensation paid by
Peregrine to FAMA in 1995 and 1994, respectively. See "Item 13.
Certain Relationships and Related Transactions." Pursuant to the
Trust's arrangements with Mr. Morrow covering his compensation for
1996, the Trust accrued $180,000 as compensation due to FAMA, which
amount was paid in the second quarter of 1997.
605218.1
37
<PAGE>
- -------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------------
Listed below are those shareholders known to the Trust as of March 20, 1997 to
be the beneficial owner or the member of a group which is the beneficial owner
of more than five percent of the Trust's shares of beneficial interest
(9,137,335 total). As of March 20, 1997, no Trustee owned Shares of Beneficial
Interest.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent
Title of Class of Beneficial Owner of Beneficial Ownership of Class
<S> <C> <C> <C>
Shares of CalREIT Investors Limited Partnership (1)
Beneficial Interest c/o Equity Group Investments, Inc.
Two North Riverside Plaza 6,959,593 76.2%
Chicago, Illinois 60606
</TABLE>
(1) The sole general partner of CalREIT Investors Limited Partnership is
Zell General Partnership, Inc., the sole director and stockholder of
which is, respectively, Samuel Zell and the Samuel Zell Revocable
Trust (for which Mr. Zell serves as trustee).
605218.1
38
<PAGE>
- -------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------------------------------
Pursuant to an oral agreement with Peregrine, 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 Peregrine. The shared costs were allocated to the
Trust and Peregrine 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 paid or accrued as a payable to
Peregrine in 1995 and 1996, respectively. As of December 31, 1996, the Trust
owed Peregrine approximately $31,000 pursuant to the cost sharing agreement. The
agreement was terminated on January 7, 1997.
605218.1
39
<PAGE>
- -------------------------------------------------------------------------------
PART IV
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
(a) (1) Financial Statements Page
- ------- -------------------- ----
Included in Part II of this report:
Reports of Independent Accountants 15
Consolidated Balance Sheets at December 31, 1996 and 1995 16
Consolidated Statements of Operations, Years Ended December 31,
1996, 1995 and 1994 17
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1996, 1995 and 1994 18
Consolidated Statements of Cash Flows, Years Ended
December 31, 1996, 1995 and 1994 19
Notes to Consolidated Financial Statements 20-32
(a) (2) Consolidated Financial Statement Schedules and Exhibits
- ------- -------------------------------------------------------
Schedule III - Real Estate and Accumulated Depreciation 41-43
Schedule IV - Mortgage Loans on Real Estate 44-45
</TABLE>
The statements and schedules referred to above should be read in conjunction
with the consolidated financial statements and notes thereto included in Part II
of this Form 10-K. Schedules not included in this section have been omitted
because they are not applicable or because the required information is shown in
the consolidated financial statements or notes thereto.
(a) (3) List of Exhibits
(a) (4) Report on Form 8-K
The Trust filed no reports on Form 8-K during the quarter ended December 31,
1996.
605218.1
40
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996 Page 1 Part A
- ------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
- ------------------------------------------- ------------- ----------------------- -------------------------------
Cost Capitalization and
Writedowns Subsequent
.Initial Cost to Trust. ........to Acquisition.........
Buildings,
Improvements
and Personal
Description Encumbrances Land Property Improvements Carrying Cost
----------- ------------ ---- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
SHOPPING CENTERS:
Fulton Square, Sacramento, California $ - Leased 3,536,000 (2,321,000) None
Totem Square, Kirkland, Washington 4,283,000 3,175,000 5,793,000 (1,598,000) None
Total shopping centers 4,283,000 3,175,000 9,329,000 (3,919,000)
Total Investment in Real Estate $ 4,283,000 3,175,000 9,329,000 (3,919,000)
</TABLE>
605218.1
41
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996 Page 1 Part B
- -----------------------------------------------------------------------------------------------------------------------
Column A Column E Column F Column G
-------- ----------------------------------------------- -------- --------
Gross Amount at Which
.....Carried at Close of Period.....
Valuation
Building and Write Accumulated Date of
Description Land Improvements Down(2) Total(1) Depreciation Construction
----------- ---- ------------ ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SHOPPING CENTERS:
Fulton Square, Sacramento, California $ Leased 1,215,000 0 1,215,000 0 1980
Totem Square, Kirkland, Washington 3,175,000 4,195,000 0 7,370,000 0 1981
----------- --------- ------ --------- ----------
Total shopping centers 3,175,000 5,410,000 - 8,585,000 -
----------- --------- ------ --------- ----------
</TABLE>
<TABLE>
<CAPTION>
Column A Column H Column I
-------- -------- --------
Life on Which
Depreciation in
Latest Income
Date Statement is
Description Acquired Computed
----------- -------- --------
<S> <C> <C>
SHOPPING CENTERS:
Fulton Square, Sacramento, California 5/91 N/A
Totem Square, Kirkland, Washington 11/90 N/A
Total shopping centers
</TABLE>
(1) Represents total cost of assets after valuation allowance.
(2) The Trust establishes allowances for possible investment losses which
represent the excess of the carrying value of individual properties over
their appraised or estimated fair value less costs to sell. Adverse
economic factors, particularly overbuilt real estate markets resulting in
declining lease renewal rates, were the primary causes of valuation
allowances.
605218.1
42
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
- -------------------------------------------------------------------------------
Reconciliation of total real estate carrying values for the three years ended
December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
ASSET RECONCILIATION:
Balance, beginning of year $ 19,992,000 20,620,000 25,787,000
Additions:
Improvements 146,000 407,000 106,000
Valuation losses on properties sold 2,380,000 - 2,880,000
Valuation losses on property foreclosed 2,970,000
Deductions:
Accumulated Depreciation applied to
property held for sale (1,264,000)
Cost of property sold/disposed (7,420,000) - (8,084,000)
Cost of property surrendered in
foreclosure (6,476,000) - -
Valuation losses (1,743,000) (1,035,000) (69,000)
------------- ----------- ------------
Balance, end of year $ 8,585,000 19,992,000 20,620,000
============= =========== ============
ACCUMULATED DEPRECIATION
RECONCILIATION:
Balance, beginning of year $ 2,777,000 2,229,000 2,520,000
Additions:
Depreciation 0 548,000 593,000
Deductions:
Depreciation applied to assets held for
sale (1,264,000)
Accumulated depreciation on real estate
sold (1,188,000) - (884,000)
Accumulated depreciation on property
surrendered in foreclosure (325,000) - -
------------- ----------- ------------
Balance, end of year $0 2,777,000 2,229,000
============= =========== ============
</TABLE>
605218.1
43
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Notes Receivable Collateralized
by Deeds of Trust) DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------
Column A Column B Column C Column D
- --------------------------------- ---------- ----------- -----------------------------
Final
Interest Maturity
Description Rate Date Periodic Payment Terms
- --------------------------------- ---------- ----------- -----------------------------
<S> <C> <C> <C>
FIRST DEEDS OF TRUST
Retail Building, Tempe 9.50% 2012 Monthly principal and interest
Arizona payments of $9,249
SECOND DEEDS OF TRUST
Office/retail complex, 7.63% 2014 50% of excess cash flows
Fountain Valley, applied to interest and
California then principal
Commercial Building, Tempe 8% 2000 Monthly 4% interest only
Arizona payments
</TABLE>
<TABLE>
<CAPTION>
Column A Column E Column F Column G Column H
- --------------------------------- ------------- ------------ ------------------------------ ------------------
Principal
Carrying Amount of
Face Valuation Write Amount of Loans Subject to
Amount of Downs and Notes Delinquent
Notes Deferred Gains Receivable Principal or
Description Prior Liens Receivable (2) (1) Interest
- --------------------------------- ------------- ------------ ---------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
FIRST DEEDS OF TRUST
Retail Building, Tempe N/A 889,000 889,000 None
Arizona
SECOND DEEDS OF TRUST
Office/retail complex, 6,623,000 6,454,000 5,888,000 566,000 None
Fountain Valley,
California
Commercial Building, Tempe 913,000 360,000 239,000 121,000 None
Arizona
-----------------------------------------------------------
$7,536,000 $7,703,000 $6,127,0000 $1,576,000
===========================================================
</TABLE>
(1) Represents carrying amount of notes after valuation allowance and deferred
gains.
(2) The Trust establishes allowances for possible investment losses which
represent the excess of the face amount of the note ver the appraised or
estimated fair value less costs to sell of the note. In addition, deferred
gains have been recorded against notes receivable when required under SFAS
66 (Note 1). Such write downs in no way limit the obligation of the
borrower to comply with the terms of the note.
605218.1
44
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
- -------------------------------------------------------------------------------
A summary of activity for notes receivable collateralized by deeds of trust for
the years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ----------
<S> <C> <C> <C>
Balance, beginning of year $ 10,502,000 13,532,000 14,036,000
Additions:
New loans - - 175,000
Deferred interest added to principal
balance - -
Recognition of deferred gain 2,084,000 66,000 12,000
Valuation losses on Notes receivable
collected 940,000
Deductions:
Collections from notes receivable (11,950,000) (850,000) (346,000)
Deferred gain on notes receivable - - -
Write off of notes receivable - - (345,000)
Valuation losses on notes receivable - (2,246,000) -
------------- ------------ ----------
Balance, end of year $ 1,576,000 10,502,000 13,532,000
============= ============ ==========
</TABLE>
605218.1
45
<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.
April 15, 1997 /s/ Frank A. Morrow
- ------------------- -----------------------------
Date Frank A. Morrow
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
April 15, 1997 /s/ Frank A. Morrow
- ------------------- -----------------------------
Date Frank A. Morrow
Chairman of the Board
April 15, 1997 /s/ Juliana Bancroft
- ------------------- -----------------------------
Date Juliana Bancroft
Trustee
April 15, 1997 /s/ Arnold E. Brown
- ------------------- -----------------------------
Date Arnold E. Brown
Trustee
April 15, 1997 /s/Elliot G. Steinberg
- ------------------- -----------------------------
Date Elliot G. Steinberg
Trustee
April 15, 1997 /s/ Martin L. Edelman
- ------------------- -----------------------------
Date Martin L. Edelman
Trustee
April 15, 1997 /s/ Gary R. Garrabrant
- ------------------- -----------------------------
Date Gary R. Garrabrant
Trustee
April 15, 1997 /s/ John R. Klopp
- ------------------- -----------------------------
Date John R. Klopp
Trustee
605218.1
46
<PAGE>
As filed with the Securities and Exchange Commission on June 2, 1997
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
[Fee Required]
For the fiscal year ended December 31, 1996
[X] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
For the Transition period from -----------------------------
Commission File Number 1-8063
California Real Estate Investment 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.)
131 Steuart Street, Suite 200, San Francisco, California 94105
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (415) 905-0288
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Shares of Beneficial Interest New York Stock Exchange
$1.00 par value ("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, and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No __
Sequential Page: 01 of
Exhibit Index: Page
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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.
[ ]
MARKET VALUE
Based on the closing sales price of $5.125 per share, the aggregate market value
of the outstanding Common Shares of Beneficial Interest held by non-affiliates
of the Registrant as of March 7, 1997 was $11,160,927.
605218.1
<PAGE>
OUTSTANDING SHARES
As of March 7, 1997 there were 9,137,335 outstanding Common Shares of Beneficial
Interest ("Common Shares"). The Common Shares are listed on the New York and
Pacific Stock Exchanges (trading symbol "CT"). Trading is reported in many
newspapers as "Cal REPRESENTATIVE" (CUSIP No. 130559107).
