As filed with the Securities and Exchange Commission on April 10, 1997
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 193
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 Commission
Only [ ] Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2)) [ ]
Definitive Additional Materials [ ] 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:
......................................................................
<PAGE>
PRELIMINARY MATERIALS -- April 10, 1997
CALIFORNIA REAL ESTATE INVESTMENT TRUST
131 Steuart Street, Suite 200
San Francisco, California 94105
May 10, 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 June 5, 1997, at 10:00 a.m., local time (the
"Annual Meeting").
In January 1997, an affiliate of Equity Group Investments, Inc. ("EGI")
acquired the 76% ownership interest in the Company from the Company's former
parent. EGI, an affiliate of Mr. Samuel Zell, is an owner, manager and financier
of real estate properties and companies throughout the United States. In
connection with securing the approval of the Company's board of trustees for the
transaction, EGI and Victor Capital Group, L.P. ("Victor Capital") presented a
proposal that included a new business plan, a new management team and a
preferred equity investment in the Company of not less than $30 million. Based
on the proposal, the board of trustees approved the EGI affiliate's acquisition
of the 76% interest in the Company and the new business plan and new management
team.
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 specialty finance company designed primarily to take
advantage of opportunities in the market for high-yielding "mezzanine"
investments in commercial real estate. 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 and professional teams.
At the Annual Meeting you will be asked to consider and vote upon 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 interest
in the Company (the "Class A Preferred Shares") for a maximum aggregate purchase
price of approximately $34 million (the "Investment") and a minimum of
approximately $32 million to Veqtor Finance Company, LLC ("Veqtor"), a newly
formed Delaware limited liability company affiliated with EGI and the principals
of Victor Capital. The terms and conditions of the Investment are governed by
the preferred share purchase agreement, dated as of April __, 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")
both of which are attached as annexes to the enclosed Proxy Statement. 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. 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
commence implementation of 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.
<PAGE>
You will also be asked at the Annual Meeting to consider and vote upon
a proposal to approve an amended and restated declaration of trust for the
Company, 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 fiscal year 1997 and the approval of a
share option 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 EACH OF THE PROPOSALS.
CalReit Investors Limited Partnership, an affiliate of EGI that owns
6,959,593 common shares of beneficial interest in the Company (approximately 76%
of the total number of outstanding shares), has advised the Company that it
intends to vote in favor of the Company 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
455009.15
<PAGE>
PRELIMINARY MATERIALS -- April 10, 1997
CALIFORNIA REAL ESTATE INVESTMENT TRUST
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on June 5, 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 June 5, 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 April , 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 a proposal to approve 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;
5. To consider and vote upon a proposal to approve a share
option plan, in the form attached to the accompanying Proxy Statement
as annex D; and
6. The transaction of such other business as may properly come
before the Annual Meeting or at any adjournment or postponement
thereof.
As of April , 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 April , 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
<PAGE>
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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.
- -------------------------------------------------------------------------------
May 10, 1997
<PAGE>
PRELIMINARY MATERIALS -- April 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 JUNE 5, 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 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 June 5, 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 affiliated with Equity Group Investments, Inc. ("EGI")
and the principals of Victor Capital Group, L.P. ("Victor Capital"). The terms
and conditions of the Investment are governed by the preferred share purchase
agreement, dated as of April , 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. EGI, an affiliate of Samuel Zell, is an owner, manager and
financier of real estate properties and companies throughout the United States.
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"
See "Risk Factors" beginning on page 13 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) a proposal to approve an amended and restated declaration of trust for
the Company, in the form attached hereto as annex C (the "Restated Declaration")
("Proposal 2"), (ii) a proposal to elect the following nominees as trustees of
the Company to serve
<PAGE>
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") and (iv) a proposal to approve a
share option plan, in the form attached hereto as annex D("Share Option Plan")
("Proposal 5"), 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
and the form of Share Option Plan is included as annex D hereto. The summaries
of portions of the Investment Agreement, the form of Certificate of Designation,
the form of Restated Declaration and the Share Option 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 and the
Share Option Plan.
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 Restated Declaration. The approval of the Investment,
the election of the Nominees, the ratification of the appointment of the
independent auditors and the adoption of the Share Option Plan require a
majority of the votes cast by shareholders at the Annual Meeting. CalReit
Investors Limited Partnership ("CRIL") an affiliate of EGI that owns 6,959,593
shares (approximately 76% of 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 May 10, 1997.
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<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.
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<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
SUMMARY................................................................................................ 1
The Company................................................................................... 1
The Annual Meeting............................................................................ 2
The Proposals................................................................................. 3
Interests of Certain Shareholders and Management in the Proposals............................. 4
Recommendation of the Board of Trustees....................................................... 4
Certain Tax Considerations.................................................................... 5
PRO FORMA CAPITALIZATION............................................................................... 6
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF THE
COMPANY................................................................................................ 7
HISTORICAL MARKET PRICE AND DIVIDENDS DATA............................................................. 12
Market Prices and Dividends................................................................... 12
Dividend Policy............................................................................... 12
RISK FACTORS........................................................................................... 13
Risk Factors Relating to the Investment....................................................... 13
BUSINESS OF THE COMPANY FOLLOWING THE INVESTMENT AND THE ACQUISITION................................... 20
Overview...................................................................................... 20
General....................................................................................... 20
Categories of Investment...................................................................... 21
Other Investments............................................................................. 24
Portfolio Management.......................................................................... 25
Certain Legal Aspects of Mortgage Loans and Real Property..................................... 26
EXISTING BUSINESS OF THE COMPANY....................................................................... 33
BUSINESS AND OTHER INFORMATION CONCERNING VICTOR CAPITAL........................................................ 34
Description of Business....................................................................... 34
Management's Discussion and Analysis of Financial Condition and Results of Operations......... 36
THE ANNUAL MEETING..................................................................................... 39
Introduction.................................................................................. 39
Matters to be Considered at the Annual Meeting................................................ 39
Voting Rights and Vote Required............................................................... 39
Voting of Proxies; Solicitation............................................................... 40
No Appraisal Rights........................................................................... 41
PROPOSAL 1 -- APPROVAL OF THE INVESTMENT................................................................ 42
Overview...................................................................................... 42
Background of and Reasons for the Proposal; Board of Trustees' Recommendation................. 42
The Investment Agreement...................................................................... 45
Interests of Certain Persons in the Investment................................................ 47
Use of Proceeds............................................................................... 47
-iv-
<PAGE>
Page
PROPOSAL 2 -- APPROVAL OF RESTATED DECLARATION.......................................................... 48
PROPOSAL 3 -- ELECTION OF TRUSTEES...................................................................... 50
Nominees for Election as Trustees............................................................. 50
Board of Trustees............................................................................. 52
Compensation of Trustees...................................................................... 52
Executive Officers............................................................................ 52
Executive Compensation........................................................................ 53
Employment Agreement.......................................................................... 53
Compliance with Section 16(a)................................................................. 54
Report on Executive Compensation.............................................................. 55
Compensation Committee
Performance Graph...................................................................................... 57
Security Ownership of Certain Beneficial Owners and Management................................ 58
Certain Relationships and Related Transactions................................................ 58
PROPOSAL 4 -- RATIFICATION OF INDEPENDENT AUDITORS...................................................... 60
PROPOSAL 5 -- ADOPTION OF THE SHARE OPTION PLAN......................................................... 61
DESCRIPTION OF CAPITAL SHARES.......................................................................... 64
FEDERAL INCOME TAX CONSIDERATIONS...................................................................... 68
GLOSSARY............................................................................................... 70
SHAREHOLDER PROPOSALS.................................................................................. 70
INCORPORATION BY REFERENCE............................................................................. 71
ADDITIONAL INFORMATION................................................................................. 71
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 Share Option Plan
Annex E -- Comparison of Form of Amended and Restated Declaration of Trust
to Declaration of Trust
</TABLE>
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<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.
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<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 specialty finance company
designed primarily to take advantage of opportunities in the market for
high-yielding "mezzanine" investments in commercial real estate. 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 equity owners. The Company
believes that mezzanine investment opportunities -- if carefully underwritten,
structured and monitored -- can provide attractive 'equity-like' returns with
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 (the "Acquisition"), including Victor Capital's existing
management team. 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 without the conflicts of interest
that might exist if Victor Capital remained a sister affiliate of the Company.
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 and interest 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 collaterized 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.
<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. Through the Company, Victor Capital, which
will continue to operate under the name Victor Capital Group as a wholly owned
subsidiary of the Company, 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 June 5, 1997 at the Pacific Stock Exchange, 301 Pine
Street, San Francisco, California 94104. The close of business on April __, 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 and the Share Option 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 April __, 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 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 and the adoption of the Share Option 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."
2
<PAGE>
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 Veqtor 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 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 and Share Option 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 the
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 Restated Declaration in the
form attached hereto as annex C. The Restated Declaration would amend the
Declaration of Trust 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 Declaration previously provided certain
restrictions upon transactions between the Company and certain large
shareholders and other affiliates. These provisions have been revised 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
Declaration provided limitations upon the conduct of the Company's business,
including providing investment policies intended to assure
3
<PAGE>
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.
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 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 - Adoption of the Share Option Plan. At the Annual Meeting,
the shareholders will be asked to approve the adoption of the Share Option Plan
for the Company. The proposed Share Option Plan is described more specifically
herein under "PROPOSAL 5 - ADOPTION OF THE SHARE OPTION PLAN."
Interests of Certain Shareholders and Management in the Proposals
In considering the recommendation of the Company's Board of Trustees
with respect to the Investment, shareholders should be aware that certain
shareholders and trustees of the Company have certain interests in the
Investment that are in addition to the interests of the Company and the
shareholders generally. See "PROPOSAL 1 -- APPROVAL OF THE INVESTMENT--Interests
of Certain Persons in the Transactions."
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 recommend approval of the Investment, see "PROPOSAL 1
- -- APPROVAL OF THE INVESTMENT--Recommendation of the Board of Trustees."
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
4
<PAGE>
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."
5
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth certain combined short-term obligations
and the combined capitalization of the Company as of December 31, 1996 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 noted included elsewhere herein.
<TABLE>
<CAPTION>
As of December 31, 1996
Historical Pro Forma
--------------------------------------
(In Thousands)
Short-Term Debt:(1)
<S> <C> <C>
Current maturities of long-term notes payable...................... $ - $ 640
----------------- -----------------
Total short-term debt.............................................. $ - $ 640
----------------- -----------------
Long-Term Debt(2)
Long-term notes payable............................................ $ 5,169 $ 8,429
----------------- -----------------
Total long-term debt............................................... 5,169 8,429
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......................................... 55,118 74,850
Unrealized holding costs on marketable securities.................. (22) (22)
Accumulated deficit................................................ (39,762) (39,762)
----------------- -----------------
Total Shareholder's Equity......................................... 24,471 56,471
----------------- -----------------
Total Capitalization (5)............................................... $ 29,640 $ 65,540
================= =================
</TABLE>
- --------------------------------
(1) Represents the current portion of the Acquisition note payable, net of an
unamortized discount of $360,000.
(2) Included on a pro forma basis is the long-term portion of the Acquisition
note payable, net of an unamortized discount of $740,000. In connection with
the sale of the Company's remaining real estate assets in the first quarter
of 1997, all but $886,000 of the Company's long-term notes payable
outstanding on December 31, 1996 have been extinguished.
(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.
(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.
6
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION OF THE COMPANY
The following 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.
The following pro forma condensed combined balance sheet as of December
31, 1996 assumes the Investment and the Acquisition and related transactions
occurred on December 31, 1996. The following pro forma condensed combined
statements of income for the year ended December 31, 1996 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.
7
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Combined Balance Sheet
December 31, 1996
(Unaudited)
(000s)
Victor Pro Forma Pro Forma
The Company Capital Adjustments Notes Combined
----------------- ------------------ ------------------ -------------- ------------------
Assets
Current Assets:
<S> <C> <C> <C> <C>
Rental properties, net $ 8,585 $ - $ - $ 8,585
Notes receivable, net 1,576 - - 1,576
Cash and cash equivalents 4,698 1,056 (236) (1) 5,518
Marketable securities 14,115 8 33,000 (2) 47,123
Accounts receivable, net 707 635 - 1,342
----------------- ------------------ ------------------ ------------------
Total current assets 29,681 1,699 32,764 64,144
Property and equipment, net - 90 - 90
Other assets, net 355 109 (106) (1) 380
Intangible assets, net - - 3,900 (1) 3,900
----------------- ------------------ ------------------ ------------------
Total Assets $30,036 $1,898 $36,558 $68,514
================= ================== ================== ==================
Liabilities and Shareholders' Equity
Liabilities:
Current maturities of long-term
notes payable, net $ - $ - $ 640 (1) $ 640
Long-term notes payable, net 5,169 - 3,260 (1) 8,429
Accounts payable and accrued
expenses 326 1,642 894 (1), (3) 2,864
Other liabilities 70 20 - 90
----------------- ----------------- ------------------ ------------------
Total Liabilities 5,565 1,662 4,794 12,043
----------------- ----------------- ------------------ ------------------
Shareholders' equity:
Class A Preferred Shares - - 12,268 (2) 12,268
Class A Common Shares 9,137 - - 9,137
Additional paid-in-capital 55,118 19,732 (2), (3) 74,850
Unrealized holding loss on
marketable securities (22) - - (22)
Accumulated earnings (deficit) (39,762) 236 (236) (1) (39,762)
----------------- ----------------- ------------------ ------------------
Total Shareholders' Equity 24,471 236 31,764 56,471
----------------- ----------------- ------------------ ------------------
Total liabilities and Shareholders'
Equity $30,036 $1,898 $36,558 $68,514
================= ================= ================== ==================
</TABLE>
The Accompanying Notes are an Integral Part of These Pro Forma Condensed
Combined Financial Statements.
8
<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
--------------- ---------------- ---------------- ---------------- -----------------
Revenues:
<S> <C> <C> <C> <C>
Rental income $2,019 $ - $ - $2,019
Real estate advisory fees - 6,940 - 6,940
Interest and investment income 1,136 70 - 1,206
--------------- ---------------- ---------------- -----------------
Total Revenues 3,155 7,010 - 10,165
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
--------------- ---------------- ---------------- -----------------
Total Expenses 2,284 4,586 139 7,009
--------------- ---------------- ---------------- -----------------
Operating Income 871 2,424 (139) 3,156
--------------- ---------------- ---------------- -----------------
Other Income (Expense)
Interest (547) - (360) (2) (907)
Depreciation and amortization (64) (44) (260) (2) (368)
Net gain on sale 1,069 263 - 1,332
Valuation reserves (1,743) - - (1,743)
--------------- ---------------- ---------------- -----------------
Total Other Income (Expense) (1,285) 219 (620) (1,686)
--------------- ---------------- ---------------- -----------------
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.
9
<PAGE>
Notes to Pro Forma Condensed Combined
Financial Information
(Unaudited)
Balance Sheet
1. Acquisition of Victor Capital
Reflects the Acquisition in exchange for a five-year, non-interest bearing, $5.0
million note payable in ten equal semi-annual installments of $500,000. See
"PROPOSAL 3--ELECTION OF TRUSTEES--Certain Relationships and Related
Transactions." The note 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. In
connection with the Acquisition, $106,000 of transaction costs incurred and
deferred by Victor Capital as of December 31, 1996 will be reimbursed by the
Company.
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 $(236)
=======
Accumulated earnings (deficit) $(236)
=======
Reimbursement of transaction costs:
Other assets, net $(106)
========
Accounts payable and accrued expenses $(106)
========
Acquisition in exchange for a non-interest bearing note
discounted at an imputed interest rate of 9.5%:
Intangible assets, net $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 December 31, 1996. 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.
Statement 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 Agreements."
10
<PAGE>
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.
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. In 1996 the
Company's pro forma income 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 $.13 per share is
payable based on a dividend rate of 9.5%. 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 12,267,658 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."
11
<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 of 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."
12
<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
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. In addition, 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."
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 of the 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.
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.
Dilution. The Investment will increase the number of outstanding shares
of the Company by approximately 138% and significantly reduce the ownership
interest percentage and proportionate voting power of the existing holders of
Common Shares. The Company's 1996 earnings per share on a pro forma basis, after
giving effect to the Investment and Acquisition as of January 1, 1996, would
have changed, from $(.05) to $(.08) per share.
Loss Carryforwards. The acquisition in January 1997 by an affiliate of
EGI 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 carryforwards
("Loss Carryforwards"). The changes in ownership are expected to result in a
limitation on the amount of Loss Carryforwards 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 Carryforwards that may be used to offset taxable income will be,
subject to certain exceptions, 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.
13
<PAGE>
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.
Risk Factors Relating to the Company's New Business Plan and the Acquisition
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 general familiarity with Subordinated
Interests. However, such officers and employees have never managed a specialty
finance business as is contemplated in the new business plan. 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.
General Risks of Investing in Real Estate. The ultimate performance of
the Company's investments 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.
Illiquidity of Real Estate. Real estate investments are relatively
illiquid. The ability of the Company to vary its portfolio 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.
Insurance Risks. 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.
Environmental Matters. 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
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 creating a special purpose entity to own
such real estate. 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 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 Considerations. 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.
Taxable 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.
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 assets. It may take considerable
time for the Company to find and consummate appropriate investments. In general,
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. To the
extent that the Company acquires assets other than those detailed herein, such
other acquisitions may pose risks to the Company and to the Company's
shareholders that are different from or in addition to the risks enumerated
herein.
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
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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.
Interest Rate Risk. The value of mortgage loans and investments 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.
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 a hedging strategy 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.
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. 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.
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.
General 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. 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 business.
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
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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.
Investment Company Act Exemption. 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 of 1940 (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"). Under current
interpretations by the Staff of the Commission, in order to qualify for this
exemption, 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.
Therefore, the assets which the Company may acquire and hold may be limited by
the provisions of the Investment Company Act. Generally, the Mortgage Loans and
certain of the Mezzanine Loans in which the Company may invest constitute
Qualifying Interests. In connection with its acquisition of Subordinated
Interests, the Company may, where appropriate, (i) seek to obtain foreclosure
rights or other similar arrangements (including obtaining Special Servicing
Rights after the Company acquires or becomes a 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, 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. If the Commission or its staff were to take a
different position with respect to whether such Subordinated Interests
constitute Qualified Interests, 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 (such registration would result
in, among other things, a significantly reduced ability to utilize leverage in
the Company's business and significantly increased operating expenses). The
Company is not currently a special servicer, rated or otherwise. See "--Risk
From Ownership Of Subordinated Interests In Pools Of Commercial Mortgage Loans."
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.
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.
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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.
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) 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. The Company is not currently a special servicer, rated or
otherwise and, although it plans to seek to become rated as a 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
special servicer, it is unlikely that it will be able to obtain special
servicing rights.
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.
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." 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.
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.
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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 specialty finance business. See "--New
Business Plan."
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.
Co-Investments. 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 will not be precluded from co-investing with its
clients or making similar equity investments in other circumstances,
shareholders may not be afforded the opportunity to co-invest with Victor
Capital's investment clients.
Personal Holding Company Status. 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. The Company will seek to avail itself of an exception for a
lending or finance company that meet certain test 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.
See "FEDERAL INCOME TAX CONSIDERATIONS."
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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 specialty finance company designed primarily to take advantage of
opportunities in the market for high-yielding "mezzanine" investments in
commercial real estate. 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 -- can provide attractive "equity-like"
returns with 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
wholly owned subsidiary of the Company and Victor Capital's management and
professional team will assume comparable positions with the Company.
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--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 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
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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 who has an opportunity to
purchase its existing mortgage debt at a discount. 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 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.
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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).
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" 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
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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 oversight and management of the resolution of such mortgage loans by
modification, foreclosure, deed in lieu of foreclosure or otherwise ("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; furthermore, the Company is
not currently a special servicer, rated or otherwise. 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 special servicer, it is unlikely that it will be
able to obtain Special Servicing Rights. 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--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
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of Victor Capital, see "BUSINESS AND OTHER INFORMATION CONCERNING VICTOR
CAPITAL--Description of Business".
Other Investments
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 and
continued ownership of the Company's existing liquid mortgage-backed securities.
Any lending with regard to the foregoing may be on a secured or an unsecured
basis. The Company may decide in the future to pursue other available
acquisition opportunities it deems suitable for the Company's portfolio. 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.
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"). 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
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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").
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
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. 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.
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
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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.
Certain Legal Aspects of Mortgage Loans and Real Property
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
Each Mortgage Loan will be evidenced by a note or bond and secured by
an instrument granting a security interest in real 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 (the
equivalent of a borrower), a trustee to whom the real property is conveyed, and
a beneficiary (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 and generally with a power of sale, to the trustee 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, 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 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
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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.
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 trust deed 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 having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon 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. 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
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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.
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 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
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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 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.
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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."
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
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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 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
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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.
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
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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.
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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 carryforwards. 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. 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 December 31, 1996, the
Company had $14,115,000 invested in such mortgage-backed securities and
$1,576,000 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 incorporated
herein by reference to the Company's 1996 Annual Report to shareholders.
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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 CBD 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
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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 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. Victor Capital currently has six such assignments representing
an asset value of approximately $900 million and total square footage of
approximately 6.8 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
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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.
From time-to-time, senior employees of Victor Capital are invited to
co-invest in the aforementioned investment opportunities on a pari-passu 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--Co-Investments."
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
Victor Capital currently employees 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 consolidated 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.
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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 estate
markets. See "RISK FACTORS--Risk Factors Relating to the Company's New Business
Plan and the Acquisition--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% if all of
Victor Capital's expenses related to salaries, 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 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. 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 including management fees payable to its general
partner, but excluding interest, income taxes, depreciation, amortization, and
certain other non-recurring items were $4,585,801 in 1996, up 1.0% from
$4,539,193 in 1995. In 1995, total expenses were up 3.1% from total expenses of
$4,400,835 in 1994. Victor Capital was successful in keeping its expenses
effectively flat during the last three years notwithstanding growing its
revenues by an annual compounded growth rate of approximately 18%. 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
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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.
For each of the three years ended December 31, 1996, approximately 80%
of all of Victor Capital's expenses related to salaries, discretionary bonuses,
and other employee benefits. The balance of Victor Capital's on-going expenses
related to general business overhead including such items as rent, telephone,
insurance, and local business taxes. No individual expense relating to these
items, constituting general and administrative expenses, exceeded 5.0% of Victor
Capital's total expenses excepting: rental expense of $292,309 and $261,917 in
1996 and 1995 respectively, and $325,434 of payments to sub-contractors in 1994
representing consulting work which was out-sourced to third party consultants on
a fee basis. Historically, revenue growth has out-paced increases in personnel
and general and administrative costs. This relationship has mitigated the effect
to Victor Capital of price competition, enabling Victor Capital to operate more
competitively.
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
Agreements.
Victor Capital's only other expenses relate to depreciation in 1996,
1995, and 1994 amounting to $44,004, $49,638 and $43,529; interest expense in
1995 and 1994 amounting to $30,852 and $64,459; and 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 operating income of $2.7 million and $1.5 million respectively. Victor
Capital's unrestricted cash totaled $1.1 million on December 31, 1996, down
slightly from $1.3 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.
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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 June 5, 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 a proposal to
approve the Restated 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 Share Option 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.
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
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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 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 and the Share Option 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 (including, without limitation, for the purpose of soliciting
additional proxies), 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.
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 Company, 6201 Fifteenth Ave., Brooklyn,
NY 11219, Attention: Paula Caropoli, or hand delivered to the Company at
American Stock Transfer 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.,
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at an estimated cost of $[7,500], 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.
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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 new management that was installed
by its creditors after it emerged from bankruptcy reorganization. The newly
elected Board of Trustees 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
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portfolio into better performing assets. Once the Company initiated its
activities in pursuing growth opportunities, the Company 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.
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 it had hired an investment banking firm to
find potential buyers. 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.
The Board of Trustees met with an investment banking firm and a venture
capital firm to evaluate their proposal to convert the Company to a residential
mortgage REIT. Those firms believed that, with the Company's approximately $25
million liquid asset base, 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.
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, which represented a premium over the
trading market price for the Common Shares at that time.
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 dividend and
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.
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
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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.
In reaching its decision to approve the foregoing, the Special
Transaction Committee and the Board of Trustees considered a number of factors,
including, without limitation, the following factors:
a. The attractiveness of 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.
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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 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 Board of Trustees also considered adverse factors relating to the
transfer of Common Shares, the new business plan and the preferred share
investment, including the risk that (i) 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. The Board of Trustees concluded
that these risks were outweighed by the potential benefits to be gained by the
Company in proceeding with EGI's and Victor Capital's proposed investment, new
business plan for the Company and new management team.
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
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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 April __, 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 April __, 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 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
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 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 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 reasonable best efforts, upon Veqtor's request, to cause any
shares held by Veqtor to be included in such registration. In connection with
any registration, Veqtor has agreed to pay all underwriting discounts and
selling commissions on the shares registered on behalf of Veqtor, as well as the
fees and expenses of Veqtor's counsel. 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"
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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 Certain Persons in the Investment
Concurrently with the consummation of the Investment, the Company will
acquire ownership of Victor Capital and certain of its affiliates. 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.
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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 AND THE COMPARISON BETWEEN THE EXISTING DECLARATION OF
TRUST AND THE RESTATED DECLARATION AND BY-LAWS ATTACHED TO THIS PROXY STATEMENT
AS ANNEX E. 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 Declaration of
Trust are desirable in light of the Company's new business plan. The Restated
Declaration makes the following significant amendments to the Declaration of
Trust.
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 Declaration previously provided certain
restrictions upon transactions between the Company and certain large
shareholders and other affiliates. These provisions have been revised 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."
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
Declaration provided 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.
49
<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. 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 of Trust 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) 66 2/3% 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 of Trust also provides that the early termination or
dissolution of the Company and amendments to the Declaration of Trust 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) 66 2/3% 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) 66 2/3% 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 of Trust 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 of Trust 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.
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 of Trust is attached to this Proxy Statement as annex E.
Although the Restated Declaration will result in substantive changes in the
Declaration of Trust 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.
50
<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 April 1, 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 .................... 55 Trustee (2)
Gary R. Garrabrant ................... 39 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.
51
<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 chief executive officer,
president and a director of EGI. She is a principal of the law firm Rosenberg &
Liebentritt P.C. 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.
52
<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.
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 totalling $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.
53
<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
Executive Officer
</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 con ulting firm, Frank A. Morrow
Associates ("FAMA"). Pursuant to an oral cost allocation
agreement with the Former Parent, 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. See "--CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." Pursuant to the Company's arrangements with Mr.
Morrow covering his compensation for 1996, the Company accrued
$180,000 as compensation due to FAMA, which amount was paid in
the second quarter of 1997.
Employment 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 Share Option 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 - ADOPTION OF THE SHARE OPTION 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.
54
<PAGE>
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 the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 4 or 5
were required for those persons, the Company believes that, during the fiscal
year ended December 31, 1996, all filing requirements applicable to its
officers, trustees and greater than ten percent beneficial owners were complied
with.
55
<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, the Company reimbursed
the Former Parent for certain shared costs, including the services of shared
executive officers. 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. This
compensation was approved by the compensation committee and was intended to
compensate him for his efforts in re-deploying the Company's assets in
connection with the Company's expansion strategy. The compensation committee
determined that his compensation should be based upon his performance in
managing the timely disposition of assets for the highest available price.
The Company has not yet paid any compensation 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 reconstituted. 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 Agreements," no new compensation has been
proposed. It is anticipated that when the reconstituted compensation committee
meets to determine such compensation, which meeting will not occur until 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 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 Trustee's 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 Share Option Plan. The Share Option
Plan will 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
- --------
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.
56
<PAGE>
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 Share Option 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.
Compensation Committee
Juliana Bancroft
Elliot G. Steinberg
57
<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
(Insert Graph Here)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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
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.
58
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of April [ ], 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
- --------------------------------------------------------------------------------------------------------------
Amount and Nature of Amount and Nature of
Beneficial Ownership(1) Beneficial Ownership(1)
Prior to the Investment After the Investment
- --------------------------------------------------------------------------------------------------------------
Five Percent Shareholders, Percent of Percent of
Directors and Executive Officers Number Class Number Class
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <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%
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) 6,959,593 76.2% -- --
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
All executive officers, trustees and -- -- -- --
nominees for trustees as a group
(7 persons)
- ----------------------------------------------------------------------------------------------
Preferred Shares
- ----------------------------------------------------------------------------------------------
Amount and Nature of
Beneficial Ownership(1)
After the Investment
- ----------------------------------------------------------------------------------------------
Percent of
Total Voting
Five Percent Shareholders, Percent of Power After
Directors and Executive Officers Number Class the Investment
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
CalREIT Investors Limited -- -- --
Partnership (2)
c/o Equity Group Investments, Inc.
Two North Riverside Plaza,
7th Floor
Chicago, Illinois 60606
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Veqtor Finance Company LLC (4) 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) -- -- --
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
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 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.
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<PAGE>
(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) The control persons of Veqtor are John R. Klopp, Craig M. Hatkoff and
Samuel Zell. 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 a verbal 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 April __, 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 to the sellers of the
Company's non-interest bearing promissory note. The promissory note will provide
for ten semi-annual principal amortization payments in equal installments.
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 April __, 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 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.
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<PAGE>
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 LLP to render a
fairness opinion to the Board of Trustees with respect to the fairness to the
Company of the proposed Acquisition. On April __, 1997, Coopers & Lybrand LLP
delivered to the Company's Board of Trustees its written opinion that 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.
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<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 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.
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<PAGE>
PROPOSAL 5 -- ADOPTION OF THE SHARE OPTION PLAN
CERTAIN ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. THIS SUMMARY
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE COMPLETE TEXT OF THE SHARE OPTION PLAN, ATTACHED TO THIS PROXY STATEMENT AS
ANNEX C. SHAREHOLDERS ARE URGED TO READ THE ANNEXES TO THIS PROXY STATEMENT IN
THEIR ENTIRETY.
The Company's 1997 Share Option Plan (the "Share Option Plan") was
adopted by the Company's Board of Trustees on April 14, 1997. The Company's
Declaration of Trust does not require shareholder approval of the Share Option
Plan. The Company is submitting the Share Option Plan to the shareholders for
ratification so that the options issued thereunder to key employees of the
Company may qualify as incentive share options under Section 422 of the Internal
Revenue Code, and so that the exercise of such options, and the delivery of the
Company's Common Shares pursuant to such exercise, are exempt from the short
swing profit provisions of Section 16(b) of the Exchange Act pursuant to Rule
16b-3 thereunder. The purpose of the Share Option Plan is to secure for the
Company and its shareholders the benefits of ownership of Company share options
by non-employee Trustees, consultants, officers and other key employees of the
Company (and any subsidiaries) who are expected to contribute materially to the
Company's future growth and success. No Common Shares have been issued under the
Share Option Plan. No award may be granted under the Share Option Plan after
April 14, 2007.
Under the Share Option Plan, the Company may grant options with respect
to a maximum of 2,000,000 Common Shares ("Options"). The Company may in its sole
discretion grant Options to non-employee Trustees, consultants, officers and
other key employees of the Company ("Discretionary Options") and shall grant
Options to the Company's non-employee Trustees subject to specified terms and
conditions and in accordance with a specified formula. It is expected that
approximately eight individuals are eligible to participate in the Share Option
Plan. On May __, 1997, the closing trading price for the Common Shares on the
NYSE was $[ ] per share. Options granted to employees may be either incentive
share options ("ISOs") meeting the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified share options
("NQSOs") not meeting the requirements of Section 422 of the Code. Options
granted to non-employee Trustees and consultants shall be NQSOs.
The Share Option Plan provides that the plan may be administered by the
Board of Trustees or a committee appointed by the Board. The Board has
designated the Compensation Committee to administer the Share Option Plan.
Subject to the terms of the Share Option Plan, the Compensation Committee will
determine the participants who will receive grants of Discretionary Options, the
number of Common Shares subject to each Discretionary Option, the grant date,
the expiration date and other terms and conditions for the Discretionary
Options. The Compensation Committee has the authority to construe and interpret
the provisions of the Share Option Plan or the Options granted thereunder. Each
grant of Options will be evidenced by a Share Option Agreement executed by the
Company and the optionee at the time of grant in accordance with the terms and
conditions of the Share Option Plan.
Discretionary Options shall expire on the date determined by the
Compensation Committee, which date may not exceed ten years from the date the
Option is granted. Unless otherwise specified by the Compensation Committee for
a particular grant, Discretionary Options vest as follows: 331/3% one year after
the date of grant, 662/3% two years after the date of grant and 100% three years
after the date of grant, in each case assuming that the recipient has been
continuously employed by the Company or any subsidiary during that time.
If an optionee's service with the Company is terminated for any reason
other than death or disability or a discharge for cause, any outstanding
Discretionary Option, to the extent that it was exercisable on the date of such
termination, may be exercised by the holder within three months after such
termination (or such shorter time as may be specified by the Compensation
Committee), but in no event later than the expiration of the Option. If an
optionee dies or becomes totally and permanently disabled while engaged by the
Company or a subsidiary, or dies within three months after the optionee ceases
to provide services to the Company, any outstanding Discretionary Option, to the
extent that it has vested, may be exercised by the optionee (his estate, or by
the person to whom the Option
63
<PAGE>
is transferred by will or the laws of descent and distribution, as the case may
be), within the period of one year after the date of death or disability (or
within such lesser period as may be specified by the Compensation Committee). If
an optionee is discharged for "cause" (as defined in the Share Option Plan), the
right of such optionee to exercise a Discretionary Option will terminate
immediately upon cessation of such services.
Options granted under the Share Option Plan must be exercised within
ten years of the grant date, except that an ISO granted to a person owning more
than 10% of the total combined voting power of all classes of shares of the
Company or of any parent or subsidiary of the Company (a "Ten Percent
Shareholder") must be exercised within five years of the grant date.
The exercise price for each Option granted under the Share Option Plan
shall not be less than 100% of the fair market value (the "Fair Value") per
Common Share on the date such Option is granted. For ISOs granted to a Ten
Percent Shareholder, the exercise price shall not be less than 110% of the Fair
Value per Common Share. The exercise price may be paid in cash (by check), by
transferring Common Shares owned by the Option holder and having a Fair Value on
the date of surrender equal to the aggregate exercise price of the Option or,
solely with respect to Discretionary Options, by cash payments in installments
or pursuant to a full recourse promissory note, in either case upon the terms
and conditions as the Compensation Committee shall determine. Upon the exercise
of any Option, the Company is required to comply with all applicable withholding
tax requirements.
Options granted pursuant to the Share Option Plan (other than Trustee
Options and ISOs) may, in the discretion of the Compensation Committee, be
transferable to members of the optionee's immediate family, a trust established
for the benefit of one or more members of the optionee's immediate family or a
partnership in which such family members are the only partners. The optionee may
not receive any consideration for the transfer.
The Board of Trustees or Compensation Committee may amend or terminate
the Share Option Plan at any time and in any respect, including modifying the
form of the Share Option Agreements, except that the Board of Trustees and
Compensation Committee cannot, without the approval of the shareholders of the
Company, amend the Share Option Plan if shareholder approval is required or
desired for compliance with (i) Rule 16b-3 under the Exchange Act or (ii)
Section 422 of the Code. No amendment of the Share Option Plan, without the
Option holder's consent, may adversely affect any Options previously granted to
him or her.
Federal Income Tax Consequences Relating to Options
In general, an optionee will not recognize taxable income upon the
grant or exercise of an ISO, and the Company will not be entitled to any
business expense deduction with respect to the grant or exercise of an ISO.
(However, upon the exercise of an ISO, the excess of the fair market value on
the date of exercise of the shares received over the exercise price of the
shares will be treated as an adjustment to alterative minimum taxable income.)
In order for the exercise of an ISO to qualify for this tax treatment, the
optionee generally must be an employee of the Company or a subsidiary (within
the meaning of Section 422 of the Code) from the date the ISO is granted through
the date three months before the date of exercise (one year preceding the date
of exercise in the case of an optionee who is terminated due to disability). In
addition, an option will not be treated as an ISO to the extent that the fair
market value of share with respect to which ISOs first become exercisable during
any calendar year exceeds $100,000.
If the optionee has held the shares acquired upon exercise of an ISO
for at least two years after the date of grant and for at least one year after
the date of exercise, when the optionee disposes of the shares, the difference,
if any, between the sales price of the shares and the exercise price of the
option will be treated as long-term capital gain or loss. If the optionee
disposes of the shares prior to satisfying these holding period requirements (a
"disqualifying disposition"), the optionee will recognize ordinary income at the
time of the disqualifying disposition, generally in an amount equal to the
excess of the fair market value of the shares at the time the option was
exercised over the exercise price of the options. The balance of the gain
realized, if any, will be long-term or short-term capital gain, depending upon
whether or not the shares were sold more than one year after the option was
exercised. If the optionee sells the shares in a disqualifying disposition at a
price below the fair market value of the shares at the time the option was
exercised, the amount of ordinary income will be limited to the amount realized
on the sale
64
<PAGE>
over the exercise price of the option. The Company will be allowed a business
expense deduction to the extent the optionee recognized ordinary income.
In general, an optionee who receives an NQSO will recognize no income
at the time of the grant of the option. Upon exercise of an NQSO, an optionee
will recognize ordinary income in an amount equal to the excess of the fair
market value of the shares on the date of exercise over the exercise price of
the option. The optionee's tax basis in shares acquired upon exercise of an NQSO
will be the fair market value on the date income is recognized, and the
optionee's holding period will commence on that date. Upon a subsequent sale or
exchange of the shares acquired upon exercise of an NQSO, the optionee will
generally have capital gain or loss (long-term or short-term depending on
whether the shares have been held for more than one year) measured by the
difference between the amount realized on the disposition and the tax basis of
the shares. The Company will be entitled to a business expense deduction in the
same amount and at the same time as the optionee recognizes ordinary income.
1997 Share Option Plan Benefits
Since grants of options will be considered by the new compensation
committee to be formed following consummation of the Investment and the
Acquisition or, in the case of Messrs. Hatkoff and Klopp are subject to further
negotiation, future grants to executive officers and employees of the Company
under the Share Option Plan cannot be determined at this time.
65
<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
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<PAGE>
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 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 either (a) the shareholder is not a "Bank
Holding Company" or an "affiliate of a Bank Holding Company" as defined in
Section 1841(a) and 1841(k) of the Bank Holding Company Act of 1956, as amended,
or (b) the shareholder intends to sell such securities to a person that is not a
Bank Holding Company and will not take delivery of the Class A Common Shares or
(c) the shareholder will not, upon the issuance of such Class A Common Shares,
own 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
67
<PAGE>
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.
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 issuance 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.
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.
Redemption Right. The holders of the Preferred Shares have the right to
require the Company, in the event of a "change in control," to redeem all (but
not a part) of their Preferred Shares at a price per Preferred Share equal to
$2.69 and all dividends per share accrued but unpaid through the date of such
redemption. A "change in control" will have occurred if either (i) a majority of
the individual members of the Board of Trustees shall at any time consist of
individuals elected or appointed without the approval of a majority of their
predecessor trustees or (ii) any person or group (within the meaning of section
13(d)(3) or 14(d)(2) of the Exchange Act) acquires, without the consent of
Veqtor or any Class A Common Shares or rights to acquire Class A Common Shares
if after such acquisition such person or group (within the meaning of section
13(d)(3) or 14(d)(2) of the Exchange Act) beneficially owns (within the meaning
of rule 13d-3 promulgated under the Exchange Act) Class A Common Shares
aggregating in excess of 15% of the number of Class A Common Shares or the
combined voting power of voting shares of the Company outstanding immediately
prior to such acquisition.
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.
68
<PAGE>
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 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 either (a) the shareholder is not a
"Bank Holding Company" or an "affiliate of a Bank Holding Company" as defined in
Section 1841(a) and 1841(k) of the Bank Holding Company Act of 1956, as amended,
or (b) the shareholder intends to sell such securities to a person that is not a
Bank Holding Company and will not take delivery of the Class A Preferred Shares
or (c) the shareholder will not, upon the issuance of such Class A Preferred
Shares, own 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 either (a) the shareholder is not a Bank Holding Company or (b) the
shareholder intends to sell such securities to a Person that is not a Bank
Holding Company and will not take delivery of the Class A Preferred Shares or
(c) the shareholder will not, upon the issuance of such Class A Preferred
Shares, own more than 4.9% of any class of voting shares of the Company.
69
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
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 Carryforwards.
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 under Code Section 382 for purposes of limitations on the
use of the Company's net operating loss and capital loss carryforwards ("Loss
Carryforwards").
As of December 31, 1996, the Company had approximately $[17,631,000 ]
million of Loss Carryforwards for Federal income tax purposes. The amount of the
Company's annual taxable income which may be offset by
70
<PAGE>
Loss Carryforwards 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 Carryforwards 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 Carryforwards 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 Carryforwards 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. 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.
71
<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.
72
<PAGE>
INCORPORATION BY REFERENCE
This Proxy Statement incorporates the financial statements,
supplementary financial information and management's discussion and analysis of
financial condition and results of operations regarding the Company included in
the Company's 1996 Annual Report to shareholders, which report includes the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
(except the exhibits thereto), as filed with the Commission on April 14, 1997
(the "1996 Form 10-K") and other information concerning the operations of the
Company.
Any statement contained in a document incorporated by reference in this
Proxy Statement will be deemed to be modified or superseded for purposes of this
Proxy Statement to the extent that a statement contained in this Proxy Statement
or in any other subsequently filed document which is also incorporated by
reference in this Proxy Statement modifies or supersedes such statement. Any
statements so modified or superseded will not be deemed, except as modified or
superseded, to constitute a part of this Proxy Statement.
The Company will provide, without charge (other than a reasonable
charge for any exhibit requested) to each Shareholder, upon written or oral
request of such Shareholder, a copy of any of the aforementioned documents
incorporated or deemed incorporated by reference herein, by first class mail or
other equally prompt means within one business day of receipt of such request.
Any such request should be directed to Frank A. Morrow, chairman of the Board of
the Company, at 131 Steuart Street #200, San Francisco, California 94105,
telephone number (415) 905-0288.