605218.1
48
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PAGE
- -------------------------------------------------------------------------------
PART II
- -------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 1-6
Item 8. Financial Statements and Supplementary Data 7-25
- -------------------------------------------------------------------------------
PART III
- -------------------------------------------------------------------------------
Item 10. Trustees and Executive Officers of the Registrant 26-28
Item 12. Security Ownership of Certain Beneficial Owners and Management 29
Item 13. Certain Relationships and Related Transactions 30
- -------------------------------------------------------------------------------
605218.1
<PAGE>
PART II
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Overview
The Trust has heretofore elected to be taxed as REIT. As long as the Trust
qualifies as a REIT, dividends paid to shareholders will be allowed as a
deduction for purposes of determining income subject to federal corporate income
tax. As a result, as long as the Trust qualifies as a REIT, the Trust will not
be subject to federal income tax on the portion of its net income that is
distributed to shareholders. However, following consummation of the Investment
and the Acquisition, the Trust anticipates that its status as a REIT will
terminate and it will become subject to income and franchise taxes on its income
to the extent that it cannot offset such income with net operating losses or
capital loss carryforwards.
Since November 1990, the Trust has not made new investments in income-producing
real property. During this period, the Trust originated new mortgage loans in
connection with the disposition of property owned.
The Trust previously developed an expansion strategy to pursue growth
opportunities through acquisitions, joint venture arrangements and a possible
infusion of new capital. In late 1994 and 1995, after pursuing opportunities to
grow and improve the profitability of its real property and mortgage portfolio
(including acquiring the hotel assets of Peregrine), the Board of Trustees
determined that the Trust should redeploy its current asset portfolio into
better performing assets. The Trust pursued the foregoing, and by the end of
March 1997, the Trust had sold or disposed of all of its income-producing
properties and had invested the proceeds in liquid mortgage-backed securities
which satisfy REIT-asset qualification requirements and mortgage loans. As of
December 31, 1996, the Trust had $14,115,000 invested in such mortgage-backed
securities and $1,576,000 in mortgage loans.
Following is a discussion and analysis on the operations and financial results
of 1996 compared with the operations and financial results of 1995 and 1994. For
comparison purposes, it should be noted that the CalREIT property portfolio
underwent a significant reduction in size between 1994 and 1996. At the
beginning of 1994, CalREIT owned a total of six properties, one of which was
sold in the latter half of the year. In 1995, CalREIT owned four commercial
properties, one hotel and a portfolio of seven mortgage notes. During 1996, the
Trust disposed of two of its commercial properties, the hotel and four mortgage
notes. As of year end 1996, the Trust's real estate portfolio included two
commercial properties and three mortgage notes.
In 1994, Peregrine, the majority shareholder at the time, voted its shares to
replace CalREIT's Board of Trustees. The new Board terminated the contracts of
CalREIT's then outside advisor and property manager and appointed new
management. During 1994, management concentrated on stabilizing property
operations and bringing mortgage note payments due the Trust current. A new
property management company was selected to oversee operations at the Trust's
commercial properties and a hotel management company was engaged to lease the
hotel property.
In 1995, the Board of Trustees was expanded to include two independent Trustees.
Also in 1995, CalREIT developed and began to implement its strategy to expand
the Trust to improve shareholder value. Management began to monetize the Trust's
assets to facilitate a growth strategy through a merger or acquisition
transaction. As part of this strategy, the Trust's four remaining commercial
properties were readied for sale. Leasing, capital and tenant improvement
expenditures were approved as they related to their impact on potential sales
prices. As of the end of 1995, Redfield Commerce Center was in escrow and the
other three commercial properties were listed with real estate brokerage firms.
605218.1
1
<PAGE>
In the first quarter of 1996, the sale of Redfield Commerce Center closed and
the Trust allowed foreclosure on its hotel because of the property's limited
investment potential given the lender's unwillingness to restructure the debt.
In the second quarter of 1996, the Bekins Storage Facility was sold. As part of
the Trust's disposition activities, a portion of the Trust's portfolio of
mortgage notes were packaged for sale and by the end of the third quarter four
mortgage notes had been sold. The two remaining commercial properties, Fulton
Square and Totem Square, had a total net book value of $8,585,000 at December
31, 1996 with collateralized indebtedness totaling $4,283,000 (50%). The Trust's
$7,703,000 mortgage note portfolio of three notes had a net book value of
$1,576,000 as of December 31, 1996, the reduction in value due primarily to
cumulative write downs in valuation.
Simultaneous with disposition activities throughout 1996, management and a
Special Committee appointed by the Board of Trustees continued to explore growth
opportunities for the Trust. Potential transactions involving hotels,
apartments, mortgage investments, mobile home communities and a variety of other
proposals were reviewed and potential merger candidates investigated.
Liquidity and Capital Resources
The Trust's primary liquidity and capital resources include its cash, marketable
securities and cash generated from the monetization of assets. The Trust's
unrestricted cash totaled $4,698,000 on December 31, 1996, down slightly from
$4,778,000 at December 31, 1995. In 1996, the Trust's principal sources of
liquidity were from cash on hand, operating income, and from interest and
principal payments from investments in liquid mortgage-backed securities. As of
December 31, 1996, the Trust had $14,115,000 invested in such marketable
securities. No dividends were paid by CalREIT in 1996.
Debt service paid on the Trust's first mortgage notes totaled $496,000 in 1996.
The note on Totem Square of $4,256,000 was originally scheduled to mature on
April 1, 1996. The Trust received an extension from the lender to May 1, 1997,
under the same terms and conditions as the original agreement. Upon the sale of
its two remaining commercial properties, which occurred in February and March of
1997, the Trust has retired all first mortgage debt obligations.
The major sources of liquidity for the Trust in 1997 will be its cash on hand as
well as interest and principal payments from its investments in real estate
securities. In addition, in connection with the Investment, the Trust will
obtain between $32 and $34 million in new equity capital to be used in
implementing the New Business Plan. See "Item 1 Recent Developments."
The primary demands on the Trust's capital resources in 1997 will be funding the
implementation of the New Business Plan. The Trust believes that the Trust has
sufficient financial resources to meet the cash requirements contemplated by the
plan.
Funds From Operations
The Trust believes that funds from operations ("FFO") is an appropriate measure
of performance of a REIT because, among other things, industry analysts have
accepted it as an appropriate measure of the performance of REITS. FFO is
defined by the National Association of Real Estate Investment Trusts as net
income computed in accordance with generally accepted accounting principles
before gains and losses on sales of property and from debt restructuring plus
depreciation and amortization. In calculating the gain or loss on sales of
property, the Trust has included and combined the gain or loss on the sales of
real estate assets and mortgage loans secured by real estate assets. Funds
Available for Distribution ("FAD") is defined as FFO less capital expenditures
funded by operations and loan amortization. The Trust believes that in order to
facilitate a clear understanding of the historical operating results of the
Trust, FFO and FAD should be examined in conjunction with net income (loss) as
presented in this report. FFO and FAD should not be considered as an alternative
to net income (loss) as an indication of the Trust's performance or to cash flow
as a measure of liquidity.
605218.1
2
<PAGE>
FFO (which was computed without adding back amortization of deferred financing
costs and depreciation of non-rental real estate assets) and FAD for the years
ended December 31, 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
Calculation of Funds From Operations and Funds Available for Distribution
(Dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income before gain (loss)
on foreclosure or sale of investments and
valuation losses $ 260 $ 437 $ 301
Depreciation and amortization 64 662 595
--------- ------- --------
Funds From Operations 324 1,099 896
Capital Improvements (146) (321) (106)
Loan principal payments (77) (405) (94)
--------- ------- --------
Funds Available for Distribution $ 101 $ 373 $ 696
========= ======= ========
</TABLE>
FFO totaled $324,000 in 1996, down 71% from the FFO of $1,099,000 in 1995. FFO
in 1995 was up 23% from $896,000 in 1994. The decrease in 1996 was primarily due
to a reduction in the number of assets contributing to the Trust's income pool.
The increase in FFO in 1995 over 1994 was a result of significant reductions in
operating expenses resulting from the sales of properties and the leasing of the
hotel to a third party. There were no cash distributions paid to shareholders in
either 1995 or 1996 as the Trust continued to build its reserves for a potential
expansion transaction; distributions paid to shareholders totaled $890,000 in
1994. FFO is not intended to be a measure of the Trust's ability to pay cash
dividends, and FFO as calculated by the Trust may not be comparable with
similarly titled information reported by other REITs.
Results of Operations
As of December 31, 1996, 1995, and 1994 overall weighted occupancy levels by
class of property were as follows:
Property Type 1996 1995 1994
------------- ---- ---- ----
Shopping Center 77% 83% 77%
Hotel - 52% 42%
The weighted average occupancy is calculated by multiplying the occupancy for
each property by its square footage and dividing by the square footage in the
portfolio.
Revenues
Total revenues were $3,155,000 in 1996, down 11% from $3,535,000 in 1995, which
were down 26% from $4,787,000 in 1994. 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 Trust's note portfolio and decreased rental
revenues. In 1995, there was a $473,000 reduction in hotel revenue compared to
the prior year as a result of the terms and conditions of the lease arrangement
in place throughout 1995.
Rental revenues at the Trust's commercial properties were $2,019,000 in 1996,
down 4% from $2,093,000 in 1995. Rental revenues in 1995 were down 19% from
$2,593,000 in 1994. The decrease in rental revenues reported in 1996
605218.1
3
<PAGE>
was attributable primarily to the absence of rent collected at Redfield Commerce
Center and the Bekins Storage Facility which were sold in the first half of the
year. The decrease in rental revenue in 1995 compared to that collected in 1994
was attributable to the absence of $196,000 in rent collected in the prior year
at the Imperial Canyon Shopping Center prior to its sale, as well as a decrease
of $305,000 in rents collected at Fulton Square Shopping Center and Totem
Square.
Because of the disposition of the Trust's hotel property in February 1996, and
the change in the status of the hotel from direct management to a lease
arrangement, a comparison of 1996, 1995 and 1994 revenues generated by this
property is not relevant. No revenues were generated to the Trust by the hotel
in 1996. The revenues generated in 1996 are comprised of lease revenues net of
any bad debt from CapStar, the hotel management company which leased the Casa
Grande Motor Inn. Despite improvements in operations and the implementation of a
lease arrangement financially favorable to the Trust, in 1994 the hotel was
unable to generate sufficient revenue to cover its debt service requirements.
The Trust suspended debt payments in 1995 and after a refusal by the lender to
restructure debt terms, CalREIT allowed the property to be foreclosed upon in
the first quarter of 1996.
Revenues from interest were $1,136,000 in 1996, down 19% from $1,396,000 in
1995. The decrease 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. Revenues from interest in 1995 were
down 17% from 1994 revenues from interest of $1,675,000. In 1994, the Trust
recognized an additional $735,000 in interest income on one of its mortgage
notes. In September 1994, this note was modified and $491,000 of accrued
interest, the recognition of which had been deferred, was paid in consideration
for releasing an asset from the pool of properties collateralizing the note.
This event was the primary cause of the decrease of interest income in 1995 from
1994.
Expenses
Total expenses were $2,895,000 in 1996, down 7% from $3,098,000 in 1995. In
1995, total expenses were down 31% from total expenses of $4,486,000 in 1994.
The reduction in expenses in 1996 was primarily the result of the downsizing of
the Trust's portfolio which reduced depreciation, interest expense and
associated property operating expenses. The reduction in expenses by $1,388,000
in 1995 over those of 1994 resulted from reduced interest expense and hotel and
commercial property operating expenses caused by the downsizing of the Trust's
portfolio and the lease agreement with the hotel management company. As noted
above, due to the disposition of the hotel property and the change in the
management of hotel operations in 1994, a direct comparison of 1996, 1995 and
1994 results is not relevant. In 1996, the hotel, as a function of the operating
lease agreement generated no income or expense to the Trust. In 1995, hotel
operating expenses decreased $763,000 from 1994, attributable to the leasing of
the property to a third-party hotel management company in mid-year.
Interest expense was $547,000 in 1996, down 33% from $815,000 in 1995, which was
down 22% from $1,044,000 in 1994. The decrease in 1996 reflected the disposition
of the hotel property. The decrease in interest expense in 1995 over that of
1994 reflected the sale of the Imperial Canyon Shopping Center and the payoff of
the note on the Fulton Square Shopping Center.
The 1996 non-cash depreciation charge was $64,000, a decrease of 90% from
$662,000 in 1995. Depreciation charges increased 11% in 1995 compared to the
depreciation charge of $595,000 in 1994. The decrease in 1996 reflected the sale
of Redfield Commerce Center, the Bekins Storage Facility and the disposition of
the hotel property. In addition, the Trust's two remaining properties were not
depreciated in 1996 because they were being held for sale. The slight increase
in 1995 over that of 1994 resulted from amortization of certain property
specific expenses.
General and administrative expenses were $1,503,000 in 1996, up significantly
from $933,000 in 1995. General and administrative expenses in 1995 were up 15%
from the $813,000 reported in 1994. While the Trust was able to lower a number
of office expenses, a net increase in general and administrative costs occurred
in 1996 due primarily to an accelerated investigation of potential merger or
acquisition candidates plus due diligence costs related to the expansion
605218.1
4
<PAGE>
transaction which had not been incurred in the prior year. Throughout 1996,
CalREIT continued to be negatively impacted by its small size with respect to
general and administrative expenses. As a result of certain fixed costs required
to operate a public company, a disproportionate amount of funds was spent on
overhead expenses and administration of the Trust. A potential benefit to an
expansion of the Trust is expected to be a reduction in the percentage of
revenues required to support overhead and administrative activities. The
increase in general and administrative costs in 1995 over those of 1994 was
primarily due to legal and accounting costs which had not been incurred in the
prior year, plus expansion transaction development costs.
Net Loss
The net loss for the Trust 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 Trust from property and mortgage note
dispositions offset by valuation losses discussed further below. Net loss in
1995 was up significantly from a net loss of $36,000 reported in 1994. The
increase in net loss in 1995 compared to 1994 was due primarily to a substantial
difference in valuation losses charged in 1995 as compared to those charged in
1994.
Operating income was $260,000 in 1996, down 41% from $437,000 in 1995. In 1995
operating income was up 45% from $301,000 in 1994. The $177,000 decline in
operating income in 1996 was primarily the result of an increase in Trust
operating expenses during the year offset by a reduction in depreciation
charges. Operating income in 1995 was $136,000 greater than that reported in
1994, primarily because of lower interest expense and reduced hotel operating
expenses.
Net Gain or Loss on Foreclosure or Sale of Investments
Income before valuation losses to the Trust was $1,329,000 in 1996 as compared
to $503,000 in 1995 and $83,000 in 1994. The net gain recognized from the sale
of the Redfield Commerce Center in the first quarter of 1996 was $299,000. There
was no gain or loss upon the foreclosure of the Casa Grande Motor Inn 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 Trust incurred a net loss of $164,000
from the sale of the Bekins Storage Facility. Also during the second quarter of
1996, the Trust sold two of its seven mortgage notes. A gain of $430,000 was
recognized upon the sale of the Trust'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 Trust'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 Trust sold two more
mortgage notes. A gain of $115,000 was recognized upon the sale of the Trust'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 Trust's mortgage note which was collateralized by a second deed of
trust on an office/industrial building in Sunnyvale, California.
In 1995, the Trust recognized a deferred gain from the partial principal payment
received on one of its mortgage notes. During the first five months of 1994, the
Trust's hotel property experienced an average operating loss after debt service
of $107,000 per month. With the execution of a lease with CapStar in 1994, the
hotel management company, 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 with CapStar
was renegotiated in June 1995, reducing the monthly lease payments from $20,000
to approximately $9,000; therefore, increasing the loss recorded by the Trust.
In 1994 the Trust 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 Trust's mortgage notes held at that time.
605218.1
5
<PAGE>
Valuation Losses
For the year ended December 31, 1996, the Trust reported total valuation losses
of $1,743,000. By year end, the Trust had reduced the book value of the Fulton
Square Shopping Center to $1,215,000 and the book value of Totem Square 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 Fulton Square Shopping
Center's value was the result of the Trust'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 Totem
Square 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 in the first quarter of 1997.
In 1995, valuation losses of $3,281,000 resulted from the write down in value of
two commercial properties and five mortgage notes. In 1994, valuation losses of
$119,000 resulted from the write down of value on two commercial properties. In
1996, 1995 and 1994 there were no extraordinary items.
Significant Changes in the Economic Environment
Changing interest rates are not expected to have a significant effect on the
Trust's operations in 1997 as most of the Trust's assets had been monetized by
year end. Should the Trust desire to undertake debt obligations or to raise
equity capital in the future, an increase in interest rates would make either
debt or equity capital more costly.
605218.1
6
<PAGE>
- -------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- -------------------------------------------------------------------------------
Index Page
- -------------------------------------------------------------------------------
Consolidated Financial Statements
Report of Independent Accountants 8
Consolidated Balance Sheets 9
Consolidated Statements of Operations 10
Consolidated Statements of Changes in Shareholders' Equity 11
Consolidated Statements of Cash Flows 12
Notes to Consolidated Financial Statements 13-25
605218.1
7
<PAGE>
Coopers Coopers & Lybrand L.L.P.
& Lybrand
a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of California
Real Estate Investment Trust:
We have audited the accompanying consolidated balance sheets of California Real
Estate Investment Trust and Subsidiary (the "Trust") as of December 31, 1996 and
1995, and the related consolidated statements of operations, cash flows, and
changes in shareholders' equity for each of the three years in the period ended
December 31, 1996. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedules as listed in
the accompanying index. 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 California Real
Estate Investment Trust and Subsidiary as of December 31, 1996 and 1995, and the
consolidated 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. In addition, in our opinion, the financial
statements schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
San Francisco, California Coopers & Lybrand L.L.P.
February 14, 1997
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International,
a Swiss limited liability association.
605218.1
8
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
----------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments, Generally Held for Sale:
Rental properties, less accumulated depreciation of
$0 and $2,777,000 in 1996 and 1995,
respectively, and valuation allowances of
$0 and $6,898,000 in 1996 and 1995,
respectively $ 8,585,000 $ 17,215,000
Notes receivable, net of valuation allowances and
deferred gains of $6,127,000 and $9,151,000 in
1996 and 1995, respectively 1,576,000 10,502,000
Marketable securities available-for-sale 14,115,000 -
---------- ------------
24,276,000 27,717,000
Cash 4,698,000 4,778,000
Receivables, net of allowance of $1,001,000 and $700,000
in 1996 and 1995, respectively 707,000 680,000
Other assets, net of valuation allowance of $0 and
$310,000 in 1996 and 1995 respectively 355,000 357,000
---------- ------------
Total Assets $ 30,036,000 $ 33,532,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term notes payable, collateralized by deeds of trust
on rental properties $ 5,169,000 $ 8,335,000
Accounts payable and accrued expenses 326,000 209,000
Other liabilities 70,000 81,000
------------ ------------
Total Liabilities 5,565,000 8,625,000
------------ ------------
Commitments (Note 10)
Shareholders' Equity:
Shares of beneficial interest, par value $1 a share; unlimited
authorization, 9,137,000 and 9,137,000 shares
outstanding in 1996 and 1995, respectively 9,137,000 9,137,000
Additional paid-in capital 55,118,000 55,118,000
Unrealized holding loss on marketable securities (22,000) -
Accumulated deficit (39,762,000) (39,348,000)
------------- -----------
Total Shareholders' Equity 24,471,000 24,907,000
------------ -----------
Total Liabilities and Shareholders' Equity $ 30,036,000 $ 33,532,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
605218.1
9
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
----------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rent $ 2,019,000 $ 2,093,000 $ 2,593,000
Interest 1,136,000 1,396,000 1,675,000
Hotel -- 46,000 519,000
------------- --------------- --------------
3,155,000 3,535,000 4,787,000
------------- --------------- --------------
Expenses:
Operating expenses 685,000 584,000 1,011,000
Hotel operating expenses -- 8,000 771,000
Property management 96,000 96,000 252,000
Depreciation and amortization 64,000 662,000 595,000
Interest 547,000 815,000 1,044,000
General and administrative 1,503,000 933,000 813,000
------------- --------------- --------------
2,895,000 3,098,000 4,486,000
------------- --------------- --------------
Income before gain (loss) on
foreclosure or sale of investments and
valuation losses 260,000 437,000 301,000
Net gain (loss) on foreclosure or sale of
investments 1,069,000 66,000 (218,000)
------------- --------------- -------------
Income before valuation losses 1,329,000 503,000 83,000
Valuation losses 1,743,000 3,281,000 119,000
------------- --------------- --------------
Net Loss (414,000) (2,778,000) (36,000)
============= =============== ==============
Net loss per share of beneficial interest $ (.05) $ (0.30) $ (0.00)
============= =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
605218.1
10
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
----------
Unrealized
Holding
Shares of Additional Loss on Total
Beneficial Interest Paid-in Accumulated Marketable Shareholders
Number Amount Capital Deficit Securities Equity
--------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 9,125,000 $9,125,000 $55,106,000 $(35,620,000) $ - $28,611,000
Net loss - - - (36,000) (36,000)
Proceeds from shares issued 12,000 12,000 12,000 - 24,000
Distributions - - - (914,000) (914,000)
--------- ---------- ----------- ------------ -----------
Balance at December 31, 1994 9,137,000 9,137,000 55,118,000 (36,570,000) 27,685,000
--------- ---------- ----------- ------------ -----------
Net loss - - - (2,778,000) (2,778,000)
--------- ---------- ----------- ------------ -----------
Balance at December 31, 1995 9,137,000 9,137,000 55,118,000 (39,348,000) 24,907,000
--------- ---------- ----------- ------------ -----------
Unrealized holding loss on
marketable securities - - - - (22,000) (22,000)
Net loss - - - (414,000) - (414,000)
------------ ---------- -----------
Balance at December 31, 1996 9,137,000 $9,137,000 $55,118,000 $(39,762,000) $ (22,000) $24,471,000
========= ========== =========== ============= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
605218.1
11
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
----------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $ (414,000) $ (2,778,000) $ (36,000)
------------ ------------ -------------
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation and amortization 64,000 662,000 595,000
(Gain) loss on foreclosure or sale of
investments (1,069,000) (66,000) 218,000
Valuation losses 1,743,000 3,281,000 119,000
Changes in assets and liabilities:
(Increase) decrease in receivables (38,000) 294,000 107,000
(Increase) decrease in other assets (61,000) (282,000) 82,000
Increase (decrease) in accounts payable
and accrued expenses 226,000 166,000 (45,000)
Increase (decrease) in other liabilities (2,000) 11,000 (106,000)
------------ ------------ -------------
Total adjustments to net (loss) 863,000 4,066,000 970,000
------------ ------------ -------------
Net cash provided by operating activities 449,000 1,288,000 934,000
------------ ------------ -------------
Cash flows from investing activities:
Payments related to sales of rental properties -- -- (100,000)
Proceeds from sale of assets 13,796,000 -- --
Improvements to rental properties (146,000) (321,000) (106,000)
Collections on notes receivable 35,000 850,000 346,000
Purchase of marketable securities (15,849,000) -- --
Principal collection of marketable securities 1,712,000 -- --
Increase in notes receivable -- -- (175,000)
------------ ------------ -------------
Net cash (used in) provided by investing activities (452,000) 529,000 (35,000)
------------ ------------ -------------
Cash flows from financing activities:
Principal payments on long-term notes payable (77,000) (405,000) (94,000)
Distributions paid -- -- (890,000)
------------ ------------ -------------
Net cash used in financing activities (77,000) (405,000) (984,000)
------------- ------------ -------------
Net (decrease) increase in cash (80,000) 1,412,000 (85,000)
Cash, beginning of year 4,778,000 3,366,000 3,451,000
------------ ------------ -------------
Cash, end of year $ 4,698,000 $ 4,778,000 $ 3,366,000
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
605218.1
12
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies:
Organization
California Real Estate Investment Trust (the "Trust" or "CalREIT") was
organized under the laws of the State of California pursuant to a
Declaration of Trust dated September 15, 1966.