ADDITIONAL INFORMATION
The Company's 1996 Annual Report to Shareholders, which includes the
1996 Form 10-K (except the exhibits thereto), is enclosed with this Proxy
Statement, but is not to be regarded as proxy soliciting material. Upon written
or oral request to the Company as set forth above, the Company will provide,
without charge to each Shareholder of the Company, copies of the exhibits to the
1996 Form 10-K as filed with the Commission.
By order of the Board of Trustees
FRANK A. MORROW
Chairman of the Board
May 10, 1997
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT.................................................................................. F-2
COMBINED BALANCE SHEETS - DECEMBER 31, 1996 AND 1995 .......................................................... F-3
COMBINED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 ........................................................................ F-4
COMBINED STATEMENTS OF CHANGES IN PARTNERS' AND MEMBERS'
CAPITAL (DEFICIENCY) FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 .........................................................................F-5
COMBINED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 ............................................................ F-6
NOTES TO FINANCIAL STATEMENTS ................................................................................. F-8
</TABLE>
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
March 10, 1997
F-2
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS .................................................... 1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2(c)) ..................... $1,056,048 $1,258,429
Investment in available for sale securities (Note 2(d)) ... 8,400 8,400
Investment in unregistered securities (Note 2(e)) ......... -- 124,250
Accounts receivable (Note 2(i)) ........................... 563,602 900,000
Expense reimbursement receivable .......................... 30,294 85,727
Due from partner (Note 4) ................................. 24,000 159,000
Sundry .................................................... 16,701 5,405
---------- ----------
TOTAL CURRENT ASSETS ...................................... 1,699,045 2,541,211
DEFERRED COSTS (Note 2(j)) ................................ 106,110 --
PROPERTY AND EQUIPMENT - NET (Notes 2(g) and 3) ........... 90,071 107,840
SECURITY DEPOSITS ......................................... 3,220 3,110
--------- ----------
TOTAL ASSETS .............................................. $1,898,446 $2,652,161
========== ==========
LIABILITIES AND PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................. $173,511 $78,979
Bonuses payable - discretionary (Note 5) .................. 1,441,500 1,206,000
Accrued local business taxes .............................. 27,845 48,869
Unearned revenue (Note 2(b)) .............................. 19,739 --
---------- -----
TOTAL LIABILITIES ......................................... 1,662,595 1,333,848
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY) ............... 235,851 1,318,313
---------- ---------
TOTAL LIABILITIES AND PARTNERS' AND
MEMBERS' CAPITAL (DEFICIENCY) ............................. $1,898,446 $2,652,161
========== ==========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-3
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
INCOME:
<S> <C> <C> <C>
Fees earned (Notes 2(b), (c), (e) and 7) $6,940,036 $5,981,219 $5,159,157
Investment income 70,126 23,627 31,174
Gain on sale of securities -- 518 3,263
Sublease income (Note 8) -- 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
EXPENSES:
Employee salaries $1,164,897 $1,294,416 $1,265,384
Discretionary employee bonuses (Note 5) 1,441,500 1,206,000 1,247,000
Payroll taxes 103,504 101,013 100,122
Employee benefits 123,146 112,420 96,004
Rent expense (Note 8) 292,309 261,917 125,143
Telephone 61,439 62,139 39,259
Insurance 15,828 30,927 36,594
Stationery, printing and supplies 31,483 46,960 26,663
Local travel and transportation 7,531 8,532 12,711
Postage 7,702 7,775 3,317
Travel and entertainment 49,147 76,364 51,535
Messenger/courier 2,909 2,987 2,764
Payments to subcontractors 40,450 168,553 325,434
Public relations 24,010 25,236 25,122
Dues and subscriptions 10,623 11,814 12,257
Miscellaneous 33,614 34,785 29,343
Contributions 29,315 8,545 6,575
Professional fees 67,804 79,647 119,259
Local business taxes 143,642 97,620 21,462
Advertising 52,076 33,151 9,117
Bad debt expense -- -- 8,581
Information system expense 22,299 31,832 16,189
---------- ---------- ----------
TOTAL EXPENSES 3,725,228 3,702,633 3,579,835
---------- ---------- ----------
NET INCOME BEFORE MANAGEMENT FEES,
DEPRECIATION, INTEREST AND EXTRAORDINARY GAIN 3,547,519 2,329,282 1,652,042
MANAGEMENT FEES (Note 7) 860,573 836,560 821,000
DEPRECIATION 44,004 49,638 43,529
INTEREST EXPENSE (Note 6) -- 30,852 64,459
---------- ---------- ----------
NET INCOME BEFORE EXTRAORDINARY ITEM 2,642,942 1,412,232 723,054
EXTRAORDINARY ITEM - Gain on extinguishment
of debt (Note 6) -- 181,319 --
---------- ---------- -------
NET INCOME $2,642,942 $1,593,551 $ 723,054
==========
The accompanying notes to combined financial statements are an integral part of these statements.
</TABLE>
F-4
<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
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
===========
The accompanying notes to combined financial statements are an
integral part of these statements.
F-5
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $2,642,942 $1,593,551 $ 723,054
---------- ---------- ----------
Adjustments to reconcile net income to net cash
provided by 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
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)
Expense reimbursement receivable 55,433 21,884 (50,538)
Prepaid local business taxes -- 12,691 (12,691)
Sundry (11,296) (5,405) 11,036
Security deposits (110) 11,590 (12,313)
(Decrease) increase in:
Accounts payable and accrued liabilities 94,532 8,372 (1,681)
Bonuses payable - discretionary 235,500 284,000 922,000
Accrued local business taxes (21,024) 48,869 --
Unearned revenue 19,739 -- --
Accrued interest due to affiliate -- 30,852 4,402
---------- --------- ---------
Total adjustments (259,409) (118,197) 609,403
---------- ---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES
2,383,533 1,475,354 1,332,457
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Employee loans receivable -- 30,000 (30,000)
Due from partner 135,000 (159,000) --
Payment of deferred costs (106,110) -- --
Purchase of property and equipment (26,235) (42,365) (77,524)
Proceeds from the sale of securities 386,835 -- --
Proceeds from disposal of property and equipment -- 4,256 --
---------- ---------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 389,490 (167,109) (107,524)
---------- ----------- -----------
Subtotal (carried forward) 2,773,023 1,308,245 1,224,933
The accompanying notes to combined financial statements are an integral part of these statements.
</TABLE>
F-6
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Subtotal (brought forward) $2,773,023 $1,308,245 $1,224,933
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from partners -- 282,883 --
Distributions to partners and members (2,975,404) (336,038) (1,833,309)
Payment of note payable due affiliate -- (500,000) --
Increase in note payable due affiliate -- -- 60,057
----------- ---------- ----------
NET CASH (USED IN) FINANCING ACTIVITIES (2,975,404) (553,155) (1,773,252)
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (202,381) 755,090 (548,319)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,258,429 503,339 1,051,658
---------- --------- ----------
CASH AND CASH EQUIVALENTS - END OF YEAR $1,056,048 $1,258,429 $ 503,339
========== ========== ==========
NONCASH FINANCING ACTIVITIES:
Unregistered securities distributed to partners $ 750,000 $ -- $ --
========== =========== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during 1995 for interest $ -- $ 2,214 $ --
========== ========== =======
The accompanying notes to combined financial statements are an integral part of these statements.
</TABLE>
F-7
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
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 6).
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).
For the period June 14, 1995 through December 31, 1996,
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.
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.
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.
F-8
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
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
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.
(d) Investment in Available for Sale Securities
As of December 31, 1996 and 1995, respectively, investment in
available for sale securities are stated at their market
values.
(e) Investment in Unregistered Securities
During 1995, the Partnership received cash and unregistered
securities in connection with an engagement to provide
financial advisory services. At the time the services were
rendered the fair market value of the securities was
determined to be $124,250. The combined financial statements
for 1995 reflect this amount as investment in unregistered
securities and fees earned. During 1996, pursuant to a plan of
merger between the issuer of the unregistered securities and
other parties, the securities were surrendered in exchange for
cash of $386,835 resulting in a gain of $262,585.
(continued)
F-9
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------------------------------------------
(e) Investment in Unregistered Securities (continued)
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.
(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.
(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 the
reported amounts of income and expenses during the three years
ended December 31, 1996. Actual results could differ from
those estimates.
F-10
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT
----------------------
Property and equipment - at cost, consists of the following at
December 31, 1996 and 1995:
December 31
--------------------------------------
1996 1995
Furniture and fixtures $ 80,328 $ 79,630
Office, telephone and
computer equipment 236,961 211,424
--------- ---------
Total 317,289 291,054
Less, accumulated depreciation (227,218) (183,214)
--------- ---------
$ 90,071 $107,840
========= ========
NOTE 4 - DUE FROM PARTNER
----------------
Due from partner represents amounts due from Valentine Wildove
& Company, Inc. relating to short term non interest 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 - 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).
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
(continued)
F-11
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 6 - NOTE PAYABLE (Continued)
------------
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 7 - 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.
Fees earned in 1996, 1995 and 1994, respectively include
$737,350, $373,523 and $28,272 from affiliates of certain
partners.
NOTE 8 - 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.
Effective January 1994, the Partnership exercised its option
to terminate an amended office lease with the affiliate of
Windsor Investors. The amended lease provided for a rent
abatement and for the forgiveness of deferred rent incurred by
the Partnership under a prior lease agreement. As of the date
the amended lease was terminated, the deferred rent and rent
abatements were being amortized on a straight-line basis
through the life of the amended lease. As of the termination
date of this lease, the remaining unamortized balances
relating to deferred rent and rent abatements amounted to
$43,229 and $71,152, respectively, which were recognized as a
reduction of rent expense in 1994.
(continued)
F-12
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
The Partnership entered into an agreement to sublease a
portion of its office space to a nonaffiliated company. The
sublease commenced in April 1994 and terminated on April 30,
1995. The agreement provided for annual fixed rent in the
amount of $54,000 payable in equal monthly installments plus
additional monthly charges for certain services provided by
the sublessor. Sublease income earned by the Partnership for
1995 and 1994 amounted to $24,030 and $41,167, respectively.
VP Metropolis Services, L.L.C. manages and administers an
asset portfolio in which certain partners of the Partnership
have less than a 1% collective interest. As part of its fee
arrangement, VP Metropolis Services, L.L.C. is entitled to a
resolution fee which is contingent upon the occurrence of
specified events as defined in the agreement. Management
contends that the possibility of the occurrence of the
specified events is more likely not 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.
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 9 - 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
respectively, the Partnership did not incur any administrative
costs directly associated with the plan.
F-13
<PAGE>
ANNEX A
PREFERRED SHARE PURCHASE AGREEMENT
dated as of April ___ , 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
C/M 10397.0019 479413.1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 1 DEFINITIONS................................................................................... 1
ARTICLE 2 SALE AND PURCHASE............................................................................. 5
Section 2.1 Sale of Class A Preferred Shares.......................................................... 5
Section 2.2 Purchase Price............................................................................ 5
Section 2.3 Closing and Closing Date.................................................................. 5
Section 2.4 Conditions to Closing..................................................................... 5
Section 2.5 Additional Closing Deliveries............................................................. 7
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................. 8
Section 3.1 Existence and Authority................................................................... 8
Section 3.2 Capitalization; Consolidated Subsidiaries................................................. 8
Section 3.3 Securities Act and Exchange Act Filings................................................... 9
Section 3.4 No Consents, Approvals, Violations or Breaches............................................ 9
Section 3.5 Taxes..................................................................................... 9
Section 3.6 Financial Statements...................................................................... 10
Section 3.7 Litigation; Legal and Governmental Proceedings and
Judgments; Licenses and Permits................................................. 10
Section 3.8 Brokers................................................................................... 10
Section 3.9 No Material Change........................................................................ 10
Section 3.10 Compliance with Laws..................................................................... 10
Section 3.11 Statements True and Correct.............................................................. 10
Section 3.12 Incorporation of Certain Additional Representations
and Warranties by Reference..................................................... 11
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER....................................................... 11
Section 4.1 Existence and Authority of Buyer.......................................................... 11
Section 4.2 Investment Intent......................................................................... 11
Section 4.3 No Consents, Approvals, Violations or Breaches............................................ 12
Section 4.4 Brokers................................................................................... 12
ARTICLE 5 COVENANTS OF THE COMPANY...................................................................... 12
Section 5.1 Operations in Ordinary Course............................................................. 12
Section 5.2 Conditions to Closing..................................................................... 13
Section 5.3 Shareholder Approval...................................................................... 13
Section 5.4 Investigations............................................................................ 13
ARTICLE 6 COVENANTS OF BUYER............................................................................ 13
Section 6.1 Conditions to Closing..................................................................... 13
Section 6.2 Bank Holding Company Restrictions......................................................... 13
ARTICLE 7 REGISTRATION RIGHTS........................................................................... 14
Section 7.1 Registration Rights....................................................................... 14
A-i
C/M 10397.0019 479413.1
<PAGE>
ARTICLE 8 FURTHER AGREEMENTS............................................................................ 18
Section 8.1 Further Assurances........................................................................ 18
Section 8.2 Restrictions on Certain Amendments to Amended and Restated Declaration
of Trust; Restrictions on Certain Equity Issuances.............................. 18
Section 8.3 Costs and Expenses........................................................................ 18
Section 8.4 Buyer's Access to Records................................................................. 18
Section 8.5 Home Office Payment....................................................................... 18
Section 8.6 Confidentiality........................................................................... 19
Section 8.7 SEC Filings and Press Releases............................................................ 19
Section 8.8 Limitation Upon Incurrence of Indebtedness................................................ 19
ARTICLE 9 MISCELLANEOUS................................................................................. 19
Section 9.1 Survival of Representations, Warranties and Covenants..................................... 19
Section 9.2 Assignment; Transfer of Interests......................................................... 20
Section 9.3 Notices................................................................................... 20
Section 9.4 Entire Agreement.......................................................................... 21
Section 9.5 No Waiver................................................................................. 22
Section 9.6 Governing Law............................................................................. 22
Section 9.7 Counterparts.............................................................................. 22
Section 9.8 Public Announcements...................................................................... 22
Section 9.9 Availability of Equitable Remedies........................................................ 22
Section 9.10 Construction............................................................................. 22
Section 9.11 Arbitration.............................................................................. 22
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 Press Release
Exhibit D Form of Opinion of Greenberg Glusker Fields Claman Machtinger LLP
Exhibit E Form of Opinion of Battle Fowler LLP
</TABLE>
DISCLOSURE SCHEDULES
Schedule 3.2 Capital Stock
Schedule 3.7 Litigation
A-ii
C/M 10397.0019 479413.1
<PAGE>
PREFERRED SHARE PURCHASE AGREEMENT ("Agreement"), dated as of
April, 1997, by and between CALIFORNIA REAL ESTATE INVESTMENT TRUST, a trust
organized under the laws of the State of California (the "Company"), and VEQTOR
FINANCE COMPANY, LLC, a Delaware limited liability company ("Buyer").
Preliminary Statement
The Company desires to sell, and Buyer desires to purchase at
the Closing (as defined below), 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 (the "Class A
Preferred Shares").
NOW, THEREFORE, in consideration of the mutual promises set
forth herein, 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.
"Agreement" means this Preferred Share Purchase Agreement and
the Exhibits attached hereto and Disclosure Schedules delivered in connection
herewith.
"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.
C/M 10397.0019 479413.1
<PAGE>
"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.
"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.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"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.
"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) total Indebtedness of the Company as reflected on the Company's last
regularly prepared balance sheet to (ii) the excess of total assets 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.
A-2
C/M 10397.0019 479413.1
<PAGE>
"Equity Securities" means, with respect to any Person, any of
the following securities:
(i) shares of any class of Capital Shares of such Person,
and securities similar thereto;
(ii) securities that, by their terms, participate in the
revenues, gross income, operating income, net income
or any other income or cash flow of such Person or in
the appreciation in any asset or assets owned by such
Person; and
(iii) securities convertible into, exchangeable for or
exercisable for any of the foregoing;
but shall not include debt securities of such Person that do not fall into any
of the categories described in clauses (i) through (iii) above.
"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
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-3
C/M 10397.0019 479413.1
<PAGE>
(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" shall mean, 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.
"Shareholders' Meeting" shall have 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.
A-4
C/M 10397.0019 479413.1
<PAGE>
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.
(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
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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 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) 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.
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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:
(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 D; 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 E.
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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.
(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, 9,156,970 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.
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(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 all press releases issued since December 31,
1995, 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 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) to the Company's knowledge, 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.
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(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 sheets 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 such
date, certified by Coopers & Lybrand L.L.P., independent certified public
accountants. Such financial statements and balance sheets fairly represent the
financial condition of the Company and its consolidated subsidiaries as of 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.
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 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. None of the
information concerning the Company and its Subsidiaries set forth in the proxy
statement (the "Proxy Statement") to be used by
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the Company to solicit any required approval of its shareholders as contemplated
by this Agreement will, when it is first mailed to the shareholders of the
Company, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which such statements are made, not misleading, or,
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"), be false or misleading with respect to any material fact or omit to
state any material fact necessary to correct any statement or remedy any
omission in any earlier communication with respect to the solicitation of any
proxy for the Shareholders' Meeting. All documents that the Company is
responsible for filing with any regulatory authority in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable law, including applicable provisions of the
securities laws.
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
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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 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 as follows:
Section 5.1 Operations in Ordinary Course. The Company
covenants and agrees that the Company shall not
(i) conduct its business and operations in such a manner as
to impair its ability to consummate the Transactions,
(ii) 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,
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(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.
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").
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(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 in accordance with applicable federal and state securities laws and
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.
(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, 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 Registration Rights.
(a) Demand Registration. Buyer shall 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 Common Shares and Preferred
Shares held from time to time by Buyer, as well as the Common Shares into which
such Preferred Shares are convertible. The Company covenants and agrees with
Buyer that, upon written request of Buyer made pursuant to this Section 7.1(a)
(which request shall state the number of Common Shares and Preferred Shares to
be so registered and the intended method of distribution thereof), the Company
shall file a registration statement under the Securities Act, to the extent
reasonably necessary to permit their sale or other disposition in accordance
with the intended method of distribution specified in the request of Buyer.
(b) Incidental Registration. (i) Whenever the Company proposes
to file a registration statement at any time and from time to time, it will,
prior to such filing, give written notice to Buyer of its intention to do so
and, upon the written request of Buyer given within twenty (20) Business Days
after the Company provides such notice (which request shall state the intended
method of distribution of such Common Shares and/or Preferred Shares), the
Company shall use its reasonable best efforts to cause all Common Shares and/or
Preferred Shares which the Company has been requested by Buyer to be included in
such registration; provided that the Company shall have the
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right to postpone or withdraw any registration effected pursuant to this Section
7.1(b) without obligation to Buyer.
(ii) In connection with any offering under this
Section 7.1(b) involving an underwritten offering, the Company shall not be
required to include any Common Shares or Preferred Shares in such underwritten
offering unless the holders thereof accept the terms of the offering as agreed
upon between the Company and the underwriters selected by it and execute and
deliver an underwriting agreement, and then only in such quantity as will not,
in the reasonable opinion of the underwriters, jeopardize the success of the
offering by the Company. If in the reasonable opinion of the managing
underwriter the registration of all, or part of, the Common Shares and Preferred
Shares which the holders have requested to be included would materially and
adversely affect such public offering, then the Company shall be required to
include in the underwritten offering only that number of Common Shares and
Preferred Shares, if any, which the managing underwriter believes may be sold
without causing such adverse effect. If the number of Common Shares and
Preferred Shares to be included in the underwritten offering in accordance with
the foregoing is less than the total number of shares which the holders of
Common Shares and Preferred Shares have requested to be included, then the
holders of Common Shares and Preferred Shares who have requested registration
and other holders of Common Shares and Preferred Shares entitled to include
Common Shares and Preferred Shares in such registration shall participate in the
underwritten offering pro rata based upon their total ownership of Common Shares
and Preferred Shares of the Company on a fully diluted basis. If any holder
would thus be entitled to include more shares than such holder requested to be
registered, the excess shall be allocated among other requesting holders pro
rata based upon their total ownership of Common Shares and Preferred Shares of
the Company on a fully diluted basis.
(c) Registration Procedures. (i) If and whenever the
Company is required by the provisions of this Agreement to effect the
registration of any of the Common Shares and/or Preferred Shares under the
Securities Act, the Company shall:
(A) file with the Commission a registration statement with
respect to such Common Shares and Preferred Shares and use its best
efforts to cause that registration statement to become and remain
effective;
(B) as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the registration
statement and the prospectus included in the registration statement as
may be necessary to keep the registration statement effective for a
period of not less than one hundred twenty (120) days from the
effective date;
(C) as expeditiously as possible furnish to Buyer such
reasonable numbers of copies of the prospectus, including a
preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as Buyer may reasonably
request in order to facilitate the public sale or other disposition of
the Common Shares and Preferred Shares owned by Buyer; and
(D) as expeditiously as possible use its best efforts to
register or qualify the Common Shares and Preferred Shares covered by
the registration statement under the securities or Blue Sky laws of
such states as Buyer shall reasonably request, and do any and all
other acts and things that may be necessary or desirable to enable
Buyer to consummate the public sale or other disposition in such
states of the Common Shares and Preferred Shares
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owned by Buyer; provided, however, that the Company shall not be
required in connection with this clause (D) to qualify as a foreign
trust or execute a general consent to service of process in any
jurisdiction.
(ii) If the Company has delivered preliminary or final
prospectuses to Buyer and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, the Company shall promptly
notify Buyer and, if requested, Buyer shall immediately cease making offers of
Common Shares and Preferred Shares and return all prospectuses to the Company.
The Company shall promptly provide Buyer with revised prospectuses and,
following receipt of the revised prospectuses, Buyer shall be free to resume
making offers of the Common Shares and Preferred Shares.
(d) Allocation of Expenses. In connection with any
registration pursuant to this Section 7.1, Buyer will pay all underwriting
discounts on the Common Shares and Preferred Shares registered on behalf of
Buyer, selling commissions on the Common Shares and Preferred Shares registered
on behalf of Buyer and the fees and expenses of Buyer's own counsel (other than
the counsel selected to represent all selling investors) and other experts Buyer
engages. The Company will pay all other costs and expenses of any registration
under this Section 7.1.
(e) Indemnification.