The Trust became a partner of Totem Square, L. P. ("Totem"), a Washington
Limited Partnership in which the Trust owns a 59% interest, on November 30,
1990. The Trust also formed CalREIT Totem Square, Inc. ("Cal-CORP") to act
as general partner of Totem. Cal-CORP has a 1% interest in Totem, and Totem
Square Associates, an unrelated party, has the remaining 40%.
In 1994, the Trust operated as a subsidiary of The Peregrine Real Estate
Trust ("Peregrine"), which then held 76% of the Trust's outstanding Shares
of Beneficial Interest. In April 1994, Peregrine replaced the CalREIT Board
of Trustees with a slate of its own Trustees. In 1995, the Board was
expanded from three to five Trustees, two of whom were independent. In
1996, the Board of Trustees was comprised of two independent Trustees, one
Trustee who concurrently served on the Board of Trustees of Peregrine, a
former officer of the Trust, and the then Chief Executive Officer of the
Trust.
On January 3, 1997, Peregrine sold its entire 76%-ownership interest in the
Trust to CalREIT Investors Limited Partnership, an entity controlled by
Samuel Zell. Simultaneous with the closing of this Transaction, the Board
of Trustees was expanded to seven members; one Trustee, who also served on
the Peregrine Board of Trustees, resigned; and three additional Trustees,
nominated by CRIL, were appointed to the Board.
At the end of 1996, the Trust owned two commercial properties, Fulton
Square Shopping Center and Totem Square located in Sacramento, California
and Kirkland, Washington, respectively. The Trust also owned a mortgage
note portfolio of three notes encompassing approximately $7.7 million in
loans, with an aggregate book value of approximately $1.6 million. These
loans bear interest at an overall effective rate of approximately 8%. They
are collateralized by mortgages on real property. Most of the investments
in the three loans were originated by the Trust in connection with the
disposition of Trust properties prior to 1996. Additionally, at December
31, 1996, the Trust had approximately $14 million invested in liquid
mortgage-backed securities.
605218.1
13
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Principles of Consolidation
For 1996, 1995 and 1994, the consolidated financial statements include the
accounts of the Trust, Cal-CORP and Totem.
Rental Properties
At December 31, 1996 and 1995, rental properties are carried at cost, net
of accumulated depreciation and less a valuation allowance for possible
investment losses. The Trust's valuation allowance for possible investment
losses represents the excess of the carrying value of individual properties
over their appraised or estimated fair value less estimated selling costs.
At December 31, 1996 all rental properties are classified as held for sale
and valued at net estimated sales price.
The additions to the valuation allowance for possible investment losses are
recorded after consideration of various external factors, particularly
overbuilding in real estate markets which has a negative impact on
achievable rental rates. A gain or loss will be recorded to the extent that
the amounts ultimately realized from property sales differ from those
currently estimated. In the event economic conditions for real estate
continue to decline, additional valuation losses may be recognized in the
near term.
When applicable, the allowance for depreciation and amortization has been
calculated under the straight-line method, based upon the estimated useful
lives of the properties which lives range from 30 to 40 years. Expenditures
for maintenance, repairs and improvements which do not materially prolong
the normal useful life of an asset are charged to operations as incurred.
Real estate acquired by cancellation of indebtedness or foreclosure is
recorded at fair market value at the date of acquisition but not in excess
of the unpaid balance of the related loan plus costs of securing title to
and possession of the property.
Other Assets
The Trust amortizes leasing commissions on a straight-line basis over the
lives of the leases to which they relate. Financing costs are amortized
over the lives of the loans or other financial instruments to which they
relate.
605218.1
14
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Income Taxes
The Trust has elected to be taxed as a real estate investment trust and as
such, is not taxed on that portion of its taxable income which is
distributed to shareholders, provided that at least 95% of its real estate
trust taxable income is distributed and that the Trust meets certain other
REIT requirements. Due to federal and California tax net operating loss
carryforwards ("NOLs"), the Trust does not have taxable income for the year
ended December 31, 1996. The Trust has federal and California NOLs as of
December 31, 1996 of approximately $17,631,000 and $5,194,000,
respectively. Such NOLs expire through 2011 for federal and 2001 for
California. The Trust also has a federal and California capital loss
carryover of approximately $1,567,000 that can be used to offset future
capital gain.
Due to the transaction and the prior year ownership change related to the
Peregrine bankruptcy, NOLs are limited for both federal and California to
approximately $1,500,000 annually. Any unused portion of such annual
limitation can be carried forward to future periods.
Cash
The Trust invests its cash in demand deposits with banks with strong credit
ratings. Bank balances in excess of federally insured amounts totaled
$4,301,000 and $4,577,000 as of December 31, 1996 and 1995, respectively.
The Trust has not experienced any losses on these deposits.
Sales of Real Estate
The Trust complies with the provisions of Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate." Accordingly, the
recognition of gains on certain transactions are deferred until such
transactions have complied with the criteria for full profit recognition
under the Statement. The Trust had deferred gains of $239,000 and
$1,103,000 at December 31, 1996 and 1995, respectively.
Interest Income Recognition
The Trust recognizes interest income on notes receivable when it is
estimated that the fair value of the collateral related to the note is
adequate.
605218.1
15
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Risks and Uncertainties
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 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.
Impairment of a Loan
Effective January 1, 1995 CalREIT adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors of Impairment of a Loan," as
amended ("SFAS 114"). In accordance with SFAS 114, CalREIT considers loans
where it is probable they will be unable to collect all amounts
contractually due, as being impaired. Where an impairment is indicated, a
valuation writedown is measured based upon the excess of the loan amount
over the fair value of the collateral of the loan less costs to sell.
Interest income from impaired loans is recognized to the extent cash is
received.
Impairment of Long-Lived Assets
In 1995, Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" was issued. This statement requires that
companies review long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the carrying amount
of the asset exceeds its estimated undiscounted net cash flow before
interest, the company must recognize an impairment loss equal to the
difference between its carrying amount and its current value. After an
impairment is recognized, the reduced carrying amount of the asset shall be
accounted for as its new cost. For a depreciable asset, the new cost shall
be depreciated over the asset's remaining useful life. Long-lived assets to
be disposed of shall be reported at the lower of carrying amount or fair
value less cost to sell. In 1996, the Trust adopted the provisions of SFAS
121. Generally, fair values are estimated using undiscounted cash flow,
direct capitalization and market comparison analyses.
Net Loss Per Share
Net loss per share of beneficial interest is based upon the
weighted-average number of shares of beneficial interest outstanding.
Shares of beneficial interest equivalents were anti-dilutive for the three
years ended December 31, 1996. The weighted average number of shares of
beneficial interest and earnings per share of beneficial interest are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average shares of
beneficial interest 9,137,335 9,137,335 9,130,961
========= ========= =========
Loss per share of beneficial interest $ (.05) $ (0.30) $ (0.00)
</TABLE>
605218.1
16
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Reclassifications
Certain reclassifications have been made in the presentation of the 1995
and 1994 financial statements to conform to the 1996 presentation.
2. Related-Party Transactions:
Until April 14, 1994, administrative services were provided to the Trust by
B & B Property Investment, Development and Management Company, Inc. ("B &
B"). B & B's compensation consisted of an advisory fee based on the real
estate investments and real estate commissions in connection with
purchases, sales and leasing of Trust properties as well as a reimbursement
of certain expenses incurred in performing services for the Trust. Until
April 14, 1994, property management responsibilities of the Trust were
assigned to B & B Property Investment, Inc. ("B & B Property"). The
compensation for property management services was computed at 5% of the
gross receipts of each property managed and each note receivable serviced.
Compensation to B & B and B & B Property was $156,000 during 1994. Certain
disputes between the Trust, B & B and B & B Property arising from the
Trust's termination of B & B's and B & B Property's advisory and management
agreements were settled in May 1994 for $60,000. Prior to 1994, the Trust
entered into a management agreement with North Main Street Company ("North
Main"), a company owned by the President and Chairman of the Board of the
Trust's former advisor, B & B, to manage the Trust's hotel. Pursuant to
that agreement, the Trust incurred management fees of $16,000 in 1994. The
Trust also terminated that agreement with North Main in 1994 and leased the
hotel property to an unrelated third party, a professional hotel management
company which operated lodging facilities nationwide. No payments were made
to B & B or B & B Property in 1995 or 1996.
The Trust is self-administered. However, during 1996 and 1995 it shared
certain personnel and other costs with Peregrine, its majority interest
shareholder. The Trust reimbursed Peregrine pursuant to a cost allocation
agreement based on each Trust's respective asset values (real property and
notes receivable) that was subject to annual negotiation. During 1996 and
1995, reimbursable costs charged to the Trust by Peregrine 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 Peregrine at December 31, 1994.
605218.1
17
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
2. Related-Party Transactions, continued:
At December 31, 1996 and 1995, the Trust had $31,000 and $45,000,
respectively, due to Peregrine pursuant to the cost allocation agreement.
The cost allocation agreement between the Trust and Peregrine was
terminated on January 7, 1997.
3. Rental Properties:
At December 31, 1996 and 1995, the Trust's rental property portfolio at
cost included a retail and mixed-use retail property carried at $8,585,000
and $13,018,000 respectively; industrial buildings, carried at $0 and
$7,395,000 respectively; and a hotel property carried at $0 and $6,477,000,
respectively.
The Trust's hotel property, with a carrying value of $3,182,000 at December
31, 1995, was returned to the lender through foreclosure proceedings in
February 1996. No gain or loss was recorded on the foreclosure of the Casa
Grande Motor Inn.
4. Investment in Marketable Securities:
At December 31, 1996 and 1995, the Trust had $14,115,000 and $0,
respectively, invested in mortgage-backed securities classified as
"available-for-sale."
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," ("SFAS 115") issued in
May 1993 requires that at the date of acquisition and at each reporting
date, debt and equity securities be classified as "held-to-maturity,"
"trading" or "available for sale." Investments in debt securities in which
the Trust has the positive intent and ability to hold to maturity are
required to be classified as "held-to-maturity." "Held-to-maturity"
securities are required to be stated at cost and adjusted for amortization
of premiums and discounts to maturity in the statement of financial
position. Investments in debt and equity securities that are not classified
as "held-to-maturity" and equity securities that have readily determinable
fair values are to be classified as "trading" or "available-for-sale" and
are measured at fair value in the statement of financial position.
Securities that are bought and held principally for the purpose of selling
them in the near term are classified as "trading." Unrealized holding gains
and losses for "trading" securities are included in earnings.
605218.1
18
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
4. Investment in Marketable Securities, continued:
Investments that are not classified as "held-to-maturity" or "trading"
securities are classified as "available-for-sale." Unrealized holding gains
and losses for "available-for-sale" securities are excluded from earnings
and reported as a separate component of shareholders' equity until
realized.
In accordance with SFAS 115, the Trust determines the appropriate
classification at the time of purchase and Representative-evaluates such
designation at each balance sheet date.
At December 31, 1996, the Trust's "available-for-sale" securities consisted
of the following:
<TABLE>
<CAPTION>
Unrealized Estimated
Cost Gains Losses Fair Value
------- ----- ------ ----------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association, adjustable rate interest
currently at 7.783%, due April 1, 2024 $2,879 ($34) $ 2,845
Federal Home Loan Mortgage
Association, adjustable rate interest
currently at 7.625%, due June 1, 2024 $967 ($10) $957
Federal National Mortgage
Association, adjustable rate interest
currently at 7.292%, due April 1, 2025 $732 ($4) $728
Federal National Mortgage
Association, adjustable rate interest
currently at 6.144%, due May 1, 2026 $3,260 ($5) $3,255
Federal National Mortgage
Association, adjustable rate interest
currently at 6.116%, due June 1, 2026 $6,299 $31 - $6,330
------- ----- ------ -------
$14,137 $31 ($53) $14,115
======= ===== ====== =======
</TABLE>
The maturity dates above are not necessarily indicative of expected
maturities as principal is often prepaid on such instruments.
605218.1
19
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
5. Notes Receivable:
In order to facilitate sales of real estate, the Trust has accepted partial
payment in the form of notes receivable collateralized by deeds of trust.
As of December 31, 1996 and 1995, the Trust had long-term notes receivable,
collateralized by deeds of trust (before valuation allowances and deferred
gains) of $7,703,000 and $19,653,000, respectively. The notes are
collateralized by real estate properties in California and Arizona.
The notes bear interest at rates ranging from 7.63% to 9.5% as of December
31, 1996. For the year ended December 31, 1996, the overall effective rate
was approximately 8%.
6. Valuation Allowances:
Based on a review of its investments, the Trust has provided for valuation
allowances as set forth below. Adverse economic factors, particularly
overbuilt real estate markets which caused a decline in lease renewal
rates, were the primary causes of these valuation losses. If such adverse
economic factors continue, additional valuation loss provisions may be
required in the near term.
As of December 31, 1996, the Trust was in the process of monetizing its
assets and accordingly, wrote down such assets to current market value,
less estimated selling costs, the accounting treatment required when
investments are held for sale.
Analysis of changes in the allowance for possible losses on real estate
investments, notes receivable, and rents and interest receivable for 1996,
1995 and 1994 follow:
605218.1
20
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
6. Valuation Allowances, continued:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rental Properties
Allowance for valuation losses on
rental property investments:
Beginning balance $ 6,898,000 $ 5,863,000 $ 8,674,000
Provision for valuation losses 1,743,000 1,035,000 69,000
Amounts charged against allowance
for valuation losses ($8,641,000) -- ($2,880,000)
----------- ------------ ------------
Ending balance $ -- $ 6,898,000 $ 5,863,000
=========== ============ ============
Notes Receivable
Allowance for valuation losses and deferred
gains on notes receivable:
Beginning balance $ 9,151,000 $ 7,182,000 $ 7,442,000
Provision for valuation losses - 2,246,000 --
Deferred gains on notes and other, net - (66,000) (12,000)
Amounts charged against allowance
for valuation losses (3,024,000) (211,000) (248,000)
----------- ------------ ------------
Ending balance $ 6,127,000 $ 9,151,000 $ 7,182,000
=========== ============ ============
Rents and Interest Receivable
Allowance for bad debt losses on
rents and interest receivable:
Beginning balance $ 700,000 $ 323,000 $ 233,000
Provision for losses 501,000 873,000 183,000
Amounts charged against allowance
for losses (200,000) (496,000) (93,000)
----------- ------------ -----------
Ending balance $ 1,001,000 $ 700,000 $ 323,000
=========== ============ ============
</TABLE>
In addition, the Trust had established an allowance for valuation losses on
other assets in the amount of $ 0 and $310,000 at December 31, 1996 and
1995, respectively.
605218.1
21
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
7. Long-Term Notes Payable:
As of December 31, 1996 and 1995, the Trust had long-term notes payable
(Notes) of $5,169,000 and $8,335,000 respectively, most of which were
collateralized by deeds of trust on rental properties with an aggregate net
book value of $8,585,000 and $11,181,000 at December 31, 1996 and 1995,
respectively. These Notes are due in installments extending to the year
2014 with interest rates ranging from 8% to 10.75%. At December 31, 1996
none of the Notes were delinquent. At December 31, 1995, $3,089,000 of such
Notes, bearing interest at a default rate of 18% and secured by the Casa
Grande Motor Inn (which was foreclosed upon in February 1996) were
delinquent. As of December 31, 1996, contractually scheduled principal
payments during each of the next five years were $4,291,000, $39,000,
$43,000, $38,000 and $41,000, respectively, and $718,000 thereafter. The
Note on the Totem Square Shopping Center of $4,256,000 is due May 1, 1997.
8. Distributions:
There were no distributions paid in 1996 or 1995. Cash distributions were
made per share of beneficial interest in 1994 and were classified for
Federal income tax purposes as follows:
1996 1995 1994
---- ---- ----
Ordinary income - % - % - %
Capital gains income - % - % - %
Return of capital - % - % 100%
------- ------ -----
- % - % 100%
======= ====== =====
Total distributions per share $ 0.00 $ 0.00 $ 0.10
======= ==== ======
9. Stock Option Plans:
In November of 1995, the Board of Trustees approved two stock option plans
(the "Plans"). The Plans provided that if they were not approved by the
holders of a majority of the outstanding shares of the Trust within one
year after their adoption, they would automatically terminate. The Plans
were not approved by the holders of a majority of the outstanding shares of
the Trust within one year after their adoption and automatically terminated
in November 1996. At December 31, 1996 there were no stock options
outstanding.
605218.1
22
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
10. Statements of Cash Flows Supplemental Information:
In connection with the sale of property, the Trust entered into various
non-cash transactions as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales price $13,853,000 $ -- $ 4,423,000
Notes receivable -- -- --
Notes payable assumed by buyer and
other liabilities applied to sales
price (57,000) -- (4,523,000)
---------- -------- ----------
Cash received (paid) $13,796,000$ -- $ (100,000)
========== ======== ==========
Cost of property sold $19,321,000$ -- $ 8,084,000
========== ======== =========
</TABLE>
In 1996, with respect to its hotel property, the Trust allowed foreclosure
on a note payable secured by a deed of trust. The amount of $3,089,000
represents the value of the note payable relieved in connection with this
foreclosure and is aggregated in the 1996 sales price category above.
Distributions were made as follows:
1996 1995 1994
---- ---- ----
Total distributions $ -- $ -- $914,000
Distributions reinvested -- -- (24,000)
---------- -------- --------
Distributions paid in cash $ -- $ -- $890,000
========== ======== ========
Interest paid on the Trust's outstanding debt for 1996, 1995, and 1994 was
$550,000, $730,000 and $1,121,000, respectively.
605218.1
23
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
11. Commitments:
During 1995, the Trust entered into a three year, non-cancelable operating
lease for office facilities in San Francisco, California. Rent expense
under the operating lease was $40,000 in 1996. At December 31, 1996 future
minimum lease payments under the lease are $50,000, with $40,000 due in
1997 and $10,000 in 1998.
12. Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 ("SFAS 107") requires
disclosure of fair value information about financial instruments, whether
or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of 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 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Trust.
The estimated fair value of the Trust's marketable securities is set forth
in Note 4. The estimated fair value of the Trust's financial instruments,
other than marketable securities, including cash, notes receivable, rents
and other receivables and long-term notes payable, at December 31, 1996 and
1995, is approximately the same as their carrying amounts.
13. Minority Interest:
The Trust has a 60% ownership interest in Totem, its subsidiary. Totem's
net losses have exhausted the minority shareholder's equity interest. On
the consolidated statement of operations, no minority interest in the
subsidiary's net loss is recorded for 1996, 1995 or 1994. In the event that
future income is generated from the subsidiary, the Trust will have first
rights to the income to the extent of the minority shareholder's
accumulated deficit in the subsidiary.
Furthermore, the Trust has a note receivable from Totem, which note is
eliminated in consolidation, in the amount of $3,336,000. Pursuant to the
terms of that note, it is likely that CalREIT will be entitled to all
future income from Totem.
605218.1
24
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
14. Selected Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
Quarter Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Revenues $ 871,000 $ 780,000 $ 771,000 $ 733,000
Gain on fore-
closure or sale of
investments, net $ 299,000 $ 297,000 $ 517,000 $ (44,000)
Net income (loss) $ 440,000 $ (213,000) $ (514,000) $ (127,000)
Net income (loss) per share $ 0.05 $ (0.02) $ (0.06) $ (0.02)
1995
Revenues $ 879,000 $ 836,000 $ 942,000 $ 878,000
Gain on fore-
closure or sale of
investments, net $ 66,000 $ - $ - $ -
Net income (loss) $ 242,000 $ 44,000 $ 100,000 $ (3,164,000)
Net income (loss) per share $ 0.03 $ 0.00 $ 0.01 $ (0.34)
1994
Revenues $ 1,131,000 $ 780,000 $1,353,000 $ 1,523,000
Gain (loss) on fore-
closure or sale of
investments, net $ - $ 114,000 $ (344,000) $ 12,000
Net income (loss) $ (1,000) $ (328,000) $ 341,000 $ ( 48,000)
Net income (loss) per share $ (0.00) $ (0.04) $ 0.04 $ (0.00)
</TABLE>
605218.1
25
<PAGE>
PART III
- -------------------------------------------------------------------------------
Item 10. Trustees and Executive Officers
- -------------------------------------------------------------------------------
Trustees and Executive Officers
As of March 10, 1997, the Board of Trustees consisted of the seven persons
listed below. Messrs. Morrow, Brown, Steinberg and Ms. Bancroft served as
Trustees throughout 1996, as did Mr. John McMahan who resigned in January 1997.
Messrs. Edelman, Garrabrant and Klopp were added to the Board during the first
two months of 1997 following CRIL's acquisition of the 6,959,593 Common Shares
from Peregrine. See "Item 1 - Recent Developments."
Name Age Office
Frank A. Morrow 57 Trustee and Chairman of the Board
Gary R. Garrabrant 39 Trustee and Vice Chairman
John R. Klopp 43 Trustee and Chief Executive Officer
Juliana Bancroft 48 Trustee and Treasurer
Elliot G. Steinberg 59 Trustee and Secretary
Arnold E. Brown 49 Trustee
Martin L. Edelman 55 Trustee
The principal occupations and affiliations of the current Trustees are as
follows:
Frank A. Morrow, Chairman. Frank A. Morrow has been a trustee of the Trust since
1994. Mr. Morrow has been active in the real estate industry for over 25 years.
As an independent advisor and business consultant, he has worked for several
real estate companies as a turnaround specialist and workout expert. Other
assignments have included due diligence investigations, stepping in as senior
management in times of crisis, and multi-site real estate portfolio management.
Mr. Morrow has had considerable experience in the acquisition, financing,
leasing, management and sale of single as well as multiple assets. For a number
of years, he served as the Managing Director of Real Estate for Stanford
University and as Senior Vice President for the Boise Cascade Urban Development
Corporation. Prior to his business career, Mr. Morrow served nine years in the
U.S. Navy as an aviator and test pilot. He graduated from the U.S. Naval Academy
and in 1971 received an MBA degree from Stanford University.