(i) In the event of any registration of any of the
Common Shares or Preferred Shares on behalf of Buyer under the Securities Act
pursuant to this Agreement, the Company will indemnify and hold harmless the
seller of such Common Shares or Preferred Shares, each underwriter of such
Common Shares or Preferred Shares, and each other person, if any, who controls
such seller or underwriter within the meaning of the Securities Act or the
Exchange Act against any losses, claims, damages or liabilities, joint or
several, to which such seller, underwriter or controlling person may become
subject under the Securities Act, the Exchange Act, state securities or Blue Sky
laws or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement under which such Common Shares or Preferred Shares were registered
under the Securities Act, any preliminary prospectus or final prospectus
contained in the registration statement, or any amendment or supplement to such
registration statement, or arise out of or are based upon the omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and the Company will
reimburse such seller, underwriter and each such controlling person for any
legal or any other expenses reasonably incurred by such seller, underwriter or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or omission made
in such registration statement, preliminary prospectus or prospectus, or any
such amendment or supplement, in reliance upon and in conformity with
information furnished to the Company, in writing, by or on behalf of such
seller, underwriter or controlling person specifically for use in the
preparation thereof.
(ii) In the event of any registration of any of
the Common Shares or Preferred Shares on behalf of Buyer under the Securities
Act pursuant to this Section 7.1, Buyer will indemnify and hold harmless the
Company, each of its trustees and officers and each underwriter (if any) and
each person, if any, who controls the Company or any such underwriter within the
meaning
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of the Securities Act or the Exchange Act, against any losses, claims, damages
or liabilities, joint or several, to which the Company, such trustees and
officers, underwriter or controlling person may become subject under the
Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in any registration statement under which
such Common Shares or Preferred Shares were registered on behalf of Buyer under
the Securities Act, any preliminary prospectus or final prospectus contained in
the registration statement, or any amendment or supplement to the registration
statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statement therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of Buyer, specifically for use in connection with the
preparation of such registration statement, prospectus, amendment or supplement.
(f) Indemnification with Respect to Underwritten Offering. In
the event that Buyer's Common Shares or Preferred Shares are sold pursuant to a
registration statement in an underwritten offering pursuant to Section 7.1(a) or
Section 7.1(b), the Company agrees to enter into an underwriting agreement
containing customary representations and warranties with respect to the business
and operations of the Company and customary covenants and agreements to be
performed by the Company, including without limitation customary provisions with
respect to indemnification by the Company of the underwriters of such offering.
(g) Information With Respect to Buyer. Buyer shall furnish to
the Company such information regarding Buyer and the distribution proposed by
Buyer as the Company may request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
this Section 7.1.
(h) Rule 144 Requirements. For so long as the Company has
registered a class of securities under Section 12 of the Exchange Act, the
Company agrees to use reasonable best efforts to do the following:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities
Act; provided, however, that the Company may suspend its compliance
with this Section 7.1(h)(i), upon written notice to Buyer, for a period
specified in such written notice to Buyer of not more than 30 days
during any 365 day period;
(ii) file with the Commission in a timely manner all
reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(iii) furnish to Buyer upon request a written
statement by the Company as to its compliance with the reporting
requirements of said Rule 144, the Securities Act and the Exchange Act,
a copy of the most recent annual or quarterly report of the Company,
and such other reports and documents of the Company as such holder may
reasonably request to avail itself of any similar rule or regulation of
the Securities and Exchange Commission allowing it to sell any such
securities without registration.
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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 convey 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.
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
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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 Securities and Exchange
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.
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 Section
7.1(e) or 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
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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 Section 7.1(e) or 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 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:
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(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.
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
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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 (it being understood that the Company intends to issue a
press release with respect to the transactions contemplated by this Agreement in
the form attached hereto as Exhibit C). 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 "6" 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
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effect for New York City. Any determination rendered therein shall be final and
binding upon the parties and their legal representatives.
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:
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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 June ___ , 1997, adopted the following resolution
providing for the issuance of two classes of the Company's preferred shares of
beneficial interests, consisting of [12,639,405]1 Class A 9.5% Cumulative
Convertible Preferred Shares, par value $1.00 per share, and [12,639,405]2 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%
- --------
1 Actual number purchased under the preferred share purchase agreement (a
minimum of $32 million and a maximum of $34 million of shares at a
purchase price of $2.69 per share), up to 12,639,405.
2 Same number as the number of Class A Preferred Shares.
C/M 10397.0019 479413.1
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Cumulative Convertible Non-Voting Preferred Shares, par value $1.00 per share,
be, and each hereby is, created, classified and authorized and the issuance
thereof provided for, 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.
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 8(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) "Annual Dividend Rate" has the meaning set forth in section
3(a) hereof.
(c) "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).
(d) "Board" means the board of trustees of the Company.
(e) "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.
(f) "Capital Shares" means any and all shares, rights, warrants
or options to purchase shares, securities convertible into
or exchangeable or exercisable for shares and
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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.
(g) "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.
(h) "Change in Control" means the occurrence of any of the
following events:
(i) the Board shall at any time consist of a
majority of individuals (the "New Majority") who
were elected or appointed trustees of the
Company without the approval of a majority of
the trustees:
(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;
(ii) any Person or group (within the meaning of
section 13(d)(3) or 14(d)(2) of the Exchange
Act) acquires, without the consent of VFC or,
if VFC shall have been dissolved, the entities
that were the managers of VFC at the time of
VFC's dissolution, any Class A Common Shares,
Class A Preferred Shares or any other rights of
any kind to acquire Class A Common Shares
(other than an acquisition by the original
holders of VFC convertible debt of Class A
Common Shares or Class A Preferred Shares on
conversion of Capital Shares) if after such
acquisition such Person or group (within the
meaning of section 13(d)(3) or 14(d)(2) of the
Exchange Act) beneficially owns (within the
meaning of rule 13d-3 promulgated under the
Exchange Act) Class A Common Shares aggregating
in excess of 15% of the number of Class A
Common Shares or the combined voting power of
Voting Shares of the Company outstanding
immediately prior to such acquisition.
(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.
(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.
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(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
8(b) hereof.
(q) "Conversion Notice" has the meaning set forth in section
8(b) hereof.
(r) "Conversion Price" has the meaning set forth in section 8(a)
hereof.
(s) "D/E Ratio" means, as of the date of determination, the ratio
of (i) total Indebtedness of the Company as reflected on the
Company's last regularly prepared balance sheet to (ii) the
excess of total assets 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.
(t) "Dividend Payment Date" has the meaning set forth in section
3(a) hereof.
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(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) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(x) "Exempted Transaction" means each and any of the following:
(i) the issuance of any Capital Shares of the
Company to employees, officers or trustees of
the Company under an employee benefit plan or
similar arrangement adopted by the Company,
(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) any acquisition by the Company of shares or
other assets of any kind in exchange, in whole
or in part, for any class of Capital Shares of
the Company, but shall not include any business
combination transaction or series of
transactions involving the Company, regardless
of whether such transaction or transactions
take the form of a merger, purchase and sale of
securities, purchase and sale of assets or
otherwise, immediately prior to which,
following which or in connection with which a
Change in Control occurs.
(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(x),
the average of the closing sale price or, in the
absence of a closing sale price, the highest bid
and lowest asked prices of one Class A
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Common Share quoted in the NASDAQ National
Market System or any similar system of automated
dissemination of quotations of securities prices
then in common use, if so quoted; or
(iii) if not quoted as described in clause (ii) of
this section 2(x), 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.
(ab) "Incur" means to issue, assume, guarantee, incur or otherwise
become liable for.
(ac) "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.
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(ad) "Issuance Date" means, with respect to any Preferred Share,
the date on which such Preferred Share is issued by the
Company.
(ae) "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:
(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.
(af) "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.
(ag) "Liquidation Preference" means, with respect to each
Preferred Share, an amount equal to $2.69.
(ah) "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.
(ai) "Preferred Shares" means, collectively, the Class A Preferred
Shares and the Class B Preferred Shares.
(aj) "Put Price" has the meaning set forth in section 5(a) hereof.
(ak) "Put Right" has the meaning set forth in section 5(a) hereof.
(al) "Redemption Date" means any date on which Preferred Shares are
to be redeemed pursuant to section 5 hereof.
(am) "Restricted Payment" has the meaning set forth in section
3(c) hereof.
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(an) "Share Purchase Agreement" means the Preferred Share Purchase
Agreement, dated as of April ___ , 1997, between the Company
and VFC, as the same may be amended, supplemented or modified
from time to time in accordance with the terms thereof.
(ao) "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.
(ap) "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.
(aq) "VFC" means Veqtor Finance Company, LLC, a Delaware limited
liability company.
(ar) "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 such Person. Any reference to a
percentage of Voting Shares shall refer to the 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
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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
applicable 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,
(ii) the acquisition of any Capital Shares in
exchange solely for Junior Shares, or
(iii) the redemption of Preferred Shares pursuant to
section 5 hereof.
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
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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 shares being treated
equally, among the Holders of the Preferred Shares based on the number
of Preferred Shares then held by each such Holder.
5 Redemption Upon a Change in Control Event.
(a) Change in Control. In the event of a Change in Control, each
Holder of Preferred Shares shall, subject to the requirements
of section 5(b) hereof, have the right to require the Company
to redeem, out of funds legally available therefor, all but
not less than all of the Preferred Shares held by such Holder
(the "Put Right"), at a price per Preferred Share (the "Put
Price") equal to the sum of the Liquidation Preference and all
dividends per share accrued but unpaid through the Redemption
Date on such Preferred Share.
(b) Procedures for Redemption upon Change in Control. Any Holder
who elects to exercise its Put Right must notify the Company
in writing, within 90 days after receipt from the Company of
written notice that a Change in Control has occurred, of its
election, and shall surrender share certificates evidencing
the Preferred Shares to be redeemed by the Company pursuant
to the Put Right. Failure by any Holder timely to so notify
the Company will be deemed to be a waiver of the Put Right by
such Holder. Not later than 10 Business Days following the
Company's receipt of the notice referred to in this section
5(b) and such surrendered share certificates, the Company
shall pay to each Holder in cash at the address of such
Holder as it appears on the records of the Company the Put
Price for each Preferred Share to be so redeemed. As long as
the Company has complied with the requirements set forth in
this section 5(b), from and after the applicable Redemption
Date, dividends on the Preferred Shares so redeemed shall
cease to accrue, such shares shall be canceled and shall no
longer be deemed to be outstanding, and all rights of the
Holders thereof as shareholders of the Company (except the
right to receive from the Company the Put Price) shall cease.
6 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 and the Company, as
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the surviving entity, does not have outstanding any Capital
Shares that are not Junior Shares, 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, and 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, and the
surviving, resulting or acquiring Person does not have
outstanding any Capital Shares that are not Junior Shares.
7 Voting Rights of Preferred Shares.
(a) Voting Rights of the Class A Preferred Shares. In addition to
the voting rights described in sections 6 and 7(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) Voting Rights of the Class B Preferred Shares. In addition to
the voting rights described in sections 6 and 7(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) 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.
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8 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 8.
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
(ii) if the Holder is either (a) not a Bank Holding
Company, (b) intends to sell such securities to
a Person that is not a Bank Holding Company or
(c) would not, upon the issuance of such Class A
Preferred Shares, own 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 8.
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 8.
(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
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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 either (a) the Holder is not
a Bank Holding Company or (b) the Holder intends to sell such
securities to a Person that is not a Bank Holding Company and
will not take delivery of the Class A Common Shares or (c) the
Holder will not, upon the issuance of such Class A Preferred
Shares, own 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 8, and a check
or cash in respect of any fractional shares issuable upon such
conversion, as provided in section 8(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 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.
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Except as otherwise provided in this section 8, 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 8(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 8(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 Price
in effect immediately prior to the date of
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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.
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(iii) In the event that the Company shall distribute
to all holders of its Common Shares any of its
assets or debt 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 8(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 8(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 8(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 8(d), or the Preferred
Shares become convertible into shares of
securities, property or assets pursuant to
section 8(e) hereof, or the Company reduces the
Conversion Price pursuant to section 8(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 8(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
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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 8(c).
(vii) For purposes of any computations of Aggregate
Consideration Receivable or other consideration
pursuant to this section 8(d), the following
shall apply:
(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 8.
(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 8(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
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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
6(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 8.
If this section 8(e) applies with respect to a transaction,
section 8(d) hereof shall not apply with respect to that
transaction. The above provisions of this section 8(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 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
8(d)(i) or (iii) hereof; or
(B) that any event described in section
8(e) hereof shall occur; or
(C) of the voluntary or involuntary
dissolution, liquidation or winding-up
of the Company;
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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 8(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.
Failure to give such notice, or any defect
therein, shall not affect the legality or
validity of such action or event.
9 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.
10 Certain Restrictions on Transfer; Legend. 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 would own no more than 4.9% of any class of Voting
Shares of the Company. The Class B Preferred Shares and the Class B
Common Shares may be transferred by a Bank Holding Company only in
accordance with applicable federal and state securities laws and 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. Holder 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
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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
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ANNEX C
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
CAPITAL TRUST
a California trust
As amended through June ___ , 1997
C/M 10397.0019 479413.1
<PAGE>
<TABLE>
<CAPTION>
CAPITAL TRUST
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I DEFINITIONS......................................................................... 2
Section 1.1 "Bank Holding Company".............................................................. 2
Section 1.2 "Board"............................................................................. 2
Section 1.3 "Business Day"...................................................................... 2
Section 1.4 "By-Laws"........................................................................... 2
Section 1.5 "Certificate of Designation"........................................................ 2
Section 1.6 "Class A Common Shares"............................................................. 2
Section 1.7 "Class A Preferred Shares".......................................................... 2
Section 1.8 "Class B Common Shares"............................................................. 2
Section 1.9 "Class B Preferred Shares".......................................................... 3
Section 1.10 "Common Shares"..................................................................... 3
Section 1.11 "Conversion Date"................................................................... 3
Section 1.12 "Conversion Notice"................................................................. 3
Section 1.13 "Corporations Commissioner"......................................................... 3
Section 1.14 "Declaration" and "Declaration of Trust"............................................ 3
Section 1.15 "Fair Market Value"................................................................. 3
Section 1.16 "File for Record"................................................................... 4
Section 1.17 "GAAP".............................................................................. 4
Section 1.18 "Internal Revenue Code"............................................................. 4
Section 1.19 "Person"............................................................................ 4
Section 1.20 "Preferred Shares".................................................................. 4
Section 1.21 "Shares"............................................................................ 4
Section 1.22 "Shareholders"...................................................................... 4
Section 1.23 "Subsidiary"........................................................................ 4
Section 1.25 "Trustees".......................................................................... 5
Section 1.26 "Voting Preferred Shares"........................................................... 5
Section 1.27 "Voting Shares"..................................................................... 5
ARTICLE II THE COMPANY......................................................................... 5
Section 2.1 Name................................................................................ 5
Section 2.2 Principal Office.................................................................... 5
Section 2.3 Purpose............................................................................. 5
Section 2.4 No Partnership Relationship......................................................... 5
Section 2.5 Amendment and Restatement of Original Declaration of Trust.......................... 6
ARTICLE III INVESTMENT POLICY................................................................... 6
Section 3.1 General Policy...................................................................... 6
Section 3.2 Maintenance of Assets............................................................... 6
Section 3.3 Disposition or Encumbrance of Assets................................................ 6
Section 3.4 Use of Brokers and Appraisers....................................................... 6
Section 3.5 Management of Company Property...................................................... 6
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Section 3.6 The Company's Right to Borrow Funds................................................. 6
Section 3.7 Transactions with Related Parties................................................... 6
ARTICLE IV CLASSES OF SHARES; DESIGNATIONS, PREFERENCES, ETC................................... 7
Section 4.1 Number of Shares; Classes........................................................... 7
Section 4.2 Designations, Preferences, etc...................................................... 8
Section 4.3 Shareholder's Interest in the Company............................................... 8
ARTICLE V COMMON SHARES....................................................................... 8
Section 5.1 Common Shares; Identical Rights..................................................... 8
Section 5.2 Dividends........................................................................... 8
Section 5.3 Liquidation Rights.................................................................. 8
Section 5.4 Voting Rights....................................................................... 8
Section 5.5 Conversion Rights................................................................... 9
Section 5.6 Stock Splits, etc................................................................... 10
Section 5.7 Consolidation, Merger or Sale....................................................... 10
Section 5.8 Reacquired Shares................................................................... 10
Section 5.9 Preferences, Appraisals, Redemption and Preemptive Rights........................... 10
Section 5.10 Nonassessability of Common Shares................................................... 10
ARTICLE VI PREFERRED SHARES.................................................................... 11
Section 6.1 Preferred Shares.................................................................... 11
Section 6.2 The Class A Preferred Shares and the Class B Preferred Shares....................... 12
Section 6.3 Nonassessability of Preferred Shares................................................ 12
Section 6.4 Recording of Certificates of Designation............................................ 12
ARTICLE VII MEETINGS OF SHAREHOLDERS............................................................ 13
Section 7.1 Annual Meeting...................................................................... 13
Section 7.2 Special Meetings.................................................................... 13
Section 7.3 Record Date......................................................................... 13
Section 7.4 Voting of Shares.................................................................... 13
Section 7.5 Inspectors of Elections............................................................. 14
Section 7.6 Shareholder List.................................................................... 14
Section 7.7 Quorum.............................................................................. 14
Section 7.8 Notice.............................................................................. 14
Section 7.9 Business Transacted................................................................. 14
Section 7.10 Action at a Meeting................................................................. 15
Section 7.11 Action Without a Meeting............................................................ 15
Section 7.12 Effect of Action.................................................................... 15
ARTICLE VIII TRUSTEES; MEETINGS OF TRUSTEES...................................................... 15
Section 8.1 Authority of Trustees............................................................... 15
Section 8.2 Powers of Trustees.................................................................. 15
Section 8.3 Number, Term and Qualifications..................................................... 17
Section 8.4 Resignations........................................................................ 17
Section 8.5 Removal of Trustees................................................................. 17
Section 8.6 Newly Created Trusteeships and Vacancies............................................ 18
Section 8.7 Compensation........................................................................ 18
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Section 8.8 Committees.......................................................................... 18
Section 8.9 By-Laws............................................................................. 18
ARTICLE IX OFFICERS............................................................................ 18
ARTICLE X CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.......................................... 19
ARTICLE XI ACCOUNTING.......................................................................... 19
Section 11.1 Standard............................................................................ 19
Section 11.2 Inspection of Records............................................................... 19
Section 11.3 Annual Audit........................................................................ 19
Section 11.4 Interim Reports..................................................................... 19
ARTICLE XII DURATION OF THE COMPANY............................................................. 20
Section 12.1 Duration............................................................................ 20
Section 12.2 Early Termination................................................................... 20
Section 12.3 Procedure Upon Termination.......................................................... 20
ARTICLE XIII AMENDMENTS.......................................................................... 20
Section 13.1 Amendment Procedure................................................................. 20
Section 13.2 Amendments without Shareholder Approval............................................. 20
Section 13.3 Recording Amendments................................................................ 21
ARTICLE XIV EXCULPATION AND INDEMNIFICATION; LIMITATION OF
LIABILITY; RIGHT OF TRUSTEES AND OFFICERS TO OWN SHARES;
REPRESENTATIONS AND GUARANTEES...................................................... 21
Section 14.1 Exculpation and Indemnification of Trustees, Officers and Others.................... 21
Section 14.2 Limitation on Liability of Shareholders, Trustees and Officers; Insurance........... 21
Section 14.3 Right of Trustees and Officers to Own Shares........................................ 21
Section 14.4 Representations and Guarantees...................................................... 21
ARTICLE XV MISCELLANEOUS....................................................................... 22
Section 15.1 Fiscal Year......................................................................... 22
Section 15.2 Checks.............................................................................. 22
Section 15.3 Successors in Interest.............................................................. 22
Section 15.4 Severability........................................................................ 22
Section 15.5 California Laws Govern.............................................................. 22
Section 15.6 Headings............................................................................ 22
Section 15.7 No Third-Party Reliance............................................................. 22
Section 15.8 Counterparts........................................................................ 22
Section 15.9 Notice.............................................................................. 22
Section 15.10 Agreement of Shareholders........................................................... 23
</TABLE>
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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"), incorporating all amendments thereto from date
of execution, September 15, 1966, to the date hereof, 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
C/M 10397.0019 479413.1
<PAGE>
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:
ARTICLE I
DEFINITIONS
Section 1.1 "Bank Holding Company". The phrase "Bank Holding Company"
shall mean 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).
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.
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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.
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 "Fair Market Value". The phrase "Fair Market Value" with
respect to 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:
(a) 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
(b) if not listed or admitted for trading as described in
clause (i) of this Section 1.15, the average of the
closing sale price or, in the absence of a closing
sale price, 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
automated dissemination of quotations of securities
prices then in common use, if so quoted; or
(c) if not quoted as described in clause (ii) of this
Section 1.15, 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.
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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
by a member firm of the New York Stock Exchange selected by
the Company.
Section 1.16 "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 1.17 "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 1.18 "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 1.19 "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 1.20 "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 1.21 "Shares". The word "Shares" shall mean the Common Shares
and the Preferred Shares, collectively.
Section 1.22 "Shareholders". The word "Shareholders" shall mean the
holders of record of the Company's outstanding Shares.
Section 1.23 "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 1.24 "Trading Days". The phrase "Trading Days" shall mean, 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
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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.
Section 1.25 "Trustees". The word "Trustees" shall mean the trustees of
the Company elected from time to time as provided in Article VIII hereof.
Section 1.26 "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 1.27 "Voting Shares". The phrase "Voting Shares" shall mean,
collectively, the Class A Common Shares and the Voting Preferred Shares.
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.
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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.
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:
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(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
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.
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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,
divided 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 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.