Juliana Bancroft, Independent Trustee. Juliana Bancroft has been a trustee of
the Trust since 1995. Ms. Bancroft is an independent consultant to the
hospitality industry. Prior to this she served as a vice president and a
regional director with Kimpton Hotel and Restaurant Group headquartered in San
Francisco. The Kimpton Group is the largest developer and operator of
independent hotels and restaurants on the West Coast. During this period, among
other responsibilities, Ms. Bancroft worked as a project manager on seven
construction and redevelopment projects. She also has owned and operated her own
firm in which she acquired, financed, rehabilitated and sold residential
properties in Southern California. She has also been a principal in the
investment banking firm of Bancroft, Garcia & Lavell, Inc. which secured more
than $2 billion in real estate financing through the tax-exempt bond markets.
Ms. Bancroft graduated from the University of Wisconsin with a B.S. degree in
1971 and from the University of Oregon with an M.S. degree in 1975.
605218.1
26
<PAGE>
Arnold E. Brown, Trustee. Arnold E. Brown has been a trustee of the Trust since
1994. Mr. Brown has over 20 years experience in real estate finance and
investment. He is a Certified Public Accountant and previously served as a
partner of the international accounting and consulting firm of Grant Thornton,
where he was one of eight members of that firm's U. S. Real Estate Task Force.
Since 1983, Mr. Brown has been in the private real estate investment and
advisory service. Through his company, Brown Partners Ltd., he has acted as a
principal or intermediary in numerous real estate transactions and has advised
real estate investment companies on financial restructuring and real estate
securities valuation matters. Mr. Brown served as the Chief Financial Officer of
CalREIT from April 1994 through 1995. He graduated from the Wharton School of
the University of Pennsylvania in 1969 and received an MBA degree from Stanford
University in 1971.
Elliot G. Steinberg, Independent Trustee. Elliot G. Steinberg has been a trustee
of the Trust since 1995. Mr. Steinberg has been a managing partner since 1994 of
Sunrise Creek, a company engaged in real estate development, and a managing
partner of W.S. Ventures, a private investment partnership in emerging growth
companies for more than the past five years. Mr. Steinberg has also served as
corporate vice president and general counsel to Itel Corporation and was a
founder and senior partner of the San Francisco law firm of Flynn & Steinberg
specializing in real estate, banking, taxation and business planning. He was an
editor of the Journal of Taxation of Investments and is the co-author of several
books. Mr. Steinberg received his undergraduate degree at the University of
California Berkeley in 1961, attended the London School of Economics through
1961, and in 1964 received his JD degree from the Boalt Hall School of Law at
the University of California at Berkeley. Mr. Steinberg serves on the Boards of
Directors of BioFactors, Inc., Ganson Ltd. and Cege Co. Ltd. He was formerly a
director of Kimco Hotel Management Company.
Martin L. Edelman, Trustee. Martin L. Edelman has been a trustee of the Trust
since February 4, 1997. Mr. Edelman has been a director of Chartwell Leisure
Inc., a publicly traded owner and operator of hotel properties ("Chartwell"),
since November 1994 and has been president of Chartwell since January 1997. He
has also been a director of HFS Incorporated and a member of that corporation's
executive committee since November 1993. Mr. Edelman has been of counsel to
Battle Fowler LLP, a New York City law firm, since January 1994 and was a
partner with that firm from 1972 through 1993. Mr. Edelman also serves as a
director of Presidio Capital Corp. and G. Soros Realty, Inc.
Gary R. Garrabrant, Trustee. Gary R. Garrabrant has been a trustee of the Trust
since January 2, 1997 and vice chairman of the Trust since February 1997. After
the Acquisition, Mr. Garrabrant will resign as vice chairman of the Trust. Mr.
Garrabrant has been a senior vice president of EGI, an owner, manager and
financier of real estate and corporations since January 1996 and managing
partner of EGI Capital Markets, L.L.C. since September 1996. Prior to joining
EGI, he was a director of Sentinel Securities Corporation where he established a
real estate securities investment management operation. In 1994, Mr. Garrabrant
co-founded Genesis Realty Capital Management, a money management firm
exclusively focused on the equity and debt securities of public real estate
companies. From 1989 to 1994, he was responsible for equity private placements
and asset sales in the real estate investment banking division of The Bankers
Trust Company. From 1981 to 1989 he was associated with Chemical Bank. He is a
director of Meritage Hospitality Group Inc.
John R. Klopp, Trustee. John R. Klopp has been a trustee of the Trust since
January 2, 1997 and chief executive officer of the Trust since February 1997.
After the Acquisition, Mr. Klopp will also serve as vice chairman of the Trust.
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 a portfolio of construction and
permanent loans. He is a director of Metropolis Realty Trust, Inc., a Manhattan
office REIT.
605218.1
27
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on its review of Forms 3 and 4 and amendments thereto furnished to
the Trust during 1996 and written representation from certain of the trustees
and from the Former Parent that no Form is required to be filed, the Trust
believes that no trustee, officer or beneficial owner of more than 10% of its
Common Shares failed to file on a timely basis reports required pursuant to
Section 16(a) of the Exchange Act with respect to 1996 or any prior fiscal year.
However, John McMahan, a former trustee of the Trust, 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 Trust on February 9, 1997.
605218.1
28
<PAGE>
- -------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------------
Listed below are those shareholders known to the Trust as of March 20, 1997 to
be the beneficial owner or the member of a group which is the beneficial owner
of more than five percent of the Trust's shares of beneficial interest
(9,137,335 total). As of March 20, 1997, no Trustee owned Shares of Beneficial
Interest.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent
Title of Class of Beneficial Owner of Beneficial Ownership of Class
<S> <C> <C> <C>
Shares of CalREIT Investors Limited Partnership (1)
Beneficial Interest c/o Equity Group Investments, Inc.
Two North Riverside Plaza 6,959,593 76.2%
Chicago, Illinois 60606
</TABLE>
(1) The sole general partner of CalREIT Investors Limited Partnership is Zell
General Partnership, Inc., the sole director and stockholder of which is,
respectively, Samuel Zell and the Samuel Zell Revocable Trust (for which
Mr. Zell serves as trustee).
605218.1
29
<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.
May 30, 1997 /s/ Frank A. Morrow
- ------------------------- ------------------------------
Date Frank A. Morrow
Chairman of the Board
605218.1
30
<PAGE>
ANNEX G
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 1-8063
California Real Estate Investment 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.)
131 Steuart Street, Suite 200, San Francisco, CA 94105
(Address of principal executive offices) (Zip Code)
(415) 905-0288
(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 [ ]
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 March 31, 1997
- ------------------------------------ -----------------------------
Common Shares of Beneficial Interest
$1.00 par value ("Common Shares") 9,137,335
605218.1
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
INDEX PAGE
Part I. Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 1
Consolidated Statements of Operations -
For the Three Months Ended
March 31, 1997 and 1996 2
Consolidated Statements of Cash Flows -
For the Three Months Ended
March 31, 1997 and 1996 3
Notes to Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Defaults Upon Senior Securities 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
605218.1
<PAGE>
PART I. FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
Item 1. Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, March 31,
1996 1997
(Audited) (Unaudited)
<S> <C> <C>
ASSETS
Investments, Generally Held for Sale:
Rental properties $ -- $ 8,585,000
Notes receivable, net of valuation allowances and deferred gains
of $6,127,000 at March 31, 1997 and
December 31, 1996 2,658,000 1,576,000
Marketable securities available for sale 13,141.000 14,115,000
------------ ------------
15,799,000 24,276,000
Cash 8,330,000 4,698,000
Receivables, net of allowance of $1,126,000 and $1,001,000
at March 31, 1997 and December 31, 1996, respectively 687,000 707,000
Other assets 208,000 355,000
------------ ------------
Total Assets $ 25,024,000 $ 30,036,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term notes payable, collateralized by deeds of trust
on rental properties $ 880,000 $ 5,169,000
Accounts payable and accrued expenses 113,000 326,000
Other liabilities -- 70,000
------------ ------------
Total Liabilities 993,000 5,565,000
------------ ------------
Commitments
Shareholders' Equity:
Shares of beneficial interest, par value $1 a share; unlimited
authorization, 9,137,000 shares outstanding at
March 31, 1997 and December 31, 1996 9,137,000 9,137,000
Additional paid-in capital 55,145,000 55,118,000
Unrealized holding income (loss) on marketable securities 19,000
(22,000)
Accumulated deficit (40,270,000) (39,762,000)
------------ ------------
Total Shareholders' Equity 24,031,000 24,471,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 25,024,000 $ 30,036,000
============ ============
</TABLE>
605218.1
1
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
1997 1996
---- ----
Revenues:
Rent $ 236,000 $ 569,000
Interest 323,000 302,000
Other 54,000 --
----------- -----------
613,000 871,000
----------- -----------
Expenses:
Operating expenses 123,000 148,000
Property management 14,000 27,000
Depreciation and amortization 21,000 5,000
Interest 99,000 137,000
General and administrative 432,000 413,000
----------- -----------
689,000 730,000
----------- -----------
Income (loss) before gain (loss) on
sale of investments (76,000) 141,000
Gain (loss) on sale of investments (432,000) 299,000
------------ -----------
Net income (loss) $ (508,000) $ 440,000
============ ===========
Net income (loss) per share of
beneficial interest $ (0.06) $ 0.05
============ ===========
See accompanying notes to consolidated financial statements.
605218.1
2
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (508,000) $ 440,000
------------- ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 21,000 5,000
Loss (gain) on sale of investments 432,000 (299,000)
Changes in assets and liabilities:
Decrease (increase) in receivables, net 20,000 (9,000)
Increase in other assets (53,000) (59,000)
(Decrease) increase in accounts payable
and accrued expenses (213,000) 258,000
(Decrease) increase in other liabilities (70,000) 2,000
------------- ------------
Total adjustments to net (loss) income 137,000 (102,000)
------------- ------------
Net cash (used) provided by operating activities (371,000) 338,000
------------- ------------
Cash flows from investing activities:
Proceeds from sale of investments 7,306,000 --
Improvements to rental properties (64,000) (45,000)
Principal collections on notes receivable 8,000 12,000
Principal collections on marketable securities 1,015,000 --
------------- ------------
Net cash provided by (used in) investing activities 8,265,000 (33,000)
------------- ------------
Cash flows from financing activities:
Principal payments on long-term notes payable (4,289,000) (23,000)
Additional paid-in capital 27,000 --
------------- ------------
Net cash used in financing activities (4,262,000) (23,000)
------------- ------------
Net increase in cash 3,632,000 282,000
Cash, beginning of period 4,698,000 4,778,000
------------- ------------
Cash, end of period $ 8,330,000 $ 5,060,000
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
605218.1
3
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation:
Organization
California Real Estate Investment Trust (the "Trust" or "CalREIT") was
organized under the laws of the State of California pursuant to a
Declaration of Trust dated September 15, 1966.
The Trust became a partner of Totem Square, L. P. ("Totem"), a Washington
Limited Partnership in which the Trust owns a 59% interest, on November 30,
1990. The Trust also formed CalREIT Totem Square, Inc. ("Cal- CORP") to act
as general partner of Totem. Cal-CORP has a 1% interest in Totem, and Totem
Square Associates, an unrelated party, has the remaining 40%.
In 1994 the Trust operated as a subsidiary of The Peregrine Real Estate
Trust ("Peregrine"), which then held 76% of the Trust's outstanding Common
Shares. In April 1994, Peregrine replaced the CalREIT Board of Trustees
with a slate of its own Trustees. In 1995, the Board was expanded from
three to five Trustees, two of whom were independent. In 1996, the Board of
Trustees was comprised of two independent Trustees, one Trustee who
concurrently served on the Board of Trustees of Peregrine, a former officer
of the Trust, and the then Chief Executive Officer of the Trust.