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(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 either (a) the
Shareholder is not a Bank Holding Company or (b) the Shareholder intends to sell
such securities to a Person that is not a Bank Holding Company and will not take
delivery of the Class A Common Shares or (c) the Shareholder will not, upon the
issuance of such Class A Common Shares, own 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
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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 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 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 Consolidation, Merger or Sale. The Company shall not in any
manner consolidate or merge with another Person or sell or convey the properties
and assets of the Company as, or substantially as, an entirety to any other
Person, unless the outstanding Common Shares of all classes and series are
convertible into the same kind and amount of shares and other securities or
property or assets (including cash) receivable under such consolidation, merger,
sale or conveyance by a holder of Common Shares.
Section 5.8 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 5.9 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 5.10 Nonassessability of Common Shares. After the payment of
subscription price therefor, no assessment shall ever be made upon the Common
Shares of the Company.
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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;
(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;
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(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.
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.
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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
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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.
(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
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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.
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
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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;
(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;
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(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.
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
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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.
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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 Commissioner of Corporations, 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.
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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.
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.
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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 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 anybody 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.
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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.
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
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office that he or she accepts an 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
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Annex D
CALIFORNIA REAL ESTATE INVESTMENT TRUST
1997 SHARE OPTION PLAN
1. Purpose
The purpose of this plan (the "Plan") is to secure for California Real
Estate Investment Trust (the "Company"), and its shareholders, the benefits
arising from the ownership of options to purchase common shares of beneficial
interest of the Company by trustees, officers, key employees of, and consultants
to, the Company or Subsidiaries (as defined in Section 18 hereof) who are
expected to contribute to the Company's future growth and success.
2. Types of Plan Benefits and Administration
(a) Types of Awards. Under the Plan, the Company may in its sole
discretion grant, with respect to the Company's common shares of beneficial
interest, par value $1.00 per share ("Common Shares"), options ("Options") to
trustees, officers, key employees and consultants (the "Participants"), as
authorized by action of the Board of Trustees of the Company (or a committee
designated by the Board of Trustees), and, in addition, the Company shall,
subject to the terms and conditions hereof, grant to each trustee of the Company
who is not an employee (an "Eligible Trustee"), Options in accordance with the
formula set forth in Section 7 hereof. As used in the Plan, an "Award" shall
mean an Option and an "Award Owner" shall mean the owner of an Option. Options
granted pursuant to the Plan to Participants who are employees of the Company
(or a Subsidiary) may be either incentive share options ("Incentive Share
Options") meeting the requirements of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), or non-statutory options ("Non-Statutory Share
Options"), which are not intended to or do not meet the requirements of Code
Section 422. Options granted to non-employees shall be only Non-Statutory Share
Options.
(b) Administration. The Plan will be administered by the Board of
Trustees of the Company, except to the extent the Board of Trustees appoints
from among its members a committee to administer the Plan (in either case, the
group administering the Plan is hereinafter referred to as the "Committee"). The
Committee's construction and interpretation of the terms and provisions of the
Plan shall be final and conclusive. The Committee may in its sole discretion
grant Options to purchase shares of the Company's Common Shares to trustees,
officers, key employees and consultants and issue shares upon exercise of such
Options, as provided in the Plan. The Committee shall grant Options to purchase
Common Shares to the Eligible Trustees, and issue shares upon exercise of such
Options, as provided in the Plan. The Committee shall have authority, subject to
the express provisions of the Plan, including, but not limited to Section 7
hereof, to construe the respective Award agreements and the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine the
terms and provisions of the respective Award agreements, which need not be
identical; to advance the
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lapse of any waiting or installment periods and exercise dates; and to make all
other determinations in the sole judgment of the Committee necessary or
desirable for the administration of the Plan. The Committee may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any Award agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect, and such determination shall be in the sole and
final judgement of the Committee. No trustee shall be liable for any action or
determination taken or made under or with respect to the Plan or any Award in
good faith.
3. Eligibility
(a) Generally. Except as provided in paragraph (b) of this Section 3
and Section 7 hereof, Awards shall be granted only to persons selected by the
Committee who are, at the time of grant, trustees, officers, key employees of,
or consultants to, the Company or any Subsidiary of the Company. A Participant
who has been granted an Award may, if he or she is otherwise eligible, be
granted one or more additional Awards if the Committee shall so determine.
(b) Incentive Share Options. No person shall be granted any Incentive
Share Option under the Plan unless, at the time such Option is granted, such
person is an employee of the Company or any Subsidiary of the Company, and does
not own, directly or indirectly, Common Shares of the Company possessing more
than 10% of the total combined voting power of all classes of shares of the
Company or of any Subsidiary (unless the requirements of Section 6(f)(i) are
satisfied).
4. Shares Subject to Plan
Subject to adjustment as provided in Sections 13 and 14 below, the
maximum number of Common Shares of the Company that may be issued and sold
pursuant to Options granted under the Plan is 1,000,000 shares in the aggregate
(one share per Option). The Company shall reserve for the purposes of the Plan,
out of its authorized but unissued Common Shares or out of shares held in the
Company's treasury, or partly out of each, such number of Common Shares as shall
be determined by the Committee. If Options granted under the Plan shall expire
or terminate for any reason without having been exercised in full, the shares
subject to the unexercised portions of such Options shall again be available for
subsequent Award grants under the Plan. Common Shares issuable upon exercise of
Options may be subject to such restrictions on transfer, repurchase rights or
other restrictions as shall be determined by the Committee.
5. Form of Option Agreements
As a condition to the grant of an Option under the Plan, each recipient
of a discretionary Option shall execute an Option Agreement, substantially in
the form of Exhibit A to the Plan (in the case of Incentive Share Options) or
Exhibit B to the Plan (in the case of Non-Statutory Share Options) or in such
other form not inconsistent with the Plan as shall be specified by the Committee
at the time such Option is granted. Each Eligible Trustee, as a condition to the
grant of Options to him or her pursuant to Section 7(a) hereof, shall execute an
Option
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Agreement, substantially in the form of Exhibit C to the Plan and/or Exhibit D
to the Plan as appropriate.
6. Discretionary Grants of Awards to Participants
(a) Committee of Non-Employee Trustees. Any Participant who is a
trustee or officer of the Company shall be granted Awards only if such person
has been selected for participation and the terms and provisions of such Awards
have been determined, solely by, and in the sole discretion of, and any actions
with respect to such Awards are taken by the Board of Trustees or a Committee of
two or more trustees each of whom is a "non-employee trustee." For purposes of
the Plan, a person shall be deemed to be a "non-employee trustee" only if such
person qualifies as a "non-employee trustee" within the meaning of Rule 16b-3 of
the Securities and Exchange Commission (the "SEC"). The term "officer" shall
have the same meaning as in Rule 16a-1(f). The foregoing provisions do not apply
to any grant which occurs prior to the date the Company first registers its
Common Shares under Section 12 of the Securities Exchange Act of 1934.
(b) Purchase Price. The purchase price per share Common Share issuable
upon the exercise of an Option granted pursuant to this Section 6 shall be the
Fair Value (as defined in Section 18 hereof) on the date that such Option is
granted. Notwithstanding anything to the contrary contained herein, in the case
of an Incentive Share Option, the exercise price shall not be less than 100% of
the Fair Value of such Common Shares at the date of grant of such Option, or
less than 110% of such Fair Value in the case of Options described in Section
6(f)(i).
(c) Exercise Period. Each discretionary Award to a Participant shall
expire on such date as the Committee shall determine, but in no event after the
expiration of ten years from the date on which such Award is granted, and in all
cases each Award shall be subject to earlier termination as provided in the
Plan.
(d) Vesting of Awards. An Award granted to a Participant may be
exercised, and payment shall be made upon exercise of such Award, only to the
extent that such Award has vested. Awards shall vest in accordance with the
schedule or terms set forth in the Award agreement executed by the Award Owner
and a duly authorized officer of the Company. The Committee may accelerate the
vesting of any Option granted pursuant to this Section 6. Notwithstanding the
foregoing, unless the Committee specifically authorizes a different vesting
schedule with respect to an Award, a discretionary Award shall become
exercisable based on the number of full years of service that such Award Owner
has completed with the Company or a Subsidiary since the date of the grant of
such Award, in accordance with the following schedule:
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Number of Years of Service Percentage of Award Available
Since First Date of Grant for Exercise (Cumulative)
1 33 1/3%
2 66 2/3%
3 100%
(e) Effect of Termination of Service. No discretionary Award may be
exercised unless, at the time of such exercise, the Participant is, and
continuously since the date of grant of his or her Award has been, engaged by
the Company or a Subsidiary, except that subject to Section 6(d) and if and to
the extent the Award agreement or instrument so provides:
(i) if the Participant ceases to be engaged by the Company
or a Subsidiary for any reason other than death or disability or a discharge for
"cause" (as defined in (iv) below), the right to exercise the Award shall
terminate three months after such cessation (or within such other period as may
be specified in the Award agreement or instrument);
(ii) if the Participant dies while engaged by the Company or
within three months after the Participant ceases to be so engaged, the Awards
may be exercised by the administrator of the Participant's estate, or by the
person to whom the Options are transferred by will or the laws of descent and
distribution, within the period of one year after the date of death (or within
such other period as may be specified in the Award agreement or instrument);
(iii) if the Participant becomes disabled (within the meaning
of Section 22(e)(3) of the Code) while engaged by the Company or a Subsidiary,
the Awards may be exercised within the period of one year after the date the
Participant ceases to be engaged by the Company or Subsidiary because of such
disability (or within such other period as may be specified in the Award
agreement or instrument); and
(iv) if the Participant, prior to the expiration date of an
Award ceases his or her services with the Company or a Subsidiary, because he or
she is discharged for "cause" (as defined below), the right to exercise an
Option shall terminate immediately upon such cessation of such services. "Cause"
shall mean: willful misconduct in connection with the Participant's performance
of services for the Company or willful failure to perform his or her services in
the best interest of the Company, as determined by the Committee, which
determination shall be conclusive;
provided, however, that in no event may any Award be exercised after the
expiration date of the Award. Any Award or portion thereof that is not exercised
during the applicable time period specified above (or any shorter period
specified in the Award agreement or instrument) shall be deemed terminated at
the end of the applicable time period for purposes of Section 4 hereof.
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(f) Incentive Share Options. Options granted under the Plan that are
intended to be Incentive Share Options shall be specifically designated as
intending to be Incentive Share Options and shall be subject to the following
additional terms and conditions:
(i) 10% Shareholder. If any Participant to whom an Incentive
Share Option is to be granted under the Plan is at the time of the grant of such
Option the owner of shares possessing more than 10% of the total combined voting
power of all classes of shares of the Company or any Subsidiary, then the
following special provisions shall be applicable to the Incentive Share Option
granted to such individual: (x) the exercise price per Common Share subject to
such Incentive Share Option shall not be less than 110% of the Fair Value (as
defined in Section 18) of one Common Share at the time of grant; and (y) the
option exercise period shall not exceed five years from the date of grant.
(ii) Dollar Limitation. Common Shares of the Company that are
acquired pursuant to the exercise of an Incentive Share Option granted to a
Participant under the Plan shall be deemed to be acquired pursuant to the
exercise of an Incentive Share Option under Code Section 422, only to the extent
that the aggregate Fair Value (determined as of the respective date or dates of
grant) of the Common Share with respect to which such Incentive Share Option,
and all other Incentive Share Options that are granted to such Participant under
the Plan (and under any other incentive share option plans of the Company or any
Subsidiary), are exercisable for the first time by such Participant in any one
calendar year, does not exceed $100,000. To effectuate the provisions of this
Section 6(f), the Committee may designate the Common Shares that are treated as
acquired pursuant to the exercise of an Incentive Share Option by issuing a
separate certificate for such shares and identifying such certificates as
Incentive Share Option shares in its share transfer records.
(iii) If a Participant makes a disposition, within the meaning
of Section 424(c) of the Code and regulations promulgated thereunder, of any
Common Share or Shares issued to such Participant pursuant to the exercise of an
Incentive Share Option within the two-year period commencing on the day after
the date of the grant or within the one-year period commencing on the day after
the date of transfer of such share or shares to the Participant pursuant to such
exercise, the Participant shall, within ten (10) days of such disposition,
notify the Company thereof, by delivery of written notice to the Company at its
principal executive office.
Except as modified by the preceding provisions of this Section
6(f), all the provisions of the Plan applicable to Options shall be applicable
to Incentive Share Options granted hereunder.
7. Non-discretionary Formula Grants of Awards to Eligible Trustees
(a) Non-discretionary Grants. Notwithstanding anything to the contrary
contained in this Plan, Eligible Trustees shall be granted Options ("Trustee
Options") as follows: on the first business day following the annual meeting of
shareholders of the Company to elect trustees in
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1997, and thereafter on the first business day following each successive annual
meeting of shareholders so long as Trustee Options remain available for grant,
(A) each person who is elected as a trustee at that meeting and is an Eligible
Trustee or who continues to serve as a trustee after that meeting, and is an
Eligible Trustee, shall be granted [10,000] Trustee Options to purchase [10,000]
Common Shares in the aggregate, subject to partial vesting as provided in
Section 7(d) below and (B) each person who is first elected as a trustee at that
meeting and is an Eligible Trustee shall be granted [5,000] Trustee Options to
purchase [5,000] Common Shares in the aggregate which shall be fully vested on
the date of grant.
(b) Purchase Price. The purchase price per Common Share issuable upon
the exercise of an Option granted pursuant to this Section 7 shall be the Fair
Value on the date that such Option is granted.
(c) Exercise Period. The term of each Option granted pursuant to this
Section 7 shall be ten years from the date of the grant thereof, subject to
earlier termination as herein provided. Any Option that is not exercised during
the applicable time period specified in this Section 7 shall be deemed
terminated at the end of the applicable time period for purposes of Section 4
hereof.
(d) Vesting of Awards. Trustee Options shall be exercisable by an
Eligible Trustee only to the extent that they have vested, and to the extent not
fully vested on grant shall vest based on years of service as follows:
Number of Years of Service Percentage of Award Available
Since First Date of Grant for Exercise (Cumulative)
Date of Grant 33 1/3%
1 66 2/3%
2 100%
(e) Effect of Termination of Services or Death. If an Eligible Trustee
ceases to serve as a trustee of the Company, the Options that have been
previously granted to that Eligible Trustee and that are vested as of the date
of such cessation may be exercised by the Eligible Trustee after the date such
Eligible Trustee ceases to be a trustee of the Company or Subsidiary. If an
Eligible Trustee dies while a trustee of the Company or a Subsidiary, the
Options that have been previously granted to that Eligible Trustee and that are
vested as of the date of such death may be exercised by the administrator of the
Eligible Trustee's estate, or by the person to whom such Options are transferred
by will or the laws of descent and distribution. In no event, however, may any
Option be exercised after the expiration date of such Option. Any Option or
portion thereof that is not exercised during the applicable time period
specified above shall be deemed terminated at the end of the applicable time
period for purposes of Section 4 hereof.
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8. Method of Exercise
An Award Owner may exercise an Option granted hereunder by delivering
to the Company at its main office (to the attention of the Secretary) written
notice of exercise, which notice shall specify the number of shares with respect
to which the Option is being exercised, together with payment of the purchase
price in exchange for the Company's issuance and delivery of certificates
therefor. The purchase price for any Common Shares purchased pursuant to the
exercise of an Option shall be paid in full upon such exercise by any one or a
combination of the following: (i) cash (by check), (ii) transferring shares of
fully paid Common Shares to the Company with a Fair Value equal to the aggregate
purchase price, or (iii) solely with respect to Options that are not Trustee
Options, by cash payments in installments or pursuant to a full recourse
promissory note, in either case, upon such terms as the Committee deems
appropriate. Notwithstanding the foregoing, the Committee shall have discretion
to determine at the time of grant of each Option (other than a Trustee Option)
or at any later date (up to and including the date of exercise) the form of
payment acceptable in respect of the exercise of such Option. The written notice
pursuant to this Section 8 may also provide instructions to the Company that
upon receipt of the purchase price in cash from the Award Owner's broker or
dealer, designated as such on the written notice, in payment for any shares
purchased pursuant to the exercise of an Option, the Company shall issue such
shares directly to the designated broker or dealer. Any shares transferred to
the Company as payment of the purchase price under an Option shall be valued at
their Fair Value on the day preceding the date of exercise of such Option. If
requested by the Committee, the Award Owner shall deliver the related Award
agreement to the Secretary of the Company who shall endorse thereon a notation
of such exercise and return such agreement to the Award Owner. No fractional
shares (or cash in lieu thereof) shall be issued upon exercise of an Option and
the number of shares that may be purchased upon exercise shall be rounded to the
nearest number of whole shares.
9. Reload Options
Options (other than Trustee Options) granted under the Plan may, in the
discretion of the Committee, include the right to acquire a reload option
("Reload Option"). The term "Reload Option" shall mean the right to purchase a
number of Common Shares equal to the number of shares tendered by a Participant
in exercising an Option, and the number of whole shares, if any, withheld by the
Company in satisfaction of Withholding Taxes (as defined in Section 20). A
Reload Option shall have a purchase price equal to the Fair Value of a Common
Share on the date the Participant receives the Reload Option and a term
extending to the expiration date of the Option with respect to which the Reload
Option was granted.
10. Transferability of Awards
No Award granted under the Plan shall be assignable or transferable by
the person to whom it is granted, either voluntarily or by operation of law,
except by will or the laws of descent and distribution. During the life of the
recipient, the Award shall be exercisable only by or on behalf of such person.
Notwithstanding the foregoing and provided the Award holder
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receives no consideration, the Committee may permit Awards (other than Trustee
Options and Incentive Share Options) to be transferable to a member of the Award
holder's "immediate family," a trust established by an Award holder for the
benefit of one or more members of such holders "immediate family" or a
partnership in which such "immediate family" members are the only partners. The
term "immediate family" shall have the meaning of such term in Rule 16a-1 of the
SEC.
11. General Restrictions
(a) Award Owner Representations. The Company may require a person to
whom an Award is granted, as a condition of exercising such Award, to:
(i) give such written assurances, in substance and form
satisfactory to the Company, as the Company deems necessary or appropriate in
order to comply with federal and applicable state securities laws, including,
without limitation, that such person is acquiring the Common Shares subject to
the Award for his or her own account for investment and not with any present
intention of selling or otherwise distributing the same;
(ii) with respect to an Award Owner of a discretionary Option
only, grant to the Company the right, which may be upon such terms as the
Committee, in its sole discretion, prescribes, to repurchase from the Award
Owner any or all shares acquired by such Award Owner through the exercise of an
Award which such Award Owner may at any time desire to sell, transfer or
otherwise dispose of; and
(iii) if the Award Owner is a trustee or officer, give written
assurances, in substance and form satisfactory to the Company, that such person
has consulted with competent counsel as to the application of Section 16(b) of
the Securities Exchange Act of 1934 (the "Exchange Act") to such exercise.
Certificates representing shares issued upon exercise of the Award shall bear
such legends as are deemed appropriate by legal counsel to the Company, unless
the Award Owner provides a written opinion of legal counsel, satisfactory to the
Company, that any such legend is not required.
(b) Compliance With Securities Laws.
(i) Each Award shall be subject to the requirement that, if
at any time counsel to the Company shall determine that the listing,
registration or qualification of such Award or the shares subject to such Award
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, is necessary as a condition
of, or in connection with the grant or exercise of such Award or the issuance or
purchase of shares thereunder, such Award shall not be effective or may not be
accepted or exercised in whole or in part (as applicable) unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained on conditions acceptable to the
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Committee. Nothing herein shall be deemed to require the Company to apply for or
to obtain such listing, registration, qualification, consent or approval.
(ii) The Company shall provide each Award Owner with such
information, statements, discussions and analyses with respect to the Company in
such manner and at such times as may be required under state or federal
securities laws.
12. Rights as a Shareholder
The Award Owner shall have no rights as a shareholder with respect to
any shares covered by the Award until the date upon which the share certificates
are issued to him or her for such shares. Except as otherwise expressly provided
in the Plan, no adjustment shall be made for dividends or other rights for which
the record date is prior to the date on which such share certificate is issued.
13. Recapitalization
In the event that the outstanding Common Shares of the Company are
changed into or exchanged for a different number or kind of shares or other
securities of the Company by reason of any recapitalization, reclassification,
share split, share dividend, combination or subdivision, an appropriate and
proportionate adjustment shall be made in the number and kind of shares subject
to the Plan and in the number, kind, and per share exercise price, of shares
subject to unexercised Options or portions thereof granted prior to such
adjustment. Any such adjustment to an outstanding Option shall be made without
change in the total price applicable to the unexercised portion of such Option
as of the date of the adjustment. No such adjustment shall be made with respect
to an Incentive Share Option that would, within the meaning of any applicable
provisions of the Code, constitute a modification, extension or renewal of any
Option or a grant of additional benefits to the holder of an Option.
14. Reorganization
In the event that without the prior approval of the Board of Trustees
(i) the Company is merged or consolidated with another entity or person other
than an Affiliate, and the Company is not a surviving entity, or (ii) all or
substantially all of the assets or more than 20% of the outstanding shares of
the Company entitled to vote for trustees is acquired by any other entity or
person other than an Affiliate or an entity or person or any affiliate thereof
owning 5% or more of the outstanding voting shares of the Company prior to the
effective date of the Plan, or (iii) there is a reorganization or liquidation of
the Company, the Committee, or the board of trustees of any corporation assuming
the obligations of the Company, shall, as to outstanding Awards, either (x) in
the case of a merger, consolidation or reorganization of the Company, make
appropriate provision for the protection of any such outstanding Awards by the
substitution on an equivalent basis of appropriate shares of the Company, or of
the merged, consolidated or otherwise reorganized corporation that will be
issuable in respect of the Common Shares of the Company (provided that no
additional benefits shall be conferred upon
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Award Owners as a result of such substitution), or (y) upon written notice to
the Award Owners, provide that all unexercised Awards must be exercised within a
specified number of days of the date of such notice or they will be terminated,
or (z) upon written notice to the Award Owners, provide that all unexercised
Awards shall be purchased by the Company or its successor within a specified
number of days of the date of such notice at a price equal to the value the
Award Owners would have received if they then exercised all their Awards and
immediately received full payment in respect of such exercise, as determined in
good faith by the Committee.
15. No Special Rights
Nothing contained in the Plan or in any Award granted under the Plan
shall confer upon any Award Owner any right with respect to the continuation of
his or her service with the Company (or any Subsidiary) or interfere in any way
with the right of the Company (or any Subsidiary), subject to the terms of any
separate agreement to the contrary, at any time to terminate such engagement or
to increase or decrease the compensation of the Award Owner from the rate in
existence at the time of the grant of an Award. Whether an authorized leave of
absence, or absence in military or government service, shall constitute
termination or cessation of services for purposes of this Plan shall be
determined by the Committee.
16. No Special Trusteeship Rights
Nothing contained in the Plan or in any Award granted under the Plan
shall constitute evidence of any agreement or understanding, express or implied,
that a trustee has a right to continue as a trustee for any period of time.
17. Other Employee Benefits
The amount of any income deemed to be received by an Award Owner as a
result of the exercise of an Award or the sale of shares received upon such
exercise will not constitute "compensation" or "earnings" with respect to which
any other benefits of such person are determined by the Company, including
without limitation benefits under any pension, profit sharing, life insurance or
salary continuation plan.
18. Definitions
(a) Affiliate. The term "Affiliate" shall mean a corporation,
partnership, trust or other entity or person which, at the time of reference,
directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the Company.
(b) Fair Value. The term "Fair Value" of a Common Share shall mean (i)
if the Common Shares are traded on a national securities exchange, the closing
price for such shares on the day immediately preceding the date of determination
or if there is no closing price on such date, the last preceding closing price,
(ii) if the Common Shares are not traded on a
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national securities exchange, the mean of the high bid and ask quotes of such
shares as reported in the Nasdaq Stock Market reports or the National Quotation
Bureau Inc.'s pink sheets or in the NASD Bulletin Board on the day immediately
preceding the date of determination or if there were no high bid and ask quotes
on such date, the last preceding day that there were, and (iii) if neither (i)
or (ii) are applicable, as determined in good faith by the Committee.
(c) Rule 16b-3. The term "Rule 16b-3" shall mean Rule 16b-3 of the SEC
(or any successor rule).
(d) Subsidiary. The term "Subsidiary" shall mean any corporation,
partnership or trust in an unbroken chain of entities beginning with the Company
if, at the time of the grant of the Award, each of the entities other than the
last entity in the unbroken chain owns shares possessing 50% or more of the
total combined voting power of all classes of shares in one of the other
entities in such chain.
19. Amendment of the Plan
(a) Except as provided in Section 7 hereof, the Board may at any time
and from time to time modify or amend the Plan in any respect, provided that,
the Board shall not modify or amend the Plan without the approval of the
shareholders of the Company if such approval were required or desired for
compliance with (i) an exemption afforded by Rule 16b-3 or (ii) Section 422 of
the Code. The termination or any modification or amendment of the Plan shall
not, without the consent of an Award Owner, affect his or her rights under an
Award previously granted to him or her. With the consent of the Award Owners
affected, the Committee may amend outstanding Award agreements in a manner not
inconsistent with the Plan.
(b) Notwithstanding the provisions of Sections 19(a)(i) and (iii), the
Board shall have the right, but not the obligation, without the consent of the
Company's shareholders, to (i) amend or modify the terms and provisions of the
Plan and of any outstanding Incentive Share Options granted under the Plan to
the extent necessary to qualify any or all such options for such favorable
federal income tax treatment (including deferral of taxation upon exercise), as
may be afforded incentive share options under Section 422 of the Code; and (ii)
amend or modify the terms and provisions of the Plan and of any outstanding
Award granted under the Plan to the extent necessary to comply with any
securities law to which, in the opinion of counsel to the Company, the Plan or
Award is subject.
20. Withholding
At such times as an Award Owner recognizes taxable income in
connection with the receipt of Common Shares hereunder (a "Taxable Event"), the
Award Owner shall pay to the Company an amount equal to the federal, state and
local income taxes and other amounts as may be required by law to be withheld by
the Company in connection with the Taxable Event (the "Withholding Taxes") prior
to the issuance, or release from escrow, of such shares. In satisfaction of the
obligation to pay Withholding Taxes to the Company, the Committee may, in
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its discretion and subject to compliance with applicable securities laws and
regulations, withhold Common Shares having an aggregate Fair Value on the date
preceding the date of such issuance equal to the Withholding Taxes.
21. Effective Date and Duration of the Plan
(a) Effective Date. The Plan shall become effective when adopted by the
Board, but no award granted under the Plan (other than Trustee Options granted
pursuant to Section 7 hereof) shall become exercisable unless and until the Plan
shall have been approved by the Company's share holders within twelve months
before or after the date of such adoption. If such shareholder approval is not
obtained within such period, any Award previously granted under the Plan (other
than Trustee Options, which shall remain in effect) shall terminate and no
further Awards shall be granted. Subject to this limitation, Awards may be
granted under the Plan at any time after the effective date and before the date
fixed for termination of the Plan.
(b) Termination. The Plan shall terminate upon the earlier of (i) June
30, 2006 or (ii) the date on which all shares available for issuance under the
Plan shall have been issued pursuant to the exercise of Awards granted under the
Plan. If the date of termination is determined under (i) above, then Awards
outstanding on such date shall continue to have force and effect in accordance
with the provisions of the instruments evidencing such Awards.
22. Governing Law
The Plan and all Award agreements issued hereunder shall be governed by
the laws of the State of California.
23. Expenses of Administration
All costs and expenses incurred in the operation and administration of
this Plan shall be borne by the Company.
The Plan was adopted by the Board of Trustees on April __, 1997 and
approved by the shareholders on _____ __, 1997.
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Exhibit A
CALIFORNIA REAL ESTATE INVESTMENT TRUST
INCENTIVE SHARE OPTION AGREEMENT
1. Grant of Options
California Real Estate Investment Trust, a California trust (the
"Company"), hereby grants to ___________________________ (the "Optionee"), __
Options (the "Options"), pursuant to the Company's 1997 Share Option Plan (the
"Plan"), to purchase an aggregate of _______ common shares of beneficial
interest, $1.00 par value per share ("Common Shares"), of the Company at a price
of $_______ per share (the "Exercise Price Per Share"), purchasable as set forth
in and subject to the terms and conditions of this Option Agreement and the
Plan. All undefined capitalized terms herein shall have the same meaning as set
forth in the Plan.
2. Incentive Share Options
These Options are intended to qualify as incentive share options
("Incentive Share Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
3. Exercise of Options and Provisions for Termination
(a) Exercisability of Options. The Options shall become exercisable and
option shares may be purchased based on the number of full years of service for
the Company or a Subsidiary that have expired since the date of grant (set forth
on the signature page hereof), in accordance with the following schedule:
Percentage of Option Shares
Number of Years of Service Available
Since Date of Grant for Purchase (Cumulative)
1 33 1/3%
2 66 2/3%
3 100%
Notwithstanding the foregoing, the Options shall not be exercisable unless such
exercise is in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), all other applicable laws and regulations (including state
securities laws) and the requirements of any securities exchange on which of
Common Shares are listed.
(b) Expiration Date. Except as otherwise provided in this Option
Agreement or the Plan, the Options may not be exercised after the date
(hereinafter the "Expiration Date") that is
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the date prior to the tenth anniversary of the date of grant, or, if the
Optionee is a 10% Shareholder as described in Section 6 of the Plan, the date
prior to the fifth anniversary of the date of grant.
(c) Effect of Termination of Employment. The Options may not be
exercised by an Optionee unless, at the time of such exercise, the Optionee is,
and continuously since the date of grant of his or her Options has been, an
employee of the Company or a Subsidiary, except that subject to the Options
vesting as of the date of termination of employment:
(i) if the Optionee ceases to be an employee of the Company
or a Subsidiary for any reason other than death or disability or a discharge for
"cause" (as defined in (iv) below), the right to exercise the Options shall
terminate three months after such cessation;
(ii) if the Optionee dies while an employee of the Company or
a Subsidiary, or within three months after the Optionee ceases to be such an
employee, the Options may be exercised by the administrator of the Optionee's
estate, or by the person to whom the Options are transferred by will or the laws
of descent and distribution, within the period of one year after the date of
death, however, Options exercised more than three months after the Optionee
ceased to be an employee may not qualify for treatment as Incentive Share
Options;
(iii) if the Optionee becomes disabled (within the meaning of
the Plan) while an employee of the Company or a Subsidiary, the Options may be
exercised within the period of one year after the date the Optionee ceases to be
an employee of the Company or Subsidiary because of such disability; and
(iv) if the Optionee, prior to the expiration date of the
Options, ceases his or her services as an employee of the Company or a
Subsidiary, because he or she is discharged for "cause" (as defined below), the
right to exercise the Options shall terminate immediately upon such cessation of
such services. "Cause" shall mean: willful misconduct in connection with the
Optionee's performance of services for the Company or willful failure to perform
his or her services in the best interest of the Company, as determined by the
Board of Trustees, which determination shall be conclusive;
provided, however, that in no event may the Options be exercised after the
expiration date thereof.
(d) Exercise Procedure. Subject to the conditions set forth in this
Agreement and, if applicable, Section 6 of the Plan, the Options shall be
exercised by the Optionee's delivery of written notice of exercise to the
Secretary of the Company, specifying the number of shares to be purchased and
the Exercise Price Per Share to be paid therefor and accompanied by payment in
accordance with Section 4 hereof. The Optionee may purchase less than the total
number of shares covered hereby, provided that no exercise of less than all the
Options may be for less than 100 whole shares.
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<PAGE>
4. Payment of Purchase Price
Payment of the Exercise Price Per Share for shares purchased upon
exercise of an Option shall be made by delivery to the Company of the purchase
price, payable in cash (by check) or any other method of payment that is
permitted by the Plan and specifically authorized by the Committee on or before
the time of exercise.
5. Delivery of Shares
The Company shall, upon payment of the Exercise Price Per Share for the
number of shares purchased and paid for, make prompt delivery of such shares to
the Optionee. No shares shall be issued and delivered upon exercise of an Option
unless and until, in the opinion of counsel for the Company, any applicable
registration requirements of the Securities Act, any applicable listing
requirements of any national securities exchange on which share of the same
class is then listed, and any other requirements of law, including state
securities laws, or of any regulatory bodies having jurisdiction over such
issuance and delivery, shall have been fully complied with.
6. Non-transferability of Options
Except as provided in Section 3(c)(ii) hereof, the Options are personal
and no rights granted hereunder may be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), except by
will or the laws of descent and distribution, nor shall any such rights be
subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of an Option or of
such rights contrary to the provisions hereof, or upon the levy of any
attachment or similar process upon any Option or such rights, this Option
Agreement and such rights shall, at the election of the Company, become null and
void.
7. No Special Employment Rights
Nothing contained in the Plan or this Option Agreement shall be
construed or deemed by any person under any circumstances to bind the Company to
continue the services of the Optionee for the period within which the Options
may be exercised. However, during the period in which the Optionee is rendering
services, the Optionee shall render diligently and faithfully the services which
are assigned to him or her from time to time by the Board of Trustees or by the
executive officers of the Company and shall at no time take any action which
directly or indirectly would be inconsistent with the best interests of the
Company.
8. Rights as a Shareholder
The Optionee shall have no rights as a shareholder with respect to any
shares which may be purchased by exercise of the Options unless and until a
certificate representing such shares is duly issued to the Optionee. Except as
otherwise expressly provided in the Plan, no adjustment
D-A-3
<PAGE>
shall be made for dividends or other rights for which the record date is prior
to the date on such share certificate.
9. Recapitalization
In the event that the outstanding Common Shares of the Company
are changed into or exchanged for a different number or kind of shares or other
securities of the Company by reason of any recapitalization, reclassification,
share split, share dividend, combination or subdivision, an appropriate and
proportionate adjustment shall be made in the number and kind of shares subject
to the Plan and in the number, kind, and per share exercise price, of shares
subject to unexercised Options or portions thereof granted prior to such
adjustment. Any such adjustment to an outstanding Option shall be made without
change in the total price applicable to the unexercised portion of such Option
as of the date of the adjustment. No such adjustment shall be made with respect
to an Option that would, within the meaning of any applicable provisions of the
Code, constitute a modification, extension or renewal of any Option or a grant
of additional benefits to the Optionee.
10. Reorganization
In the event that without the prior approval of the Board of Trustees
(i) the Company is merged or consolidated with another entity and the Company is
not a surviving entity, or (ii) all or substantially all of the assets or more
than 20% of the outstanding voting share of the Company entitled to vote for
trustees is acquired by any other entity or person other than an Affiliate or
any entity or person or any affiliate thereof owning 5% or more of the
outstanding voting share of the Company prior to the effective date of the Plan,
or (iii) there is a reorganization or liquidation of the Company, prior to the
Expiration Date or termination of this Option Agreement, the Optionee shall,
with respect to the Options or any unexercised portion hereof, be entitled to
the rights and benefits, and be subject to the limitations, set forth in Section
14 of the Plan.
11. Withholding Taxes
The Company's obligation to deliver shares upon the exercise of an
Option shall be subject to the Optionee's satisfaction of all applicable
federal, state and local income and employment tax withholding requirements
("Withholding Taxes") with respect to the Option. The Optionee shall pay the
Withholding Taxes to the Company in cash prior to the issuance, or release from
escrow, of shares of Common Share. In satisfaction of the Withholding Taxes, the
Committee may, in its discretion and subject to compliance with applicable
securities laws and regulations, withhold a portion of the shares issuable to
the Optionee upon exercise of the Option having an aggregate Fair Value on the
date preceding the date of such issuance equal to the Withholding Taxes.
D-A-4
<PAGE>
12. Optionee Representations; Legend
(a) Representations. The Optionee represents, warrants and covenants
that he or she has had such opportunity as he or she has deemed adequate to
obtain from representatives of the Company such information as is necessary to
permit the Optionee to evaluate the merits and risks of his or her investment in
the Company. The Optionee understands that there may be restrictions on his or
her ability to resell any shares acquired on exercise of an Option, including
insider trading laws and the Company's insider trading policy, as well as other
restrictions that will apply if the Optionee is an "affiliate" of the Company.
By making payment upon exercise of an Option, the Optionee shall be deemed to
have reaffirmed, as of the date of such payment, the representations made in
this Section 12.
(b) Legend on Share Certificate. The Optionee understands that, any
Common Share acquired upon exercise of an Option may not have been registered
under the Securities Act, nor the securities laws of any state. Accordingly,
unless all such registrations are then in effect, all share certificates
representing Common Share issued to the Optionee upon exercise of an Option
shall have affixed thereto a legend substantially in the following form, in
addition to any other legends required by applicable state law:
"THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, NOR THE SECURITIES LAW OF ANY
STATE. CONSEQUENTLY, THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION, OR AN EXEMPTION FROM REGISTRATION
UNDER SUCH LAWS."
13. Limitation on Disposition of Incentive Share Option Shares
It is understood and intended that these Options shall qualify as
Incentive Share Options, as defined in Section 422 of the Code. Accordingly, the
Optionee understands that in order to obtain the benefits of an Incentive Share
Option under Section 421 of the Code, no sale or other disposition may be made
of any shares acquired upon exercise of an Option within the one year period
beginning on the day after the day of the issuance of such shares to him or her,
nor within the two year period beginning on the day after the date of grant of
such Option. If the Optionee disposes of any such shares (whether by sale,
exchange, gift, transfer or otherwise) prior to the expiration of either such
period, he or she will notify the Company in writing within ten days after such
disposition.
Notwithstanding the foregoing, nothing herein shall be deemed to be or
interpreted as a representation, guarantee or other undertaking on the part of
the Company that these Options are or will be determined to be Incentive Share
Options within the meaning of Section 422 of the Code or any other Code Section.
D-A-5
<PAGE>
14. Miscellaneous
In the event that the Plan terminates prior to the expiration date of
the Options granted hereunder, this Option Agreement shall incorporate by
reference all applicable provisions of the Plan until the earlier of (i) the
close of business on the day the Option(s) granted hereunder expire, or (ii) the
date on which all shares available for issuance hereunder shall have been issued
pursuant to the exercise of Options granted hereunder.
All notices under this Option Agreement shall, unless otherwise
provided herein, be mailed or delivered by hand to the parties at their
respective addresses set forth beneath their names below or at such other
address as may be designated in writing by either of the parties to the other.
This Option Agreement shall be governed by and construed in accordance
with the laws of the State of California.
This Option Agreement shall be binding upon and inure to the heirs,
successors and assigns of the Optionee (subject, however, to the limitations set
forth herein with respect to assignment of the Options or rights therein) and
the Company, and shall be construed in a manner that is consistent with the
provisions of the Plan.
Date of Grant: California Real Estate Investment Trust
By:
---------------------------------------
Title:
Address:
Optionee:
--------------------------------------
Name:
Address:
D-A-6
<PAGE>
Exhibit B
CALIFORNIA REAL ESTATE INVESTMENT TRUST
NON-STATUTORY SHARE OPTION AGREEMENT
1. Grant of Options
California Real Estate Investment Trust, a California trust (the
"Company"), hereby grants to ___________________________ (the "Optionee"), __
Options (the "Options"), pursuant to the Company's 1997 Share Option Plan (the
"Plan"), to purchase an aggregate of _______ Common shares of beneficial
interest, $1.00 par value per share ("Common Share"), of the Company at a price
of $_______ per share (the "Exercise Price Per Share"), purchasable as set forth
in and subject to the terms and conditions of this Option Agreement and the
Plan. All undefined capitalized terms herein shall have the same meaning as set
forth in the Plan.
2. Exercise of Options and Provisions for Termination
(a) Exercisability of Options. The Options shall become exercisable and
option shares may be purchased based on the number of full years of service for
the Company or a Subsidiary that have expired since the date of grant (set forth
on the signature page hereof), in accordance with the following schedule:
Percentage of Option Shares
Number of Years of Service Available
Since Date of Grant for Purchase (Cumulative)
1 33 1/3%
2 66 2/3%
3 100%
Notwithstanding the foregoing, the Options shall not be exercisable unless such
exercise is in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), all other applicable laws and regulations (including state
securities laws) and the requirements of any securities exchange on which the
Common Shares are listed.
(b) Expiration Date. Except as otherwise provided in this Option
Agreement or the Plan, the Options may not be exercised after the date
(hereinafter the "Expiration Date") that is the tenth anniversary of the date of
grant.
D-B-1
<PAGE>
(c) Effect of Termination of Service. The Options may not be exercised
by an Optionee unless, at the time of such exercise, the Optionee is, and
continuously since the date of grant of his or her Options has been, rendering
services to the Company or a Subsidiary, except that subject to the Options
vesting as of the date of termination of services:
(i) if the Optionee ceases to be engaged by the Company or a
Subsidiary for any reason other than death or disability or a discharge for
"cause" (as defined in (iv) below), the right to exercise the Options shall
terminate three months after such cessation;
(ii) if the Optionee dies while engaged by the Company or a
Subsidiary, or within three months after the Optionee ceases to be so engaged,
the Options may be exercised by the administrator of the Optionee's estate, or
by the person to whom the Options are transferred by will or the laws of descent
and distribution, within the period of one year after the date of death;
(iii) if the Optionee becomes disabled (within the meaning of
the Plan) while an employee of the Company or a Subsidiary, the Options may be
exercised within the period of one year after the date the Optionee ceases to be
engaged by the Company or Subsidiary because of such disability; and
(iv) if the Optionee, prior to the expiration date of the
Options, ceases his or her services as an employee of the Company or a
Subsidiary, because he or she is discharged for "cause" (as defined below), the
right to exercise the Options shall terminate immediately upon such cessation of
such services. "Cause" shall mean: Willful misconduct in connection with the
Optionee's performance of services for the Company or willful failure to perform
his or her services in the best interest of the Company, as determined by the
Board of Trustees, which determination shall be conclusive;
provided, however, that in no event may the Options be exercised after the
expiration date thereof.
(d) Exercise Procedure. Subject to the conditions set forth in this
Agreement and, if applicable, Section 6 of the Plan, the Options shall be
exercised by the Optionee's delivery of written notice of exercise to the
Secretary of the Company, specifying the number of shares to be purchased and
the Exercise Price Per Share to be paid therefor and accompanied by payment in
accordance with Section 3 hereof. The Optionee may purchase less than the total
number of shares covered hereby, provided that no exercise of less than all the
Options may be for less than 100 whole shares.
3. Payment of Purchase Price
Payment of the Exercise Price Per Share for shares purchased upon
exercise of an Option shall be made by delivery to the Company of the purchase
price, payable in cash (by
D-B-2
<PAGE>
check) or any other method of payment that is permitted by the Plan and
specifically authorized by the Committee on or before the time of exercise.
4. Delivery of Shares
The Company shall, upon payment of the Exercise Price Per Share for the
number of shares purchased and paid for, make prompt delivery of such shares to
the Optionee. No shares shall be issued and delivered upon exercise of an Option
unless and until, in the opinion of counsel for the Company, any applicable
registration requirements of the Securities Act, any applicable listing
requirements of any national securities exchange on which share of the same
class is then listed, and any other requirements of law, including state
securities laws, or of any regulatory bodies having jurisdiction over such
issuance and delivery, shall have been fully complied with.