On January 3, 1997, Peregrine sold its entire 76%-ownership interest in the
Trust to CalREIT Investors Limited Partnership ("CRIL"), an entity
controlled by Samuel Zell. Simultaneous with the closing of this
Transaction, the Board of Trustees was expanded to seven members; one
Trustee, who also served on the Peregrine Board of Trustees, resigned; and
three additional Trustees, nominated by CRIL, were appointed to the Board.
As of March 31, 1997, the Trust had sold its two remaining commercial
rental properties, Fulton Square Shopping Center and Totem Square in
Sacramento, California and in Kirkland, Washington, respectively. At the
end of the first quarter, the Trust owned a mortgage note portfolio of four
notes encompassing approximately $8,785,000 in loans with an aggregate book
value of approximately $2,658,000. These loans bear interest at an overall
effective rate of approximately 8%. They are collateralized by mortgages on
real property. Three of the investments in the four loans were originated
by the Trust in connection with the disposition of Trust properties prior
to 1996. The remaining note, in the face amount of approximately
$1,090,000, was made in conjunction with the sale of Fulton Square Shopping
Center in February 1997.
Additionally, as of March 31, 1997 the Trust had approximately $13,141,000
invested in liquid mortgage-backed securities.
605218.1
4
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation, continued:
Basis of Presentation
The accompanying financial statements are unaudited; however, they have
been prepared in accordance with generally accepted accounting principles
for interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting solely of normal recurring matters)
necessary for a fair presentation of the financial statements for these
interim periods have been included. The results for the interim period
ended March 31, 1997, are not necessarily indicative of the results to be
obtained for the full fiscal year. These financial statements should be
read in conjunction with the December 31, 1996, audited financial
statements and notes thereto, included in the California Real Estate
Investment Trust Annual Report on Form 10-K. The accompanying unaudited
consolidated financial statements of California Real Estate Investment
Trust include the accounts of the Trust, Cal-CORP and Totem.
Stock-Based Compensation
As of March 31, 1997 and December 31, 1996 there were no stock options
outstanding nor stock option plans in place.
2. Investments in Notes Receivable:
As of March 31, 1997 and December 31, 1996, the Trust had long-term notes
receivable, collateralized by deeds of trust (before valuation allowances
and deferred gains) of $8,785,000 and $7,703,000, respectively. The notes
are collateralized by real estate properties in California and Arizona. In
conjunction with the Trust's plan to monetize assets, its mortgage note
investments are classified for accounting purposes as "held for sale." The
notes bear interest at rates ranging from 7.63% to 9.5% as of March 31,
1997. For the quarter ended March 31, 1997 the overall effective rate was
approximately 8%.
605218.1
5
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. Investments in Marketable Securities:
At March 31, 1997, the Trust had $13,141,000 invested in liquid
mortgage-backed securities classified as "available-for-sale."
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," (SFAS 115) issued in
May 1993 requires that at the date of acquisition and at each reporting
date, debt and equity securities be classified as "held-to-maturity,"
"trading," or "available for sale." Investments in debt securities in which
the Trust has the positive intent and ability to hold to maturity are
required to be classified as "held-to-maturity." "Held-to-maturity"
securities are required to be stated at cost and adjusted for amortization
of premiums and discounts to maturity in the consolidated balance sheet.
Investments in debt and equity securities that are not classified as
"held-to-maturity" and equity securities that have readily determinable
fair values are to be classified as "trading" or "available-for-sale" and
are measured at fair value in the consolidated balance sheet. Securities
that are bought and held principally for the purpose of selling them in the
near term are classified as "trading." Unrealized holding gains and losses
for "trading" securities are included in earnings.
Investments that are not classified as "held-to-maturity" or "trading"
securities are classified as "available-for-sale." Unrealized holding gains
and losses for "available-for-sale" securities are excluded from earnings
and reported as a separate component of shareholders' equity until
realized.
In accordance with SFAS 115, the Trust determines the appropriate
classification at the time of purchase and reevaluates such designation at
each balance sheet date.
605218.1
6
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. Investments in Marketable Securities, continued:
At March 31, 1997, the Trust's "available-for-sale" securities consisted of
the following:
<TABLE>
<CAPTION>
(In thousands)
Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association, adjustable rate interest
currently at 7.842%, due April 1, 2024 $ 2,681 $ -- $ (17) $ 2,664
Federal Home Loan Mortgage
Corporation, adjustable rate interest
currently at 7.666%, due June 1, 2024 908 -- (3) 905
Federal National Mortgage
Association, adjustable rate interest
currently at 7.311%, due April 1, 2025 656 -- (5) 651
Federal National Mortgage
Association, adjustable rate interest
currently at 6.147%, due May 1, 2026 3,089 17 -- 3,106
Federal National Mortgage
Association, adjustable rate interest
currently at 6.156%, due June 1, 2026 5,788 27 -- 5,815
-------- ------ ------ --------
$ 13,122 $ 44 $ (25) $ 13,141
======== ====== ======= ========
</TABLE>
The maturity dates above are not necessarily indicative of expected
maturities as principal is often prepaid on such instruments.
4. Long-Term Notes Payable:
The Trust has one note payable to John Alden Life Insurance Company with an
interest rate of 9.25% per annum. Principal and interest are payable
monthly until August 7, 2017 when the entire unpaid principal balance and
any unpaid interest are due.
605218.1
7
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
5. Income Taxes:
The Trust has elected to be taxed as a real estate investment trust and as
such, is not taxed on that portion of its taxable income which is
distributed to shareholders, provided that at least 95% of its real estate
trust taxable income is distributed and that the Trust meets certain other
REIT requirements.
6. Related-Party Transactions:
Pursuant to an oral agreement with Peregrine, costs for certain general
administrative services, including executive services, accounting services,
treasury services, financial reporting and internal bookkeeping services,
shareholder relations, and directors and officers insurance were shared
with Peregrine. The shared costs were allocated to the Trust and Peregrine
based upon their respective asset values (real property and notes
receivable), subject to annual negotiation. At March 31, 1997 and December
31, 1996, the Trust had $9,000, and $31,000, respectively due to Peregrine
pursuant to the cost allocation arrangement. The cost allocation
arrangement between the Trust and Peregrine was terminated on January 7,
1997.
7. Statements of Cash Flows Supplemental Information:
In connection with the sale and foreclosure of properties, the Trust
entered into various non-cash transactions as follows:
(In thousands)
For the Three Months Ended
March 31, March 31,
1997 1996
Sales price less selling costs $ 8,396,000 $ 1,033,000
Amount due from Buyer 1,090,000 (1,033,000)
---------- -----------
Net cash received $ 7,306,000 $ --
=========== ============
Cash paid for interest on the Trust's outstanding debt during the
three-month periods ended March 31, 1997 and 1996, was $99,000 and
$139,000, respectively.
605218.1
8
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
8. Per Share Data:
Per share data is for the three-month periods ended March 31, 1997, and
March 31, 1996, based on the weighted average number of Common Shares
outstanding during each period. The weighted average number of shares used
in the computation was 9,137,000.
9. Gain (loss) on Sale of Investments:
Components of the gain (loss) on the sale of investments for the three
months ended March 31, 1997, and March 31, 1996, were as follows:
(In thousands)
For the
Three Months Ended
March 31,
1997 1996
---- ----
Sale of Redfield Commercial Center $ -- $ 299,000
Sale of Fulton Square Shopping Center (34,000) --
Sale of Totem Square (398,000) --
---------- ----------
$ (432,000) $ 299,000
=========== =========
10. 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 LLP ("C&L") as the Trust's auditors for the fiscal
year ending December 31, 1997 and (ii) to engage Ernst & Young LLP as the
Trust's independent auditors for the fiscal year ending December 31, 1997.
The reports of C&L on the Trust'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 opinion nor were they qualified
or modified as to uncertainty, audit scope or accounting principles.
During the Trust's two most recent fiscal years ended December 31, 1996,
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
Trust'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.
605218.1
9
<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 Trust.
Recent Developments
On January 3, 1997, CalReit Investors Limited Partnership ("CRIL"), an affiliate
of Equity Group Investments, Inc. ("EGI") and Samuel Zell, purchased from the
Trust's former parent, The Peregrine Real Estate Trust ("Peregrine"), 6,959,593
Common Shares in the Trust (representing approximately 76% of the outstanding
Common Shares) then owned by Peregrine for an aggregate purchase price of
$20,222,011.
Prior to the purchase, EGI and Victor Capital Group, L.P. ("VCG") presented to
the Board a proposed new business plan in which the Trust would cease to be a
REIT and instead become a specialty finance company designed primarily to take
advantage of high-yielding "mezzanine" investment opportunities in commercial
real estate. EGI and VCG also proposed that they provide the Trust with a new
management team to implement the business plan and that they invest through an
affiliate a minimum of $30 million in a new class of preferred shares to be
issued by the Trust.
The Board approved CRIL's purchase of Peregrine's Common Shares, the new
business plan and the issuance of the convertible preferred shares of the Trust
at $2.69 per share, the preferred shares to be convertible into common shares of
the Trust on a one-for-one basis. The Board also concluded that the transfer to
CRIL would not jeopardize the qualification of the Trust as a REIT, and exempted
CRIL's ownership from certain provisions of the Trust's declaration of trust
intended to discourage ownership of more than 10% of the outstanding shares of
the Trust.
In reaching its decision to approve the foregoing, the Board of Trustees
considered a number of factors 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 Trust would obtain from the proposed preferred share issuance. The Board
also considered the terms of previous alternative offers to purchase Peregrine's
interest in the Trust of which the Board was aware and the fact that the average
price of the Trust's Common Shares during the 60 trading days preceding the
Board of Trustees' meeting at which the proposed equity investment was approved
was $2.38 per share.
In connection with CRIL's purchase of the 6,959,593 Common Shares from
Peregrine, the Board of Trustees increased the size of the Board from five to
seven trustees, appointed three new trustees and accepted the resignation of one
then incumbent trustee associated with Peregrine.
The Trust has filed a preliminary proxy statement with the Securities and
Exchange Commission with respect to the annual meeting of its shareholders which
is expected to be held in June. At the annual meeting, the Trust's shareholders
will be asked to vote on proposals to (i) approve the issuance by the Trust of
up to $33,000,000 of cumulative convertible preferred shares ("Preferred
Shares") to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of Samuel Zell
and the principals of VCG (the "Investment"), (ii) approve an amended and
restated declaration of trust of the Trust, (iii) elect seven trustees to serve
on the Trust's board of trustees, (iv) ratify the appointment of Ernst & Young
LLP as auditors of The Trust for the fiscal year 1997 and (v) approve a share
option plan. The preliminary proxy statement will also outline the terms of the
Investment and the Preferred Shares and the Trust's proposed new business plan
and management team.
605218.1
10
<PAGE>
In connection with the commencement of the new business plan (the "New Business
Plan"), concurrently with the consummation of the Investment, the Trust will
acquire the business of VCG, including VCG's existing management team (the
"Acquisition"). The Trust believes that, by acquiring direct ownership of VCG's
existing real estate investment banking, real estate advisory and real estate
asset management businesses as well as the services of VCG's experienced
professional team, the Trust will be better positioned to implement the New
Business Plan.
The issuance and sale of the Preferred Shares and related transactions are
subject to customary conditions, including completion of definitive
documentation.
CRIL, the affiliate of Samuel Zell, that owns the 76% common share interest in
the Trust has advised the Trust that it intends to vote in favor of the
proposals presented in the proxy statement. Accordingly, approval of the
proposals is assured. The record and meeting dates for the annual meeting will
be announced in the near future.
Dispositions of Properties and Mortgage Notes
As of January 1, 1997, the Trust's investment portfolio included two commercial
properties, as well as three mortgage notes secured by real property, all "held
for sale." The Trust's real estate portfolio, carried at a book value of
$8,585,000 as of January 1, 1997, included Fulton Square Shopping Center in
Sacramento, California and a 60% interest in Totem Square, a mixed-use retail
property in Kirkland, Washington. During the first quarter, these two commercial
properties were sold. The sale of Fulton Square closed on February 14, 1997 and
the sale of Totem Square closed on March 3, 1997. The proceeds from these sales
were invested in liquid mortgage-backed securities which satisfy REIT-asset
qualification requirements and mortgage loans. As of the end of the first
quarter, the Trust had $13,141,000 invested in such securities.
The Trust's mortgage note portfolio, carried at an aggregate book value of
$2,658,000 as of March 31, 1997, consists of four loans which bear interest at
an overall effective rate of approximately 8% and are collateralized by
mortgages on real property.
Management of the Trust's Investments
All strategic and investment decisions are made by the Board of Trustees. The
Trust is self-administered and has no employees; in 1996 operating and
administration services were provided by the employees of Peregrine (for which
Peregrine received a reimbursement of costs) and by independent contractors. As
of January 7, 1997, the arrangement with Peregrine was mutually terminated.
Day-to-day operations and administration of CalREIT are currently being provided
by independent contractors.
United Property Services, Inc. ("UPSI") was the property manager for the Trust's
commercial properties. The Trust's agreement with UPSI terminated upon the
disposition of Totem Square.
The Trust's financial and operating performance information is further set forth
in the accompanying financial statements.
Comparison of the Three Months Ended March 31, 1997 to the Three Months Ended
March 31, 1996
Net Loss of $508,000 was reported by the Trust for the three months ended March
31, 1997, a decrease of $948,000 from the net income of $440,000 for the three
months ended March 31, 1996. The net loss was primarily the result of a decrease
in rental revenues from properties sold during the period and the losses
resulting from the sales of investments.
605218.1
11
<PAGE>
Total Revenues decreased $258,000, or 30%, to $613,000 for the three months
ended March 31, 1997, down from $871,000 for the three months ended March 31,
1996 The decrease for the three months ended March 31, 1997, was primarily
attributable to a decrease in rental revenue as a result of the sale of the
Trust's remaining rental properties.
Rental revenues, decreased $333,000, or 38%, to $236,000 for the three months
ended March 31, 1997, down from $569,000 for the three months ended March 31,
1996. These decreases were primarily the result of decreases in rental revenue
due to the sale of the Redfield Commerce Center in March 1996, the sale of the
Bekins Storage Facility in May 1996, the foreclosure sale of the Casa Grande
Motor Inn in February 1996, the sale of Fulton Square Shopping Center in
February 1997 and the sale of Totem Square in March 1997.
Interest revenues increased $21,000, or 7%, to $323,000 for the three months
ended March 31, 1997, up from $302,000 for the three months ended March 31,
1996. This increase was primarily due to the increase in interest earned on cash
accounts and marketable securities.
Total Expenses decreased $41,000, or 60%, to $689,000 for the three months ended
March 31, 1997, down from $730,000 for the three months ended March 31, 1996.
These decreases were primarily attributable to decreases in operating and
interest expenses resulting from the disposition of properties and mortgage
notes within the Trust's portfolio during the prior twelve-month period.
Interest expense decreased $38,000, or 28%, to $99,000 for the three months
ended March 31, 1997, down from $137,000 for the three months ended March 31,
1996. This decrease primarily resulted from the cessation of interest expense on
notes secured by properties which have been sold.
Dispositions. During the first quarter of 1997, the Trust sold Fulton Square
Shopping Center, a retail property located in Sacramento, California. The net
loss recognized from the sale of Fulton Square was approximately $34,000. The
Trust also sold Totem Square, a retail property located in Kirkland, Washington.
The net loss recognized from the sale of Totem Square was approximately $398,000
of which the majority was transfer taxes and the elimination of unamortized
tenant improvements and leasing commissions.
605218.1
12
<PAGE>
Liquidity and Capital Resources
The Trust considers its liquidity and ability to generate cash from operations
and financings to be sufficient to sustain day-to-day operations and to
implement the New Business Plan.
At March 31, 1997, the Trust had $8,330,000 in cash; and an investment portfolio
of liquid mortgage-backed securities with a net book value of $13,141,000. The
Trust experienced a net increase in cash of $3,632,000 for the three months
ended March 31, 1997, compared to a net increase in cash of $282,000 for the
three months ended March 31, 1996, a difference of $3,350,000. The Trust's
improved cash position during the above twelve-month period resulted from the
redeployment of the real estate portfolio into better performing assets, a
reduction in overall expenses and from investing activities.
As of March 31, 1997 the Trust owned a mortgage note portfolio of four notes
totaling approximately $8,785,000 in loans with an aggregate book value of
$2,658,000. These loans bear interest at an overall effective rate of 8% and are
collateralized by mortgages on real property.
The Trust has one long-term outstanding debt obligation of $880,000.
Funds From Operations and Funds Available for Distribution. REIT analysts
generally consider Funds From Operations (FFO) an appropriate measure of
performance in comparing the results of operations of REITs. FFO is defined by
the National Association of Real Estate Investment Trusts as net income computed
in accordance with generally accepted accounting principles before gains and
losses on sales of property and from debt restructuring plus depreciation and
amortization. Funds Available for Distribution (FAD) is defined as FFO less
capital expenditures funded by operations and loan amortization. The Trust
believes that in order to facilitate a clear understanding of the historical
operating results of the Trust, FFO and FAD should be examined in conjunction
with net income as presented in this report. FFO and FAD should not be
considered as an alternative to net income as an indication of the Trust's
performance or to cash flow as a measure of liquidity.
605218.1
13
<PAGE>
FFO (which was computed without adding back amortization of deferred financing
costs and depreciation of non-rental real estate assets) and FAD for the three
months ended March 31, 1997 and 1996 are summarized as follows:
Calculation of Funds From Operations and Funds Available for Distribution
(In thousands)
For the Three Months Ended
March 31,
1997 1996
---- ----
Net income before
gain (loss) on sale of investments ($76) $ 141
Depreciation and
amortization 21 5
-------- --------
Funds From Operations (55) 146
Capital Improvements (64) (45)
Loan principal
payments -- (23)
-------- ---------
Funds Available For
Distribution $ -- $ 78
======== ========
605218.1
14
<PAGE>
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Trust filed a complaint in San Francisco Superior Court on
September 27, 1996, seeking a declaratory judgment against Carrillion
V, a California limited partnership, and its general partner, with
respect to an earnest money deposit given by the Defendant under a May
1996 mortgage loan purchase agreement. The dispute was settled
out-of-court in the Trust's favor for $54,000 (included in other
revenues) in the first quarter of 1997.
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(b) During the quarter ended March 31, 1997, the Trust filed
one Report on Form 8-K dated January 3, 1997, reporting a
change in control of the Registrant (Item 2 of Form 8-K).
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.
CALIFORNIA REAL ESTATE INVESTMENT TRUST
May 15, 1997 /s/ Frank A. Morrow
- ---------------- --------------------------
Date Frank A. Morrow,
Chairman of the Board
605218.1
15
<PAGE>
CALIFORNIA REAL ESTATE INVESTMENT TRUST
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF CALIFORNIA REAL ESTATE
INVESTMENT TRUST FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON [DAY],
JULY __, 1997.
The undersigned, as a holder of common shares of beneficial interest,
$1.00 par value per share (the "Common Shares"), of California Real Estate
Investment Trust ("the "Company") hereby appoints John R. Klopp and Gary R.
Garrabrant, and each of them, with full power of substitution, proxies to vote
all Common Shares for which the undersigned is entitled to vote through the
execution of a proxy with respect to the Annual Meeting of Shareholders of the
Company to be held at the Pacific Stock Exchange, 301 Pine Street, San
Francisco, California 94104, on Thursday, July __, 1997 at 10:00 a.m., local
time, or any adjournment or adjournments thereof, and authorizes and instructs
said proxies to vote in the manner directed below.
THE BOARD OF TRUSTEES OF THE COMPANY RECOMMENDS VOTES "FOR" EACH OF THE
FOLLOWING
1. On the proposal to approve the issuance and sale, at a price of $2.69 per
share, of a maximum of 12,639,405 shares and a minimum of 11,895,911
shares of the Company's class A 9.5% cumulative convertible preferred
shares, $1.00 par value, of beneficial interests in the Company (the
"Class A Preferred Shares") upon the terms and conditions set forth in the
preferred share purchase agreement, dated as of June __1997, by and
between the Company and Veqtor Finance Company, LLC, a Delaware limited
liability company ("Veqtor"), attached to the accompanying Proxy Statement
as annex A, and in the 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 the Company,
in the form attached to the accompanying Proxy Statement as annex B.
(check one box) / / For / / Against / / Abstain
2. On the proposal to approve
(a) an amendment to the existing declaration of
trust of the Company (the "Existing
Declaration") which reclassifies the Common
Shares as "Class A Common Shares" and creates
another class of common shares, "Class B
Non-Voting Common Shares";
(check one box) / / For / / Against / / Abstain
(b) an amendment to the Existing Declaration which
revises certain restrictions upon transactions
between the Company and certain large
shareholders and other affiliates;
(check one box) / / For / / Against / / Abstain
(c) an amendment to the Existing Declaration which
eliminates certain provisions intended to assure
the Company's continued treatment as a "real
estate investment trust" for federal tax
purposes; and
(check one box) / / For / / Against / / Abstain
604509.3
<PAGE>
(d) other amendments to the Existing Declaration,
each of the foregoing amendments to be contained
in an amended and restated declaration of trust
of the Company, in the form attached to the
accompanying Proxy Statement as annex C.
(check one box) / / For / / Against / / Abstain
3. Election of Trustees.
FOR WITHHELD Nominees: Martin L. Edelman
/ / / / Gary R. Garrabrant
Craig M. Hatkoff
John R. Klopp
Sheli Z. Rosenberg
Lynne B. Sagalyn
Samuel Zell
For, except vote withheld for the following nominee(s):
-------------------------------------------------------
4. On the proposal to ratify the appointment of Ernst & Young LLP as the
independent auditors of the Company for fiscal year 1997.
(check one box) / / For / / Against / / Abstain
5. On the proposal to approve a long-term incentive share plan, in the
form attached to the accompanying Proxy Statement as annex D.
(check one box) / / For / / Against / / Abstain
6. On the proposal to approve a trustee share plan, in the form attached
to the accompanying Proxy Statement as annex E.
(check one box) / / For / / Against / / Abstain
7. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting, or any adjournment
thereof, or upon matters incident to the conduct of the meeting.
You may revoke this proxy at any time by forwarding to the Company a
subsequently dated proxy received by the Company prior to the Annual Meeting.
(Continued and to be signed on the reverse side)
Returned proxy cards will be voted (1) as specified on the matters listed above;
(2) in accordance with the Board of Trustees' recommendations where no
specification is made; and (3) in accordance with the judgment of the proxies on
any other matters that may properly come before the meeting. Please mark your
choice like this: x
604509.3
<PAGE>
The shares represented by this Proxy will be voted in the manner directed and,
if no instructions to the contrary are indicated, will be voted FOR the election
of the named nominees and approval of the proposals set forth above.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders and the proxy statement furnished therewith.
Print and sign your name below exactly as it appears hereon and date this card.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title, as such. Joint owners should each sign. If a corporation,
please sign as full corporate name by president or authorized officer. If a
partnership, please sign in partnership name by authorized person.
Date: ______________________, 1997
Signature (title, if any)
Signature, if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE TODAY. YOU MAY REVOKE THIS PROXY AT ANY TIME PRIOR TO THE TAKING OF A
VOTE ON THE MATTERS HEREIN.
604509.3