5. Non-transferability of Options
Except as provided in Section 2(c)(ii) hereof, the Options are personal
and no rights granted hereunder may be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), except by
will or the laws of descent and distribution, nor shall any such rights be
subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of an Option or of
such rights contrary to the provisions hereof, or upon the levy of any
attachment or similar process upon any Option or such rights, this Option
Agreement and such rights shall, at the election of the Company, become null and
void.
6. No Special Rights
Nothing contained in the Plan or this Option Agreement shall be
construed or deemed by any person under any circumstances to bind the Company to
continue the services of the Optionee for the period within which the Options
may be exercised. However, during the period in which the Optionee is rendering
services, the Optionee shall render diligently and faithfully the services which
are assigned to him or her from time to time by the Board of Trustees or by the
executive officers of the Company and shall at no time take any action which
directly or indirectly would be inconsistent with the best interests of the
Company.
7. Rights as a Shareholder
The Optionee shall have no rights as a shareholder with respect to any
shares which may be purchased by exercise of the Options unless and until a
certificate representing such shares is duly issued to the Optionee. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date on such
share certificate.
D-B-3
<PAGE>
8. Recapitalization
In the event that the outstanding Common Share of the Company are
changed into or exchanged for a different number or kind of shares or other
securities of the Company by reason of any recapitalization, reclassification,
share split, share dividend, combination or subdivision, an appropriate and
proportionate adjustment shall be made in the number and kind of shares subject
to the Plan and in the number, kind, and per share exercise price, of shares
subject to unexercised Options or portions thereof granted prior to such
adjustment. Any such adjustment to an outstanding Option shall be made without
change in the total price applicable to the unexercised portion of such Option
as of the date of the adjustment.
9. Reorganization
In the event that without the prior approval of the Board of Trustees
(i) the Company is merged or consolidated with another entity and the Company is
not a surviving entity, or (ii) all or substantially all of the assets or more
than 20% of the outstanding voting shares of the Company entitled to vote for
trustees are acquired by any other entity or person other than an Affiliate or
an entity or person or any affiliate thereof owning 5% or more of the
outstanding voting shares of the Company prior to the effective date of the
adoption of the Plan, or (iii) there is a reorganization or liquidation of the
Company, prior to the Expiration Date or termination of this Option Agreement,
the Optionee shall, with respect to the Options or any unexercised portion
hereof, be entitled to the rights and benefits, and be subject to the
limitations, set forth in Section 14 of the Plan.
10. Withholding Taxes
The Company's obligation to deliver shares upon the exercise of an
Option shall be subject to the Optionee's satisfaction of all applicable
federal, state and local income and employment tax withholding requirements
("Withholding Taxes") with respect to the Option. The Optionee shall pay the
Withholding Taxes to the Company in cash prior to the issuance, or release from
escrow, of Common Shares. In satisfaction of the Withholding Taxes, the
Committee may, in its discretion and subject to compliance with applicable
securities laws and regulations, withhold a portion of the shares issuable to
the Optionee upon exercise of the Option having an aggregate Fair Value on the
date preceding the date of such issuance equal to the Withholding Taxes.
11. Optionee Representations; Legend
(a) Representations. The Optionee represents, warrants and covenants
that he or she has had such opportunity as he or she has deemed adequate to
obtain from representatives of the Company such information as is necessary to
permit the Optionee to evaluate the merits and risks of his or her investment in
the Company. The Optionee understands that there may be restrictions on his or
her ability to resell any shares acquired on exercise of an Option, including
insider trading laws and the Company's insider trading policy, as well as other
D-B-4
<PAGE>
restrictions that will apply if the Optionee is an "affiliate" of the Company.
By making payment upon exercise of an Option, the Optionee shall be deemed to
have reaffirmed, as of the date of such payment, the representations made in
this Section 11.
(b) Legend on Share Certificate. The Optionee understands that, any
Common Share acquired upon exercise of an Option may not have been registered
under the Securities Act nor the securities laws of any state. Accordingly,
unless all such registrations are then in effect, all share certificates
representing Common Shares issued to the Optionee upon exercise of an Option
shall have affixed thereto a legend substantially in the following form, in
addition to any other legends required by applicable state law:
"THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, NOR THE SECURITIES LAW OF ANY
STATE. CONSEQUENTLY, THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION, OR AN EXEMPTION FROM REGISTRATION
UNDER SUCH LAWS."
12. Miscellaneous
In the event that the Plan terminates prior to the expiration date of
the Options granted hereunder, this Option Agreement shall incorporate by
reference all applicable provisions of the Plan until the earlier of (i) the
close of business on the day the Option(s) granted hereunder expire, or (ii) the
date on which all shares available for issuance hereunder shall have been issued
pursuant to the exercise of Options granted hereunder.
Except as provided herein or in the Plan, this Option Agreement may not
be amended or otherwise modified unless evidenced in writing and signed by the
Company and the Optionee.
All notices under this Option Agreement shall, unless otherwise
provided herein, be mailed or delivered by hand to the parties at their
respective addresses set forth beneath their names below or at such other
address as may be designated in writing by either of the parties to the other.
This Option Agreement shall be governed by and construed in accordance
with the laws of the State of California.
D-B-5
<PAGE>
This Option Agreement shall be binding upon and inure to the heirs,
successors and assigns of the Optionee (subject, however, to the limitations set
forth herein with respect to assignment of the Options or rights therein) and
the Company, and shall be construed in a manner that is consistent with the
provisions of the Plan.
Date of Grant: California Real Estate Investment Trust
-------------------------------------------
By:
Title:
Address:
Optionee
-------------------------------------------
Name:
Address:
D-B-6
<PAGE>
Exhibit C
CALIFORNIA REAL ESTATE INVESTMENT TRUST
NON-STATUTORY SHARE OPTION AGREEMENT
FOR ELIGIBLE TRUSTEES
INITIAL GRANT
1. Grant of Options
California Real Estate Investment Trust, a California Trust (the
"Company"), hereby grants to ___________________________ (the "Optionee"),
pursuant to the Company's 1997 Share Option Plan (the "Plan"), 5,000 Options
(the "Options"), to purchase an aggregate of 5,000 common shares of beneficial
interest, $1.00, $.001 par value per share ("Common Shares"), of the Company at
a price of $______ per share (the "Exercise Price Per Share"), purchasable as
set forth in and subject to the terms and conditions of this Option Agreement
and the Plan. All undefined capitalized terms herein shall have the same meaning
as set forth in the Plan.
2. Exercise of Options and Effect of Termination of Services or Death.
(a) Exercisability of Options. The Options are fully vested and
exercisable and option shares may be purchased by the Optionee at any time,
subject to the terms of this Agreement. Notwithstanding the foregoing, the
Options shall not be exercisable unless such exercise is in compliance with the
Securities Act of 1933, as amended (the "Securities Act"), all other applicable
laws and regulations (including state securities laws) and the requirements of
any securities exchange on which the Common Shares are listed.
(b) Expiration Date. Except as otherwise provided in this Option
Agreement or the Plan, the Options may not be exercised after the date
(hereinafter the "Expiration Date") that is the tenth anniversary of the date of
grant.
(c) Effect of Termination of Services or Death. The Optionee may
exercise the Options at any time prior to the Expiration Date after the date
such Optionee ceases to be a trustee of the Company or Subsidiary. If the
Optionee dies while a trustee of the Company or a Subsidiary, the Options may be
exercised at any time prior to the Expiration Date by the administrator of the
Optionee's estate, or by the person to whom such Options are transferred by will
or the laws of descent and distribution. In no event, however, may any Option be
exercised after the Expiration Date of such Option.
D-C-1
<PAGE>
(d) Exercise Procedure. Subject to the conditions set forth in this
Agreement and, if applicable, Section 7 of the Plan, the Options shall be
exercised by the Optionee's delivery of written notice of exercise to the
Secretary of the Company, specifying the number of shares to be purchased and
the Exercise Price Per Share to be paid therefor and accompanied by payment in
accordance with Section 3 hereof. The Optionee may purchase less than the total
number of shares covered hereby, provided that no exercise of less than all the
Options may be for less than 100 whole shares.
3. Payment of Purchase Price
Payment of the Exercise Price Per Share for shares purchased upon
exercise of an Option shall be made by delivery to the Company of the purchase
price, payable in cash (by check) or any other method of payment that is
permitted by the Plan.
4. Delivery of Shares
The Company shall, upon payment of the Exercise Price Per Share for the
number of shares purchased and paid for, make prompt delivery of such shares to
the Optionee. No shares shall be issued and delivered upon exercise of an Option
unless and until, in the opinion of counsel for the Company, any applicable
registration requirements of the Securities Act, any applicable listing
requirements of any national securities exchange on which share of the same
class is then listed, and any other requirements of law, including state
securities laws, or of any regulatory bodies having jurisdiction over such
issuance and delivery, shall have been fully complied with.
5. Non-transferability of Options
Except as provided in the Plan, the Options are personal and no rights
granted hereunder may be transferred, assigned, pledged or hypothecated in any
way (whether by operation of law or otherwise), except by will or the laws of
descent and distribution, nor shall any such rights be subject to execution,
attachment or similar process. Upon any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of an Option or of such rights contrary to the
provisions hereof, or upon the levy of any attachment or similar process upon
any Option or such rights, this Option Agreement and such rights shall, at the
election of the Company, become null and void.
6. No Special Trusteeship Rights
Nothing contained in the Plan or in this Option Agreement shall
constitute evidence of any agreement or understanding, express or implied, that
the Optionee has a right to continue as a trustee for any period of time.
D-C-2
<PAGE>
7. Rights as a Shareholder
The Optionee shall have no rights as a shareholder with respect to any
shares which may be purchased by exercise of the Options unless and until a
certificate representing such shares is duly issued to the Optionee. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date on such
share certificate.
8. Recapitalization
In the event that the outstanding Common Shares of the Company
are changed into or exchanged for a different number or kind of shares or other
securities of the Company by reason of any recapitalization, reclassification,
share split, share dividend, combination or subdivision, an appropriate and
proportionate adjustment shall be made in the number and kind of shares subject
to the Plan and in the number, kind, and per share exercise price, of shares
subject to unexercised Options or portions thereof granted prior to such
adjustment. Any such adjustment to an outstanding Option shall be made without
change in the total price applicable to the unexercised portion of such Option
as of the date of the adjustment.
9. Reorganization
In the event that without the prior approval of the Board of Trustees
(i) the Company is merged or consolidated with another entity and the Company is
not a surviving entity, or (ii) all or substantially all of the assets or more
than 20% of the outstanding voting share of the Company entitled to vote for
trustees is acquired by any other entity or person other than an Affiliate or
any entity or person or any affiliate thereof owning 5% or more of the
outstanding voting share of the Company prior to the effective date of the Plan,
or (iii) there is a reorganization or liquidation of the Company, prior to the
Expiration Date or termination of this Option Agreement, the Optionee shall,
with respect to the Options or any unexercised portion hereof, be entitled to
the rights and benefits, and be subject to the limitations, set forth in Section
14 of the Plan.
10. Withholding Taxes
The Company's obligation to deliver shares upon the exercise of an
Option shall be subject to the Optionee's satisfaction of all applicable
federal, state and local income and employment tax withholding requirements, if
any.
11. Optionee Representations; Legend
(a) Representations. The Optionee represents, warrants and covenants
that he or she has had such opportunity as he or she has deemed adequate to
obtain from representatives of the Company such information as is necessary to
permit the Optionee to evaluate the merits and risks of his or her investment in
the Company. The Optionee understands that there may be
D-C-3
<PAGE>
restrictions on his or her ability to resell any shares acquired on exercise of
an Option, including insider trading laws and the Company's insider trading
policy, as well as other restrictions that will apply if the Optionee is an
"affiliate" of the Company. By making payment upon exercise of an Option, the
Optionee shall be deemed to have reaffirmed, as of the date of such payment, the
representations made in this Section 11.
(b) Legend on Share Certificate. The Optionee understands that, any
Common Shares acquired upon exercise of an Option may not have been registered
under the Securities Act nor the securities laws of any state. Accordingly,
unless all such registrations are then in effect, all share certificates
representing Common Share issued to the Optionee upon exercise of an Option
shall have affixed thereto a legend substantially in the following form, in
addition to any other legends required by applicable state law:
"THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, NOR THE SECURITIES LAW OF ANY
STATE. CONSEQUENTLY, THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION, OR AN EXEMPTION FROM REGISTRATION
UNDER SUCH LAWS."
12. Miscellaneous
In the event that the Plan terminates prior to the expiration date of
the Options granted hereunder, this Option Agreement shall incorporate by
reference all applicable provisions of the Plan until the earlier of (i) the
close of business on the day the Option(s) granted hereunder expire, or (ii) the
date on which all shares available for issuance hereunder shall have been issued
pursuant to the exercise of Options granted hereunder.
Except as provided herein or in the Plan, this Option Agreement may not
be amended or otherwise modified unless evidenced in writing and signed by the
Company and the Optionee.
All notices under this Option Agreement shall, unless otherwise
provided herein, be mailed or delivered by hand to the parties at their
respective addresses set forth beneath their names below or at such other
address as may be designated in writing by either of the parties to the other.
This Option Agreement shall be governed by and construed in accordance
with the laws of the State of California.
D-C-4
<PAGE>
This Option Agreement shall be binding upon and inure to the heirs,
successors and assigns of the Optionee (subject, however, to the limitations set
forth herein with respect to assignment of the Options or rights therein) and
the Company, and shall be construed in a manner that is consistent with the
provisions of the Plan.
Date of Grant: CALIFORNIA REAL ESTATE INVESTMENT TRUST
------------------------------------------
By:
Title:
Address:
Optionee
------------------------------------------
Name:
Address:
D-C-5
<PAGE>
Exhibit D
CALIFORNIA REAL ESTATE INVESTMENT TRUST
NON-STATUTORY SHARE OPTION AGREEMENT
FOR ELIGIBLE TRUSTEES
ANNUAL GRANT
1. Grant of Options
California Real Estate Investment Trust, a California trust (the
"Company"), hereby grants to ___________________________ (the "Optionee"),
pursuant to the Company's 1997 Share Option Plan (the "Plan"), 10,000 Options
(the "Options"), to purchase an aggregate of 10,000 common shares of beneficial
interest, $1.00 par value per share ("Common Share"), of the Company at a price
of $_______ per share (the "Exercise Price Per Share"), purchasable as set forth
in and subject to the terms and conditions of this Option Agreement and the
Plan. All undefined capitalized terms herein shall have the same meaning as set
forth in the Plan.
2. Exercise of Options and Effect of Termination of Services or Death.
(a) Exercisability of Options. The Options shall become exercisable and
option shares may be purchased in accordance with the following schedule:
Percentage of Option Shares
Number of Years of Service Available
Since Date of Grant for Purchase (Cumulative)
Date of Grant 33 1/3%
1 66 2/3%
2 100%
Notwithstanding the foregoing, the Options shall not be exercisable unless such
exercise is in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), all other applicable laws and regulations (including state
securities laws) and the requirements of any securities exchange on which the
Common Shares are listed.
(b) Expiration Date. Except as otherwise provided in this Option
Agreement or the Plan, the Options may not be exercised after the date
(hereinafter the "Expiration Date") that is the tenth anniversary of the date of
grant.
(c) Effect of Termination of Services or Death. If the Optionee ceases
to serve as a trustee of the Company or a Subsidiary, the Options that have been
previously granted to the Optionee and that are vested as of the date of such
cessation may be exercised by the Optionee
D-D-1
<PAGE>
after the date such Optionee ceases to be a trustee of the Company or
Subsidiary. If the Optionee dies while a trustee of the Company or a Subsidiary,
the Options that have been previously granted to the Optionee and that are
vested as of the date of such death may be exercised by the administrator of the
Optionee's estate, or by the person to whom such Options are transferred by will
or the laws of descent and distribution. In no event, however, may any Option be
exercised after the Expiration Date of such Option.
(d) Exercise Procedure. Subject to the conditions set forth in this
Agreement and, if applicable, Section 7 of the Plan, the Options shall be
exercised by the Optionee's delivery of written notice of exercise to the
Secretary of the Company, specifying the number of shares to be purchased and
the Exercise Price Per Share to be paid therefor and accompanied by payment in
accordance with Section 3 hereof. The Optionee may purchase less than the total
number of shares covered hereby, provided that no exercise of less than all the
Options may be for less than 100 whole shares.
3. Payment of Purchase Price
Payment of the Exercise Price Per Share for shares purchased upon
exercise of an Option shall be made by delivery to the Company of the purchase
price, payable in cash (by check) or any other method of payment that is
permitted by the Plan.
4. Delivery of Shares
The Company shall, upon payment of the Exercise Price Per Share for the
number of shares purchased and paid for, make prompt delivery of such shares to
the Optionee. No shares shall be issued and delivered upon exercise of an Option
unless and until, in the opinion of counsel for the Company, any applicable
registration requirements of the Securities Act, any applicable listing
requirements of any national securities exchange on which share of the same
class is then listed, and any other requirements of law, including state
securities laws, or of any regulatory bodies having jurisdiction over such
issuance and delivery, shall have been fully complied with.
5. Non-transferability of Options
Except as provided in the Plan, the Options are personal and no rights
granted hereunder may be transferred, assigned, pledged or hypothecated in any
way (whether by operation of law or otherwise), except by will or the laws of
descent and distribution, nor shall any such rights be subject to execution,
attachment or similar process. Upon any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of an Option or of such rights contrary to the
provisions hereof, or upon the levy of any attachment or similar process upon
any Option or such rights, this Option Agreement and such rights shall, at the
election of the Company, become null and void.
D-D-2
<PAGE>
6. No Special Trusteeship Rights
Nothing contained in the Plan or in this Option Agreement shall
constitute evidence of any agreement or understanding, express or implied, that
the Optionee has a right to continue as a trustee for any period of time.
7. Rights as a Shareholder
The Optionee shall have no rights as a shareholder with respect to any
shares which may be purchased by exercise of the Options unless and until a
certificate representing such shares is duly issued to the Optionee. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date on such
share certificate.
8. Recapitalization
In the event that the outstanding Common Share of the Company
are changed into or exchanged for a different number or kind of shares or other
securities of the Company by reason of any recapitalization, reclassification,
share split, share dividend, combination or subdivision, an appropriate and
proportionate adjustment shall be made in the number and kind of shares subject
to the Plan and in the number, kind, and per share exercise price, of shares
subject to unexercised Options or portions thereof granted prior to such
adjustment. Any such adjustment to an outstanding Option shall be made without
change in the total price applicable to the unexercised portion of such Option
as of the date of the adjustment.
9. Reorganization
In the event that without the prior approval of the Board of Trustees
(i) the Company is merged or consolidated with another entity and the Company is
not a surviving entity, or (ii) all or substantially all of the assets or more
than 20% of the outstanding voting share of the Company entitled to vote for
trustees is acquired by any other entity or person other than an Affiliate or
any entity or person or any affiliate thereof owning 5% or more of the
outstanding voting share of the Company prior to the effective date of the Plan,
or (iii) there is a reorganization or liquidation of the Company, prior to the
Expiration Date or termination of this Option Agreement, the Optionee shall,
with respect to the Options or any unexercised portion hereof, be entitled to
the rights and benefits, and be subject to the limitations, set forth in Section
14 of the Plan.
10. Withholding Taxes
The Company's obligation to deliver shares upon the exercise of an
Option shall be subject to the Optionee's satisfaction of all applicable
federal, state and local income and employment tax withholding requirements, if
any.
D-D-3
<PAGE>
11. Optionee Representations; Legend
(a) Representations. The Optionee represents, warrants and covenants
that he or she has had such opportunity as he or she has deemed adequate to
obtain from representatives of the Company such information as is necessary to
permit the Optionee to evaluate the merits and risks of his or her investment in
the Company. The Optionee understands that there may be restrictions on his or
her ability to resell any shares acquired on exercise of an Option, including
insider trading laws and the Company's insider trading policy, as well as other
restrictions that will apply if the Optionee is an "affiliate" of the Company.
By making payment upon exercise of an Option, the Optionee shall be deemed to
have reaffirmed, as of the date of such payment, the representations made in
this Section 11.
(b) Legend on Share Certificate. The Optionee understands that, any
shares of Common Share acquired upon exercise of an Option may not have been
registered under the Securities Act nor the securities laws of any state.
Accordingly, unless all such registrations are then in effect, all share
certificates representing Common Share issued to the Optionee upon exercise of
an Option shall have affixed thereto a legend substantially in the following
form, in addition to any other legends required by applicable state law:
"THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, NOR THE SECURITIES LAW OF ANY
STATE. CONSEQUENTLY, THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION, OR AN EXEMPTION FROM REGISTRATION
UNDER SUCH LAWS."
12. Miscellaneous
In the event that the Plan terminates prior to the expiration date of
the Options granted hereunder, this Option Agreement shall incorporate by
reference all applicable provisions of the Plan until the earlier of (i) the
close of business on the day the Option(s) granted hereunder expire, or (ii) the
date on which all shares available for issuance hereunder shall have been issued
pursuant to the exercise of Options granted hereunder.
Except as provided herein or in the Plan, this Option Agreement may not
be amended or otherwise modified unless evidenced in writing and signed by the
Company and the Optionee.
All notices under this Option Agreement shall, unless otherwise
provided herein, be mailed or delivered by hand to the parties at their
respective addresses set forth beneath their names below or at such other
address as may be designated in writing by either of the parties to the other.
This Option Agreement shall be governed by and construed in accordance
with the laws of the State of California.
D-D-4
<PAGE>
This Option Agreement shall be binding upon and inure to the heirs,
successors and assigns of the Optionee (subject, however, to the limitations set
forth herein with respect to assignment of the Options or rights therein) and
the Company, and shall be construed in a manner that is consistent with the
provisions of the Plan.
Date of Grant: California Real Estate Investment Trust
------------------------------------
By:
Title:
Address:
Optionee
---------------------------------------
Name:
Address:
D-D-5
<PAGE>
ANNEX E
COMPARISON OF THE RESTATED DECLARATION
AND THE EXISTING DECLARATION OF TRUST
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 of Trust. 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 of Trust
attached to the Proxy Statement as annex B (and related form of By-laws) and the
existing Declaration of Trust.
<TABLE>
<CAPTION>
<S> <C> <C>
Topic Existing Declaration of Trust Restated Declaration of Trust (and
related By-laws)
Declaration Formal declaration of terms and conditions Same provisions as old Declaration
- ----------- upon which the trust is to be created and with additional declaration that
terms and conditions upon which the Trustees will hold all investments
proportionate share and interest of each of every type and description
shareholder is to be determined as well as acquired and investment proceeds
terms and conditions under which property in trust and manage, improve, hold
is to be held. 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 Section 2.4 incorporates Section 2.3 of
Relationship states that the Trustees, the shareholders or the old Declaration and, in addition,
any other Person are not to be considered characterizes the Company as a common law
co-partners or members of any association. 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.
<PAGE>
Amendment and No comparable provision. Section 2.5 states that the Restated
Restatement of Original Declaration amends and restates in
Declaration of Trust its entirety the existing Declaration
of Trust.
Investment Policy
General Statement of Section 3.1 sets forth the Company's intent Section 3.1 eliminates the references to
Policy to operate as a REIT and instructs the REIT status and the descriptions of
Trustees to comply with all necessary permissible real property investments,
rules and regulations required to maintain the stating that the Board shall from time
Company's REIT status. Section 3.2 sets forth to time establish policies to govern the
permissible investments for the Company, investment and reinvestment of monies and
primarily in the area of real property. other property held in the trust estate.
Maintenance of Assets Section 3.3 empowers the Trustees to Section 3.2 incorporates Section 3.3
maintain the Company's assets. of the old 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 Section 3.3 incorporates Section 3.4
Encumbrance of Assets discretion in disposing of or encumbering of the old Declaration and also
Company assets. grants the Board of Trustees
discretion in financing Company
assets.
Use of Brokers and Section 3.5 authorizes the Trustees to Section 3.4 incorporates Section 3.5
Appraisers employ any Person for the purposes of of the old Declaration and broadens
appraising, acquiring, encumbering or it to include employing Persons for
disposing of Company assets, subject to the financing purposes.
Declaration's restrictions governing
transactions with related parties.
Management of Company Section 3.6 authorizes the Trustees to select Section 3.5 incorporates Section 3.6
Property a qualified contractor to actively manage the of the old 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
Borrow Funds to borrow funds and issue debt
obligations.
<PAGE>
Transactions with Section 3.7 sets forth the procedures Section 3.7 indicates that no
Related Parties requiring disinterested Trustee Approval of contract or transaction between a
any "Material Transaction" with a "Related Trustee, officer or shareholder and
Party." Section 3.7 provides that such the Company shall be void or
transactions must be fair and reasonable to voidable solely because of the
the Company and its shareholders as a interested party's relationship with
whole at the time of authorization. the Company or the interested
"Material Transaction" is defined to party's presence at a meeting where
include, without limitation, any purchase, such transaction was approved or
sale, loan, lease, pledge, exchange or other the interested party's votes were
transfer of Company assets or securities, counted for such purpose if either
and any merger, consolidation, (i) the material facts as to the
reorganization, joint venture, partnership or interested party's relationship or
other entity involving the Company. interest were disclosed and the
"Related Party" means any Trustee, officer, transaction was approved in good
Large Shareholder, investment manager or faith by either a majority of the
advisor of the Company, or any Affiliate or shareholders or a majority of the
Associate of such person. "Large disinterested Trustees or (ii) the
Shareholder" means any person who is the contract or transaction is fair to the
beneficial owner (within the meaning of Company. In addition, Section 3.7
Rule 13d-3 of the Act) of 5% or more of eliminates any "corporate
the outstanding common shares or preferred opportunity" claims by the
shares of the Company entitled to vote in Company or any shareholder with
the election of Trustees after including respect to any Trustee, officer or
among his shares those owned by an shareholder.
Affiliate or Associate. "Affiliate" and
"Associate" have the meanings assigned in
Rule 12b-2 of the Exchange Act; provided
that a person is not an "Affiliate" or a
"Associate" of any other person solely by
reason of being a Trustee or officer of the
Company.
Classes of Shares;
Designations,
Preferences, etc.;
Shareholders
<PAGE>
Number of Shares; Section 4.1(a) and (b) provides for two Sections 4.1(a) and (b) provide for
Classes classes of shares, common shares and four classes of shares, in unlimited
preferred shares, in unlimited amounts. 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.
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 Interest Section 2.2 specifies the nature of a Section 4.3 incorporates the text of
in Company shareholder's interest in the Company. Section 2.2 of the old Declaration.
Common Shares
Common Shares; Section 4.1(a) provides that, all common Section 5.1 provides that, except as
Identical Rights shares 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.
<PAGE>
Dividends Sections 4.1(a) and 5.1 provide the terms Section 5.2 incorporates text from
governing the declaring of dividends on the Sections 4.1(a) and 5.1 of the old
common shares. 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
holders of Class A Common Shares to 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 Section 5.3 incorporates text from
the liquidation rights of the holders of Sections 4.1(a) and 9.2 of the old
common shares. Declaration, but specifies that
amounts will be distributed ratably
among the holders of all classes of
common shares.
<PAGE>
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.
<PAGE>
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
surrendering share certificates on
the Conversion Date. Section
5.5(c) provides 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.
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.
<PAGE>
Consolidation, Merger or No comparable provision. Section 5.7 provides that the Company will
Sale 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, Appraisals, Section 4.1(a) and Section 4.7 provide that Section 5.9 incorporates the text of
Redemption and holders of common shares are not entitled to 4.1(a) of the old Declaration and
Preemptive Rights preferences, appraisals, conversions, eliminates the prohibitions on
exchanges, preemptive or redemption rights conversions and exchanges.
(except redemption rights as provided in
Section 4.10).
Nonassessability of Section 4.2 provides that the Company's Section 5.10 provides that the
Common Shares shares are 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 Section 6.1 incorporates the text of
issue preferred shares and to set the rights, 4.1(b) of the old Declaration and
powers, preferences, privileges and adds a provision empowering the
restrictions with respect to such shares in a Board of Trustees to amend the
resolution set forth in a certificate of resolutions creating such classes or
designation. series of preferred shares.
The Class A Preferred No comparable provision. Section 6.2 provides that the Class
Shares and the Class B A Preferred Shares and the Class B
Preferred Shares Preferred Shares have the rights,
preferences, privileges and
restrictions stated in the Certificates
of Designation.
<PAGE>
Nonassessability of Section 4.2 provides that the Company's Section 6.3 provides that the
Preferred Shares shares are nonassessable. Company's preferred shares are
nonassessable after the payment of
the subscription price.
Recording of Certificates No comparable provision. Section 6.4 provides that the
of Designation Company may record the
Certificate of Designation.
Share Certificates
Issuance of Certificates Section 4.3 provides for the issuance of Section 4.1 of the By-Laws
share certificates. incorporates the text of Section 4.3
of the old 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 old Declaration, substituting two
officers designated by the Board as
signatories in place of specified, titled
officers.
Replacement Certificates Section 4.5 provides procedures for the Section 4.3 of the By-Laws
replacement of share certificates. incorporates the text of Section 4.5
of the old Declaration.
Only Registered Holder Section 4.6 provides for a registry of Section 4.4 of the By-Laws
Recognized shareholders and procedures for resolving incorporates the text of Section 4.6
disputes concerning title to share of the old Declaration.
certificates.
Shareholder's Transfer of Section 4.7 provides procedures for share Section 4.5 of the By-Laws
Shares certificate transfers. incorporates the text of Section 4.7
of the old Declaration, eliminating
references to the prohibition on
fractional shares.
Transfers by Operation Section 4.8 establishes the procedures for Section 4.6 of the By-Laws
of Law transfer of shares by operation of law. incorporates the text of Section 4.8
of the old Declaration, eliminating
the reference to the prohibition on
fractional shares.
<PAGE>
Certain Restrictions on No comparable provision. Section 4.7 of the By-Laws imposes
Transfer; Legend conditions on the 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.
Right to Refuse to Section 4.10 provides restrictions on Provision eliminated.
Transfer Shares; transferability and limited rights of the
Acquisition Restriction; Company to redeem shares in order to
Redemption Rights ensure that the Company qualifies as a
REIT under applicable law.
Meetings of Shareholders
Annual Meeting Section 7.1 establishes the time and place of Section 7.1 incorporates the text of
the annual meeting and the method of Section 7.1 of the old Declaration,
providing notice. changing the location to New York,
New York instead of San
Francisco, California.
Special Meetings Section 7.2 establishes the procedures for Section 7.2 incorporates the text of
calling a special meeting. Section 7.2 of the old Declaration.
Record Date Section 7.5 provides for the fixing of a Section 7.3 incorporates the text of
record date. Section 7.5 of the old 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 Section 7.4 incorporates the text of
voting. Section 7.7 of the old Declaration,
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 Elections No comparable provision. Section 7.5 provides for the
appointment of election inspectors
and specifies their duties at
shareholder meetings.
<PAGE>
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 Section 7.7 incorporates the text of
for shareholder meetings. Section 7.6 of the old Declaration.
Notice Section 7.3 establishes notice requirements Section 7.8 incorporates the text of
for shareholder meetings. Section 7.3 of the old Declaration,
eliminating the reference to the
special meeting notice requirement
now covered in Section 7.9.
Business Section 7.3 provides that no Section 7.9 incorporates the special
Transacted business may be transacted at a special meeting notice requirement from
meeting unless notice of such business Section 7.3 of the old Declaration.
has been given in the call for the meeting.
Action at a Meeting Section 7.7(a) provides that whenever any Section 7.10 incorporates the text
action is to be taken by shareholders, unless of Section 7.7(a) of the old
otherwise required by the Declaration, by Declaration.
provisions relating to outstanding preferred
shares or by law, it is by affirmative
majority vote.
Action Without a Section 7.7(a) provides for shareholder Section 7.11 incorporates the text
Meeting action without a meeting. of Section 7.7(a) of the old
Declaration 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 Section 7.11 incorporates the text
provided by law or the Declaration, no of Section 7.4 of the old
action taken by the shareholders is binding Declaration and adds an additional
on the Trustees in their management of the exception for provisions in
Company. certificates of designation.
Annual Report Section 7.8 provides for a report at each Provision eliminated.
annual meeting.
Trustees
<PAGE>
Authority of Trustees Section 2.1 entrusts, except as otherwise Section 8.1 incorporates the text of
expressly provided, the business, affairs and Section 2.1 of the old Declaration.
assets of the 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 Section 8.2 incorporates the text of
Trustees. Section 8.10 of the old 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.
Number, Term and Section 8.1 directs that the Trustees act as a Section 8.3(a) incorporates the text
Qualifications Board, provides for the number of Trustees of Section 8.1, changing the
and the method of Trustee succession, and permissible number of trustees to
vests ownership of Company assets in the no more than 21. Section 8.3(b)
Trustees jointly. Section 8.2(b) specifies incorporates the text of Section
the Trustees' terms of office. Section 8.2(b), and Section 8.3(c)
8.2(d) specifies the method for electing and incorporates the text of Section
qualifying Trustees. Section 8.2(a) contains 8.2(d) of the old Declaration.
a restriction that limits, to less than a Section 8.2(a)'s restriction with
majority, the number of Trustees that are respect to the number of Affiliates
Affiliates or Associates of an investment or Associates that may be Trustees
manager or advisor to the Company. has been eliminated.
Resignations Section 8.4 specifies how Trustees may Section 8.4 incorporates the text of
resign. Section 8.4 of the old Declaration,
eliminating a requirement that a
resignation be recorded in order to
be effective.
Removal of Trustees Section 8.3 specifies how Trustees are Section 8.5 incorporates the text of
removed. Section 8.3 of the old Declaration
and changes the required Trustee
vote to a simple majority.
<PAGE>
Newly Created Section 8.5 provides that the Trustees may Section 8.6 incorporates the text of
Trusteeships and fill vacancies on the Board of Trustees and Section 8.5 of the old Declaration
Vacancies specifies the term of the newly-elected and also provides for the transfer of
Trustee. 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 Section 1.2 of the By-Laws
Trustees constitutes a quorum. incorporates the text of Section 8.5
of the old Declaration.
Notice Section 8.5 provides that meetings may be Section 1.3 of the By-Laws
called at any time by the Chairman or any incorporates the text of Section 8.5
two Trustees, upon at least three days' of the old Declaration.
notice.
Action Section 8.5 provides that the Trustees may Section 1.4 of the By-Laws provides
by Trustees act pursuant to the vote or written consent, that the vote of a majority of the
with or without a meeting, of more than half of Trustees present at a meeting at
the number of Trustees in office. which a quorum is present shall be the
act of the Board (fixing an inconsistency
in Section 8.5 of the old Declaration
with respect to actions with and without
meetings).
By-Laws Section 8.6 provides that the Trustees may Section 8.2 empowers the Trustees
adopt, amend or repeal by-laws for the to adopt, implement, amend and
conduct of their duties and for defining the restate by-laws which are not
duties of the Company's officers, agents, inconsistent with the new
employees and representatives. Declaration. Section 8.9
incorporates the text of Section 8.6
of the old Declaration and specifies
the scope of the permitted by-laws.
Compensation Section 8.8 provides that the Trustees, Section 8.7 incorporates the text of
the secretary and every other person engaged Section 8.8 of the old Declaration
to assist in the execution of the Company and broadens it slightly to cover all
are to be compensated from Company Company officers.
assets at rates fixed by the Board.
<PAGE>
Action without Meeting Section 8.5 provides that no action of the Section 1.5 of the By-Laws
Trustees without a meeting is effective incorporates the text of Section 8.5
unless all Trustees in office sign a written of the old Declaration.
consent to such action and 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 incorporates the text of Section 8.9
its use. of the old Declaration.
Committees Section 8.7 provides for the appointment of Section 8.8 incorporates the text of
committees of the Company and the Section 8.7 of the old Declaration,
delegation of powers to such committees, eliminating the references to the
excepting the power to declare dividends delegation of authority to act on
and to amend the Declaration of Trust and behalf of the Company (which is
for the delegation of authority to act in covered in Article IX of the
behalf of the Company to any Trustee, Restated Declaration).
officer, employee or agent.
Officers
<PAGE>
Officers Generally Section 8.7 provides for the delegation of Article IX incorporates the
authority to act in behalf of the Company to provisions of Section 8.7 of the old
any Trustee, officer, employee or agent. Declaration, and further provides
that the Board 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, Merger, Section 3.8 provides that, subject to other Article X incorporates the
Sale of Assets, etc. restrictions in the Declaration and in any restrictions on the major
series of preferred shares that may be transactions contained in (b) and (c)
outstanding, the Company may not: (a) take of Section 3.8 of the old
any action which would forseeably cause it Declaration, eliminates the
to lose its REIT status; (b) be incorporated, restriction on losing REIT status,
merged, consolidated, reorganized, and changes the approval
liquidated or dissolved; or (c) sell, lease, requirement to the affirmative vote
exchange or otherwise dispose of all or or written consent of a majority of
substantially all of its assets, without the the outstanding Voting shares
affirmative vote or written consent of either entitled to vote, voting as a single
(i) 75% of the Trustees and a majority of class or series.
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 Section 11.1 incorporates the text
records of the Company be kept in of Section 6.1 of the old
conformity with GAAP. Declaration and adds a provision
allowing the Board to determine
otherwise.
Inspection of Records Section 6.2 specifies the procedures for Section 11.2 incorporates the text
inspecting the records of the Company. of Section 6.2 of the old
Declaration.
<PAGE>
Annual Audit Section 6.3 provides for an annual audit of Section 11.3 incorporates the text
the Company's books in conformity with of Section 6.3 of the old
GAAP and the filing and distribution to the Declaration, eliminates a reference
shareholders of the audit within 90 days of to Company surplus, and adds a
the close of the period covered by the provision allowing the Board to
report. determine whether the audit should
be conducted in conformity with
GAAP.
Interim Reports Section 6.4 provides for interim reports Section 11.4 incorporates the text
containing a balance sheet, which may be of Section 6.4 of the old
unaudited, to be prepared quarterly and to Declaration.
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 Section 12.1 incorporates the text
will continue for the lives of the named of Section 9.1 of the old Declaration.
children and 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 Section 12.2 incorporates the text
irrevocable and that, subject to the of Section 9.2 of the old
provisions of any series of outstanding Declaration and changes the
preferred shares, it may be terminated or approval requirement to the
dissolved only upon the affirmative vote or affirmative vote or written consent
written consent of either (i) 75% of the of either (i) a majority of the
Trustees and a majority of the common Trustees and a majority of the
shares entitled to vote or (ii) 662/3% of the outstanding Voting shares or (ii)
common shares entitled to vote. 662/3% of the outstanding Voting
shares.
<PAGE>
Procedure Upon Section 9.3 provides that upon termination Section 12.3 incorporates the text
Termination of the Company, the Trustees will liquidate of Section 9.3, adds a requirement
the Company assets as they deem desirable, for payment of any preferential
pay or make provision for payment of all amounts due to any holders of
present and contingent Company liabilities, preferred shares, and revises how
and distribute the remaining assets, either in the remaining assets are to
kind or in money or both, to the distributed by requiring that they be
shareholders in proportion to their holdings. distributed ratably to holders of
outstanding common shares, subject to any
participating or similar rights of the
outstanding preferred shares.
Amendments
Amendment Procedure Section 10.3 provides that any amendment Section 13.1 incorporates the text
must be in writing and, subject to the of Section 10.3 of the old
changes required by law or to maintain Declaration, eliminates the
REIT status and the provisions of any reference to maintenance of REIT
outstanding preferred shares, requires the status and changes the approval
affirmative vote or written consent of either requirement to the affirmative vote
(i) 75% of the Trustees and a majority of or written consent of either (i) a
the outstanding common shares entitled to majority of the Trustees and a
vote or (ii) 662/3% of the outstanding majority of the outstanding Voting
common shares entitled to vote. shares or (ii) 662/3% of the
outstanding Voting shares.
Amendments Without Section 10.4 provides that, notwithstanding Section 13.2 incorporates the text
Shareholder Approval Section 10.3, the Declaration may be of Section 10.4 of the old
amended by 75% of the Trustees without Declaration, eliminates the
the vote or consent of the shareholders to reference to REIT status and
the extent they deem it necessary to extends the notice period to 90
maintain REIT status or to conform the 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 Amendments Section 10.5 provides for the execution and Section 13.3 incorporates the text
recording of an instrument setting forth the of Section 10.5 of the old
amendment by the Secretary and the Declaration, but provides that such
Chairman. instrument may be recorded if
deemed advisable by the Board.
<PAGE>
Exculpation and
Indemnification
Exculpation of Trustees, Section 2.6 provides that no Trustee, Section 14.1 provides that the
Officers and Others; officer, employee or agent of the Company Company may, to the full extent
Fidelity Bond is liable to the Company or any other permitted by law, limit the liability
person for any act or omission except for of and indemnify any and all
his own willful misfeasance, bad faith, Trustees, officers, employees or
gross negligence or reckless disregard of agents and their respective legal
duty or his failure to act in good faith in the successors for actions on the
reasonable belief that his actions are in Company's behalf in a by-law
Company's best interests. It further adopted by a majority of the Board.
provides that the above named individuals Section 2.1 of the By-Laws
when acting in connection with the incorporates the text of Section 2.6
Company are deemed to be acting for the of the old Declaration, eliminating
Company and not as individuals, that they the fidelity bond requirement.
are not liable for actions taken or
omitted for or on behalf of the Company,
and that resort must be to the assets of
the Company for payment or performance.
It also requires that the Trustees
obtain, file and maintain a good and
sufficient fidelity bond by a
California-qualified corporate surety.
Limitation on Liability of Section 2.5 provides that anyone dealing Section 14.2 incorporates the text
Shareholders, Trustees with or having a claim against the Trustees, of Section 2.6 of the old
and Officers or any officer, agent or employee of the Declaration.
Company must look only 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.
<PAGE>
Indemnification and Section 2.7 provides for indemnification of Section 2.2 of the By-Laws
Reimbursement those connected to the Company and acting incorporates the text of Section 2.7
on its behalf, unless the claim or asserted of the old Declaration.
liability arises out of 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 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, Section 14.3 incorporates the text
Officers to Own Shares officer, agent, or employee of the Company of Section 4.9 of the old
or Other Property and to may acquire or dispose of Company shares Declaration.
Engage in Other for his individual account and exercise all
Businesses rights of a shareholder, as if he were not
associated with the Company.
Representations and Section 2.10 limits the authority of an Sections 14.4 incorporates the text
Guarantees officer, agent, representative or employee of of Section 2.10 of the old
the Company to make representations or Declaration.
guarantees concerning 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.
<PAGE>
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>
<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 WEDNESDAY, JUNE 5,
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, June 5, 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
6. 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 April
, 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
7. On the proposal to approve 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
8. On the proposal to approve a share option plan, in the form attached
to the accompanying Proxy Statement as annex D.
(check one box) / / For / / Against / / Abstain
9. 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):
- --------------------------
10. 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
11. 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)
<PAGE>
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
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.
